DBRS Morningstar Confirms Canadian Core Real Estate LP’s Ratings at A (low) with Stable Trends

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 trend considers DBRS Morningstar’s expectation for both total debt-to-EBITDA and EBITDA-to-interest to operate at or better than the mid-5.0 times (x) range over 2024, which takes into consideration an improvement in the CCRE’s overall business risk assessment (BRA) with strengthened market position, diversification, lease maturity, and tenant quality and portfolio size. Market Position has been revised higher in consideration of continued growth, extensive outreach, and the Fund’s superior ability to strategically lever from both its Fund and Asset Managers, Royal Bank of Canada (RBC) Global Asset Management and British Columbia Investment Management Corporation’s (BCI; rated AAA with Stable trends by DBRS Morningstar) real estate operating platform, QuadReal Property Group (QuadReal), respectively. Lease Maturity and Tenant quality have been revised higher following the Fund’s sustained leasing in the last 12 months ending September 30, 2023 (LTM), which is positively affecting Weighted Average Lease Term to maturity (WALTs) and the credit quality of the portfolio’s largest tenants. DBRS Morningstar also sees a marginal improvement in the Fund's other qualitative factors, such as Diversification and Portfolio size, as compared with previous year.

DBRS Morningstar’s current expectations for total debt-to-EBITDA and EBITDA-to-interest are weaker than prior expectations due to increased leverage to be in line with the long-term target thresholds and a softer economic outlook. Note that we expect CCRE to operate with a total debt-to-EBITDA metric trending towards the 6.0x-7.0x range in the long term.

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; and (2) a superior market position as a result of the Fund's ability to leverage its strategic relationship with BCI and QuadReal. The ratings are principally constrained by a relatively small and more concentrated portfolio for the current rating category with EBITDA anticipated to be in the high $190 million range in the near term (188.9 million for the LTM ended September 30, 2023), which contributes to (1) high concentration in office, comprising 44.5% of LTM net operating income (NOI); (2) some concentrated exposure to oil and gas (O&G) tenants; and (3) high property concentration with the top 20 properties contributing 69.4% of LTM NOI.

DBRS Morningstar would consider a positive rating action should our assessment of CCRE’s total debt-to-EBITDA metric be below 5.4 x on a sustained basis, all else equal. Albeit not expected 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 7.3x and EBITDA-to-Interest coverage fall below 4.0x on a sustained basis, all else equal. This leverage threshold for a negative rating action is higher contrasted with the prior review because of DBRS Morningstar's upward assessment of the Fund’s qualitative factors.

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/416784 (July 4, 2023).

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

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

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 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 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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