DBRS Confirms Brookfield Office Properties Canada and BPO Properties Ltd. at BBB

DBRS has today confirmed the Issuer Rating of Brookfield Office Properties Canada (BOPC or the Trust) at BBB with a Stable trend. DBRS has also confirmed the Issuer Rating of BPO Properties Ltd. (BPO or the Company) at BBB and its Cumulative Redeemable Preferred Shares ratings at Pfd-3. The trends are Stable.

The confirmations follow BOPC’s announcement of the acquisition of the Canadian Office Fund portfolio (the Acquisition) from BPO for approximately $362 million, including assumed mortgages totaling approximately $140 million. DBRS expects BOPC to fund the balance of the Acquisition primarily with cash on hand and a drawdown on the Trust’s revolving credit facility. The Acquisition includes an undivided 25% interest in nine Class AA and Class A office properties, including such high-quality office properties as First Canadian Place in downtown Toronto and Jean Edmonds Towers, Place de Ville I and Place de Ville II in Ottawa.

DBRS views the Acquisition as being neutral to BOPC’s credit profile since it continues to build on its scale within the Class AA and Class A office space and provides a modest improvement to its geographic diversification with the addition of office properties in Ottawa. These positive attributes, however, are offset by higher re-leasing risk exposure in 2013 and a modest increase in leverage levels.

In terms of scale, the Acquisition increases BOPC’s owned leasable area by 16%, or approximately 1.3 million leasable square feet. The Acquisition is expected to increase pro forma EBITDA by 17% to $235 million, based on an estimated average capitalization rate of 6.2%. The portfolio has strong occupancy of 93.3% and complements the existing portfolio, with well-located office properties occupied by government tenants and tenants in the financial services sector. Upon completion of the Acquisition, despite the modest improvement in geographic diversification with the addition of office properties in Ottawa, BOPC’s portfolio will continue to have significant property concentration and be heavily concentrated in the downtown Toronto (57% of net operating income) and Calgary (35% of net operating income) markets.

DBRS notes that the downtown Toronto office market continues to achieve good demand for space, driven by the banking sector, even with the large blocks of available space that returned to the market in 2010. The downtown Calgary office market has also rebounded strongly, with 2010 having near-record absorption, with 1.9 million square feet absorbed as the high price of oil and renewed capital investment spurred new leasing. Space available in new development projects has largely been absorbed, with approximately 95% of the 7.2 million square feet of new development product being brought to market between 2007 and 2012 now leased.

BOPC has minimal near-term lease maturities (2011–2012), which should continue to contribute stable cash flow and limit the Trust’s exposure to changes in market conditions and re-tenanting costs. In addition, on a pro forma basis, in-place rental rates are approximately 13% below comparable market rents.

The financial impact of the Acquisition is expected to result in BOPC’s leverage increasing to approximately 44.7% (debt-to-capital ratio based on fair value) from 42.0%, while EBITDA interest coverage is expected to improve to 2.50 times, which DBRS considers appropriate for the current rating category

The confirmation of BPO’s ratings reflects its 83.3% equity interest in BOPC and strong ownership by Brookfield Office Properties, Inc.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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