DBRS Confirms Choice Properties Limited Partnership at BBB, Maintains Positive Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debenture rating of Choice Properties Limited Partnership (CPLP) and the Senior Unsecured Debenture (guaranteed by CPLP) rating of Choice Properties Real Estate Investment Trust (the Trust; together with CPLP, CP REIT or Choice Properties) at BBB. All trends remain Positive. These confirmations and reiteration of the Positive trend reflect DBRS’s recent rating action on Loblaw Companies Limited (Loblaw; rated BBB with a Positive trend by DBRS; see the DBRS press release dated November 17, 2017).

The CPLP ratings take into consideration DBRS’s view that the credit risk profiles and ratings of CPLP are aligned to that of Loblaw, as Loblaw effectively controls CP REIT through its majority ownership and is the dominant tenant. The Senior Unsecured Debenture (guaranteed by CPLP) of the Trust is based on the guarantee provide by CPLP.

While Loblaw does not provide explicit support to CPLP, DBRS assesses the level of implicit support by Loblaw to CPLP as strong based on the following considerations, which take into account essentiality, contractual obligations, ownership, reputation and integration: (1) CPLP is essential to the operation of Loblaw. CPLP is Loblaw’s dominant landlord, representing a substantial number of Loblaw’s corporate- and franchise-owned stores, rent and gross leasable area, both currently and for the foreseeable future, with the weighted-average term to maturity of Loblaw-banner leases at 10.5 years as at September 30, 2017. (2) There are substantial contractual arrangements between CPLP and Loblaw, including (a) the Strategic Alliance Agreement whereby CPLP will have the right of first offer to purchase any property in Canada that Loblaw seeks to sell; (b) Loblaw will be generally required to present shopping-centre property acquisitions in Canada to CPLP to allow for a right of first opportunity to acquire the property itself; (c) CPLP has the right to participate in future shopping-centre developments involving Loblaw; and (d) CPLP will compensate Loblaw, over time, with intensification payments, as CPLP pursues development, intensification or redevelopment of excess land acquired from Loblaw. There are also long-term lease agreements, services and property management agreements between Loblaw and CPLP. (3) Loblaw held an 82.4% direct effective interest in the Trust as at September 30, 2017. Loblaw’s controlling shareholder, George Weston Limited (rated BBB with a Stable trend by DBRS), owns a 6.1% direct effective interest in the Trust as at September 30, 2017. The reputational risk implications of CPLP to Loblaw are high given its strong interconnections with CPLP. (4) Integration between Loblaw and CPLP is strong through strategies, operations and oversight. Given its ownership interest in the Trust, Loblaw has the right to nominate the nine trustees who serve on the Trust’s board.

Choice Properties’ credit risk profile could be assessed on a stand-alone basis if Loblaw’s ownership and/or control in the Trust were to diminish materially over time. The ratings of CPLP and the Trust could also move independently of Loblaw, without a meaningful reduction of ownership by Loblaw, should CPLP materially grow and diversify its tenant base over the longer term. Should this occur, Choice Properties’ stand-alone risk profile would be based on the DBRS methodology “Rating Entities in the Real Estate Industry,” which incorporates business and financial risk assessment factors.

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 principal methodologies are Rating Entities in the Real Estate Industry (April 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

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

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.

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