DBRS Confirms bcIMC Realty at AA, Stable

DBRS has today confirmed the rating of bcIMC Realty Corporation’s (bcIMC Realty or the Company) Medium-Term Notes at AA with a Stable trend. The rating continues to be supported by the strength of bcIMC Realty’s owner and governance framework, as well as the Company’s institutional quality portfolio and conservative financial profile. In addition to these rating considerations, bcIMC Realty operates under a legislative framework and has a covenant pattern, both of which should help ensure the Company will continue to be financially managed in prudent manner going forward. DBRS notes that bcIMC Realty (a) is prohibited from incurring incremental debt, unless such leverage is used to invest in real estate assets; (b) is prohibited from issuing additional indebtedness if, post-issuance, the ratio of indebtedness to market value of assets exceeds 35%; and (c) is prohibited from incurring indebtedness that would increase the total encumbered assets ratio (encumbered assets/aggregate assets) to 50% or greater (Encumbered assets are deemed to be those that have a loan-to-value ratio of greater than or equal to 20%). DBRS also notes the legislative framework makes it difficult for the ownership of bcIMC Realty to change, as the Company must always be 100% owned by registered pension plans.

Net rental income increased by 5.3% to $514 million in 2013, driven mainly by net property acquisitions and higher average rental rates on lease renewals in each segment of the portfolio, partially offset by higher vacancy rates in each segment of the portfolio, with the exception of office.

In terms of financial profile, bcIMC Realty funded its property acquisitions and development projects with operating cash flow, debt and equity. As a result, the Company’s debt-to-market value of assets ratio remained relatively steady (20.8% as at Q4 2013 versus 20.1% a year earlier). EBITDA interest coverage, however, improved to 5.83 times (x) for 2013 from 5.41x a year earlier, primarily as a result of the stronger than expected growth in operating income.

DBRS expects bcIMC Realty will continue to deliver steady growth in operating income, mainly driven by its recent acquisitions (Bayview Village Shopping Centre in Toronto and Bankers Hall in downtown Calgary) and completion of several development projects (Delta Hotel and an adjacent office building, Bremner Tower, located south of the financial district in downtown Toronto) in 2014. These investments are expected to contribute incremental income of approximately $86 million in 2015 and approximately $102 million upon stabilization. As such, DBRS forecasts that EBITDA should reach approximately $600 million in 2015. DBRS believes bcIMC Realty’s institutional quality commercial real estate assets and relatively long-term lease profile should continue to provide underlying stability to earnings going forward. In addition, bcIMC Realty’s office lease maturities are well-balanced, which should help mitigate the impact of any softness that may arise in office market rents from new supply in the Company’s core Toronto and Calgary markets over the next several years.

While DBRS does not anticipate any significant acquisition activity for the remainder of 2014, mainly due to heightened valuations in the real estate market, the Company has the debt capacity and financial flexibility to take advantage of any attractive property investment opportunities that may arise over the medium term. bcIMC Realty’s leverage remains below the 25% to 30% range incorporated in the current rating. Financial flexibility continues to benefit from the Company’s large pool of unencumbered assets and ample cushion within its encumbered asset ratio covenant.

Note:
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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Entities in the Real Estate Sector, which can be found on our website under Methodologies.

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