DBRS Limited (DBRS Morningstar) confirmed Granite REIT Holdings Limited Partnership’s (GRHLP) Issuer Rating and Senior Unsecured Debentures rating at BBB (high), both with Stable trends. DBRS Morningstar based the ratings on the credit risk profile of the combined entity, including GRHLP and its subsidiaries, as well as Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust).
The confirmations and Stable trends consider Granite's further progress executing its long-term strategy of growing and diversifying its asset base. During 2021, Granite continued to upgrade its portfolio largely with acquisitions consisting of modern distribution/e-commerce assets in key distribution markets in the U.S., Europe, and Canada ($924.0 million acquired), while continuing to dispose of noncore properties ($36.8 million disposed). The resilience of its assets and cash flows continues to be demonstrated through the Coronavirus Disease (COVID-19) pandemic with solid operating performance. Granite funded this growth with a combination of equity, debt, and cash on hand resulting in relatively stable financial risk metrics, notably total debt-to-EBITDA of 8.2 times (x) at December 31, 2021.
The Stable trends also consider DBRS Morningstar's expectation that industrial real estate fundamentals will remain supportive in the near to medium term and that Granite will continue to execute its long-term strategy of growing and diversifying its asset base through acquisitions and developments and will fund such growth initiatives with cash on hand, incremental debt, and equity, similarly to recent years. DBRS Morningstar expects that, in the near term, Granite's total debt-to-EBITDA ratio will remain relatively stable within the range of 8.5x–9.0x through YE2023, and the EBITDA interest coverage ratio will remain above 6.0x.
The ratings continue to be supported by Granite's (1) institutional-quality industrial real estate portfolio; (2) financial flexibility provided by a sound balance sheet and low cost of debt; (3) strong lease profile with high-quality tenants including Amazon.com, Inc.; and (4) unsecured debt capital stack and sizable unencumbered asset pool valued at $7.9 billion at December 31, 2021. The ratings continue to be constrained by Granite’s (1) lack of scale in its trade areas with a relatively geographically dispersed portfolio; (2) tenant concentration with 51% of annualized revenue derived from the Trust’s top 10 tenants (as at December 31, 2021), including a Tier 1 global automotive supplier in Magna International Inc. (rated A (low) with a Stable trend by DBRS Morningstar) and its operating subsidiaries; (3) heightened lease renewal risk in 2023 and 2024; and (3) asset-type concentration with a portfolio solely focused on the industrial segment, notwithstanding some diversification across different industrial uses.
DBRS Morningstar would need to assess further improvement in either Granite's business risk assessment profile or a material sustained improvement in leverage relative to DBRS Morningstar's expectations before considering further positive rating actions, which is unlikely in the near to medium term. DBRS Morningstar would consider a negative rating action should its outlook for Granite's total debt-to-EBITDA ratio increases above 9.3x 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.
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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