Morningstar DBRS Confirms Real Estate Split Corp.'s Preferred Shares at Pfd-3 (high)

DBRS Limited (Morningstar DBRS) confirmed its credit rating of Pfd-3 (high) on the Preferred Shares issued by Real Estate Split Corp. (the Company). The Company invests in a diversified portfolio composed of dividend-paying securities of issuers operating in the real estate or related sectors, including real estate investment trusts, that the Middlefield Capital Corporation (the Advisor), believes are well-positioned to benefit from low interest rates, the rapid adoption of e-commerce, the growth of data infrastructure as well as attractive valuations in various areas of the real estate sector. As of October 17, 2024, the Company held a portfolio of common shares (the Portfolio) issued by 20 entities. The investments were largely made in Canadian entities (91.4%) with a smaller amount in U.S. issuers (8.6%). The Portfolio may include securities denominated in currencies other than the Canadian dollar (CAD), exposing the Preferred Shares to foreign currency risk. The Company has not hedged its current U.S. dollar (USD) exposure to currency fluctuations; however, it closely monitors USD/CAD currency movements. The Portfolio is actively managed in accordance with the Company's investment objectives, strategy, and restrictions.

The Preferred shareholders are entitled to a quarterly distribution of $0.13125 per Preferred Share, representing a yield of 5.25% per annum on the issue price of $10.0. The targeted monthly cash distributions to the Class A Shares are $0.13 per Class A Share, representing a yield of 10.4% per annum on the initial issue price of $15.0. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or the net asset value (NAV) per unit (Unit; one Unit is composed of one Preferred Share and one Class A Share) falls to less than $15.0.

On June 25, 2024, Middlefield Limited (the Manager) announced its intention to merge the Middlefield Global Real Asset Fund (Real Asset) into the Company. The unitholders of Real Asset voted in favour of a resolution approving the merger on September 24, 2024, which is expected to be completed on or about December 6, 2024 (the Effective Date). Pursuant to the merger, Real Asset unitholders will receive Units of the Company. The merger will be completed at an exchange ratio calculated as the NAV per unit of Real Asset divided by the NAV per Unit of the Company, both determined as at the close of trading on the Toronto Stock Exchange on the business day immediately prior to the Effective Date. Therefore, there is no expected impact to the NAV per Unit of the Company.

After the completion of the merger, the Company's portfolio may have exposures to an additional number of large capitalization dividend paying issuers that are aligned with its investment strategy, including an exposure to Blackstone Core+ Real Estate Investment Limited Partnership. The Company's net assets are expected to increase by approximately $28 million, based on the net asset value of the Real Asset fund as of October 17, 2024, which may lead to a gain in operational efficiency.

As of October 7, 2024, the downside protection increased to 55.6% from 47.9% as of October 31, 2023. Dividend coverage based on the current dividend yield on the Portfolio was above one time. Without considering the capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the targeted monthly distributions to the Class A Shares are likely to create an average annual grind on the Portfolio's NAV equivalent to 6.4% over the remaining term to maturity. To supplement Portfolio income, the Manager may engage in covered call option writing on all, or a portion of, the securities held in the Portfolio or rely on realized capital gains. Downside protection and potential grind in the Portfolio are expected to remain mostly unchanged after the merger, and dividend coverage is expected to remain above one time.

Morningstar DBRS notes the following announcements from the Company during the past 12 months:

-- On April 23, 2024, the company completed an overnight treasury offering of Class A and Preferred Shares, raising approximately $9.5 million in gross proceeds. The Class A shares were offered at a price of $11.7 per share for a yield-to-maturity of 13.3%, and the Preferred Shares were offered at a price of $9.65 per share for a yield-to-maturity of 7.5%.

The maturity date for both classes of shares is December 31, 2025. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio, up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares.

Considering the levels of downside protection, potential grind until maturity, the dividend coverage above one time, and foreign-exchange exposure, Morningstar DBRS confirmed its credit rating on the Preferred Shares at Pfd-3 (high).

The main constraints to the credit rating are the following:

(1) Market fluctuations could affect the Company's NAV. Resulting volatility in prices, along with changes in the dividend policies of the underlying issuers, may result in significant reductions in the Preferred Shares' dividend coverage or downside protection from time to time.

(2) Reliance on the Portfolio Manager to generate additional income, through option writing, to meet distributions and other trust expenses without having to liquidate the Portfolio's securities.

(3) The high concentration of the Portfolio in one industry (real estate).

(4) Potential foreign-exchange risk because the income received on the Portfolio is not hedged all the time.

(5) Stated monthly distributions on the Class A Shares may create a grind on the Portfolio. This risk is mitigated by an asset coverage test of 1.5x that ensures sufficient levels of downside protection to the holders of the Preferred Shares.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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

The principal methodology applicable to the credit rating is Rating Canadian Split Share Companies and Trusts (June 21, 2024), https://dbrs.morningstar.com/research/434794.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.