DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debenture rating on Choice Properties Limited Partnership (CPLP) as well as the Senior Unsecured Debenture (guaranteed by CPLP) rating on Choice Properties Real Estate Investment Trust (CPREIT or the Trust; together with CPLP, Choice Properties) at BBB (high). All trends are Stable. Because CPLP guarantees CPREIT’s debentures, the two Senior Unsecured Debenture ratings are harmonized. The ratings on Choice Properties reflect (1) the confirmation of DBRS Morningstar’s rating of Loblaw Companies Limited’s (Loblaw) long-term debt at BBB (high) with a Stable trend, (2) the presence of a cross-default provision (please see discussion below) that effectively caps Choice Properties’ ratings at the level of Loblaw’s ratings, and (3) the improving financial metrics and outlook, notwithstanding the ongoing effects of the Coronavirus Disease (COVID-19) pandemic.
Note that DBRS Morningstar assesses Choice Properties’ credit risk profile on a stand-alone basis. However, DBRS Morningstar understands that, under certain circumstances, if Loblaw were insolvent, CPREIT’s credit facility would also be in default, thus Choice Properties’ rating can be no higher than that of Loblaw.
On a stand-alone basis, the ratings continue to be supported by Choice Properties’ strong market leadership, particularly in necessity-based retail, across Canada’s largest urban centres; strategic alliance with Loblaw; long-term lease profile with low counterparty risk, which provides underlying stability to cash flows; large, well-located portfolio of retail, industrial, and office properties; and solid financial risk profile with high interest coverage and a high level of unsecured debt in a debt structure supported by a large pool of unencumbered assets. The ratings continue to be constrained by concentration risks associated with a retail-focused portfolio and the majority of revenue being derived from Loblaw banners.
The Stable trends reflect DBRS Morningstar’s expectation that Choice Properties will maintain its key financial metrics near current levels (i.e., total debt-to-EBITDA of 7.3 times (x) and EBITDA interest coverage of 3.56x for the six months ended June 30, 2021) on a sustained basis, all else equal, while undertaking its development and intensification program, especially in the burgeoning residential sector.
Although it is not currently anticipated, DBRS Morningstar may take a negative rating action on Choice Properties if DBRS Morningstar downgrades its ratings on Loblaw or if there is a broad-based weakening in the operating environment and a deteriorating earnings performance that leads to material declines in EBITDA and operating cash flows as well as higher financial leverage. Conversely, DBRS Morningstar may take a positive rating action on Choice Properties if it upgrades the ratings on Loblaw.
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).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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