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

DBRS has today confirmed the ratings of Brookfield Office Properties Inc. (Brookfield or the Company) at BBB (high) and Pfd-3 (high), changing the trend to Negative from Stable. The trend change reflects DBRS’s concern that Brookfield’s coverage ratios will remain at levels that are inconsistent with the current rating category, particularly in light of the slower-than-expected progress in re-leasing space at the World Financial Center (WFC) in New York City.

DBRS had previously expected Brookfield’s coverage ratios to show meaningful improvement by the end of 2012 or early 2013. DBRS now believes it will take longer to re-lease the upcoming vacancy at the WFC to new tenants. As a result, DBRS expects that operating income from this space may not stabilize until the latter part of 2014 or in early 2015. In addition, DBRS believes the Company’s U.S. markets will likely remain challenged by high unemployment rates and slow, uneven economic growth. As a result, material improvement in coverage ratios over the near to medium term will, in DBRS’s opinion, be difficult for the Company to achieve. Lack of improvement in coverage ratios due to weakening operating performance and/or more aggressive financial management would likely result in a downgrade in the near term. The pressure on Brookfield’s ratings could be relieved if the Company took meaningful steps to strengthen its financial profile by lowering debt levels and improving its EBITDA interest coverage ratio back to levels above 2.00 times.

The rating confirmation takes into consideration the following credit strengths: Brookfield’s high-quality office portfolio located in high barrier-to-entry markets across North America, Australia and, more recently, Europe; a solid tenant base with long-term leases; and good portfolio occupancy levels. The rating also reflects the following credit challenges: low coverage ratios, Bank of America/Merrill Lynch lease expiries in 2013 and geographic concentration risks.

Brookfield’s office portfolio continues to perform reasonably well, with occupancy levels generally above market levels. As at Q2 2012, portfolio occupancy remains solid at 93.4%, benefiting from comparatively stronger results from its Canadian and Australian properties. In the near term, DBRS expects operating income levels to remain relatively flat, as Brookfield recycles capital from mature, non-core assets into properties with growth potential (i.e., lower occupancy and rental rates), the effect of which will likely offset any rental rate growth in the Company’s stronger Canadian and Australian markets. DBRS believes this may be followed by further pressure on operating income during the re-leasing transition period (2014-2015) at the World Financial Center.

Despite challenging economic conditions, particularly in the United States, DBRS expects Brookfield’s high-quality office properties in high barrier-to-entry markets and in-place average rental rates that are currently below average market rental rates to provide underlying support to cash flow stability going forward. In terms of financial flexibility, Brookfield has sufficient liquidity and sources of capital (including proceeds from a further sell-down of the Company’s interest in Brookfield Canada Office Properties and potential non-core asset sales in the range of $200 million to $250 million) to fund upcoming commitments.

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.