DBRS Confirms Brookfield Properties at BBB (high) and Pfd-3 (high)

DBRS has today confirmed the ratings of Brookfield Properties Corporation (Brookfield or the Company) at BBB (high) and Pfd-3 (high) with a Stable trend. This follows the announcement of Brookfield’s proposed acquisition of an interest in 16 Australian office properties from Brookfield Asset Management’s (BAM) Multiplex Group (Multiplex) operations (the Acquisition) for approximately $1.4 billion. Brookfield has also announced the disposition of its residential land and housing business, known as Carma, as part of its repositioning strategy of becoming a pure-play office company.

The rating confirmation takes into consideration the fact that the Acquisition enhances Brookfield’s geographic reach by adding three Australian markets, including Sydney, Melbourne and Perth, to its existing North American real estate platform. DBRS notes, however, that the Company will still have concentration risk in New York City. The Acquisition will increase Brookfield’s income-producing office portfolio by 7.2 million sq. ft. (excludes one development property comprising just over 900,000 sq. ft.).

The 16 office properties are well located, with strong occupancy levels (99% compared with average market rates of 92% to 93%) and are occupied by solid investment-grade-quality tenants, such as government (accounts for 31% of leaseable area), banking and finance (22%), and professional service tenants (18%). DBRS notes that these types of tenants are consistent with the Company’s Class A office and central business district profile. Going forward, DBRS expects the Acquisition to produce sustainable cash flow with underlying support from an average lease term to maturity of eight years. In addition, DBRS notes that with the sale of Carma and removal of the volatility associated with the land and housing business, we expect the predictability of the Company’s cash flow stream to improve on a go-forward basis.

The rating confirmation also takes into consideration that, from a financial risk perspective, the Acquisition is expected to have a neutral impact on the Company’s balance sheet ratios. DBRS expects Brookfield to fund the Acquisition with available liquidity, including un-drawn bank facilities ($788 million) and a cash balance ($475 million) totalling approximately $1.3 billion and from a $750 million bridge facility provided by BAM. Over the next several quarters, DBRS expects Brookfield to repay this bridge facility with a combination of proceeds from the following: a sell-down of the Company’s interest in Brookfield Office Properties Canada (the REIT; of which the Company currently owns a 91% interest), asset sales and other capital activities. As a result, DBRS estimates that the Company’s debt-to-capital ratio will remain close to 55% (including preferred shares) and EBITDA interest coverage should modestly improve to the 2.35 times range (including capitalized interest). This level of interest coverage remains at the low end of the range for the current rating category. However, DBRS takes comfort in the fact that Brookfield has made good progress in improving its overall financial flexibility position and that office fundamentals in the Company’s core markets are showing signs of improvement.

Overall, DBRS believes that the Acquisition complements Brookfield’s existing high-quality office portfolio and offers an immediate and sizeable presence in a new market. Over time, DBRS expects Brookfield to grow this platform, which should further benefit leasing initiatives and tenant retention rates.

Notes:
All figures are in U.S 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.