DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debenture rating on Choice Properties Limited Partnership (CPLP) as well as the Senior Unsecured Debenture (guaranteed by CPLP) rating on Choice Properties Real Estate Investment Trust (CPREIT; together, Choice Properties) at BBB (high). All trends are Stable. DBRS Morningstar assesses the ratings on a consolidated credit basis because CPLP guarantees CPREIT’s Senior Unsecured Debentures. DBRS Morningstar notes that while Choice Properties’ credit risk profile is assessed on a stand-alone basis, DBRS Morningstar understands that under certain circumstances, if Loblaw Companies Limited (Loblaw) were insolvent, CPREIT’s credit facility would also be in default, and thus Choice Properties’ ratings can be no higher than that of Loblaw.
The Stable trends reflect (1) the confirmation of the rating on Loblaw’s long-term debt at BBB (high) with Stable trends and (2) DBRS Morningstar’s expectation that Choice Properties will maintain its key financial metrics near current levels (i.e., total debt-to-EBITDA in the low to mid-7.0 times (x) range and EBITDA interest coverage above 3.5x) while undertaking its development and intensification program and continuing to dispose of noncore assets. On March 31, 2022, Choice Properties disposed of six noncore office assets to Allied Properties Real Estate Investment Trust (Allied; rated BBB with a Stable trend by DBRS Morningstar) for total consideration of $751 million, consisting of tax-efficient exchangeable Class B limited partnership units in an affiliate of Allied (economically equivalent to Allied units) and a promissory note of $200 million maturing on December 31, 2023.
The ratings continue to be supported by Choice Properties’ (1) strong market leadership, particularly in necessity-based retail, across Canada’s largest urban centres; (2) strategic alliance with Loblaw; (3) long-term lease profile with low counterparty risk, which provides underlying stability to cash flows; (4) large, well-located portfolio of retail, industrial, mixed-use residential, and office properties; and (5) solid financial risk profile with high interest coverage and a high level of unsecured debt in the debt structure supported by a large pool of unencumbered assets. The ratings continue to be constrained by (1) concentration risks with a retail-focused portfolio and the majority of revenue derived from Loblaw banners; (2) a cross-default provision in Choice Properties’ credit facility between CPREIT and Loblaw; and (3) relatively high leverage for the rating as measured by total debt-to-EBITDA.
DBRS Morningstar may take a negative rating action on Choice Properties if DBRS Morningstar downgrades its ratings on Loblaw or if there is a broad-based weakening in the operating environment and deteriorating earnings performance that leads to material declines in EBITDA and operating cash flows, as well as higher financial leverage. Conversely, DBRS Morningstar may take a positive rating action on Choice Properties if it upgrades the ratings on Loblaw.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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).
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 firstname.lastname@example.org.
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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