DBRS Downgrades Rating of bcIMC Realty’s Medium-Term Notes Rating to AA (low), Stable

DBRS Limited (DBRS) downgraded the rating of bcIMC Realty Corporation’s (bcIMC Realty or the Company) Medium-Term Notes to AA (low) from AA. The trend is Stable. The AA (low) rating takes into consideration bcIMC Realty’s stand-alone risk profile, manageable level of secured debt and DBRS’s view of implicit support provided by its owner, British Columbia Investment Management Corporation (bcIMC or BCI).

The downgrade largely reflects the gradually weakening business risk factors over the last three years relative to DBRS’s covered pension plan real estate company universe. DBRS further notes that with the recent expansion of DBRS’s coverage universe in Canadian pension plan real estate entities, DBRS has developed a better appreciation of bcIMC Realty’s position relative to its peers.

DBRS revised its view downward on two of bcIMC Realty’s business risk factors: market position and lease maturity profile. With the evolution of the Calgary, Toronto and Vancouver property markets over the last three years, it is DBRS’s view that bcIMC Realty’s relative real estate market position has eroded, albeit remaining strong in these three Canadian markets, as reflected in its slowly deteriorating commercial occupancy rate. Additionally, bcIMC Realty’s overall lease maturity profile has weakened due to the leasing environment in the Calgary office market since 2014, where bcIMC Realty has a concentration. Significant improvement in the lease maturity profile is not likely to occur soon. The revisions are also in the context of bcIMC Realty’s position relative to its pension plan real estate entity peers rated by DBRS.

Despite the business risk factors deteriorating, bcIMC Realty’s stand-alone credit risk profile remains supported by its quality office and retail asset portfolio; its multi-residential assets, which produce stable and predictable net rental income; and its tenant quality and diversification.

The Stable outlook takes into consideration DBRS’s view that bcIMC Realty will generate modest EBITDA growth from improving occupancy and net rental income from non-Alberta properties, which more than offsets continued pressure on rental income growth from its Alberta portfolio. Over the longer term, there is opportunity for asset growth through developments within the Company. bcIMC Realty manages its capital structure in accordance with the covenants in its existing notes. DBRS anticipates the pro forma debt-to-EBITDA (including capitalized interest) ratio to remain around 7.0 times (x) (including DBRS adjustments) on a sustained basis.

With this downgrade, bcIMC Realty is well positioned in this rating category. DBRS does not anticipate a positive or negative rating action in the foreseeable future but notes that, while highly unlikely, DBRS would consider a negative rating action should one or more of the following factors occur on a sustained basis: (1) debt levels rise such that debt-to-EBITDA increases above 8.0x, (2) significant deterioration in business risk factors, (3) secured debt-to-total debt approaches 40% or (4) DBRS changes its view on the strength or level of support provided by BCI.

DBRS notes that the above press release was amended on March 27, 2019, to add a note about the National Instrument 25-101 Designated Rating Organizations. The amendment was minor and would not impact the understanding of the reader.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Entities in the Real Estate Industry (April 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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