DBRS Downgrades Brookfield Office Properties to BBB and Pfd-3, Trend Stable

DBRS has today downgraded the Issuer Rating and Senior Unsecured Debt of Brookfield Office Properties Inc. (Brookfield or the Company) to BBB from BBB (high), and the Cumulative Redeemable Preferred Shares, Class AAA to Pfd-3 from Pfd-3 (high).The trends on all ratings have been revised to Stable from Negative.

On October 18, 2012, DBRS changed the trends on Brookfield’s ratings to Negative from Stable. That rating action reflected DBRS’s concern that Brookfield’s coverage ratios would remain at levels insufficient for the BBB (high) rating category for a longer period of time than originally expected. DBRS had previously expected Brookfield’s coverage ratios to show meaningful improvement by the end of 2012 or early 2013 (for the year ended December 31, 2012, Brookfield had an EBITDA interest coverage of 1.78 times (x)); however, slower-than-expected progress in re-leasing space at Brookfield Place New York (BPNY, formerly the World Financial Center) caused DBRS to question its view. With the trend change on October 18, 2012, DBRS stated that a lack of improvement in coverage ratios (i.e., EBITDA interest coverage to above 2.00x) due to weakened operating performance and/or more aggressive financial management would likely result in a downgrade in the near term.

Since then, Brookfield has released its F2012 year-end results, which included an update on the pending three million square foot (sq. ft.) vacancy at towers two and four of BPNY. Brookfield’s management indicated that it is nearing letters of intent on 1.5 million sq. ft. at BPNY, which accounts for approximately 50% of the remaining exposure to the Bank of America Merrill Lynch lease. While this leasing update is encouraging, DBRS expects operating income to remain relatively flat in 2013, and expects further pressure on operating income during the BPNY re-leasing transition period in 2014 and 2015.

Since DBRS does not expect Brookfield to take measures that would meaningfully reduce debt to offset softness in operating income, DBRS expects the EBITDA coverage ratio to remain below 2.00x during this time frame. As a result, DBRS believes Brookfield’s credit risk profile is no longer consistent with a BBB (high) rating.

In terms of outlook, the Stable trends on the ratings are mainly due to Brookfield’s high-quality office portfolio and liquidity position. 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 addition, Brookfield has ample liquidity (approximately $1.2 billion as at Q4 2012) and various 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) available to fund upcoming commitments.

DBRS notes that a prolonged weakness in operating performance (particularly due to further leasing delays at BPNY) and/or an increase in financial leverage that results in further deterioration of key credit metrics (i.e., EBITDA interest coverage below 1.70x) could result in a trend change to Negative. Although highly unlikely at this time, a change to Positive trend would require Brookfield to demonstrate meaningful improvement in operating income and significant deleveraging of its balance sheet.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Real Estate Entities (April 2011), which can be found on our website under Methodologies.