DBRS Morningstar Removes First Capital Realty Inc. from Under Review–Developing Implications, Confirms at BBB with Stable Trend

DBRS Limited (DBRS Morningstar) removed First Capital Realty Inc.’s (First Capital or the Company) Senior Unsecured Debentures from Under Review with Developing Implications, under which it was initially placed on April 16, 2019. At the same time, DBRS Morningstar confirmed the Company’s Senior Unsecured Debentures rating at BBB with a Stable trend.

The confirmation follows the announced majority shareholder approval of First Capital’s conversion to a real estate investment trust (REIT; the REIT Conversion) and DBRS Morningstar’s review of documentation pertaining to the REIT Conversion such that DBRS Morningstar believes the existing Senior Unsecured Debentures are not disadvantaged with respect to ranking and seniority in the structure. The actual closing of the REIT Conversion is anticipated by December 30, 2019.

The newly formed First Capital REIT will be co-principal debtor under the Indenture, and the Senior Unsecured Debentures shall be guaranteed by all applicable guarantor entities required by the terms of the Indenture. DBRS Morningstar expects that any future issuances of senior unsecured debentures will rank pari passu with the existing Senior Unsecured Debentures.

The rating is supported by the Company’s stable portfolio of supermarket- and drugstore-anchored retail properties, leading market position within its core trade areas, resilient tenant base, and development capabilities. The rating benefits from a low proportion of secured debt as the Company’s secured debt-to-total debt ratio is expected to remain comfortably below 40% on a sustained basis (calculated by DBRS Morningstar at 30.7% as at September 30, 2019). The rating also takes into consideration First Capital’s evolved urban investment strategy with a heightened focus on dispositions of non-core assets and capital recycling to lower leverage and fund redevelopment and intensification projects in its core urban markets, which should lead to improving portfolio quality and productivity of underlying real estate over time. DBRS Morningstar estimates that for the last 12 months ended September 30, 2019, total debt-to-EBITDA and EBITDA interest coverage (including capitalized interest) were 11.4 times (x) and 2.41x, respectively.

A positive rating action could result if First Capital executes its disposition program and brings total debt-to-EBITDA, as measured by DBRS Morningstar, below 9.8x on a sustained basis, all else equal. DBRS Morningstar does not anticipate a negative rating action given that First Capital is well positioned within the current rating category.

Notes:
The principal methodologies are Rating Entities in the Real Estate Industry, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, DBRS Criteria: Guarantees and Other Forms of Support, and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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