DBRS Morningstar Upgrades Primaris Real Estate Investment Trust to BBB (high) from BBB, Maintains Stable Trends

DBRS, Inc. (DBRS Morningstar) upgraded the Issuer Rating and Senior Unsecured Debentures rating on Primaris Real Estate Investment Trust (Primaris or the REIT) to BBB (high) from BBB and maintained the Stable trends.

The rating upgrades largely reflect Primaris' transition to an unsecured debt funding model, thereby reducing the secured debt-to total debt ratio comfortably below 40% (21.4% as at December 31, 2022) with the expectation this model will continue. Primaris has an unsecured debt stack and sizable unencumbered asset pool of $2.9 billion, which provides an additional source of liquidity. In conjunction with this funding model, Primaris is likely to maintain its strong operating performance as it relates to same-property net operating income growth, increased occupancy, and strong rents and tenant sales.

Primaris was formed on December 31, 2021, by way of spin-out from H&R Real Estate Investment Trust (rated BBB (high) with a Stable trend by DBRS Morningstar) of its Primaris properties portfolio (27 properties, 7.6 million square feet (sf) of gross lease area (GLA), $2.4 billion of gross asset value (GAV)) and a contribution of retail properties from Healthcare of Ontario Pension Plan (HOOPP) (eight properties, 3.9 million sf of GLA, $0.8 billion of GAV) (the Transaction). As a result of the Transaction, Primaris is an owner/operator of a portfolio of enclosed malls and open-air centers, together comprising 35 properties, 10.9 million sf of total GLA, and $3.2 billion of total assets at the end of December 31, 2022.

The Stable trends reflect the expected continued improvement in Primaris' leverage as measured by the total debt-to-EBITDA ratio as a result of the Transaction and is at 5.5 times (x) at the end of December 31, 2022. The Stable trends also reflect Primaris' ability to sustain DBRS Morningstar's business risk assessment of the REIT's asset quality, market position, lease maturity profile, and tenant quality.

The ratings are supported by (1) Primaris’ strong balance sheet with low leverage and financial flexibility as reflected in the REIT’s strong total debt-to-EBITDA metric, which is likely to remain in the low to mid-5x range, and with the REIT’s EBITDA interest coverage, similarly likely to remain in the low to mid-4x range until the end of 2024; (2) DBRS Morningstar’s assessment of the REIT’s solid asset quality with a portfolio of well-maintained, well-located open-air centers and enclosed malls that are often dominant within their respective secondary markets; (3) Primaris’ well-laddered lease maturity profile with a diversified tenant roster, with several high-quality investment-grade tenants among its largest; and (4) the REIT’s robust market position within its well-defined niche as one of the largest owner/operators of enclosed shopping centers nationally.

The ratings are constrained by (1) concentration risks related to Primaris' portfolio as a niche player, including asset type and property concentrations; (2) execution risks for a new entity with an unproven strategy as a pure play owner/operator of enclosed malls; and (3) development and intensification given several identified opportunities for growth, which could contribute to potential financial risk metric volatility.

DBRS Morningstar would consider a negative rating action should Primaris’ operating environment deteriorate, causing DBRS Morningstar to reassess the REIT’s qualitative business risk assessment factors as well as the REIT’s key financial risk assessment metrics, or if the secured debt-to-total debt ratio is no longer comfortably below 40% on a sustained basis. A positive rating action is unlikely in the near to medium term given the overall business risk assessment.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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).

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

The principal methodologies applicable to the rating are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683).

The 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 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.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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