DBRS Confirms First Capital Realty at BBB (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the rating of First Capital Realty Inc.’s (First Capital or the Company) Senior Unsecured Debentures at BBB (high) with a Stable trend. The rating confirmation takes into consideration the expected progress First Capital has made in enhancing its portfolio quality by focusing on real estate investments and development in growing urban markets while divesting non-strategic assets in smaller markets. The Stable trend reflects DBRS’s expectation for gradual earnings growth in the near term, while maintaining reasonable debt levels.

The rating continues to be supported by First Capital’s portfolio of unenclosed supermarket- and drugstore-anchored shopping centres, diverse tenant base, strong record of development and low proportion of secured debt. In addition, the rating also reflects First Capital’s relatively small portfolio, geographic concentration, low coverage ratios, high leverage ratio and relatively high proportion of anchor tenants.

The Stable outlook reflects DBRS’s expectation that First Capital’s near-term earnings profile should gradually improve within the current rating category, as the Company benefits from its enhanced portfolio quality and full-year earnings contributions from recent acquisitions and completed developments. DBRS also expects the Company to generate modest internal cash flow growth from a reasonable amount of expiring leases with below-market rental rates in the near term. Although the Alberta economy is expected to remain challenging in the near term, DBRS believes First Capital’s exposure to Alberta (accounting for 23% of annual minimum rent for YE2015) is somewhat manageable, given its focus on non-discretionary-type retail tenants.

DBRS expects that any acquisitions will likely occur on an opportunistic or strategically motivated basis for First Capital, mainly because of currently high valuation (less accretive) for attractive retail assets in Canada. DBRS anticipates First Capital will fund its real estate investments mainly with the proceeds from asset dispositions (valued at approximately $97.7 million as at YE2015), free cash flow and, to a lesser extent, incremental debt. The current rating incorporates DBRS’s expectation that First Capital keeps debt levels and coverage ratios close to current levels. A negative rating action could result from weaker operating and earnings performance and/or higher financial leverage, such that EBITDA interest coverage falls below 2.20x on a sustainable basis. On the other hand, a positive rating action would likely be a result of (1) a material increase in portfolio size and/or (2) a decrease in financial leverage that results in a sustained improvement in EBITDA interest coverage to above 3.20x.

Notes:
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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Entities in the Real Estate Industry (May 2015), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.