DBRS Confirms OMERS Realty Corporation’s Senior Unsecured Notes at AA (low), Stable

DBRS Limited (DBRS) confirmed OMERS Realty Corporation’s (ORC or the Company) Senior Unsecured Notes rating at AA (low) with a Stable trend. The rating takes into consideration ORC’s stand-alone risk profile, low level of secured debt and DBRS’s view of the implicit support provided by OMERS Administration Corporation (OMERS; rated AAA with a Stable trend by DBRS).

The confirmation reflects the improving business risk factors over the last three years — specifically, better asset diversification and a better lease maturity profile, which somewhat offsets the deterioration in the financial risk profile. Since 2014, the portfolio’s asset mix has been slowly improving with the contribution of office decreasing and retail increasing (as measured by ORC’s share of gross leasable area), notwithstanding the relatively high concentration in the office segment. The lease maturity profile has been extending, with the weighted-average lease term increasing to 5.4 years as at December 31, 2017, from 5.1 years as at December 31, 2014, as a result of longer-term leases in both the office and retail sectors. Leverage, as measured by the debt-to-EBITDA ratio, has deteriorated and is at the high end of the range for the current rating category.

Additionally, the stand-alone risk profile is supported by ORC’s high-quality real estate portfolio and strong market position in key Canadian markets, leading to its ability to generate stable EBITDA ($567 million in 2017). However, the stand-alone risk profile is constrained by geographical, property and some asset-type concentrations as well as its high leverage (8.7 times (x) debt-to-EBITDA as at December 31, 2017).

The Stable outlook reflects DBRS’s view that ORC will gradually deleverage to a more reasonable level, such that debt-to-EBITDA will improve to a level that is comfortably around the low to mid-8.0x range in 18 months, with continued improvement thereafter. EBITDA growth is anticipated to be the result of increasing same-property rental income and recently completed free-rent periods from new developments and is supported by the Company’s high-quality real estate portfolio. The stable outlook also takes into account DBRS’s expectation that ORC will maintain a secured debt-to-total debt ratio comfortably below the 40% level (17% as at December 31, 2017).

DBRS would consider a negative rating action should one or more of the following occur: (1) ORC maintains its debt-to-EBITDA ratio at or above 8.7x (on a sustained basis); (2) operating conditions deteriorate, resulting in operating cash flow and EBITDA deterioration; (3) secured debt-to-total debt approaches 40%; and (4) DBRS’s view on the strength and level of implicit support provided by OMERS changes. At this time, DBRS does not anticipate a positive rating action in the foreseeable future.

Note that all property rental revenue and EBITDA have been restated to include amortization of tenant incentives for all periods. Also note that the enclosed financial results and corresponding discussions are based on ORC’s proportionate share.

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 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.