DBRS Confirms Rating on Ivanhoé Cambridge II Inc. at AA (low), Stable Trend

DBRS Limited (DBRS) confirmed its rating on Ivanhoé Cambridge II Inc.’s (IC II or the Company) Senior Unsecured Debentures at AA (low) with a Stable trend. The rating considers IC II’s stand-alone credit risk profile and DBRS’s view of implicit support by IC II’s ultimate parent, Caisse de dépôt et placement du Québec (CDPQ; rated AAA with a Stable trend by DBRS). The rating continues to be supported by the Company’s high-quality real estate portfolio, strong market position through Ivanhoé Cambridge, CDPQ’s leading global real estate management platform and low proportion of secured debt in the capital structure. The rating continues to be constrained by significant property concentration as measured by the composition and contribution of IC II’s ten-largest net operating income contributors, geographic concentration most significantly in Montréal and Calgary as well as a relatively small portfolio as measured by EBITDA compared with IC II’s rated pension fund real estate entity peers.

The Stable trend considers IC II’s strengthening market position through demonstrated leadership by Ivanhoé Cambridge in recent transaction activity across real estate subsectors and growing assets under management as well as relatively weaker operating performance in IC II’s retail segment, where occupancy declined 3.5% year over year at December 31, 2018, largely driven by Sears store closures. The Stable trend also reflects DBRS’s view that, in the near to medium term, IC II will generate modest EBITDA growth supported by the continued stability of income generated from institutional-quality office and retail assets as well as increased debt as IC II continues to build out a curve in the senior unsecured debt market. The rating already takes into consideration DBRS’s expectation that IC II’s financial risk metrics (particularly total debt-to-EBITDA and EBITDA interest coverage) will deteriorate materially, albeit from very strong levels.

Although unlikely in the foreseeable future, DBRS would consider a positive rating action if IC II significantly increases the size and scale of its portfolio, such that asset quality and diversification are materially improved, while maintaining (1) key financial metrics at levels that are commensurate with the current rating and (2) a low proportion of secured debt in the capital structure. Alternatively, DBRS would consider a negative rating action if one or more of the following factors occurs on a sustained basis: (1) DBRS changes its views on the level of implicit support provided by CDPQ; (2) the secured debt-to-total debt ratio exceeds 40%; (3) the operating environment continues to deteriorate, leading to higher vacancy and declining operating cash flow; and (4) the Company’s key financial metrics deteriorate, resulting in total debt to EBITDA greater than 8.0 times.

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) and DBRS Criteria: Guarantees and Other Forms of Support (January 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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