DBRS Morningstar 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 real estate investment trusts (REIT) issuers, primarily in Canadian space, engaged in e-commerce, data infrastructure, and the multifamily, retail, office, and healthcare sectors. As of June 30, 2023, the Company held a portfolio of common shares (the Portfolio) issued by 21 entities. As on September 30, 2023, the investments were largely made in Canadian entities (91.9%) with a smaller amount in U.S. issuers (8.1%). The Company witnessed growth in total assets to $139.8 million as of September 29, 2023, from $119.1 million as of December 31, 2022. Year-to-date (YTD) growth is driven by new issuances made during the year through both overnight offerings and 'at-the-market equity programs' (ATM Programs) as elaborated further in this press release.

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 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) of the Portfolio falls below $15.0.

Over the past 12 months, downside protection has been volatile; it peaked at 59.3% in January 2023 and ended Q1 2023 at 57.1% before it started declining as a result of the negative impact from the collapse of several regional banks in the U.S., which sparked fears of a credit crunch in commercial real estate, particularly for office space. As of October 18, 2023, the pre-distribution downside protection declined to 50.7% compared with 54.6% as of October 31, 2022. However, average downside protection over the past 12 months stood at a relatively higher level of 55.5%. Dividend coverage based on the current dividend yield on the Portfolio was at 1.4 times (x). Without giving consideration to 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 6.9% over the remaining term to maturity. To supplement Portfolio income, Middlefield Limited (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. As of June 20, 2023, the Company terminated its securities lending program.

The Company has a loan facility for working capital purposes, with a maximum amount equivalent to 5% of the total assets of the Company. The Company may pledge the Portfolio securities as collateral for amounts borrowed under the loan facility. As of June 30, 2023, the outstanding amount drawn under this facility was $0.5 million representing 0.4% of the total assets.

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

(1)	On November 15, 2022

The company completed an overnight treasury offering of Class A and Preferred Shares, raising approximately $15.0 million in gross proceeds. The Class A shares were offered at a price of $13.9 per share for a yield to maturity of 11.2%, and the Preferred Shares were offered at a price of $9.45 per share for a yield to maturity of 5.6%.

(2)	On February 3, 2023

The Company established its ATM Program that will be effective until February 13, 2025, and allows maximum gross proceeds of $75 million of each of the Preferred Shares and the Class A Shares of the Company. The ATM Program allows the Company to issue Class A Shares and Preferred Shares at the Company's discretion.

(3)	On March 30, 2023

The company completed an overnight treasury offering of Class A and Preferred Shares, raising approximately $8.7 million in gross proceeds. The Class A shares were offered at a price of $14.6 per share for a yield to maturity of 10.7%, and the Preferred Shares were offered at a price of $9.65 per share for a yield to maturity of 5.4%.

(4)	On June 29, 2023

The company completed an overnight treasury offering of Class A and Preferred Shares, raising approximately $10.3 million in gross proceeds. The Class A shares were offered at a price of $14.25 per share for a yield to maturity of 10.9%, and the Preferred Shares were offered at a price of $9.35 per share for a yield to maturity of 8.1%.

(5)	On September 29, 2023

The company completed an overnight treasury offering of Class A and Preferred Shares, raising approximately $13.3 million in gross proceeds. The Class A shares were offered at a price of $13.4 per share for a yield to maturity of 11.6%, and the Preferred Shares were offered at a price of $9.55 per share for a yield to maturity of 7.4%.

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, grind until maturity, the dividend coverage, and FX exposure, DBRS Morningstar 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 resulting from high inflation and interest rate hikes 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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 16, 2023; https://www.dbrsmorningstar.com/research/415986).

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

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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@dbrsmorningstar.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.

DBRS Morningstar 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

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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://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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

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