DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debenture rating of Choice Properties Limited Partnership (CPLP) as well as the Senior Unsecured Debenture (guaranteed by CPLP) rating of Choice Properties Real Estate Investment Trust (CPREIT or the Trust; together, Choice Properties) at BBB (high). All trends are Stable. DBRS Morningstar assesses the ratings on a consolidated credit basis since CPLP guarantees CPREIT’s Senior Unsecured Debentures. DBRS Morningstar notes that while Choice Properties’ credit risk profile is assessed on a stand-alone basis, DBRS Morningstar understands that under certain circumstances, if Loblaw Companies Limited (Loblaw; rated BBB (high) with a Stable trend by DBRS Morningstar) were insolvent, CPREIT’s credit facility would also be in default, and thus Choice Properties’ ratings can be no higher than that of Loblaw.
The Stable trends reflect (1) the recent confirmation of Loblaw's Issuer Rating at BBB (high) with a Stable trend on May 18, 2023, and (2) DBRS Morningstar's expectation that Choice Properties will maintain its key financial metrics near current levels (i.e., a total debt-to-EBITDA ratio in the low to mid-7.0 times (x) range and EBITDA interest coverage around 3.4x) while undertaking its development and intensification program and continuing its capital recycling initiatives.
The ratings continue to be supported by Choice Properties’ (1) strong market leadership, particularly in necessity-based retail, across Canada’s largest urban centres; (2) strategic alliance with Loblaw; (3) long-term lease profile with low counterparty risk, which provides underlying stability to cash flows; (4) large, well-located portfolio of retail, industrial, mixed-use residential, and office properties; and (5) solid financial risk profile with high interest coverage and a high level of unsecured debt in the debt structure supported by a large pool of unencumbered assets. The ratings continue to be constrained by (1) concentration risks with a retail-focused portfolio and the majority of revenue derived from Loblaw banners; (2) a provision in CPREIT’s credit facility whereby, under certain circumstances, if Loblaw were insolvent, CPREIT's credit facility would be in default; and (3) relatively high leverage for the ratings as measured by the total debt-to-EBITDA ratio.
DBRS Morningstar may take a positive rating action on Choice Properties if it upgrades the ratings on Loblaw. Conversely, DBRS Morningstar may take a negative action on Choice Properties if it downgrades the ratings on Loblaw or if there is broad-based weakening in the operating environment and deteriorating earnings performance that leads to material declines in EBITDA and operating cash flows, as well as higher financial leverage.
ENVIRONMENTAL, SOCIAL, AND 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.
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 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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