DBRS Assigns Provisional Ratings of AA to Ontario Teachers’ Cadillac Fairview Properties Trust

DBRS Limited (DBRS) has today assigned a provisional rating of AA with a Stable trend to Ontario Teachers’ Cadillac Fairview Properties Trust’s (OT CFPT or the Trust) Senior Unsecured Debentures. As of March 9, 2017, the Trust had no senior unsecured debt outstanding. OT CFPT is a wholly owned subsidiary of the Ontario Teachers’ Pension Plan Board (OTPPB or the Plan; rated AAA by DBRS). OTPPB owns and manages a portfolio of Canadian real estate investments primarily through its key real estate operating subsidiaries, The Cadillac Fairview Corporation Limited (CFCL) and Ontrea Inc. (Ontrea).

On March 3, 2017, the Trust acquired the Plan’s wholly owned equity interests in CFCL and Ontrea through a reorganization. CFCL is the property and asset manager of OTPPB’s real estate operations, including the Trust and other real estate investments held outside of the Trust. CFCL and Ontrea’s assets primarily include interests in super-regional and regional shopping centres and Class A office properties located in key Canadian markets.

In addition to incorporating the reorganization, the rating considers the strength of OT CFPT’s high-quality real estate investments, conservative financial profile, low secured debt levels as well as the implicit support from OTPPB. OT CFPT operates under a governance framework, which is consistent with OTPPB’s; in DBRS’s view, this will ensure that the Trust’s strategic, financial and operating policy decisions are managed in a prudent manner going forward. The rating also takes into consideration the Trust’s significant property concentration, considerable geographic concentration in the Greater Toronto Area and a high degree of exposure to discretionary retail-oriented properties.

The Stable rating outlook factors in DBRS’s expectation for OT CFPT to deliver steady earnings growth over the next couple of years primarily because of incremental income contributions from the completion of the Trust’s multi-year development plan and new investments. As such, DBRS forecasts EBITDA to reach $945 million by F2020. DBRS also expects OT CFPT’s well-laddered lease maturity profile and high-quality properties to continue providing underlying stability to operating metrics and earnings.

OT CFPT’s real estate investments have traditionally been funded with a combination of unsecured loans from owner/related parties and capital contributions from its owner. With the reorganization, DBRS expects debt levels to decrease to 20%–25% of total assets. Over the next several years, DBRS expects the $4.2 billion of intercompany debt owed by the Trust to be refinanced in the capital markets. Development and investment projects are expected to be funded with equity from OTPPB. As such, key financial metrics are expected to benefit from the aforementioned earnings growth and interest rate savings from this new intercompany debt. The current rating incorporates DBRS’s expectation that the Trust’s EBITDA interest coverage will increase to 5.95 times (x) from 2.43x for the last 12 months ending (LTM) Q1 2017 and that total debt-to-EBITDA will improve to 5.2x from 8.0x for the LTM Q1 2017 on pro forma basis. It also considers that the Trust will manage returns to beneficiaries in a manner that will keep financial metrics and flexibility strong going forward.

RATING DRIVERS
A positive rating action is unlikely in the near to medium term, given OT CFPT’s property and geographic concentration risks. CFPT's rating could be downgraded if (1) the operating environment deteriorates, leading to higher vacancy levels and declines in operating cash flow; and/or (2) its financial metrics deteriorate, with debt-to-EBITDA exceeding 6.7x, EBITDA interest coverage falling below 3.2x, and/or secured debt-to-total debt exceeding 40% on a consistent basis.

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 principal methodologies are Rating Entities in the Real Estate Industry (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com 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.