DBRS Finalizes Rating of OMERS Realty Corporation’s Senior Unsecured Notes at AA (low)

On May 24, 2013, DBRS confirmed OMERS Realty Corporation’s (ORC or the Company) Issuer Rating at AA (low) with a Stable trend. A provisional rating of AA (low) with a Stable trend was also assigned to the Company’s offering of $600 million 2.498% Series 1 Senior Unsecured Notes due June 5, 2018, and the $500 million 3.358% Series 2 Secured Unsecured Notes due June 5, 2023 (collectively, the Notes). With the closing of the Notes issuance on June 5, 2013, DBRS has today finalized this provisional rating.

ORC’s ratings reflect several credit strengths, including (1) the strong ownership of OMERS Administration Corporation (rated AAA by DBRS) and corporate governance. However, as with traditional real estate comparables, the ratings rely significantly on the strength and performance of the underlying real estate portfolio. The ratings also take into consideration the following strengths: (2) a mid-sized portfolio of institutional quality assets, featuring several of Canada’s preeminent enclosed shopping centres and office buildings; (3) conservative financial leverage and good financial flexibility, enhanced by a sizable unencumbered asset pool; and (4) diversity by asset segment and tenant base.

In addition, ORC has put in place stringent covenants and operates under a legislative framework, such that it: (a) shall always be 100% owned by pension funds or other federally prescribed entities; (b) is unable to add incremental leverage, unless such leverage is used to invest in real estate assets; (c) is prohibited from issuing additional indebtedness if, post-issuance, the ratio of indebtedness to market value of assets exceeds 50%; and (d) will not incur any indebtedness, unless the total encumbered assets ratio (encumbered assets/aggregate assets) would be less than or equal to 50%. Encumbered assets are deemed to be those that have a loan-to-value ratio of greater than or equal to 15%. The covenants, together with legislation currently in force, make it unlikely that ownership of ORC will change. The covenants also ensure that ORC’s interest coverage, liquidity, ownership and leverage will be much more stable than would be the case for traditional real estate comparables.

The ratings are also partially offset by the following challenges: (1) a high degree of geographic concentration in the Greater Toronto Area (GTA) and Calgary markets; (2) significant property concentration; (3) considerable exposure to the office segment; and (4) moderate levels of secured debt within the capital structure.

The Stable trend reflects DBRS’s expectation that ORC will continue to deliver steady growth in net rental income and EBITDA in the near to medium term, based mainly on higher average rental rates on leasing activity in the portfolio’s retail and office segments. Leasing activity should also benefit from a limited amount of new supply expected in the Company’s core markets and overall robust fundamentals across each of ORC’s asset segments. In addition, ORC’s high-quality commercial real estate assets and stable residential portfolio should support portfolio metrics and the Company’s earnings profile going forward.

While DBRS does not anticipate any significant acquisition activity in 2013, mainly due to a highly competitive real estate market, the Company has the debt capacity and financial flexibility to take advantage of attractive property investment opportunities that may arise over the medium term. DBRS expects the Company will manage dividends and/or return of capital to OMERS in a manner that will keep credit metrics and financial flexibility consistent with the current rating category. The Company has a targeted leverage range of 35% to 45% on a total debt-to-market value of assets basis, which is reasonable for the current rating category. Pro forma the Notes offering and draw on a new revolving credit facility, DBRS estimates a debt-to-market value of assets ratio of 38%, resulting in strong EBITDA interest coverage ratio of 4.48 times (x).

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.