DBRS Confirms OMERS Realty Corporation’s Senior Unsecured Notes Rating at AA (low) with a Stable Trend

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 and its low level of secured debt as well as DBRS’s view of the implicit support provided by OMERS Administration Corporation (OMERS; rated AAA with a Stable trend by DBRS).

The rating confirmation reflects the change in business risk factors over the last four years, which somewhat offset the deterioration in the financial risk profile. Since 2014, the portfolio’s asset mix (as measured by ORC’s share of gross leasable area) has been improving, with the contribution of office decreasing meaningfully to 37% in F2018 from 46% in F2014 and industrial increasing to 35% in F2018 from 26% in F2014. Retail remained fairly steady at 27% in F2018 compared with 28% in F2014. The lease maturity profile has been improving, with the weighted-average lease term increasing to 5.6 years as at December 31, 2018, from 5.1 years as at December 31, 2014, as a result of longer-term leases in both the industrial and office sectors. Leverage, as measured by the debt-to-EBITDA ratio, has deteriorated from 7.9 times (x) at F2016 to 8.6x in F2018, a level that is elevated for the A (low) stand-alone risk profile.

Additionally, the Company’s stand-alone risk profile is supported by ORC’s high-quality real estate portfolio, strong market position in key Canadian markets and diverse tenant base, leading to its ability to generate EBITDA of $583 million in F2018, up from $566.7 million the year before. However, the stand-alone risk profile is constrained by geographic and property concentration, as well as ORC’s high leverage.

The Stable outlook reflects DBRS’s view that ORC will, primarily through EBITDA growth, gradually improve the debt-to-EBITDA ratio to a level that is comfortably around the low- to mid-8.0x range by the end of 2019, with continued improvement thereafter. EBITDA growth is anticipated to be the result of increasing same-property rental income and income 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 (15% as at December 31, 2018; down from 17% the year before).

DBRS would consider a negative rating action should one or more of the following occur: (1) ORC’s debt-to-EBITDA ratio trends higher 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. Given the current elevated leverage levels, DBRS does not consider a positive rating action likely at this time.

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

The principal methodologies are Rating Entities in the Real Estate Industry, DBRS Criteria: Guarantees and Other Forms of Support and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, 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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