DBRS Limited (DBRS Morningstar) confirmed Ontario Teachers’ Cadillac Fairview Properties Trust’s (OT CFPT or the Trust) Issuer Rating and Senior Unsecured Debentures rating at AA, with Stable trends. The ratings take into consideration OT CFPT’s stand-alone risk profile, the Trust’s low level of secured debt, and DBRS Morningstar’s view of the implicit support provided by the Ontario Teachers’ Pension Plan Board (OTPPB; rated AAA with a Stable trend by DBRS Morningstar).
The ratings continue to be supported by OT CFPT’s high-quality real estate portfolio and benefit from The Cadillac Fairview Corporation Limited’s (a wholly owned subsidiary of OTPPB) strong market position as a leading North American property developer and manager, which, taken together, provide some stability to operating metrics and earnings. OT CFPT’s conservative financial-risk profile, as measured by leverage and interest coverage and low level of secured debt-to-total debt, also benefit the ratings. The ratings are constrained by OT CFPT’s significant property concentration, geographic concentration in the Greater Toronto Area (which is expected to increase further with development projects), and a high degree of net operating income (NOI) exposed to discretionary retail.
The Stable trends reflect DBRS Morningstar’s view that OT CFPT will begin to recover EBITDA lost during the ongoing Coronavirus Disease (COVID-19) pandemic as public health measures are gradually lifted. EBITDA recovery in the near to medium term will be driven by the same property NOI growth and incremental income from the stabilization of completed developments. DBRS Morningstar’s expectation is that development costs will be funded with equity from OTPPB, as has been the case historically, and that the $1.8 billion of intercompany debt owed by OT CFPT will be refinanced in the capital markets over the next several years. DBRS Morningstar expects that OT CFPT’s total debt-to-EBITDA and EBITDA-to-interest expense ratios will improve for the last 12 months (LTM) period ending April 30, 2022, to 5.9 times (x) and 4.25x, respectively, before returning to pre-pandemic levels by the LTM period ending April 30, 2023. Improvement is expected to be supported by the developments at 16 York Street and 160 Front Street, both in Toronto, that will start contributing meaningfully to EBITDA in 2022 and 2023, respectively.
There is an upcoming debt maturity of approximately $610 million in 2022. The Trust's liquidity position is considered sufficient because it has $350.1 million in available liquidity, consisting of $200.1 million of cash, $150 million of availability under its credit facility, and a $83.7 million U.S. denominated credit facility for debt servicing, before it gives consideration to unencumbered assets of over $21.9 billion as at April 30, 2021.
Notwithstanding some encouraging developments with the pandemic (e.g., high vaccination uptake, fewer reported deaths, and staged reopenings), some potential headwinds, such as the recent declaration that a fourth wave is upon us, could affect OT CFPT in the near term, including potential future business closures pursuant to public health mandates. Such closures could have significant negative implications for the Trust's ability to collect rents, recover EBITDA, and improve leverage, which may result in future negative rating actions.
DBRS Morningstar would consider a negative rating action should one or more of the following factors occur on a sustained basis: (1) debt-to-EBITDA exceeds 6.0x; (2) secured debt-to-total debt exceeds 40% (1.5% at April 30, 2021); (3) the operating environment deteriorates, leading to material declines in operating cash flow and EBITDA; or (4) DBRS Morningstar’s view on the strength and level of implicit support provided by OTPPB changes. Currently, DBRS Morningstar does not anticipate a positive rating action in the foreseeable future, given OT CFPT’s concentration risks noted above.
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 (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), 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 firstname.lastname@example.org.
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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