DBRS, Inc. (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Crombie Real Estate Investment Trust (Crombie or the Trust) at BBB (low). Both trends are Stable.
The rating confirmations and Stable trends consider strong operating results in Crombie’s grocery and pharmacy-anchored properties and continued improvement in Crombie’s financial risk metrics. Crombie’s total-debt-to-EBITDA ratio for the last 12 months ended March 31, 2023, was 8.6 times (x) (including Crombie’s share of joint-venture debt), which is lower than DBRS Morningstar’s prior year expectations for total-debt-to-EBITDA ratio of 9.3x by YE2022 and 8.9x by YE2023. DBRS Morningstar now expects the Trust to maintain its leverage around 9.0x in the near- to medium term, which is based on Crombie's robust development-led growth initiatives being largely funded through proceeds from opportunistic asset sales and/or equity issuances and supported by stabilization of recently completed developments.
The Stable trends also reflect Crombie executing its near-term development pipeline, modernizations, acquisitions, dispositions with a strategic focus on high-growth urban markets. DBRS Morningstar also considers Crombie’s lease maturity profile/tenant quality, giving consideration for its long and varied lease maturity profiles and largely investment-grade-rated tenant roster as the credit profile of its largest tenant, Sobeys Inc. (Sobeys; rated BBB with a Stable trend by DBRS Morningstar), stabilizes and improves.
The ratings continue to be supported by Crombie's grocery- and pharmacy-anchored properties, long weighted-average lease terms with investment-grade tenants, built-in contractual rental rate increases in most of its leases, geographically diverse portfolio, and strategic relationship with Empire Company Limited/Sobeys Inc. The ratings continue to be constrained by a moderate financial profile, development execution risk, asset type and tenant concentration, and a relatively small portfolio with exposure to secondary and tertiary Canadian markets.
A positive rating action could result from a significant decrease in financial leverage such that Crombie's total debt-to-EBITDA ratio falls below 8.0x on a sustained basis or if secured debt-to-total debt falls comfortably below 40% on a sustained basis, all else being equal. A negative rating action could result from weaker operating and earnings performance that hurts financial metrics, including a total debt-to-EBITDA ratio that is higher than 10.3x on a sustained basis or if EBITDA interest coverage falls below 2.3x on a sustained basis, all else being equal.
While common ownership and the strong connection between Sobeys’ and Crombie’s operations closely align their interests, Crombie’s ratings do not necessarily move in tandem with Sobeys’ ratings. DBRS Morningstar would likely leave Crombie’s ratings unchanged if should there be any rating action with Sobeys’ ratings.
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)
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.
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