DBRS Confirms BPO Properties Following Proposal to Convert into REIT

DBRS has today confirmed the Issuer Rating of BPO Properties Ltd. (BPO or the Company) at BBB and its Cumulative Redeemable Preferred Shares rating at Pfd-3; the trends are Stable. The rating confirmations follow BPO’s announcement of a transaction that involves the reorganization of the Company’s real property assets, excluding the Canadian Office Fund and certain development properties under a new real estate investment trust, named Brookfield Office Properties Canada (the REIT), for consideration consisting of the assumption of existing liabilities, REIT units and securities exchangeable for REIT units. Concurrently, BPO’s majority shareholder Brookfield Properties Corporation (BPC or Brookfield; rated BBB (high) with a Stable trend) will transfer its interest in Brookfield Place (comprising Bay Wellington Tower, a 50% interest in the retail space of Brookfield Place and a 56% interest in the parking space serving the Brookfield Place complex) to the REIT in exchange for REIT units and securities exchangeable for REIT units. (Together, the Transaction.)

Upon completion of the Transaction, the real property assets of BPO along with the Brookfield Place interest (excluding the Canadian Office Fund and certain development properties) will be held by the REIT through its interest in a newly formed limited partnership, Brookfield Office Properties Canada LP (BOPC LP). In terms of ownership structure, BPC, which currently beneficially owns in the aggregate approximately 89.7% of BPO’s common equity, will receive trust units of the REIT and Class B limited partnership units of BOPC LP, representing an aggregate equity interest in the REIT of approximately 91.1%. Holders of BPO common shares other than BPC and its affiliates (the Public Common Shareholders), who currently hold an aggregate of approximately 10.3% of BPO’s common equity, will receive, for each BPO common share held, one REIT unit, representing an aggregate equity interest in the REIT of approximately 8.9%. Following the Transaction, all of the common equity of BPO will be beneficially owned by BPC. BPO’s preferred shares will remain within BPO and no changes will be made to the terms of these preferred shares. DBRS notes that following the Transaction, a subsidiary of BPC will provide asset and property management services to the REIT under new management arrangements that are on market terms.

Under DBRS methodology, the Transaction would typically result in a rating differential between BOPC LP and BPO, with BOPC LP attaining the higher of the two ratings. This is due to the fact that a majority of the assets reside at BOPC LP. However, DBRS believes that the structural issue is mitigated by the following:

(1) BPO currently has no senior unsecured debt.

(2) The articles of BPO will prohibit it from incurring any unsecured indebtedness for borrowed money, or guaranteeing any such indebtedness of any other person, other than indebtedness that is guaranteed by BOPC LP.

(3) In accordance with the Canadian Business Corporations Act, any revision to or removal of the corporate article containing the debt restriction will require approval by special resolution of the common shareholders. Note that BPC will hold all the common shares.

(4) This restriction will not affect the “grandfathered” status of the preferred shares.

DBRS also takes comfort in the fact that:

(1) BPO will receive a cash flow amount from its ownership in BOPC LP that is comparatively equal to the amount under the pre-REIT structure.

(2) BPO will have an investment in liquid REIT units and ownership in a high-quality office portfolio and will maintain certain income-producing assets (the Canadian Office Fund assets).

(3) Going forward, DBRS expects BOPC LP to maintain conservative debt levels and coverage ratios similar to previous levels achieved by BPO and that are consistent with the BBB rating category.

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.