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Rating Action:

Moody's assigns Baa3 to Granite REIT Holdings LP's notes; outlook positive

30 Sep 2013

Approximately $460 million in securities affected.

New York, September 30, 2013 -- Moody's Investors Service rated Granite REIT Holdings Limited Partnership's senior unsecured debentures at Baa3 with a positive outlook. Moody's also affirmed the ratings of Granite Real Estate investment Trust at Baa3 and revised the rating outlook to positive.

This rating action reflects Granite's change to a REIT in January 2013 and its strategic restructuring plan. The company owns, develops and manages industrial and commercial real estate properties located in North America and Europe with good financial metrics and a prudently managed balance sheet.

The positive outlook reflects Moody's expectation that Granite will maintain its solid operational performance as a net lease company, while continuing to acquire properties leased to non-Magna tenants to increase tenant diversification.

The following ratings were affirmed with a positive outlook:

Granite Real Estate Investment Trust—senior unsecured shelf at (P)Baa3; senior unsecured debt at Baa3.

The following ratings were assigned with a positive outlook:

Granite REIT Holdings Limited Partnership- senior unsecured debt at Baa3; senior unsecured shelf at (P)Baa3; senior subordinate debt shelf at (P)Ba1; subordinate debt shelf at (P)Ba1.

RATINGS RATIONALE

The Baa3 rating reflects consistent cash flows from long-term net leases, the majority of them leased to Granite's former parent, Magna International, Inc. (Baa2 rated), from which Granite was spun off in 2003. Granite completed its conversion to a Canadian REIT in January 2013, which is expected to provide long-term cost savings as well as greater transparency to all of Granite's constituents.

Granite's debt metrics are well-situated with excellent liquidity coverage reflecting more than enough internal liquidity to cover its cash needs over the next year. Granite's main source of liquidity is cash flows from its real estate operations, which are stable given the net lease structure. The company also has a $175 million multicurrency revolver (81% available at 2Q13) that is mainly used for acquisitions, which expires in February 2015 (with a $75 million accordion and one-year extension option) and C$63 million cash on balance sheet. Liquidity needs will increase somewhat, with the planned increase in the dividend to $2.10/share on an annual basis. The only major debt maturity the company has is approximately CAD$265 million of senior unsecured debentures, due 2016. The majority of the company's assets are unencumbered, a plus; however, alternative uses for these types of assets may be limited. Fixed charge coverage is strong at 9.1x at 2Q13YTD. Granite's leverage (debt/gross assets of 15.2% at 2Q13 YTD) and net debt/EBITDA (1.6x at 2Q13 YTD) are also very strong. The company currently has a secured debt/gross assets ratio of 1.7% and is expected to maintain a mostly unsecured capital strategy going forward. Although Granite has some unhedged FX exposure, its revenues are diversified, with approximately 32% Canadian dollar, 26% US dollar and 41% Euro (1% other currencies).

These credit strengths are counterbalanced by Granite's acute concentration with Magna, which has decreased to 90% on a square footage basis and will decrease further after upcoming acquisitions, as well as its reliance on the health of the auto industry, which is a cyclical business.

Granite has a strong franchise in owning and operating 108 properties located in nine countries. Granite has 29 million square feet of leaseable area in the core real estate business, which is concentrated in terms of property type -- a credit challenge, with approximately 97% (based on square footage) manufacturing plants and warehouses and 3% office buildings. These properties are comprised predominantly of industrial plants strategically located and used by Magna to provide automotive parts and modules to the world's manufacturers of cars and light trucks for their assembly plants throughout North America and Europe. On a fair value basis at June 30, 2013, the properties are distributed in Canada (34%), Austria (31%), USA (19%), Germany (8%), Mexico (6%) and other countries (2%). The total amount of development and redevelopment has historically been low, and Moody's anticipates it remaining minimal in the intermediate term.

Moody's stated that further rating improvement would be contingent upon the current management team's ability to successfully execute their strategic plan towards greater tenant diversification with Magna's share of revenues being less than 75% based upon annualized lease payments, while continuing to prudently manage its balance sheet. A rating downgrade would occur should Granite experience a substantive weakening in its credit metrics likely resulting from a significant deterioration in the automotive industry that forces Magna International to close a substantial number of its properties leased from Granite, significant changes in growth strategy, or substantially increased leverage.

Moody's last rating action with respect to Granite (then MI Developments) was on November 11, 2011 when Moody's upgraded the senior unsecured debt to Baa3 with a stable outlook.

The principal methodology used in this rating was the Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Granite Real Estate Investment Trust. (GRT.UN.TO:TSX; GRP.U:NYSE) is a Canadian-based real estate investment trust engaged in the ownership and management of predominantly industrial properties in North America and Europe. As of June 30, 2013, Granite had total assets of C$2.2 billion and shareholders' equity of C$1.7 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Merrie S. Frankel
VP - Senior Credit Officer
Commercial Real Estate Finance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nicholas Levidy
MD - Structured Finance
Commercial Real Estate Finance
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Baa3 to Granite REIT Holdings LP's notes; outlook positive
No Related Data.
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