Morningstar DBRS Changes Trends on Dream Summit Industrial LP to Stable from Positive, Confirms Credit Ratings at BBB

DBRS Limited (Morningstar DBRS) changed the trends to Stable from Positive and confirmed the Issuer Rating and Senior Unsecured Debentures credit rating of Dream Summit Industrial LP (Dream Summit or the Company) at BBB.

KEY CREDIT RATING CONSIDERATIONS
In restoring the Stable trends, Morningstar DBRS considered that Dream Summit’s financial risk assessment (FRA) has weakened somewhat, primarily as a result of the higher interest rate environment. Morningstar DBRS expects Dream Summit’s EBITDA interest coverage metric will continue to deteriorate in the near to medium term. Additionally, Dream Summit’s leverage is expected to remain higher than DBRS Morningstar previously expected. The lower FRA has been somewhat offset by improvement in the Company’s overall business risk assessment (BRA). In Morningstar DBRS’ view, Dream Summit’s market position and portfolio size have strengthened as a result of continued growth in its portfolio and successful execution of its strategy by way of its asset manager (indirectly Dream Unlimited Corp.).

CREDIT RATING DRIVERS
All else equal, Morningstar DBRS would consider a positive rating action should the Company’s earnings profile improve considerably and/or capital allocation were managed such that key credit metrics remain strong for the current rating (i.e. Morningstar DBRS total debt-to-EBITDA leverage is maintained structurally below 8.0 times (x) on a sustained basis). The trigger for a positive rating action has remained the same as improvements in the BRA have afforded a similar leverage trigger in relation to prior review, notwithstanding the expectation for deteriorating EBITDA interest coverage.

Conversely, Morningstar DBRS would consider a negative rating action should Morningstar DBRS total debt-to-EBITDA rise above 9.3x with deteriorated levels of interest coverage beyond our current level of expectations or if Dream Summit reverses course on the progress made with respect to unencumbering its balance sheet (i.e. its low secured debt-to-total debt ratio).

FINANCIAL OUTLOOK
Morningstar DBRS projects Morningstar DBRS EBITDA interest coverage metrics to weaken to the low-3.00x by YE2024 primarily as a result of the greater cost of debt as the Company continues to grow its portfolio. Morningstar DBRS debt-to-EBITDA is forecast to be near 9.0x at YE2023 before modestly improving to the high 8.0x range at YE2024, largely driven by EBITDA growth from same-store net operating income growth and additional revenue from recent acquisitions. Morningstar DBRS leverage expectations for Dream Summit factor in equity contributions from its well capitalized ultimate shareholders, GIC (Realty) Private Limited and Dream Industrial REIT (rated BBB with stable trends by Morningstar DBRS).

CREDIT RATING RATIONALE
The credit rating confirmations are supported by the Company’s (1) predominately unsecured debt structure with a secured debt-to-total debt ratio below 40% (26.6% as at September 30, 2023); (2) adequate-quality assets that should provide average cash flow stability; (3) superior property and tenant diversification; (4) strong operating performance and successful accretive acquisition strategy; and (5) strong interest coverage for the current rating category, notwithstanding the expected deterioration to be in the low-3.0x range by YE2024 (from 4.86x for the 9 months ended September 30, 2023). Relative to Morningstar DBRS’ real estate coverage universe, the credit ratings are constrained by (1) a below-average portfolio size as measured by EBITDA, notwithstanding continued robust growth in the near to medium term; (2) weak asset-type diversification as a pure play in the light-industrial segment; and (3) below-average tenant quality.

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.

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.

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