DBRS Confirms Brookfield Canada Office Properties at BBB, Stable Trend

DBRS has today confirmed the Issuer Rating of Brookfield Canada Office Properties Real Estate Investment Trust (BCOP or the Trust) at BBB, with a Stable trend. The confirmation is based primarily on BCOP’s steady operating performance and stable financial profile within the context of a relatively inactive year for new investment. The Stable trend reflects DBRS’s expectation that operating performance will remain consistent in the near to medium term, incorporating the potential for moderately higher financial leverage that may be incurred with the refinancing of upcoming debt maturities.

BCOP’s BBB rating continues to reflect the following credit strengths: (1) a premier Class A to AAA office portfolio located throughout the downtown markets of Toronto, Calgary, Ottawa and Vancouver; (2) occupancy levels generally above market averages; (3) moderate financial leverage and reasonable coverage ratios; and (4) ownership by Brookfield Office Properties Inc., which provides leasing and property management expertise. The rating also considers the following challenges: (1) the high degree of geographic concentration in downtown Toronto and Calgary; (2) a significant degree of property concentration; (3) above-average tenant concentration, somewhat mitigated by the high credit quality of the largest tenants; and (4) limited external growth potential over the near term.

BCOP’s operating income increased significantly to $239 million in 2012 from $204 million in 2011, primarily due to a full year of contribution from the 25% interest in the Canadian Office Fund, which was acquired in late 2011. BCOP achieved same-property net operating income growth of 4.8% in 2012, mainly due to higher average rental rates on renewals and a slight improvement in overall occupancy rate (96.9% as at December 31, 2012). The higher rental rates and solid occupancy levels reached by BCOP are reflective of favourable office leasing conditions in its core markets. That said, there has been a lack of suitable supply with attractive valuations in these markets, which contributed to the fact that BCOP did not make any significant new investments or require any material capital raises in 2012.

As such, BCOP’s debt balance and EBITDA interest coverage remained relatively steady in 2012 at 2.19 times (x), versus 2.22x in 2011. DBRS notes that debt-to-capital decreased to 39.9% at December 31, 2012, from 43.1% at the end of 2011, based on higher asset valuations.

BCOP’s rating trend is Stable, as DBRS does not expect any significant investing activity in the near term. In terms of same property NOI, DBRS expects cash flow from operations to grow steadily in 2013, mainly due to continued lease-up of those properties in the Canadian Office Fund portfolio with above portfolio average vacancy rates, built-in rent step-ups in existing leases and higher rental rates at renewal. DBRS believes that favourable office market leasing conditions, combined with the high quality of BCOP’s assets, should continue to support the Trust’s cash flow stability over the medium term.

In terms of financial profile, DBRS expects BCOP to increase leverage modestly upon the refinancing of significant debt maturities over the next two years. This should also cause coverage ratios to decline, but remain in the range of 2.00x to 2.20x, which is adequate for the current rating category. DBRS notes that a prolonged and continued deterioration of the Trust’s coverage ratio below this expected range could result in negative action on the credit.

Notes:
All figures are in Canadian 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, which can be found on our website under Methodologies.