Morningstar DBRS Confirms Dream Industrial Real Estate Investment Trust at BBB with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures credit rating on Dream Industrial Real Estate Investment Trust (Dream Industrial or the REIT) at BBB with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend considers Morningstar DBRS' expectation for continued organic growth within Dream Industrial's portfolio as embedded lease mark-to-market potential is captured and near-term developments are completed and stabilized, contributing to net operating income (NOI) growth. Morningstar DBRS recognizes a trend toward deleveraging as measured by Morningstar DBRS total debt-to-EBITDA on account of the continued NOI growth. Conversely, Morningstar DBRS anticipates tolerable deterioration in the Morningstar DBRS EBITDA interest coverage ratio to below 5.0 times (x) through YE2024, down from current levels (6.23x for the last 12 months ended September 30, 2023) as historically low-cost debt is replaced with debt at current market rates. While Morningstar DBRS would normally award uplift to the credit ratings for a low proportion of secured debt in the capital stack, Morningstar DBRS awaits Dream Industrial's further progress on deleveraging to a level more commensurate with the credit ratings, as measured by Morningstar DBRS total debt-to-EBITDA.

Morningstar DBRS did not factor in distributions from the U.S. fund and Dream Summit JV (together, the equity accounted investments) in its calculation of EBITDA. Morningstar DBRS assessed the distributions the REIT receives from its interest in its equity accounted investments and deemed the distributions as not material enough to warrant a credit rating benefit at this time. Morningstar DBRS is of the view that the ownership interest in the equity accounted investments are core long term investment holdings of the REIT, which was recognized in Morningstar DBRS' previous review of Dream Industrial by way of an upward revision to market position. The distributions further enhance the diversification of the REIT's cash flows and act as a source of cash for capital requirements.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a positive rating action should the REIT's leverage as measured by Morningstar DBRS total debt-to-EBITDA decline below 9.2x on a sustained basis while maintaining a low secured debt-to-total debt ratio, all else equal. Morningstar DBRS would consider a negative rating action should the REIT's Morningstar DBRS total debt-to-EBITDA deteriorate above 10.0x and Morningstar EBITDA interest coverage decline below 4.0x on sustained basis, all else equal.

FINANCIAL OUTLOOK
Morningstar DBRS projects Morningstar DBRS total debt to EBITDA to improve to the low-8.0x range through YE2025, largely driven by EBITDA growth from mark-to-market leases and additional development NOI. Morningstar DBRS EBITDA interest coverage is forecast to weaken to the high-4.00x range by YE2024 and mid-4.00x range by YE2025 but remain strong for the current credit rating category. For comparative purposes, the REIT had a Morningstar DBRS total debt-to-EBITDA and EBITDA interest coverage ratio of 9.9x and 6.23x, respectively, as of the last 12 months ended September 30, 2023.

CREDIT RATING RATIONALE
The credit rating confirmations are supported by (1) institutional-quality industrial assets that should continue to provide cash flow stability; (2) superior tenant, property, and geographic diversification; and (3) DBRS Morningstar’s expectation for EBITDA interest coverage to remain strong in the high 4.00x range through YE2024 as a result of the REIT’s demonstrated ability to swap Canadian dollar denominated debt underwritten in Canada for euro-denominated debt at relatively low rates, notwithstanding the aforementioned expected deterioration in the metric. The credit ratings are constrained by (1) elevated leverage for the BBB credit rating category; (2) asset-type concentration as a pure play in the industrial real estate segment; and (3) relatively concentrated lease maturities with a weighted-average lease term to maturity of 4.4 years, combined with elevated counterparty risk relative to DBRS Morningstar’s real estate coverage universe with a broad range of smaller nonrated tenants, notwithstanding the potential upside for lease renewals and new leases to be rolled up to market rents which are significantly higher in certain markets relative to in-place rents.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Dream Summit, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Dream Summit, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Dream Summit, the BRA carries greater weight than the FRA.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023), https://dbrs.morningstar.com/research/412477

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (November 9, 2023),
https://dbrs.morningstar.com/research/423052.
--DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023)
https://dbrs.morningstar.com/research/411694.
--DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (September 27, 2023)
https://dbrs.morningstar.com/research/421119.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577