DBRS Confirms bcIMC Realty Corporation 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 AA rating takes into consideration bcIMC Realty’s stand-alone risk profile relatively low level of secured debt in its capital structure and DBRS’s view of implicit support by bcIMC.

bcIMC Realty’s stand-alone rating of “A” incorporates its strong business risk assessment factors relative to its real estate pension fund peers, while also taking into consideration the relatively weaker debt-to-EBITDA metrics. bcIMC’s Realty’s stand-alone rating continues to be supported by the stability and predictability of its cash flows generated by the Company’s large portfolio of Class A and Class AA office buildings and high-quality super-regional/regional shopping centres and strong market position in key Canadian markets. However, these rating strengths are partially offset by the Company’s high degree of exposure to the office segment, considerable geographic concentration and significant property concentration. In terms of financial risk assessment factors, DBRS acknowledges the Company’s strong EBITDA interest coverage relative to its similarly rated real estate pension fund peers, while acknowledging the deterioration in debt-to-EBITDA following the incurrence of incremental debt. This modest deterioration does not warrant a change in the current rating.

DBRS expects bcIMC Realty will continue to experience weaker operating results from its Alberta office properties (29.9% of net operating income in 2016) where current average in-place rental rates are above market rates. However, DBRS anticipates positive results from its other regions, mainly Toronto and Vancouver, to more than offset this weakness. DBRS notes that recently bcIMC Realty sold its entire hotel portfolio and believes the Company will continue to focus on relatively more stable assets going forward, such as retail and multi-residential properties. bcIMC Realty is also expected to benefit from incremental EBITDA contributions from recent real estate investments, such as the Company’s recent acquisition of Oakridge Centre, a high-quality super-regional shopping centre located in Vancouver. DBRS believes bcIMC Realty’s diversified and high-quality portfolio with laddered lease maturities should provide underlying support to earnings and limit the Company’s exposure to unfavourable changes in market rents.

DBRS expects bcIMC Realty to maintain a financial profile in 2017 commensurate with the current stand-alone rating based on the Company’s capacity to generate free cash flow and solid financial metrics. DBRS expects bcIMC to use free cash flow, incremental debt and proceeds from asset dispositions (former hotel portfolio) to fund real estate investments and return of capital to its parent, Realpool Investment Fund. DBRS estimates the resulting higher debt levels will increase debt-to-EBITDA to 7.2 times (x) in 2017 from 6.9x a year earlier, while EBITDA interest coverage declines to 4.9x from 5.3x over the same period.

As bcIMC Realty has a relatively low level of secured debt in its capital structure (less than 40%), the stand-alone rating is elevated by one notch to reflect DBRS’s view of minimal subordination. DBRS believes the Company will maintain its low level of secured debt since real estate investments are mainly financed with capital contributions from bcIMC, and mortgages are only incurred on multi-residential properties or assumed through property acquisitions.

DBRS also takes into consideration the implicit support from bcIMC Realty’s ultimate parent, bcIMC, and has determined this level of implicit support to be worth a two-notch uplift. This strength of implicit support is based on factors that motivate bcIMC to support bcIMC Realty, including essentiality, contractual obligations, ownership, reputation and integration.

While DBRS does not anticipate a negative rating action in the near term, if debt levels rise such that debt-to-EBITDA increases above 7.3x or EBITDA interest coverage declines below 3.50x on a sustained basis, in conjunction with a deterioration of other business risk assessment factors, a negative rating action could occur. Furthermore, should secured debt-to-total debt rise above 40% or the strength of implicit support from bcIMC change, 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 principal methodologies are Rating Entities in the Real Estate Industry (April 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.