DBRS Confirms OMERS Realty Corporation at AA (low) with Stable Trend

DBRS Limited (DBRS) has today confirmed the Senior Unsecured Notes rating of OMERS Realty Corporation (ORC or the Company) at AA (low), 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 some weakness in earnings from the Company’s Alberta properties, particularly in the office segment, over the next few years.

The rating continues to be supported by the strength of ORC’s high-quality portfolio and conservative financial profile, as well as implicit support from OMERS. In addition to these rating considerations, ORC operates under a legislative framework and has put in place a stringent covenant pattern, which should help to ensure that the Company will continue to be financially managed in a prudent manner going forward. DBRS notes that ORC is (a) prohibited from issuing additional indebtedness if, post-issuance, the ratio of indebtedness to market value of assets exceeds 50%; (b) 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 15%); and (c) unable to add incremental leverage, unless such leverage is used to invest in real estate assets. DBRS also notes that the legislative framework makes it difficult for the ownership of ORC to change, as the Company must always be 100% owned by registered pension plans.

DBRS believes ORC will experience some earnings pressure from the challenging leasing conditions in Alberta, particularly in the office segment, over the next few years. Notwithstanding, DBRS believes ORC’s Alberta office exposure is manageable, given office lease maturities above 20,000 square feet (sf ) account for no more than 1.8% of the Company’s commercial portfolio GLA in any year to the end of 2021. DBRS, however, still expects ORC to deliver modest growth in net rental income and EBITDA primarily from property investments in 2016 and 2017. In addition, ORC’s diversified and high-quality portfolio with laddered lease maturities should provide support to earnings stability and limit the Company’s exposure to unfavourable changes in market rents.

DBRS expects ORC to continue to maintain a conservative financial profile. The current rating factors in the Company’s targeted leverage range of 35% and 45% on a total debt-to-market value of assets basis (41.6% as at December 31, 2015). DBRS expects the institutional-quality real estate portfolio to continue to generate strong levels of operating cash flow in 2016.

DBRS expects that any cash flow (in the form of dividends or a return of capital) that the Company distributes to OMERS will largely be motivated by proceeds from asset dispositions and cash flow from operations. As such, 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.

RATING DRIVERS
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 an EBITDA coverage ratio (excluding debt guaranteed by OMERS) falling below 3.50 times.

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 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.

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.