DBRS Limited (DBRS Morningstar) assigned an Issuer Rating and Senior Unsecured Debentures rating of BBB with Positive trends to Dream Summit Industrial LP (Dream Summit or the Company).
These rating actions follow Dream Summit’s assumption of the Senior Unsecured Debentures as successor entity to Summit Industrial Income Real Estate Investment Trust (Summit). In connection with the assumption, Summit and Dream Summit, among others, have entered into a supplemental indenture. As a result, Dream Summit became liable in place of Summit for the payment of all of the Senior Unsecured Debentures and interest payments on the Senior Unsecured Debentures, and Summit has been released from all of its obligations.
As successor to Summit, DBRS Morningstar is of the view that the credit risk profile of Dream Summit remains generally consistent with that of Summit. The ratings continue to be supported by the Company’s (1) predominately unsecured debt structure with a secured debt-to-total debt ratio below 40% (30.3% as at December 31, 2022); (2) adequate-quality assets that should provide average cash flow stability; (3) superior property and tenant diversification; (4) a well-laddered lease maturity profile; and (5) strong interest coverage for the ratings as measured by EBITDA interest coverage, which is expected to be in the mid-4 times (x) range by YE2023 (from 4.55x for the last 12 months ended December 31, 2022). Relative to DBRS Morningstar’s real estate coverage universe, the ratings continue to be constrained by (1) a below-average portfolio size as measured by EBITDA of $174.1 million for YE2022, notwithstanding continued robust growth expected in the near to medium term; (2) weak asset-type diversification as a pure play in the light-industrial segment; and (3) below-average tenant quality.
The Positive trends reflect the expected continued improvement in Dream Summit’s leverage as measured by total debt-to-EBITDA, which DBRS Morningstar expects to be below 8.0x by YE2023, from 8.3x for the last 12 months ended December 31, 2022. The Company’s improving leverage will be driven largely by EBITDA growth as a result of recent property acquisitions and as in-place leases roll to market rents. The Company has an unsecured debt stack and sizable unencumbered asset pool of institutional-quality assets, which was valued at approximately $4.1 billion at December 31, 2022, providing ample coverage of unsecured debt (2.7x at December 31, 2022, assuming full draws on the revolving credit facility and green development facility).
DBRS Morningstar will consider rating upgrades within the next few quarters should Dream Summit demonstrate a financial risk profile (including total debt-to-EBITDA and secured debt-to-total debt) consistent with DBRS Morningstar’s expectations outlined above, on a sustained basis, all else equal. DBRS Morningstar would consider changing the trends to Stable should Dream Summit’s total debt-to-EBITDA fail to improve as expected or if Dream Summit reverses course on the progress already made with respect to unencumbering its balance sheet (e.g., its low secured debt-to-total debt ratio) and concurrently failing to demonstrate a sufficient unencumbered stabilized asset pool value relative to unsecured debt (fully funded).
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 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies applicable to the ratings 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).
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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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.
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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