DBRS Limited (DBRS Morningstar) downgraded SmartCentres Real Estate Investment Trust’s (SmartCentres) Issuer Rating and Senior Unsecured Debentures rating to BBB from BBB (high) and changed the trends on the ratings to Stable from Negative.
The downgrades are largely due to a slower-than-anticipated improvement in SmartCentres’ financial risk metrics relative to DBRS Morningstar's prior expectations at the last rating review (on December 12, 2022), notwithstanding the modest improvement in its operating environment. DBRS Morningstar expects SmartCentres’ coverage as calculated by EBITDA-interest coverage to worsen for 2023 and 2024 to 2.8 times (x) and 2.9x, respectively, from the 3.1x range at the last review as a result of rising interest rates, primarily on SmartCentres’ floating-rate debt. By comparison, coverage for the last 12 months ended Q1 2023 was 2.83x. Leverage as calculated by total debt-to-EBITDA as at Q1 2023 remains particularly elevated at 10.2x, with both resulting in a deterioration in SmartCentres’ credit risk profile, which, in DBRS Morningstar’s view, is no longer consistent with the current rating category. The downgrades also reflect DBRS Morningstar’s view of SmartCentres’ expected leverage weakening to 9.8x and 9.6x for 2023 and 2024, respectively, from 9.5x and 9.3x, respectively, as the pace of dispositions factored into DBRS Morningstar’s expectations has not materialized in the first five months of 2023. DBRS Morningstar believes the environment surrounding dispositions has changed; as such, the visibility of execution of capital recycling initiatives in the back half of 2023 and 2024 are less certain. DBRS Morningstar’s view on SmartCentres’ business risk assessment factors remains unchanged relative to the prior rating action on December 12, 2022.
DBRS Morningstar would consider taking further negative rating actions if SmartCentres’ total debt-to-EBITDA ratio deteriorates above 10.8x and EBITDA-interest coverage deteriorates below 2.3x on a sustained basis. Conversely, a positive rating action could occur if SmartCentres achieves a total debt-to-EBITDA ratio comfortably below 9.3x and EBITDA interest coverage above 3.0x 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 (May 17, 2022).
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023) https://www.dbrsmorningstar.com/research/412477
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022)
The credit 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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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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