DBRS Assigns BBB Rating to Brookfield Office Properties Canada

DBRS has today assigned an Issuer Rating of BBB with a Stable trend to Brookfield Office Properties Canada Real Estate Investment Trust (BOPC or the Trust). The trend is Stable.

The rating reflects the following credit strengths: (1) BOPC has a premier Class-A to AAA office portfolio located in the downtown markets in three of Canada’s largest office markets, including Toronto, Calgary and Vancouver. The portfolio comprises of 19 properties containing 11.7 million of gross leasable area (net owned interest of 8.3 million leasable sq. ft.) and features a number of flagship office properties, such as Bay Wellington Tower, Exchange Tower, Bankers Hall and the recently completed Bay Adelaide Centre in downtown Toronto’s financial district. DBRS views BOPC’s properties as very high quality and believes that they provide good support for the current rating category. This is highlighted by strong occupancy levels achieved by the portfolio through the recent downturn. As at Q3 2010, BOPC’s properties had occupancy levels above market comparables in each of its markets.

(2) The long-term nature of BOPC’s leases, averaging approximately 8.5 years, provides underlying stability to cash flow and good protection from changes in market conditions. Looking ahead, minimal near-term lease maturities should continue to contribute stable cash flow and limit the Trust’s exposure to the current challenging office markets, particularly in Calgary and reduces re-tenanting costs. (3) BOPC has an experienced external management team with a good track record operating office properties in North America.

The rating is also supported by BOPC’s reasonable debt levels and coverage ratios. Looking forward, DBRS expects coverage metrics to improve with the lease up of the Bay Adelaide Centre (BAC). DBRS estimates an EBITDA interest coverage ratio of 2.20 times reflecting $200 million of incremental debt and a 90% occupancy at BAC by the end of 2010. DBRS notes that BOPC currently has several commitments from tenants to achieve this level of occupancy.

Conversely, the rating incorporates the risks associated with: (1) BOPC’s portfolio, which is heavily concentrated in the downtown markets of Toronto and Calgary, making the Trust more sensitive to local economic conditions and supply imbalances. DBRS notes that the Calgary office market is currently experiencing challenging fundamentals mainly due to a significant amount of new office supply that has come online over the past few years. DBRS expects fundamentals to remain under pressure as high market vacancy rates and two large office towers (the Bow comprising 1.8 million square feet (sq. ft.) and Eighth Avenue Place comprising 1.0 million sq. ft.) scheduled for completion by the end 2011 will likely slow any recovery in the Calgary market in the near term.

(2) The portfolio exhibits significant property concentration with the Trust’s top five properties account for about 63.4% of owned leaseable area in the portfolio, making the portfolio heavily reliant on the performance of those specific properties. Additionally, there is some degree of concentration among the Trust’s tenant base, however this concern is somewhat mitigated by their high creditworthiness. A majority of the Trust’s top 15 tenants fall into the BBB (high) to AAA rating category. DBRS notes that The Trust’s concentrations are outside levels expected for the BBB rating category, however DBRS believes the Trust’s asset quality and aforementioned credit strengths partially offset these concerns.

Overall, DBRS expects BOPC to achieve reasonable EBITDA growth in the near term, mainly due to full year cash flow contributions from completed development projects and the lease up of Bay Adelaide Centre, DBRS also expects the Trust’s credit profile to remain stable, with support from its high-quality office portfolio, manageable near-term debt maturities and gradually improving credit metrics in the near term.

Note:
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.