Press Release

DBRS Confirms BPO Properties at BBB and Pfd-3

Real Estate
March 08, 2007

DBRS has today confirmed the ratings of BPO Properties Ltd. (BPO) at BBB and Pfd-3 with Stable trends.

BPO’s credit profile remains stable as strengthening fundamentals in BPO’s major office markets including Calgary and Toronto, and the addition of 25% of the O&Y portfolio in late 2005, have contributed to solid growth in net operating income. Looking ahead, DBRS expects that development activity will be a more prominent growth vehicle going forward, which will increase the risk profile of BPO. However, DBRS expects this to be manageable given BPO’s prudent approach to development and stronger fundamentals in its key markets.

BPO’s current development plans total approximately $425 million over the next three years, to complete Phase 1 of the Bay-Adelaide development in Toronto and Bankers Court in Calgary, which adds a combined 1.4 million square feet of leasable area (15% increase in BPO’s net interest). BPO has already completely preleased Bankers Court and has signed a lead tenant for Bay-Adelaide, thereby mitigating some of the development risk. There has also been limited new supply in downtown Toronto in recent years while fundamentals continue to improve with occupancy in the downtown core improving 2.7% over the past year to 93.1% at the end of Q1 2007.

BPO’s debt-to-gross book value could increase to approximately 55% over the next two years, while EBITDA interest coverage could decline during construction but is expected to remain above 2 times including capitalized interest. Excluding capitalized interest, EBITDA interest coverage should remain above 2.5 times, which supports the current rating. In addition, the continued strength in office markets over the next two years should continue to drive growth in cash flows from higher net rents on expiring leases, which could result in stronger coverage ratios. Net rental rates in Calgary in particular experienced unprecedented growth of close to 35% in 2006. BPO’s in-place rents are on average 30% below current market net rents, partly due to long-term leases. Fixed charges coverage should remain manageable at close to 1.9 times (2.5 times excluding capitalized interest).

Looking further ahead, the addition of new space does represent a key challenge given the scale of new development projects underway in Calgary and Toronto. Office space in downtown Calgary will increase by 22% and Toronto’s financial core by 9% by 2010-2011 based on current projects. This could have a negative longer-term impact, depending largely on market conditions at the time. Over the next two years, new space will be needed to meet demand, especially in Calgary.

The rating also reflects the following factors:

(1) BPO has greater scale and diversification with the addition of new markets in Ottawa and Edmonton, which should enhance cash flow stability. As well, the exposure to key office markets in Toronto and Calgary position BPO for stronger office fundamentals over the next couple of years.

(2) BPO’s solid tenant profile and average lease maturity of seven years is expected to support cash flow stability.

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

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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