DBRS Confirms BPO Properties at BBB, Pfd-3, Stable Trend

DBRS has today confirmed the Issuer Rating of BPO Properties Ltd. (BPO or the Company) at BBB and its Cumulative Redeemable Preferred Shares rating at Pfd-3, with trends at Stable. The BBB rating incorporates the following credit strengths: (1) BPO has strong ownership and an experienced management team; (2) BPO 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, featuring a number of flagship office properties, such as First Canadian Place, Bay Adelaide Centre West Tower, Bay Wellington Tower, Exchange Tower and Bankers Hall; (3) the portfolio has strong occupancy levels, which are above market comparables in each of its markets, with exception to Toronto; and (4) BPO’s reasonable credit metrics and certain debt restrictions.

Conversely, the rating incorporates the following associated risks: (1) BPO’s portfolio’s heavy concentration in the downtown markets of Toronto and Calgary; (2) significant property concentration with the Company’s top five properties, accounting for approximately 54.8% of the Company’s total leasable area in the portfolio; (3) above-average tenant concentration (however, this concern is somewhat mitigated by the high creditworthiness of the Company’s top 15 tenants).

BPO has achieved reasonable growth in operating income, mainly due to incremental income from the lease-up of the Company’s Bay Adelaide Centre West Tower in downtown Toronto and higher average rental rates on lease renewals in 2011. DBRS notes that office leasing conditions in BPO’s core markets, particularly Calgary and Toronto, are healthy and have experienced lower vacancy rates and increasing market rents over the past 18 months. With exception to the Toronto market, BPO’s portfolio continues to achieve occupancy levels above market levels, highlighting the overall quality of the Company’s portfolio and tenant base. As at Q1 2011, occupancy stood at 96.2%.

From a financial standpoint, BPO used debt proceeds and operating cash flow to fund investments, including a deposit on-demand advanced to Brookfield Office Properties Inc. BPO’s debt levels remain reasonable, while EBITDA interest coverage declined to 2.18 times, mainly due to higher interest expense associated with refinancing activity during the year.

The stable outlook takes into consideration DBRS’s expectation for reasonable growth in operating cash flow in 2012, mainly due to the continued lease-up of Bay Adelaide Centre West Tower. In addition, minimal lease maturities in 2012 should continue to contribute stable cash flow and limit the Company’s exposure to market conditions and re-tenanting costs. DBRS expects BPO to maintain a good liquidity position and positive free cash flow position. The Company has no active commercial development projects and has manageable near-term capital commitments. Overall, DBRS expects BPO’s financial profile to remain stable in 2012, with support from higher cash flow levels and reasonable financial flexibility to fund manageable capital commitments (mainly maturing mortgages).

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