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 26, 2016, BCOP had no senior unsecured debt outstanding. The confirmation reflects DBRS’s expectation that the Trust will incur higher debt in the near term causing coverage ratios to remain inconsistent with the current rating category; however, DBRS believes that BCOP’s low coverage ratios should gradually improve to levels commensurate with the current rating category following completion of the Trust’s Brookfield Place Calgary East (BPCE) development in late 2017. The confirmation also considers the Trust’s above-average geographic exposure to downtown Calgary, which is currently facing challenging leasing conditions. DBRS, however, notes that the Trust’s Calgary office properties have a modest amount of lease maturities over the next few years, partially mitigating this risk.

The stable rating outlook incorporates the expectation of moderate EBITDA growth of 6.0% to 7.0% as contributions from recently completed developments are partially offset by recent property dispositions and lower same-property net operating income (NOI). DBRS expects the Bay Adelaide East development to contribute $32 million in NOI on an annual basis and notes that BPY is on the headlease for 95% of the property and obligated to cover any income shortfall required to reach this threshold. This growth is expected to be partially offset by the loss of income from recent property dispositions, including the Royal Centre in Vancouver. In addition, DBRS expects modestly lower same-property NOI in 2016, mainly because of BCOP’s lease expirations and current vacancies, particularly for its Calgary properties.

The rating outlook also reflects the expectation that BCOP will continue to incur high maintenance capital expenditures and leasing costs to lease upcoming expirations in its Calgary and Toronto markets. These rising costs combined with higher distributions should result in a negative free cash flow position and higher payout ratio in 2016. The Trust has also paid out a one-time special distribution of approximately $150 million in April 2016 following the sale of Royal Centre. DBRS expects BCOP’s financial profile fund its free cash flow deficit, one-time distribution and BPCE development expenditures with property dispositions and incremental debt. Despite the expectation of additional debt, DBRS estimates EBITDA interest coverage (including capitalized interest) will recover to the 2.20 times (x) to 2.25x range in 2016, which is still low for the current rating category. Upon completion of the BPCE development in late 2017, DBRS estimates that coverage ratios will gradually improve to the 2.40x to 2.45x range, which is commensurate with the current rating.

RATING DRIVERS
If BCOP has weaker-than-expected operating results in its Calgary markets from a prolonged downturn in the energy sector and/or leverage increases resulting in the Trust’s coverage ratio falling below 2.20x on a sustained basis, a negative rating action could occur.

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 (May 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.