DBRS Confirms Brookfield Canada Office Properties at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the rating of Brookfield Canada Office Properties Real Estate Investment Trust’s (BCOP or the Trust) Senior Unsecured Debt at BBB with a Stable trend. As of May 28, 2015, BCOP had no senior unsecured debt outstanding. The confirmation incorporates DBRS’s expectation that BCOP will incur incremental debt in order to fund its Bay Adelaide East (BAE) and Brookfield Place Calgary East (BPCE) development projects while acknowledging a gradual decline in financial metrics until these projects become income producing in late 2015 and late 2017, respectively. BCOP’s rating continues to be based on 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) solid occupancy levels and long-term lease profile; (3) reasonable coverage ratios; and (4) ownership by Brookfield Property Partners L.P. The rating also considers the following challenges: (1) 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) high proportion of secured debt.

The Stable trend incorporates DBRS’s expectations of lower same-property net operating income in 2015 because of slower leasing velocity for the Trust’s current and pending vacancies. In particular, DBRS believes that the current low oil price environment combined with excess supply in the downtown Calgary office market (29.2% of BCOP’s owned area) could put pressure on the Trust’s operating metrics in the near term. However, DBRS notes that BCOP’s average in-place net rent for its Calgary properties at $31 per square foot is approximately 7.6% below market rents, which, combined with an average lease life of 10.8 years, should provide moderate protection in the near term. The Stable trend reflects DBRS’s expectation that BCOP will fund the remaining costs related to the BAE and BPCE projects primarily with debt by drawing on its $350 million and $575 million construction facilities, respectively. In addition, the Trust is expected to refinance its expiring Royal Centre and HBC mortgages with short-term floating rate debt as well as place new financing on its Place de Ville properties. This should cause the BCOP’s EBITDA interest coverage ratio (including capitalized interest) to temporarily deteriorate to the 2.10 times (x) to 2.15x range. With that said, the BAE and BPCE projects are expected to contribute approximately $32 million and $56 million of net operating income, respectively, upon completion. As a result, DBRS expects coverage ratios to recover closer to 2.40x, which is commensurate with the current rating category. DBRS notes that a prolonged downturn in the energy sector and/or increased leverage that results in the Trust’s coverage ratio falling below 2.20x on a sustained basis could result in negative action.

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 Entities in the Real Estate Industry, which can be found on our website under Methodologies.

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