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 confirmations follow Dream Industrial’s press release on February 17, 2023, wherein the REIT announced the closing of its previously described acquisition of Summit Industrial Income Real Estate Investment Trust by a joint venture between GIC and Dream Industrial (the Transaction). Dream Industrial’s 10% share of the equity purchase is being funded with multiple sources of debt.
As previously indicated in DBRS Morningstar’s related press release on November 7, 2022, it revised upward its assessment of Dream Industrial’s market position. The upward revisions are supported by (1) the addition of 22.3 million square feet (at 100% share) of strategically located light-industrial assets in favourable markets that present synergies to Dream Industrial’s current portfolio and (2) the REIT’s partnership with GIC (a global sovereign wealth fund) and the ability to leverage and earn additional fee income by way of property management, construction management, and leasing services.
DBRS Morningstar continues to be of the view that the improvement in Dream Industrial’s business risk assessment profile is offset by deterioration in the REIT’s financial risk assessment profile. DBRS Morningstar expects that, pro forma the Transaction, Dream Industrial’s leverage will deteriorate as measured by total debt-to-EBITDA such that the REIT will be operating in the 10 times (x) range in the near term, before improving slightly thereafter.
The ratings continue to be 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 more than 5.0x through YE2024 as a result of the REIT’s demonstrated ability to swap Canadian dollar-denominated debt underwritten in Canada for euro-denominated debt at relatively low rates, supported by its European assets. The ratings continue to be constrained by (1) the aforementioned elevated leverage for the current ratings; (2) asset-type concentration as a pure play in the industrial real estate segment; and (3) relatively concentrated lease maturities with a weighted-average lease term to maturity of 4.7 years, combined with elevated counterparty risk relative to DBRS Morningstar’s real estate coverage universe with a broad range of smaller nonrated tenants, notwithstanding the potential upside for lease renewals and new leases to be rolled up to market rents which are significantly higher in certain markets relative to in-place rents.
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. 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.
DBRS Morningstar would consider a positive rating action should the REIT’s leverage as measured by 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 10.8x and EBITDA interest coverage deteriorates below 5.0x 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 (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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