Morningstar DBRS Confirms Credit Ratings on Ivanhoé Cambridge II Inc. at AA (low) With Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed Ivanhoé Cambridge II Inc.’s (IC II or the Company) Issuer Rating and Senior Unsecured Debentures credit rating at AA (low) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings consider (1) the stand-alone credit assessment of IC II; (2) the implicit support of Caisse de dépôt et placement du Québec (CDPQ; rated AAA with a Stable trend by Morningstar DBRS); and (3) Morningstar DBRS' expectation that the Company will successfully refinance its upcoming debt maturities and increase its leverage in the medium to long term, which would be more in line with Morningstar DBRS-rated pension fund real estate entity peers. Based on Morningstar DBRS’ expectations surrounding the integration with CDPQ, it does not anticipate that the integration will have an impact on the Company’s credit risk profile.

The Stable trends consider (1) IC II's continued disposition of noncore retail assets in 2023, (2) the Company’s substantial capital expenditure investments into remaining assets to maintain trophy-status quality in respective markets, and (3) IC II's strong EBITDA interest coverage ratio given the Company's low leverage. As a result of recent dispositions, IC II's portfolio has become more concentrated, as measured by property and tenant diversification. The portfolio size business risk assessment factor was adjusted lower given additional dispositions as the increased portfolio concentration enhances property-specific risk; however, the Company’s smaller portfolio size is mitigated by the market position of its parent company, Ivanhoé Cambridge Inc. (Ivanhoé Cambridge).

CREDIT RATING DRIVERS
Morningstar DBRS would consider a negative credit rating action if one or more of the following factors occur on a sustained basis: (1) Morningstar DBRS changes its view on the level of implicit support provided by CDPQ; (2) the secured debt-to-total debt ratio exceeds 40% on a sustained basis (19.2% as of YE2023, inclusive of the proportionate joint venture share); or (3) IC II's key financial metrics deteriorate significantly more than currently expected, resulting in total debt-to-EBITDA greater than 5.3 times (x) and an EBITDA interest coverage ratio of less than 4.50x on a sustained basis, all else equal. A positive credit rating action is unlikely at this time as it would require a sustained change in business risk assessment relative to expectations.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates IC II to increase leverage closer to the 3.0x debt-to-EBITDA range in the near term, which would be largely driven by anticipated revolver advances and moderately less EBITDA following recent dispositions. Morningstar DBRS expects EBITDA interest coverage to remain above 5.00x in the near term, which is one of the strongest coverages in Morningstar DBRS’ rated universe. Morningstar DBRS notes that IC II’s credit ratings consider Morningstar DBRS' long-term expectation that the Company will gradually issue additional material amounts of unsecured debt, resulting in IC II’s financial risk metrics (particularly total debt-to-EBITDA and EBITDA interest coverage) deteriorating from current levels. Despite the deterioration, Morningstar DBRS expects the debt-to-EBITDA and EBITDA interest coverage ratios to be similar relative to other Morningstar DBRS-rated pension fund peers.

CREDIT RATING RATIONALE
The credit ratings continue to be supported by (1) Morningstar DBRS’ view of implicit support from IC II’s ultimate parent, CDPQ; (2) IC II's strong market position through Ivanhoé Cambridge, CDPQ’s leading global real estate management platform; (3) the Company’s high-quality real estate portfolio; (4) the Company's well-laddered lease profile with a diversified above-average-quality tenant roster; and (5) IC II’s solid balance sheet with a low proportion of secured debt in the capital structure. The credit ratings continue to be constrained by (1) concentration risks in the form of significant property concentration, geographic concentration, and asset type concentration; and (2) a relatively modest portfolio size as measured by EBITDA and square footage.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of IC II, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of IC II, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of IC II, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024), https://dbrs.morningstar.com/research/431170

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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