DBRS Confirms Brookfield Office Properties Canada at BBB, Stable Trend

DBRS has today confirmed the Issuer Rating of Brookfield Office Properties Canada Real Estate Investment Trust (BOPC or the Trust) at BBB, with a Stable trend. The rating confirmation takes into consideration sound operating metrics, an improving interest coverage ratio, a negative free cash flow position and a rebound in office leasing conditions.

BOPC has achieved reasonable growth in operating income mainly due to cash flow contributions from the lease-up of the Trust’s Bay Adelaide Centre over the past several quarters. Same-property net operating income growth also benefited from this leasing activity and increased by 10.3% during Q1 2011 over the comparable period in 2010. DBRS notes that office leasing conditions in BOPC’s core markets, particularly Calgary and Toronto, have rebounded nicely and have experienced lower vacancy rates and stabilizing market rents. BOPC’s portfolio continues to achieve occupancy levels above market levels, highlighting the overall quality of the Trust’s portfolio and tenant base. As at Q1 2011, occupancy stood at 97.4%.

From a financial standpoint, BOPC used debt proceeds to fund modest growth capital expenditures and its negative free cash flow position. During Q1 2011, the Trust completed the refinancing of Queen’s Quay Terminal in Toronto for $90 million, generating net proceeds of $58 million. The new debt has a ten-year term maturing on April 1, 2021 and bears an interest rate of 5.40% per annum. BOPC’s debt levels remain reasonable with EBITDA interest coverage improving to 2.23 times mainly due to higher cash flow levels during the 12 month period ended March 31, 2011. BOPC’s BBB rating incorporates 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, namely Toronto, Calgary and Vancouver. The portfolio features a number of flagship office properties, such as Bay Adelaide Centre, Bay Wellington Tower, Exchange Tower and Bankers Hall; (2) The portfolio has achieved strong occupancy levels, which are above market comparables in each of its markets; (3) BOPC’s reasonable debt levels and coverage ratios; (4) BOPC has strong ownership and an experienced external management team.

Conversely, the rating incorporates the risks associated with: (1) BOPC’s portfolio is heavily concentrated in the downtown markets of Toronto and Calgary; (2) Significant property concentration with the Trust’s top five properties accounting for about 63.4% of owned leasable area in the portfolio; (3) A 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.

The stable outlook takes into consideration DBRS’s expectation for reasonable growth in operating cash flow in 2011 mainly due to due to the continued lease-up of Bay Adelaide Centre. Although BOPC’s core office markets have displayed improving fundamentals, DBRS expects that office fundamentals could temporarily soften due to new supply in the Calgary and Toronto markets scheduled to come online towards the end of 2011. BOPC, however, has minimal near-term lease maturities which should continue to contribute stable cash flow and limit the Trust’s exposure to market conditions and re-tenanting costs. DBRS expects coverage metrics to improve with the continued lease-up of the Bay Adelaide Centre (BAC). DBRS estimates EBITDA interest coverage to improve to the 2.30 times range with the lease-up of Bay Adelaide Centre. In addition, BOPC maintains a good liquidity position, with $73.5 million in cash balances. The Trust has no active commercial development projects and has manageable near-term capital commitments, mainly consisting of property-level debt maturities and a development loan related to Bay Adelaide Centre due in 2012.

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.