Morningstar DBRS Confirms Credit Ratings on Granite REIT Holdings Limited Partnership at BBB (high) with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Granite REIT Holdings Limited Partnership's (GRHLP) Issuer Rating and Senior Unsecured Debentures rating at BBB (high), both with Stable trends.

Morningstar DBRS based the credit ratings on the credit risk profile of the combined entity, including GRHLP and its subsidiaries, as well as Granite Real Estate Investment Trust (Granite REIT) and Granite REIT Inc. (collectively, Granite or the Trust).

KEY CREDIT RATING CONSIDERATIONS

The Stable trends consider a gradual improvement of Granite's diversification business risk assessment (BRA) factor by way of property level concentration, and visibility towards lower trending leverage as measured by total debt-to-EBITDA, while maintaining a relatively strong EBITDA interest coverage ratio. Morningstar DBRS' medium term financial risk assessment include assumptions of (1) future growth funded with a mix of debt, equity and cash on hand; (2) EBITDA interest coverage ratio remaining above 4.0x; (3) modest same property net operating income (SPNOI) growth; and (4) tempered development activity. Morningstar DBRS notes the U.S. portfolio experienced a decline in occupancy driven largely by recently delivered speculative development and does not expect future large-scale speculative development projects in the near term.

CREDIT RATING DRIVERS

All else equal, Morningstar DBRS would consider a positive rating action should the Trust achieve a Morningstar DBRS total debt-to-EBITDA of 7.2x or better on a sustained basis, while maintaining a Morningstar DBRS EBITDA interest coverage ratio above 4.0x on a sustained basis. Conversely, Morningstar DBRS would consider a negative rating action should Granite's total debt-to-EBITDA exceed 9.3x on a sustained basis, which would cause Morningstar DBRS to review the one-notch overlay factor applicable to the low proportion of secured debt in the debt stack.

FINANCIAL OUTLOOK

Over the medium term, Morningstar DBRS projects total debt-to-EBITDA to improve to the low-to-mid 7.0x range and EBITDA interest coverage to remain greater than 4.0x. Weakened EBITDA interest coverage is driven by the drawdown of the September 2026 Term Loan in September 2023, the issuance of the Series 7 Senior Unsecured Debentures in October 2023 to refinance the lower cost Series 3 Senior Unsecured Debentures due November 2023 and the planned refinancing of the US$185 million December 2024 Term Loan which is currently swapped to EUR at an all-in effective rate of 0.27%. For comparative purposes, the Trust had a Morningstar DBRS total debt-to-EBITDA and EBITDA interest coverage ratio of 7.9x and 5.2x, respectively, as of YE2023.

CREDIT RATING RATIONALE

The credit rating confirmation is supported by Granite's (1) institutional-quality industrial real estate portfolio; (2) completely unsecured debt capital stack and sizable unencumbered asset pool valued at $8.8 billion at December 31, 2023, providing ample coverage over unsecured debt of 2.2x (inclusive of undrawn amounts on unsecured credit facilities); (3) financial flexibility provided by a sound balance sheet and relatively low in-place cost of debt; and (4) strong lease profile with high-quality tenants including Magna International, Inc. (rated A (low) with a Stable trend by Morningstar DBRS) and Amazon.com, Inc. The credit ratings are constrained by Granite's (1) lack of scale in its trade areas with a relatively geographically dispersed portfolio; (2) tenant concentration with 44.5% of annualized revenue derived from the Trust's top 10 tenants (as at December 31, 2023), including a Tier 1 global automotive supplier in Magna International Inc. and its operating subsidiaries; and (3) asset-type concentration with a portfolio solely focused on the industrial segment, notwithstanding some diversification across different industrial uses.

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 Granite REIT Holdings Limited Partnership the BRA factors were considered in the order of importance contemplated in the methodology.

B)	Weighting of FRA Factors

In the analysis of Granite REIT Holdings Limited Partnership 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 Granite REIT Holdings Limited Partnership 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: 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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