DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating on Dream Industrial Real Estate Investment Trust (Dream Industrial or the REIT) at BBB with Stable trends.
The Stable trends consider DBRS Morningstar's expectation for continued robust fundamentals in the industrial real estate sector contributing to same property net operating income growth, as well as continued acquisitive growth in Dream Industrial's portfolio. DBRS Morningstar anticipates that the REIT will fund such growth largely with debt while continuing to grow its portfolio of unencumbered assets. As a result of the aforementioned considerations, DBRS Morningstar expects modest improvement in the REIT's total debt-to-EBITDA to the low 9.0 times (x) range through YE2023 from 9.7x for the last 12 months ended March 31, 2022, which is generally consistent with DBRS Morningstar’s expectations at the time of its last review following the closing of the European portfolio acquisition on June 24, 2021. While DBRS Morningstar would normally award uplift to the ratings for a low proportion of secured debt in the capital stack, DBRS Morningstar awaits Dream Industrial's further progress on deleveraging to a level more commensurate with the ratings, as measured by total debt-to-EBITDA.
The ratings are supported by (1) institutional-quality industrial assets that should continue to provide cash flow stability; (2) superior tenant, property, and geographic diversification; and (3) DBRS Morningstar's expectation for EBITDA interest coverage to remain very robust at over 5.0x through YE2023 as a result of the REIT’s demonstrated ability to swap Canadian dollar-denominated debt underwritten in Canada for euro-denominated debt at very low rates, supported by its European assets. The ratings continue to be constrained by (1) the aforementioned elevated leverage for the current ratings; (2) a below-average portfolio size as measured by EBITDA and a limited market position in its trade areas with a portfolio geographically diversified across Canada and Europe (and the United States through its equity accounted fund investment); and (3) relatively concentrated lease maturities with a weighted-average lease term to maturity of 4.6 years, combined with elevated counterparty risk relative to DBRS Morningstar's real estate coverage universe with a broad range of smaller non-rated tenants, notwithstanding several multinationals among the REIT's largest tenants; and (4) asset-type concentration as a pure play in the industrial real estate segment.
DBRS Morningstar would consider a positive rating action should the REIT’s total debt-to-EBITDA decline below 9.2x on a sustained basis while maintaining a low secured debt-to-total debt ratio, all else equal. DBRS Morningstar would consider a negative rating action if the REIT’s total debt-to-EBITDA exceeds 9.8x and EBITDA interest coverage declines below 4.0x on a sustained basis, all else equal.
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.
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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