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. The rating takes into consideration the Trust’s current available liquidity and the short duration of its outstanding series of senior unsecured debt. Available liquidity is sufficient to repay the outstanding Series C Senior Unsecured Debenture, assuming Dream Office will redeem these debentures at or before their maturity on January 21, 2020, and no further Senior Unsecured Debentures will be issued in the interim and the rating thus benefits from this uplift. At June 30, 2019, available liquidity was approximately $351 million ($14 million in cash plus $337 million available on its credit facilities) relative to the outstanding Series C Senior Unsecured Debenture of $150 million.

The rating also incorporates the improvement in asset quality, notwithstanding the significant reduction in portfolio size over the last three years. Assets sales have predominantly been in geographies with weaker market dynamics or where the Trust did not have economies of scale, resulting in a high proportion of properties located in the central business district of Toronto, which has strong office market dynamics, as reflected in growth in same property net operating income and an occupancy rate of 97% (in-place) for downtown Toronto assets at June 30, 2019.

The rating also includes an expectation of improvement in Dream Office’s financial risk metrics and maintenance of these metrics over the medium term. The leverage ratio, as measured by EBITDA, is expected to improve to 8.0 times (x) by the end of 2019 and 7.8x for 2020, from 10.0x in the last 12 months (LTM) ending June 30, 2019. EBITDA-to-interest expense is also anticipated to improve from 2.24x LTM ending June 30, 2019, to 2.46x in 2019 and 2.90x in 2020. The progress is the result of the completion of significant asset dispositions, culminating with the recently announced sale of 700 de la Gauchetière for gross proceeds of approximately $323 million and corresponding net proceeds used to repay debt in 2019.

The rating is constrained by the Trust’s market position, diversification (geographic, asset type and property) and portfolio size. With the shedding of properties, the remaining assets generated $127 million of EBITDA for the LTM ending June 30, 2019, with an expectation of $126 million and $131 million in 2019 and 2020, respectively.

Although unlikely, given the anticipated improving financial risk metrics following the repayment of debt with sales proceeds and the quality of the assets, a negative rating action could occur if financial metrics deteriorate from the current expectations of debt-to-EBITDA at 8.0x and 7.8x in 2019 and 2020, respectively (due to higher vacancies, weakness in the Greater Toronto Area and other currently strong markets or less debt repayment than planned), compared to debt-to-EBITDA rising above 8.5x and EBITDA interest coverage (including capitalized interest) falling below 2.30x on a sustained basis. A positive rating action is not contemplated at this time due to the above-noted constraining factors.

Note that all references to EBITDA reflect DBRS’s calculation methodology and exclude income generated from the Trust’s holdings of units of Dream Industrial REIT.

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: Preferred Share and Hybrid Security Criteria for Corporate Issuers, 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.

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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