DBRS Limited (DBRS Morningstar) confirmed bcIMC Realty Corporation’s (bcIMC Realty or the Company) Issuer Rating and Medium-Term Notes (MTNs) rating at AA (low) with Stable trends. The rating confirmations consider the impact of the ongoing Coronavirus Disease (COVID-19) pandemic on bcIMC Realty's operations and the deterioration in DBRS Morningstar's financial risk assessment of bcIMC Realty relative to prior expectations, with such deterioration in the Company's overall credit risk profile more than offset by positive considerations, including improved access to liquidity and additional credit enhancement.
Additional credit enhancement is provided with the addition of Parkpool, owner of Parkbridge Lifestyle Communities Inc. (Parkbridge), as a guarantor of the MTNs under the Trust Indenture (the Guarantee). Parkpool, by way of Parkbridge, owns a portfolio of manufactured housing communities across Canada generating more than $62 million EBITDA on $1.5 billion in income producing property (IPP) in 2020 with nominal debt outstanding. As a result, DBRS Morningstar is of the view that the Guarantee warrants a modest uplift to the ratings of bcIMC Realty. Furthermore, bcIMC Realty's access to liquidity is strengthened by way of a $500 million intercompany credit agreement with its parent, BCI QuadReal Realty (BQR), in addition to bcIMC Realty's $102 million cash on hand at December 31, 2020.
The Stable trends consider DBRS Morningstar's expectation of further deterioration in bcIMC Realty's leverage as measured by its total debt-to-EBITDA of 8.0 times (x) at December 31, 2020, which is expected to approach the high 8x range in the near to medium term. This results largely from the combination of (1) reduced EBITDA from the disposition of partial interests in IPP by way of the partnership between RBC Global Asset Management (RBC GAM) and QuadReal Property Group Limited Partnership (QuadReal; the RBC GAM Transaction) and (2) DBRS Morningstar's expectation of accelerating growth in capital expenditure (capex) resulting in modestly increasing debt. This level of leverage may serve to limit financial flexibility for the current rating at a time of heightened uncertainty, in DBRS Morningstar's view. DBRS Morningstar expects bcIMC Realty's total debt-to-EBITDA to improve thereafter as growth capex spending tapers and development completions begin to generate positive net operating income. The Stable trends also reflect DBRS Morningstar's view that the worst of the economic fallout from the pandemic has already occurred and that bcIMC Realty should see continued improvement in bad debt expenses, rent abatements, rent collections, and vacancy rates, notwithstanding the current third wave of the pandemic in Canada. Indeed, overall portfolio rent collections have improved to 94% as of March 2021 versus 87% in Q2 2020.
The ratings continue to be supported by (1) DBRS Morningstar’s view of implicit support from the British Columbia Investment Management Corporation (BCI) as sole trustee of bcIMC Realty's parent, BQR; (2) the Company’s high-quality real estate portfolio with exposure to all four core real estate subsectors; (3) strong market position through BCI’s leading global real estate management platform, QuadReal; (4) a diversified tenant base with low counterparty risk; and (5) a low level of secured debt (secured debt-to-total debt ratio of 33.7% at December 31, 2020) and a large pool of unencumbered assets with an estimated value of approximately $10.9 billion at December 31, 2020 that could be pledged as security for loans, if needed. The ratings continue to be constrained by (1) bcIMC Realty's elevated leverage and execution risks stemming from the RBC GAM Transaction and resulting dispositions which will reduce cash flows while the Company's capital-intensive development pipeline will require ample funding; and (2) concentration risks by several measures including property, geography, and lease maturities.
DBRS Morningstar would consider a negative rating action if (1) bcIMC Realty's operating environment fails to improve as expected, resulting in its total debt-to-EBITDA ratio remaining above 9.2x on a sustained basis, all else equal, or if DBRS Morningstar views downward revisions to bcIMC Realty's business risk assessment as warranted; (2) bcIMC Realty’s secured debt-to-total debt ratio increases above 40%; or (3) DBRS Morningstar changes its views on the level of implicit support from BCI or the credit enhancement provided by the Parkpool Guarantee. Given the constraints noted above, such as elevated leverage, a positive rating action is unlikely at this time.
In its calculations of DBRS Morningstar-adjusted metrics such as total debt-to-EBITDA as of this review, DBRS Morningstar now considers total debt at face value ($3.8 billion at December 31, 2020) instead of fair value ($4.0 billion) on the balance sheet.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021, https://www.dbrsmorningstar.com/research/377358) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021, https://www.dbrsmorningstar.com/research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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