DBRS Morningstar Confirms Real Estate & E-Commerce Split Corp.’s Preferred Shares at Pfd-2 (low)

DBRS Limited (DBRS Morningstar) confirmed its rating of Pfd-2 (low) on the Preferred Shares issued by Real Estate & E-Commerce Split Corp. (the Company), managed by Middlefield Limited (the Manager). Middlefield Capital Corporation provides investment advice to the Company. The Company invests in a diversified portfolio composed of approximately 15 real estate and e-commerce issuers (the Portfolio) operating in the real estate or related sectors, including real estate investment trusts. The Portfolio may include securities denominated in currencies other than the Canadian dollar, exposing the Preferred Shares to foreign currency risk. The Company takes a tactical approach to determine whether to hedge the exposure to foreign currencies.

Holders of the Preferred Shares receive quarterly fixed cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a 5.25% per-annum return on the original issue price of $10.00. The fixed distributions of dividends on the Preferred Shares are funded from the dividends received on the securities in the Portfolio, which cover approximately 1.8 times the annual Preferred Shares distributions. Holders of the Class A Shares receive regular monthly noncumulative distributions targeted to be $0.13 (or $1.56 annually) per Class A Share to yield 10.4% per annum on the original issue price of $15.00. Distributions to the Class A Shares were increased from the initial amount of $0.10 (or $1.20 annually) per Class A Share as of September 15, 2021. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the Company’s net asset value (NAV) falls below $15.00 or if the dividends of the Preferred Shares are in arrears.

As of November 11, 2021, the downside protection available to the Preferred Shares was approximately 65.7%. Regular distributions to holders of the Class A Shares are projected to cause an average annual portfolio grind of about 4.4% in the remaining term. To supplement Portfolio income, the Manager may engage in covered call option writing on all or a portion of the securities held in the Portfolio, engage in securities lending, or rely on realized capital gains.

The Company established a loan facility for working capital purposes, with the maximum amount of 5% of the total assets of the Company. The Company may pledge the Portfolio securities as collateral for amounts borrowed under the loan facility.

On August 30, 2021, the Company completed an overnight offering of Preferred Shares and Class A Shares, raising approximately $31.3 million in gross proceeds.

A limited number of Class M Shares that rank junior to the Preferred Shares and Class A Shares in respect of capital upon the dissolution, winding up, or liquidation of the Company have been issued by the Company. There are currently $10 worth of such shares outstanding. The Class M Shares are not entitled to receive any dividends for as long as any Preferred Shares or Class A Shares are outstanding. Furthermore, no additional Class M Shares can be issued until the Preferred Shares and the Class A Shares have been retracted, redeemed, or purchased for cancellation.

The maturity date for both classes of shares is December 31, 2025. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares and the Class M Shares.

Considering the credit quality and consistency of dividend distributions of the underlying real estate and e-commerce issuers included in the Portfolio, as well as the amount of downside protection available to the Preferred Shares and the Manager’s expertise and strong presence in the market, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-2 (low).

The main constraints to the rating are the following:

(1) Sensitivity of the Company’s NAV to the Portfolio securities’ price volatility.
(2) Potential foreign exchange risk because the Portfolio may not be substantially hedged at all times.
(3) Stated distributions to the Class A Shares.
(4) Potential changes in the dividend policies of the underlying companies.
(5) The real estate industry-specific risks.

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.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Split Share Companies and Trusts (June 28, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 info@dbrsmorningstar.com.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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