DBRS Morningstar Changes Trends on OMERS Realty Corporation to Negative from Stable, Confirms Ratings at AA (low)

DBRS, Inc. (DBRS Morningstar) changed the trends on OMERS Realty Corporation's (ORC or the Company) Issuer Rating and Senior Unsecured Notes rating to Negative from Stable, while also confirming the ratings at AA (low). This rating action is a result of the recently announced disposition of Vaughan Business Park and 75% disposition of Brampton Business Park, plus the assumption of a material debt reduction in the immediate term following the transaction.

The Negative trends reflect a weaker business risk assessment (BRA), specifically asset quality, without a corresponding improvement in financial risk assessment (FRA) metrics.

In its last review (press release dated June 29, 2023), DBRS Morningstar expected ORC’s BRA asset quality assessment to be an A (high), but it is now an “A” because of the expected dilution of EBITDA generated from ORC’s top-quality retail assets as a percentage of the total portfolio EBITDA following the expected asset divestitures and acquisitions in the near term. Nevertheless, the asset quality of ORC’s real estate portfolio remains desirable and is in line with its peers. FRA metrics of debt-to-EBITDA and EBITDA interest coverage are expected to remain relatively stable from DBRS Morningstar’s last review because the weakened FRA metrics from the transaction are anticipated to be offset with a material debt reduction in the immediate term. Factoring in the transaction and the material debt reduction, DBRS Morningstar anticipates debt-to-EBITDA and EBITDA interest coverage in the low 8.0 times (x) range and high 2.00x range for YE2024, respectively. FRA improvement is expected in 2025 primarily driven by EBITDA growth from planned asset acquisitions and same property net operating income (NOI) growth.

In addition to debt reduction by way of capital downstream from OMERS in the immediate term, the rating actions also consider the Company successfully refinancing its maturing $550 million Series 7 – 2.858% Senior Unsecured Debentures due in February 2024, and successfully managing its upcoming lease expirations in 2024. DBRS Morningstar notes progress has been made with renewing office and retail tenants with upcoming lease expirations.

The rating confirmations and trend changes incorporate the dispositions by ORC of the 100% equity interests in Vaughan Business Park (25% equity interests retained by ORC affiliate outside of the Company) and 75% equity interests in Brampton Business Park, which were not considered in the June 29, 2023, rating actions. Sale proceeds are expected to pay down outstanding mortgage debt and partially pay down unsecured credit facility revolver debt, with the remaining proceeds retained upstream to OMERS, resulting in a modest increase in debt-to-EBITDA in the immediate near term.

In DBRS Morningstar’s view, the weakening of the BRA factor results in less flexibility within the FRA factors, causing the downward rating pressure at this time.

The ratings are supported by (1) ORC's high-quality real estate portfolio; (2) Oxford Properties Group's (Oxford; ORC's affiliated asset manager) strong global market position, particularly in key Canadian markets; (3) tenant and asset type diversification; and (4) the Company’s high-quality tenant roster. The ratings are constrained by (1) ORC's elevated leverage levels compared with other DBRS Morningstar-rated pension-plan peers; (2) the portfolio's property and geographic concentration relative to the DBRS Morningstar-rated universe; (3) a relatively short lease maturity profile among its pension fund peers; and (4) its relatively small portfolio for the subject rating category. The ratings confirmations consider (1) the stand-alone credit assessment of ORC; (2) the implicit support of OMERS Administration Corporation (OMERS; rated AAA with a Stable trend by DBRS Morningstar), ORC's parent; and (3) the low proportion of secured debt in ORC's capital structure.

Rating downgrades are likely if total debt-to-EBITDA exceeds 8.0x in YE2024 and 7.5x in YE2025, or EBITDA interest coverage is below 3.17x on a sustained basis, all else equal. Additionally, rating downgrades may occur should DBRS Morningstar change its view on the level of implicit support provided by OMERS. Conversely, DBRS Morningstar may restore the trends to Stable if ORC’s total debt-to-EBITDA is 8.0x or lower in YE2024 and 7.5x or lower in YE2025, and an EBITDA interest coverage ratio of 3.17x or higher on a sustained basis, all else equal.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023), https://www.dbrsmorningstar.com/research/412477

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023), https://www.dbrsmorningstar.com/research/411694
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (November 9, 2023), https://www.dbrsmorningstar.com/research/423052
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (September 27, 2023), https://www.dbrsmorningstar.com/research/421119

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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