DBRS Morningstar Confirms H&R Real Estate Investment Trust’s Issuer Rating and Senior Unsecured Debentures at BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed H&R Real Estate Investment Trust’s (H&R or the Trust) Issuer Rating and Senior Unsecured Debentures rating at BBB with Stable trends. These rating actions reflect the Trust’s strong operating performance, particularly in its residential and industrial segments, and ongoing capital recycling initiatives as H&R continues executing its strategic plan to dispose of its grocery-anchored retail portfolio and several office properties and rezone several of its Canadian office properties as residential and industrial properties.

The Stable trends reflect DBRS Morningstar’s expectation that H&R’s total debt-to-EBITDA ratio will remain stable near current levels (9.3 times (x) for the last 12 months ended June 30, 2023 (LTM)) and EBITDA interest coverage will continue to deteriorate to the 2.40x-range in the near to medium term from the current level of 2.68x for the LTM. DBRS Morningstar expects H&R’s strong operating performance to moderate through YE2024 and that the Trust will continue to dispose of noncore office and retail assets, reinvest the proceeds in acquisitions or developments of residential or industrial assets, repay debt, and buy back units.

The ratings continue to be supported by H&R's (1) high-quality real estate portfolio with strong positioning in key markets, notwithstanding recent dispositions; (2) highly creditworthy commercial tenants with long-term leases; and (3) solid asset type and geographical diversification with a broadly diversified portfolio across real estate subsectors and in several markets in Canada and the U.S. The ratings continue to be constrained by the Trust’s (1) elevated leverage, (2) relatively smaller portfolio size, (3) property concentration, and (4) execution risk related to the Trust’s strategic plan such that DBRS Morningstar would expect a greater buffer to threshold leverage levels for a given rating in light of capital recycling and development initiatives as well as potential further downward revisions in H&R's business risk assessment, particularly its lease maturity profile, tenant quality, and market position.

DBRS Morningstar would consider negative rating actions if H&R's total debt-to-EBITDA ratio rises above 9.8x and EBITDA interest coverage declines below 2.3x, on a sustained basis. Given the challenges noted above, a positive rating action would require a material change in H&R's financial policy (e.g., significantly lower leverage, unencumbered balance sheet, etc.) and is thus not currently contemplated.

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 (July 4, 2023).

Notes:
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 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.

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@dbrsmorningstar.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.

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.

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 info@dbrsmorningstar.com.

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