DBRS Confirms bcIMC Realty’s Rating at AA with a Stable Trend

DBRS Limited (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 confirmation acknowledges the Company’s above-average exposure to Alberta’s oil and gas-based markets and takes into consideration DBRS’s expectation for weakening results from the Company’s Alberta properties, particularly in the office segment (31.1% of net operating income in 2015) over the next few years.

The rating continues to be supported by the strength of bcIMC Realty’s high-quality portfolio and conservative financial profile, as well as implicit support from bcIMC. In addition to these rating considerations, bcIMC Realty operates under a legislative framework and has indebtedness covenants in place that should help ensure the Company will continue to be financially managed in a prudent manner going forward. DBRS notes that bcIMC Realty (1) is prohibited from issuing additional indebtedness if, post-issuance, the ratio of indebtedness to market value of assets exceeds 35%; and (2) 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 that 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.

DBRS expects bcIMC Realty will experience weakening operating results particularly from its Alberta office portfolio; in-place rental rates for leases expiring are approximately 25% above market rates and challenging leasing conditions will likely translate into some pressure on earnings. Notwithstanding, DBRS believes bcIMC Realty’s Alberta office exposure is manageable given office lease maturities account for only 6.9% of the Company’s commercial portfolio gross leasable area over the next five years. In addition, bcIMC Realty’s diversified and high-quality portfolio with laddered lease maturities should provide support to cash flow stability and limit the Company’s exposure to unfavourable changes in market rents.

Consistent with 2015, DBRS expects bcIMC Realty to maintain a solid financial profile in 2016 based on the Company’s capacity to generate free cash flow. DBRS expects bcIMC Realty to use free cash flow, incremental debt and proceeds from asset dispositions to fund property acquisitions and development projects in 2016. bcIMC is conducting a strategic review of its hospitality portfolio that could result in the sale of certain hotel properties. In addition, bcIMC Realty is expected to acquire multi-residential properties from a related party and invest $360 million in ongoing development projects during the year. As a result, debt levels will likely increase modestly in 2016 but DBRS expects key financial metrics to remain at a level acceptable for the current rating category.

DBRS would consider a negative rating action should the Company increase its debt levels beyond expectations and/or the weak conditions in Alberta persist over the next few years causing tenant departures and lower rents, resulting in the EBITDA coverage ratio falling below 3.50 times.

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.

The applicable methodologies are Rating Entities in the Real Estate Industry (May 2015), and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.