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

DBRS has today confirmed the ratings of Brookfield Office Properties Inc. (Brookfield or the Company) at BBB (high) and Pfd-3 (high) with a Stable trend. The rating confirmation takes into consideration Brookfield’s high-quality office portfolio located in high barrier-to-entry markets across North America and, more recently, Australia; its modest near-term lease profile, with embedded rents below market levels; and its low coverage ratios.

Brookfield’s office portfolio continues to perform reasonably well, with occupancy levels generally above market levels. Despite some recent slippage due to expected tenant departures, portfolio occupancy remains solid at 93.3% as at Q2 2011 and has benefited from comparatively stronger results from its Canadian and Australian properties. In the United States, office fundamentals have been slowly recovering, with notable improvement in Brookfield’s largest market, New York City, where market rental rates have increased and large blocks of office space are limited. This should bode well for Brookfield’s future development projects and the eventual re-leasing of its Bank of America/Merrill Lynch space at World Financial Center in 2013.

On a negative note, the current challenges faced by the U.S. economy, characterized by poor job formation and slow and uneven economic growth, are a concern and could pressure office fundamentals. Brookfield, however, partially mitigates this concern with its modest near-term lease profile that has current in-place average rental rates below average market rates. (As at Q2 2011, Brookfield had a positive mark-to-market rental rate spread of 20%). In addition, the Company’s high-quality office properties in high barrier-to-entry markets and its presence in relatively stronger office markets outside the United States (Australia and Canada) should provide underlying support to cash flow stability going forward.

In terms of financial profile, Brookfield has meaningfully improved its financial flexibility over the past several years with significant capital raises. While debt maturities are above average for the next few years, Brookfield has adequate liquidity, strong access to capital, and other sources of capital, including the further sell-down of its interest in Brookfield Office Properties Canada, to fund upcoming capital commitments. On the other hand, at the current levels and in the context of the current economic climate, Brookfield’s coverage ratios warrant a cautious rating posture. For the six-month period ended June 30, 2011, EBITDA interest coverage declined to 1.89 times (on a proportionate consolidation basis and including capitalized interest) from 2.10 times during the comparable period 2010. While DBRS notes that this decline is partly due to the higher-cost debt associated with the Australian acquisitions and recognizes the positive contribution the Australian assets have made to Brookfield’s business risk profile, the levels of the Company’s coverage ratios are outside the range for the current rating category.

Although the stability of Brookfield’s cash flow and high-quality portfolio has provided some leniency for weak coverage metrics, DBRS does expect coverage metrics to improve in 2012 from higher average rental rates realized on lease renewals, particularly lease expiries in Houston and Washington D.C., and perhaps some modest improvement in occupancy rates. Absent any improvement, however, DBRS will reconsider its rating and outlook over the next 18 months.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Real Estate Entities, which can be found on our website under Methodologies.