DBRS Confirms bcIMC Realty at AA with a Stable Trend

DBRS has today confirmed the Medium-Term Notes rating of bcIMC Realty Corporation (bcIMC Realty or the Company) at AA with a Stable trend. bcIMC Realty maintains a strong credit profile, with support from a solid balance sheet, very conservative credit metrics and the Company’s high-quality and diversified real estate portfolio, which features several premier Canadian properties, including Commerce Court in downtown Toronto, and Livingston Place and Western Canadian Place, both of which are located in downtown Calgary.

The rating confirmation takes into consideration the fact that bcIMC Realty continues to demonstrate a strong financial profile that has supported on-balance-sheet property development and modest property acquisitions in 2009. The Company also has strong financial flexibility, with support from a positive net free cash flow position. DBRS expects cash flow from operations to continue to fund upcoming maintenance capital requirements and development costs. Financial flexibility is also enhanced by the Company’s large pool of unencumbered assets, with more than sufficient room under its encumbered asset ratio covenant, if needed. Over the next couple of years, bcIMC Realty has a reasonable amount of debt maturing, with no more than 14.5% of total debt in any one year over this period. DBRS does not anticipate any refinancing risk given bcIMC Realty’s portfolio of high-quality properties and strong access to capital, highlighted by its recently completed $200 million, 3.38% Series 7 medium-term notes issue.

The confirmation also recognizes that despite weak office fundamentals across the Company’s markets and challenges in the financial services and energy sectors, its office properties continue to perform well, with strong occupancy rates (96.9% as at Q3 2009) that are generally above current market levels. Although the Company has made progress in enhancing overall diversification and broadening the size and scale of its real estate portfolio through significant property acquisitions and development over the past several years, bcIMC Realty’s portfolio continues to have a significant weighting in the Toronto and Calgary office markets. In the near term, DBRS expects this exposure to increase as the Company’s current development pipeline is weighted toward these markets and includes two large office towers, 18 York Street in Toronto (65% pre-leased) and Jamieson Place in Calgary (96% pre-leased). In addition, DBRS notes that both these markets have a significant amount of new office space (including the previously noted projects) scheduled for completion between 2010 and 2011, with 3.2 million square feet (sq. ft.) of Class A office space in Toronto and 4.6 million sq. ft. in Calgary currently under construction.

Going forward, DBRS expects office market fundamentals to stay weak until the latter part of 2010, when we expect positive economic momentum, particularly job creation, to take hold and translate into demand for space. However, the recovery will likely be more challenging in markets that have new supply coming on line. The Company also has exposure to re-leasing risk, with 34% of its office space set to mature during the 2010 to 2012 period. Overall, DBRS believes these exposures are manageable given the Company’s high-quality and diversified real estate portfolio and very conservative financial profile.

The rating continues to reflect the following credit strengths, which offset the existing concentration risks:

(1) bcIMC Realty’s real estate portfolio – diversified across office (represents 48.1% of net operating income (NOI)), residential (18.0%), hotel (includes two restaurants) (12.7%), industrial (12.3%), and retail properties (8.5%) – continues to provide a solid base of cash flow and exhibit occupancy rates in the mid-90% range or above in each asset type (excluding hotels). As at Q3 2009, the overall portfolio had a strong occupancy rate of 95.6% and has benefited from acquisitions over the past few years that have higher average occupancy rates than the existing portfolio, particularly in the office portfolio. DBRS notes that the Company’s industrial portfolio has experienced pressure on net average rental rates and occupancy levels, particularly in the Greater Toronto Area market.

Going forward, EBITDA is expected to modestly improve for the remainder of 2010 as incremental income is realized from completed development projects and, to a lesser extent, higher average rental rates on lease renewals. DBRS notes that the Company’s large office development project, Jamieson Place (scheduled for occupancy in 2010) located in downtown Calgary, is expected to contribute approximately $2.6 million of NOI on annualized basis. bcIMC Realty’s lease maturity profile (an average of 12% per annum over the next three years) should also provide reasonable stability of cash flow. Over the medium term, DBRS expects bcIMC Realty to seek to enhance its earnings profile by further reducing its exposure to the relatively more volatile office and hotel sectors and gradually re-invest cash flow into the industrial and retail segments.

(2) bcIMC Realty has a very conservative financial profile, with strong coverage and balance sheet ratios relative to traditional real estate companies. Although the Company’s debt ratios trended higher with an increase in common share redemption and a decline in property market values, it remains below its debt incurrence covenant of 35% and its intended operating level of 30% of the market value of assets, with a debt-to-market-value ratio of 24.1%. EBITDA interest coverage continues strong at 4.87 times for the 12 months ending September 30, 2009, and has benefited from higher cash flow levels and robust portfolio metrics.

Overall, DBRS believes that bcIMC Realty’s very conservative balance sheet, with strong financial flexibility and modest capital requirements in 2010, and its high-quality and diversified portfolio provide underlying support to the Company’s credit profile in light of the weak office market fundamentals expected throughout 2010.

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

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate rating.