DBRS, Inc. (DBRS Morningstar) confirmed the Senior Unsecured Debentures rating of CT Real Estate Investment Trust (the Trust) and the Issuer Rating of CT REIT Limited Partnership (CT REIT LP; collectively with the Trust, CT REIT) at BBB. Both trends are Stable.
These rating actions reflect DBRS Morningstar’s view that CT REIT’s credit risk profile and ratings are aligned with those of Canadian Tire Corporation, Limited (CTC; rated BBB with a Stable trend by DBRS Morningstar), largely because CTC effectively controls CT REIT through its majority ownership and is the most substantial tenant of CT REIT, among other reasons. Any change in CTC’s rating would have a direct effect on CT REIT’s ratings.
While CTC does not provide explicit support to CT REIT LP, DBRS Morningstar assesses the level of CTC’s implicit support to CT REIT LP as strong, based on the following considerations:
(1) There are substantial contractual arrangements between CT REIT and CTC, including long-term lease agreements, service agreements, and property management agreements.
(2) CT REIT LP is essential to the operation of CTC. CT REIT LP is CTC’s most significant landlord for the foreseeable future.
(3) CTC’s effective ownership of CT REIT was 68.7% of CT REIT’s equity as at December 31, 2022.
(4) The reputational risk implications of CT REIT to CTC are high, given their strong interconnection.
(5) Integration of CTC and CT REIT is strong through strategies, operations, and oversight.
The rating on the Trust’s Senior Unsecured Debentures reflects (1) DBRS Morningstar’s expectation that no additional unsecured debt will be issued at CT REIT LP, excluding its existing credit facilities; (2) DBRS Morningstar’s expectation that future unsecured debentures will be issued only at the Trust level; (3) the Trust’s Senior Unsecured Debentures ranking pari passu with the Class C LP units of CT REIT LP in terms of distributions and claims that result in a low level of prior-ranking debt (i.e., the sum of secured debt, such as mortgages, and the limit on the unsecured credit facilities at CT REIT LP) in CT REIT’s debt structure (i.e., <40% of total debt); and (4) a provision in CT REIT LP’s credit facility that cross defaults to CTC under certain conditions.
CTC’s stated intention is to remain the majority unitholder of CT REIT over the long term. If CTC’s ownership or control in CT REIT diminishes materially or if CTC no longer represents a material proportion of CT REIT’s portfolio, by size or by rent received, CT REIT’s credit risk profile could be assessed on a stand-alone basis using DBRS Morningstar’s “Global Methodology for Rating Entities in the Real Estate Industry.”
In the event that CT REIT’s credit risk profile is assessed on a stand-alone basis, DBRS Morningstar notes that CT REIT LP’s Issuer Rating and the Trust’s Senior Unsecured Debentures rating would be limited to CTC’s rating on account of a provision in CT REIT LP's credit facility that cross defaults to CTC under certain conditions and the Senior Unsecured Debentures rank pari passu with the Class C LP units of CT REIT LP.
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).
DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023; https://www.dbrsmorningstar.com/research/412477).
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694).
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
-- Global Methodology for Rating Companies in the Merchandising Industry (September 2, 2022; https://www.dbrsmorningstar.com/research/402334).
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.
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.
DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at firstname.lastname@example.org.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
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