DBRS Morningstar Confirms Canadian Core Real Estate LP at A (low), Stable

DBRS Limited (DBRS Morningstar) confirmed Canadian Core Real Estate LP's (CCRE or the Fund) Issuer Rating and Senior Unsecured Notes rating at A (low) with Stable trends.

The Stable trends take into consideration CCRE's continued progress toward executing its business plan to grow its portfolio of core Canadian commercial and multifamily real estate assets primarily by way of acquiring partial interests in select assets of BCI QuadReal Realty (BQR; rated AA (low) with a Stable trend by DBRS Morningstar). Indeed, CCRE closed on the acquisition of a fourth tranche of assets from BQR on November 1, 2022 (Tranche Four). Tranche Four represents an increase in ownership of 26 previously owned assets (incremental increases ranging from 5% to 35%) as well as a 50% purchase of three new industrial assets. Approximately 75% of the gross asset value from Tranche Four is composed of industrial and residential assets, which reflects CCRE's continued asset class balancing and accretive capital deployment. DBRS Morningstar anticipates subsequent tranches will continue to top up CCRE's ownership of existing assets to 50% (with some exceptions), while being funded with a combination of equity and debt, similar to prior tranches. DBRS Morningstar expects that CCRE's total debt-to-EBITDA and EBITDA-to-interest expense metrics will fluctuate approximately in the mid-5.0 times (x) and 7.0x ranges, respectively, with the timing and funding of future tranches of asset purchases through 2024.

The ratings continue to be supported by (1) the Fund's high-quality real estate portfolio with exposure to all four core real estate subsectors; (2) a superior market position as a result of the Fund's ability to leverage its strategic relationship with British Columbia Investment Management Corporation (BCI) and BCI's global real estate operating platform, QuadReal Property Group Limited Partnership, and its affiliates; and (3) a conservative balance sheet with plans to operate with a debt-to-EBITDA metric below 6.6x. The ratings are principally constrained by a smaller and more concentrated portfolio, with EBITDA anticipated to be in the $185 million range pro forma Tranche Four (from $151.6 million for the last 12 months ended September 30, 2022), which contributes to (1) some concentration in Calgary office space, comprising approximately 11% of net operating income (NOI) pro forma Tranche Four; (2) some concentrated exposure to oil and gas tenants; and (3) some property concentration, with the top 10 properties contributing 46.4% of NOI pro forma Tranche Four.

While DBRS Morningstar understands CCRE may transition toward an unsecured debt stack over time as the Fund continues to borrow in the unsecured debt market, DBRS Morningstar does not currently expect CCRE's secured debt-to-total debt ratio to be below 40% in the near to medium term.

DBRS Morningstar would consider a positive rating action should CCRE successfully transition to a predominately unsecured debt stack with a sizable pool of quality unencumbered assets such that secured debt-to-total debt can be reasonably expected to be below 40% on a sustained basis, all else equal. DBRS Morningstar would consider a negative rating action should CCRE's total debt-to-EBITDA exceed 6.6x on a sustained basis, all else equal.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 protected].

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.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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