DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debenture rating on Choice Properties Limited Partnership (CPLP) as well as the Senior Unsecured Debenture (guaranteed by CPLP) rating on Choice Properties Real Estate Investment Trust (CPREIT; together, Choice Properties) at BBB (high). All trends are Stable. The confirmations follow the execution of CPREIT’s revised credit facility and reflect the removal of the provision whereby, 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 default. As a result, Choice Properties’ ratings are no longer constrained by Loblaw’s rating.
The Stable trends consider DBRS Morningstar’s modest downward revision to Choice Properties’ financial risk assessment (FRA). DBRS Morningstar previously expected Choice Properties’ total debt-to-EBITDA ratio to be in the low- to mid-7.0 times (x) range and its EBITDA interest coverage ratio (ICR) to be around 3.40x. DBRS Morningstar now expects Choice Properties’ total debt-to-EBITDA ratio to be in the mid-7.0x range and its EBITDA ICR to be around 3.20x through YE2024 compared with 7.6x and 3.55x, respectively, for the last 12 months ended June 30, 2023. DBRS Morningstar based its revised FRA of Choice Properties on the current macroeconomic environment, which is characterized by slowing growth and persistent capital constraints (i.e., higher-cost capital), and DBRS Morningstar’s view on the possibility that Choice Properties could look to expand its current capital recycling, development, and intensification strategy.
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 largely retail-focused portfolio and the majority of revenue derived from Loblaw banners; and (2) relatively high leverage for the current rating category as measured by the total debt-to- EBITDA ratio.
DBRS Morningstar may consider a positive rating action if Choice Properties continues to incrementally improve its asset quality and diversification or demonstrate a sustained improvement in its FRA. DBRS Morningstar may consider a negative rating action if Choice Properties’ total debt-to-EBITDA ratio exceeds 8.7x and its EBITDA ICR deteriorates to below 2.7x 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/416784/dbrs-morningstar-criteria-approach-to-environmental- social-and-governance-risk-factors-in-credit-ratings (4 July 2023).
All figures are in Canadian dollars unless otherwise noted.
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)
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.
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The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit 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 credit 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 credit ratings are under regular surveillance.
Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
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