DBRS Confirms BPO Properties at BBB and Pfd-3

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

BPO’s credit profile continues to be supported by improved fundamentals in BPO’s major office markets including Calgary and Toronto which have driven occupancy levels higher and have contributed to solid growth in net operating income (NOI). BPO has increased its focus on development activity as a growth vehicle which increases the risk profile of BPO. However, DBRS expects this to be manageable given BPO’s prudent approach to development and strong fundamentals in its key markets.

BPO’s current developments require an additional investment of $300 million over the next two years to complete Phase 1 of the Bay-Adelaide Centre 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 pre-leased Bankers Court and has pre-leased 65% of Bay-Adelaide, thereby mitigating some of the development risk. Office market fundamentals continue to improve in downtown Toronto with occupancy improving 2.5% over the past year to 95.6% at the end of Q1 2008.

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 will increase by 20% in downtown Calgary and by 13% in Toronto’s financial core through 2009-2011 based on current projects. This could have a negative longer-term impact, depending largely on market conditions at the time. For 2008, new space coming online will be needed to meet demand, especially in Calgary.

BPO's debt-to-gross book value could increase to closer to 50% to 55% over the next two years from 44% currently. EBITDA interest coverage is likely to decline prior to Bay-Adelaide coming online in mid-2009, but is expected to remain close to 2.5 times including capitalized interest, which is acceptable for the current rating. Fixed-charges coverage should remain manageable at close to two times. Excluding capitalized interest, EBITDA interest coverage should remain above three times.

Over the short term, BPO should continue to benefit from stronger office markets looking forward which could drive growth in cash flows to support EBITDA interest coverage ratios. Net rental rates in Calgary have experienced unprecedented growth of approximately 50% over the past two years to $35 to $40 per square foot. BPO's in-place rents are on average 25% to 30% below current market net rents, partly due to long-term leases.

The rating also reflects the following factors: (1) BPO has greater diversification with the addition of new markets in Ottawa and Edmonton in recent years that enhance cash flow stability. (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.