DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB with a Stable trend to Primaris Real Estate Investment Trust (Primaris or the REIT).
Primaris was formed on December 31, 2021, by way of a spin-out from H&R Real Estate Investment Trust (H&R REIT; rated BBB (high) with a Negative trend by DBRS Morningstar) of its Primaris properties portfolio (27 properties, 7.6 million square feet (sf) of gross leasable area (GLA), $2.4 billion of gross asset value (GAV)) and a contribution of retail properties from Healthcare of Ontario Pension Plan (HOOPP) (eight properties, 3.8 million sf of GLA, $0.8 billion of GAV) (the Transaction). As a result of the Transaction, Primaris is an owner/operator of a portfolio of enclosed malls, open air centres, and one grocery-anchored centre, together comprising 35 properties, 13.3 million sf total GLA (11.5 million sf at the REIT’s share) and an appraised value of $3.2 billion.
The rating is supported by the following factors:
(1) Primaris’ strong balance sheet with relatively low leverage and financial flexibility as reflected in the REIT’s strong adjusted total debt-to-EBITDA metric, which DBRS Morningstar expects to trend toward the low-5.0 times (x) range from 5.8x for year-end 2021 (5.5x pro forma the conversion of exchangeable units into regular units, which occurred after year-end) and with the REIT’s EBITDA interest coverage similarly expected to trend toward the high-5.0x range through 2023;
(2) DBRS Morningstar’s assessment of the REIT’s solid asset quality with a portfolio of well-maintained, well-located open air centres and enclosed malls that are often dominant within their respective secondary markets, notwithstanding recent setbacks related to the Coronavirus Disease (COVID-19) pandemic;
(3) Primaris’ well-laddered lease maturity profile with a diversified tenant roster including several high-quality tenants among its largest; and
(4) the REIT’s robust market position within its well-defined niche as one of the largest owner/operators of enclosed shopping centres nationally.
The rating is constrained by (1) several concentration risks related to its relatively small size, particularly as a niche player, including asset type concentration and property concentration; and (2) execution risks for a new entity with an unproven strategy as a pure play owner/operator of enclosed malls with several identified development and intensification opportunities such as Dufferin Grove and resulting potential for financial risk metric volatility, which
together are modestly credit negative.
The Stable trend considers DBRS Morningstar’s expectation that the worst of the coronavirus pandemic is in the rear view, and Primaris’ operating environment will continue to normalize resulting in robust same property net operating income growth as bad debt provisions, rent deferrals and abatements, and tenant bankruptcies return to pre-pandemic levels. The Stable trend also considers the likelihood of Primaris continuing to transition to an unsecured funding model and unencumbering its balance sheet, thereby reducing secured debt-to-total debt below 40% in the near to medium term.
DBRS Morningstar would consider a negative rating action should Primaris’ operating environment deteriorate causing DBRS Morningstar to reassess the REIT’s qualitative business risk assessment factors as well as the REIT’s key financial risk assessment metrics. DBRS Morningstar would consider a positive rating action should Primaris
successfully transition to a predominately unsecured debt stack with a sizable pool of quality unencumbered assets such that secured debt-to-total debt can be reasonably expected to be remain below 40% on a sustained basis, after having demonstrated a successful track record of executing on its strategy.
DBRS Morningstar understands that there is currently no rated senior unsecured debt outstanding; however, if the REIT were to issue rated senior unsecured debt, DBRS Morningstar expects that such debt will be issued with terms and conditions consistent with market standards and that result in the rated senior unsecured debt ranking pari passu with all current and future unsecured revolving credit facilities and that are satisfactory to DBRS Morningstar.
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; https://www.dbrsmorningstar.com/research/377358), 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).
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 email@example.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.
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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