DBRS Confirms Ratings on bcIMC Realty Corporation at AA (low) and R-1 (middle), Stable Trends

DBRS Limited (DBRS) confirmed the ratings on bcIMC Realty Corporation’s (bcIMC Realty or the Company) Medium-Term Notes at AA (low) and Commercial Paper (CP) at R-1 (middle), all with Stable trends. The ratings continue to be supported by DBRS’s view of implicit support provided by bcIMC Realty’s owner, British Columbia Investment Management Corporation (BCI); the Company’s high-quality real estate portfolio with exposure across all four core real estate subsectors; strong market position through BCI’s leading global real estate management platform, QuadReal Property Group Limited Partnership (QuadReal); and diversified tenant base with low counterparty risk. The ratings are constrained by a relatively short lease maturity profile, geography and property concentration risks as well as disproportionate exposure to the Calgary office market.

The Stable trends consider BCI’s recently announced agreement with the Royal Bank of Canada’s (RBC; rated AA with a Positive trend by DBRS) Global Asset Management division and QuadReal (the RBC Transaction) as well as bcIMC Realty’s potentially evolving capital structure in consequence. On March 12, 2019, RBC announced an agreement with BCI and QuadReal to form the RBC Canadian Core Real Estate Fund (the Fund), which will comprise over 40 of BCI’s existing Canadian real estate assets with a total value of over $7 billion and will be available to institutional investors. The Fund is expected to become an equal owner in the assets through a multi-stage vend-in process over the next several years, beginning in the third quarter of 2019, while QuadReal will continue to manage the properties. While DBRS recognizes the potential for increased use of secured debt as a source of capital within the Fund, which would be credit negative for the Company, DBRS believes that an increased secured debt-to-total debt ratio may be offset as bcIMC Realty reduces its overall debt with proceeds from the disposition of partial interests in the portfolio of properties vended into the Fund, thus decreasing leverage while maintaining ample coverage of unencumbered assets over unsecured debt.

The Stable trends also consider bcIMC Realty’s solidifying market position through QuadReal’s demonstrated market leadership; relatively weak operating performance in the Company’s office segment where occupancy declined 80 basis points year over year to 89.5% at December 31, 2018, largely driven by significant exposure to the Calgary office market; and a shortened lease maturity profile as bcIMC Realty looks to intensify existing assets and work through potential future vacancy resulting from the Canadian Imperial Bank of Commerce (CIBC; rated AA with a Stable trend by DBRS) consolidating its Greater Toronto Area office footprint at CIBC Square, which is scheduled for phased completion in 2020 and 2023.

A negative rating action could result if bcIMC Realty’s secured debt-to-total debt ratio increases above 40% and its total debt-to-EBITDA ratio remains above 6.0 times on a sustained basis, all else equal, or if DBRS changes its views on the level of implicit support provided by BCI. Given constraints noted above, such as recent operating performance and short lease maturity profile, a positive rating action is unlikely 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 2019), DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), DBRS Criteria: Guarantees and Other Forms of Support (January 2019) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

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.

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

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