DBRS Limited (DBRS Morningstar) confirmed Dream Industrial Real Estate Investment Trust’s (Dream Industrial or the REIT) Issuer Rating and Senior Unsecured Debentures rating at BBB with Stable trends. The confirmations follow Dream Industrial’s press release on June 24, 2021, wherein the REIT announced the closing of its previously described portfolio acquisition of European logistics properties valued at $1.3 billion (the European Acquisition). The European Acquisition is being funded with (1) assumed mortgage debt of approximately $500 million, (2) net proceeds from the equity offering of $287.5 million subscription receipts completed on May 31, 2021, (3) a portion of the net proceeds from the REIT’s $800 million three-tranche offering of Senior Unsecured Debentures completed on June 17, 2021, and (4) cash on hand. In its press release, Dream Industrial further elaborated on the capital recycling initiatives related to its U.S. portfolio that are expected to net $250 million in equity proceeds.
As previously indicated in its related commentary on June 2, 2021, DBRS Morningstar has revised upward its assessment of Dream Industrial’s key business risk assessment factors, including asset quality, market position, lease maturity profile/tenant quality, and portfolio size. Upward revisions to the aforementioned business risk assessment factors are supported by (1) the addition of 8.9 million square feet gross leasable area of institutional quality pan-European modern logistics assets, by way of the European Acquisition, located in key industrial markets including France, Netherlands, and Germany, 100% leased to large quality tenants, and (2) the REIT’s continued growth into a sizable owner-operator of industrial real estate generating in excess of $200 million EBITDA annually (pro forma the European Acquisition) as management continues to demonstrate a proven ability to source and execute transactions and solidify a global operating platform.
DBRS Morningstar continues to be of the view that the improvement in Dream Industrial’s business risk assessment profile is substantially offset by deterioration in the REIT’s financial risk assessment profile. DBRS Morningstar expects that, pro forma the European Acquisition, Dream Industrial’s leverage will deteriorate as measured by total debt-to-EBITDA such that the REIT will be operating in the 10 times (x) range in the near to medium term from 7.1x for the last 12 months ended March 31, 2021 (LTM), before improving thereafter. DBRS Morningstar anticipates that, should the REIT successfully execute its U.S. portfolio capital recycling initiatives as described, Dream Industrial’s leverage will be modestly lower. DBRS Morningstar expects EBITDA interest coverage will remain strong in the 5x range from 4.98x in the LTM, as the REIT continues to swap Canadian-dollar-denominated debt underwritten in Canada for euro-denominated debt at very low rates supported by its European assets. Indeed, Dream Industrial disclosed that the REIT entered into cross-currency interest rate swap arrangements to swap the proceeds of its recent $800 million three-tranche offering of Senior Unsecured Debentures into euros, which resulted in an average all-in interest rate of 0.35%. DBRS Morningstar also considers the potential for Dream Industrial’s enhanced financial flexibility because of the REIT’s transition to a largely unsecured debt capital stack with a large pool of institutional quality unencumbered assets; however, the aforementioned elevated leverage levels are expected to remain a constraining factor on the ratings on an interim basis until leverage improves.
DBRS Morningstar would consider a positive rating action should the REIT’s total debt-to-EBITDA decline below 9.2x on a sustained basis, while EBITDA interest coverage remains strong, all else equal. DBRS Morningstar would consider a negative rating action if the REIT’s total debt-to-EBITDA exceeds 10.8x on a sustained basis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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