DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating, Senior Unsecured Debentures rating, and Senior Unsecured Debentures, Series I rating of RioCan Real Estate Investment Trust (RioCan or the Trust) to BBB from BBB (high). DBRS Morningstar also returned the trends on the ratings to Stable from Negative.
The downgrades largely reflect DBRS Morningstar's assessment of sustained deterioration in RioCan's financial risk profile that’s no longer consistent with a BBB (high) rating. The weakening financial risk profile reflects financial risk metrics and ongoing risks associated with its development strategy. DBRS Morningstar’s updated expectation for RioCan’s total debt-to-EBITDA is 10.3 times (x) at YE2021, trending to the low 9.0x-range through 2023 (10.8x for the last 12 months at September 30, 2021 (LTM)). This updated expectation contrasts with DBRS Morningstar’s prior expectation for total debt-to-EBITDA below 10.0x by YE2021 and below 9.3x by YE2022. Furthermore, DBRS Morningstar recognizes additional risks weighing on the rating that have become more material since its last review, which are in part related to RioCan's development strategy, such as (1) the contingent liabilities resulting from the Trust's debt guarantees of co-owner interests in development projects; and, (2) a relatively short debt maturity ladder with a weighted average term to maturity of 3.7 years at September 30, 2021, as well as the increased volatility of cash flows tied to the realization of profits in condominium projects. Accordingly, DBRS Morningstar is of the view that RioCan’s credit risk profile is more commensurate with a BBB rating.
The BBB ratings are strongly supported by (1) high-quality, increasingly necessity-based, urban retail assets in Canada’s six major markets; (2) a solid market position as one of the largest real estate investment trusts in Canada with 35.3 million square feet (sf) of well-located income-producing net leasable area (NLA) at September 30, 2021; (3) strong lease maturity and tenant profile with long-term leases, low counterparty risk, and above-average tenant diversification; (4) DBRS Morningstar’s continued expectation for strong EBITDA interest coverage in the 3.0x to 3.5x range through 2023; (5) ample access to liquidity of $807.7 million available (consisting of credit facility capacity and cash and cash equivalents, excluding an additional $266 million undrawn construction lines and other bank loans) at September 30, 2021; and (6) an unencumbered asset pool valued at $8.5 billion providing 1.9x coverage over unsecured debt (assuming fully drawn credit facilities). The ratings are constrained by (1) leverage that remains elevated for the rating as measured by total debt-to-EBITDA expected to be in the 9.0x-10.0x-range through 2023; (2) retail and geographic concentration risks as a retail-focused REIT in Canada's key urban markets; and (3) development execution risks such as the aforementioned cash flow volatility, contingent liabilities, and short debt ladder, which together are modestly negative.
The Stable trends consider several credit supportive initiatives of the Trust such as its ongoing disposition program and one-third distribution cut effective in January 2021, both of which provide additional sources of cash for its continued high grading of its portfolio. Indeed, DBRS Morningstar anticipates RioCan's financial risk metrics will demonstrate an improving trend through YE2023 when the Trust's total debt-to-EBITDA is expected to approach the 9.0x range and EBITDA interest coverage in the 3.50x range, as (1) proceeds from dispositions are used as a source of funds to progress RioCan's development pipeline; (2) several of the Trust's sizable development projects are completed, stabilized, and earning cash rent; and (3) the negative impact of the Coronavirus Disease (COVID-19) pandemic on the Trust's operations subsides.
DBRS Morningstar is of the view that RioCan is well positioned within the current BBB rating following these downgrades and a further negative rating action is not likely at this time. DBRS Morningstar may consider a positive rating action should RioCan's financial risk profile improve such that total debt-to-EBITDA demonstrates an improving trend below 9.3x on a sustained basis, including consideration for guaranteed co-owner debt on development projects, with corresponding improvement in EBITDA interest coverage and a debt ladder commensurate for the rating.
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 methodology is Rating Entities in the Real Estate Industry (April 23, 2021), 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 (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).
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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.
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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