DBRS Confirms Granite REIT Holdings Limited Partnership at BBB with a Stable Trend

DBRS Limited (DBRS) confirmed the rating of Granite REIT Holdings Limited Partnership’s (GRHLP) Senior Unsecured Debentures at BBB with a Stable trend. DBRS notes that the rating is based on the credit risk profile of the consolidated entity, including GRHLP and its subsidiaries, Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust). The rating is supported by Granite’s strong anchor tenant in Magna International Inc. (rated A (low) with a Stable trend by DBRS) via its operating subsidiaries (together, Magna), stable industrial portfolio, low proportion of secured debt and financial flexibility (total debt-to-EBITDA of 3.5 times) to execute its strategic plan of leveraging the balance sheet to acquire productive assets. The rating is restrained by Granite’s small portfolio, relative to similarly rated entities; high proportion of special-purpose facilities; tenant and geographic concentration; and the execution risk of Granite’s aforementioned strategic plan.

The Stable rating outlook reflects DBRS’s view that, in the near to medium term, Granite will lever the balance sheet and deploy several hundred million dollars to acquire accretive assets, primarily in the United States, potentially resulting in improving the diversification of the portfolio by reducing property/tenant/geographic concentration risks while increasing leverage.

During fiscal year 2017 (F2017), Granite’s EBITDA was $192.7 million, a reduction of $0.3 million or 0.2% over the prior year that was largely driven by lease renewals and extensions at lower rental rates in Canada and the United States; vacancies (incremental vacancy of 1.0%) and disposals; and negative foreign exchange impacts, which were partially offset by expansions, contractual rent increases and acquisitions. Granite continues to generate significant free cash flow, achieving $41.6 million in F2017.

DBRS would consider a positive rating action should Granite significantly increase the size and scale of its portfolio as measured by EBITDA while continuing to diversify and upgrade its portfolio and while maintaining key financial metrics at levels commensurate with the current rating category and a low proportion of secured debt to total debt (less than 40%). Alternatively, DBRS would consider a negative rating action should the proportion of secured debt materially increase in Granite’s capital structure such that secured debt comprises more than 40% of total debt on a sustained basis.

DBRS notes that the Senior Unsecured Debentures of GRHLP are unconditionally guaranteed by Granite REIT and Granite REIT Inc. DBRS further notes that Granite’s reported financial statements are based on the consolidated entity.

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

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

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.com.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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