DBRS Limited (DBRS Morningstar) confirmed Granite REIT Holdings Limited Partnership’s (GRHLP) Issuer Rating and Senior Unsecured Debentures rating at BBB (high), both with Stable trends. DBRS Morningstar based the ratings on the credit risk profile of the combined entity, including GRHLP and its subsidiaries, as well as Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust).
The rating actions consider Granite’s efforts in offsetting previously noted lease maturity risk in 2023 and 2024 with high renewal rates and double-digit base rent spreads. The Stable trends also consider DBRS Morningstar’s expectation that industrial real estate fundamentals will remain stable in the near term and that Granite will continue to execute its long-term strategy of growing and diversifying its asset base through acquisitions and developments. DBRS Morningstar anticipates upcoming growth plans to be funded with a mix of cash on hand, incremental debt, and equity, similar to recent years.
DBRS Morningstar notes Granite’s continued portfolio size growth as a result of recent acquisitions ($481 million completed in 2022) and its development pipeline ($330 million invested throughout 2022), which will continue to further increase EBITDA in the near to medium term. DBRS Morningstar expects Granite to operate with a total debt-to-EBITDA ratio of approximately 8.0 times (x) throughout 2023 and 2024. DBRS Morningstar does expect modest deterioration in Granite’s EBITDA interest coverage as the company has $400.0 million of low interest rate maturing debt in November 2023; however, EBITDA interest coverage is forecasted to remain strong, totaling over 4.50x through year-end (YE) 2024.
The ratings continue to be supported by Granite's (1) institutional-quality industrial real estate portfolio; (2) financial flexibility provided by a sound balance sheet and relatively low in-place cost of debt; (3) strong lease profile with high-quality tenants including Amazon.com, Inc.; and (4) unsecured debt capital stack and sizable unencumbered asset pool valued at $8.8 billion at December 31, 2022, providing ample coverage over unsecured debt of 2.2x (inclusive of undrawn amounts on unsecured credit facilities). The ratings continue to be constrained by Granite’s (1) lack of scale in its trade areas with a relatively geographically dispersed portfolio; (2) tenant concentration with 47% of annualized revenue derived from the Trust’s top 10 tenants (as at December 31, 2022), including a Tier 1 global automotive supplier in Magna International Inc. (rated A (low) with a Stable trend by DBRS Morningstar) and its operating subsidiaries; and (3) asset-type concentration with a portfolio solely focused on the industrial segment, notwithstanding some diversification across different industrial uses.
DBRS Morningstar recognizes the recent improvements in property and tenant diversification, thus reducing concentration risk to specific counterparties and assets. DBRS Morningstar would consider a positive rating action should Granite continue to show further improvement in these business risk factors while executing its long-term growth strategy or sustain material improvement in leverage relative to DBRS Morningstar’s expectations, the latter of which is unlikely in the near to medium term. DBRS Morningstar would consider a negative rating action should Granite’s total debt-to-EBITDA exceed 9.3x on a sustained basis (relative to the 8.0x expected for YE2023 and YE2024), which would cause DBRS Morningstar to review the one-notch overlay factor applicable to the low proportion of secured debt in the debt stack.
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 rating are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694).
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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