DBRS Confirms Dream Office REIT’s Senior Unsecured Debentures at BBB (low), Stable Trend

DBRS Limited (DBRS) confirmed its rating on the Senior Unsecured Debentures of Dream Office Real Estate Investment Trust (Dream Office or the Trust) at BBB (low) with a Stable trend. DBRS notes that these debentures are guaranteed by a wholly owned principal subsidiary of the Trust, which eliminates structural subordination. The confirmation reflects the Trust’s current liquidity, which is sufficient relative to the outstanding Series C senior unsecured debenture; the assumption that Dream Office will redeem these debentures at or before their maturity on January 21, 2020, with no further senior unsecured debentures issued in the interim, notwithstanding a weaker credit risk profile than originally anticipated; and the ongoing portfolio reduction caused by the execution of its strategic plan. Current liquidity of around $230 million ($16 million cash plus $214 million credit line availability) is enough to redeem the only outstanding Series C senior unsecured debenture of $150 million due January 21, 2020.

From a financial profile perspective, DBRS forecasts sources of liquidity to exceed uses in the near term if there are no further unit repurchases and Dream Office uses proceeds from the sale of assets to repay debt. Although the debt-to- earnings before interest, depreciation and amortization (EBITDA) ratio of 9.0 times (x) in the last 12 months (LTM) was higher than the 8.2x threshold referred to in DBRS’s June 30, 2017, press release, this ratio is expected to improve as the Company completes its strategic plan. DBRS expects Dream Office to demonstrate progress in its commitment to deleveraging, pursuant to the strategic plan, by using proceeds from planned property dispositions to materially pay down debt by the end of 2019. As such, DBRS anticipates key financial metrics to gradually improve in 2019. DBRS forecasts that, upon completion of the current strategic initiatives (including all announced and planned property dispositions and debt repayment), the Trust’s total debt-to-EBITDA ratio could improve to about 8.2x and EBITDA interest coverage could increase to about 2.9x.

The execution of Dream Office’s ongoing strategic initiatives (i.e., asset dispositions, unit buybacks and new developments) have materially reduced the size of the Trust’s income-producing portfolio and, correspondingly, its ability to generate EBITDA. Portfolio size was 7.4 million square feet (sf) as at June 30, 2018, compared with 8.2 million sf in F2017 and 17.2 million sf in F2016, which is below the 15.0 million sf threshold for the BBB (low) rating category. EBITDA has fallen to $76.1 million for the six months ended June 30, 2018, and $173.5 million for the LTM ended June 30, 2018, compared with $250.2 million for F2017 and $389.1 million for F2016, which is below the $200 million EBITDA threshold for the BBB (low) rating category. While Dream Office’s credit profile is weaker than originally expected, its liquidity position and the short duration of the Senior Unsecured Debentures support the rating confirmation.

Negative rating action could occur if liquidity declines below the level required to redeem the outstanding senior unsecured debenture and financial metrics deteriorate further because of circumstances deviating from current expectations (i.e., higher vacancies, weakness in the Greater Toronto Area and other currently strong markets, less debt repayment than planned, etc.), such that EBITDA interest coverage (including capitalized interest) falls below 2.30x and/or debt-to-EBITDA rises above 8.5x on a sustained basis. Positive rating action is not contemplated at this time.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 2018), DBRS Criteria: Guarantees and Other Forms of Support (January 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2017), 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.

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