DBRS Limited (DBRS Morningstar) confirmed First Capital Real Estate Investment Trust’s (First Capital or the Trust) Issuer Rating and Senior Unsecured Debentures rating at BBB with Stable trends. The Stable trends take into consideration First Capital's 1) healthy operational performance, which remains underpinned by its strategic focus on high-quality grocery-anchored and mixed-use properties in neighborhoods with strong demographics; 2) resiliency in its tenant base, modest improvement in same property net operating income (NOI) growth primarily driven by strong rent collections and leasing activity, recovery in variable revenues (temporary tenants, storage, parking, etc), rent escalations, and lower bad debt expense; 3) demonstrated ability to sell noncore assets (assets held for sale of $253 million as of March 31, 2022) at or above IFRS values, which DBRS Morningstar expects will largely fund the recently announced strategy to repurchase its trust units; and 4) continued progress on high grading its portfolio through its ongoing redevelopment/development initiatives and property dispositions.
As a result of these factors, DBRS Morningstar expects First Capital to continue demonstrating modest growth in EBITDA in the near to medium term, largely driven by First Capital's development/redevelopment program, acquisitions and modest growth in same property NOI, notwithstanding dispositions. However, improvement in First Capital's financial risk assessment shall be partially offset by ongoing development spend in the near to medium term, as well as the aforementioned unit buybacks. As a result, DBRS Morningstar expects First Capital's total debt-to EBITDA to modestly improve to the 11.0 times (x) range by year-end (YE) 2023 from 11.4x at March 31, 2022.
The ratings continue to be supported by First Capital’s (1) largely unencumbered pool of high-quality portfolio of grocery- and pharmacy-anchored retail properties (unencumbered assets with an IFRS value of approximately $7.5 billion); (2) strong market position in its core trade areas through ownership in property assemblies within neighbourhoods and resultant low property concentration risk; and (3) highly resilient tenant base. Elevated leverage continues to constrain the ratings, as well as the Trust's asset type concentration as the Trust is virtually a pure-play retail real estate investment trust with some diversification by format and category (e.g., necessity based, service oriented, discretionary, etc.).
DBRS Morningstar would consider a positive rating action if First Capital successfully executes its capital recycling initiatives in a credit-accretive way, such that the Trust's total debt-to-EBITDA declines below 9.8x on a sustained basis, all else equal. A negative rating action could occur if the Trust's total debt-to-EBITDA increases above 11.8x and if EBITDA interest coverage declines below 1.83x, on a sustained basis, all else equal.
ENVIRONMENTAL, SOCIAL, and GOVERNANCE CONSIDERATIONS
There were no environmental, social, or governance factors that had a significant or relevant effect on the credit analysis.
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/396929.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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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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