DBRS Confirms bcIMC Realty at AA, 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.

Operating income for bcIMC Realty’s portfolio held relative steady for the nine months ended September 30, 2010 despite higher operating expenses, office vacancies and a decline in hotel income. Higher average rental rates on industrial and retail lease expiries and occupancy improvement across the portfolio (excluding office) helped to support cash flow levels during the period. Property acquisitions during the year were minimal as bcIMC Realty, instead, continued to focus on its two large office tower development projects, 18 York Street in Toronto (70% pre-leased) and Jamieson Place in Calgary (tenants took occupancy in March 2010). From a financial standpoint, bcIMC Realty funded these development projects and modest acquisitions with operating cash flow. The Company’s net debt-to-capital ratio trended lower (31.8% as at Q3 2010) from the comparable period in 2009 as net free cash flow and equity contributions were used to repay debt. The Company’s debt-to-market value of assets ratio also benefited from recovering property market values.

bcIMC Realty’s AA rating is underpinned by the following credit strengths: (1) a large, diversified portfolio featuring several premier Canadian office properties; (2) conservative balance sheet ratios and debt limitations; and (3) strong pension and public-sector fund sponsorship and governance. The rating category also reflects the following challenges: (1) high exposure to the office segment; (2) property concentration; and (3) retail and industrial assets underrepresented in the portfolio.

The stable rating outlook takes into consideration DBRS’s expectation that cash flow levels could grow at a reasonable rate in 2011, due to the incremental income realized from Jamieson Place (expected to contribute $24.9 million of annual NOI) and, to a lesser extent, higher average rental rates on lease renewals. Despite expected higher cash flow levels in 2011, bcIMC Realty continues to have exposure to office and industrial re-leasing risk over the next few years. In addition, new supply remains a concern in the Company’s core office markets and a strong Canadian dollar will likely continue to curb demand for industrial space, especially in the Greater Toronto Area (GTA) market. DBRS, however, believes these concerns are manageable, particularly as the economic environment continues to improve. In addition, bcIMC Realty’s high quality portfolio, asset type diversification and reasonable retail lease maturities should provide underlying stability to cash flow.

While DBRS does not anticipate meaningful property acquisitions in 2011, mainly due to the fact that a limited amount of quality assets are being brought to market, bcIMC Realty’s conservative balance sheet and positive net free cash flow position affords it the ability to make debt funded acquisitions and keep leverage in the 25% to 30% range. Financial flexibility is also supported by the Company’s large pool of unencumbered assets, with more than sufficient room under its encumbered asset ratio covenant, if needed.

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.