Morningstar DBRS Confirms bcIMC Realty Corporation at AA (low), Stable

DBRS Limited (Morningstar DBRS) confirmed bcIMC Realty Corporation’s (bcIMC Realty or the Company) Issuer Rating and the credit rating on the Company’s Medium-Term Notes (MTNs) at AA (low) with Stable trends.

Key Credit Rating Considerations
The credit ratings consider (1) the stand-alone credit assessment of bcIMC Realty; (2) implicit support of British Columbia Investment Management Corporation (BCI) as sole trustee of bcIMC Realty's parent, BCI QuadReal Realty (BQR; rated AA (low) with a Stable trend by Morningstar DBRS); and (3) additional credit enhancement provided by Parkpool, owner of Parkbridge Lifestyle Communities Inc. (Parkbridge), as a guarantor of the MTNs under the Trust Indenture (Parkpool Guarantee).

The Stable trends consider a downward assessment of bcIMC’s Realty’s Business Risk Assessment (BRA) factor, namely asset quality, and an upward assessment of the Company’s Financial Risk Assessment (FRA), namely bcIMC Realty’s total debt-to-EBITDA; both revisions have a credit neutral impact on the overall rating.

Morningstar DBRS’ lower assessment of bcIMC Realty’s asset quality reflects the Company’s elevated exposure to office assets, which is grappling persistent secular headwinds including increasing oversupply, obsolescence, and evolving remote working dynamics that have put downward pressure on rental rates and occupancy levels. Morningstar DBRS continues to maintain its credit negative outlook on the office sector and believes it will take longer to recover than during normal cyclical lows. On the other hand, the FRA, namely the Company’s total-debt-to-EBITDA, has been revised upwards, taking into account Morningstar DBRS’ expectations of modest growth in the Company’s EBITDA relative to increase in development-related debt led by stable, consistent same-property net operating income growth coupled with a modest uptick provided by the Company’s new development pipeline becoming stabilized in the near to medium term.

Credit Rating Drivers
Given the downward assessment in asset quality, Morningstar DBRS would consider a negative rating action if (1) bcIMC Realty's total debt-to-EBITDA ratio increases above 9.3 times (x) or EBITDA interest coverage declines below 4.0x on a sustained basis, all else equal; (2) bcIMC Realty’s secured debt-to-total debt ratio increases above 40%; or (3) Morningstar DBRS changes its views on the level of implicit support from BCI or the credit enhancement provided by the Parkpool Guarantee and the realized gains from QuadReal's programmatic dispositions strategy. A positive rating action is unlikely at this time unless there is a significant improvement in either the BRA or the FRA factors in the near to medium term.

Financial Outlook
In contrast to prior expectations of deterioration in total debt-to-EBITDA in the mid to high 9x range through year-end (YE) 2024, Morningstar DBRS now expects bcIMC Realty’s total debt-to-EBITDA to remain stable at 9.0x times through YE2025, in line with 8.9x for the last 12 months (LTM) ended December 31, 2023. However, Morningstar DBRS expects bcIMC Realty’s EBITDA interest coverage will continue to deteriorate from 5.3x LTM to the low 4x range through YE2025 as it refinances upcoming maturing notes at higher interest rates. Despite Morningstar DBRS’ revised expectations on FRAs, the Company has little additional financial flexibility within the current rating due to slight deterioration in the BRAs.

Credit Rating Rationale
The ratings continue to be supported by (1) Morningstar DBRS’ view of implicit support from BCI as sole trustee of bcIMC Realty's parent, BQR; (2) the Company’s high-quality real estate portfolio, notwithstanding Morningstar DBRS’ lower assessment as noted above, with exposure to all four core real estate subsectors; (3) strong market position through BCI’s leading global real estate management platform managed by QuadReal; (4) a well-diversified tenant base with low counterparty risk; and (5) a low level of secured debt (secured debt-to-total debt ratio of 26.3% at December 31, 2023) and a large pool of unencumbered assets with an estimated value of approximately $9.2 billion at December 31, 2023, that could be pledged as security for loans, if needed.

The ratings are constrained by (1) bcIMC Realty's modestly elevated leverage and execution risks stemming from the Company's capital recycling initiatives and capital-intensive development pipeline that will require ample funding and continued support from BCI and BQR; (2) concentration risks by several measures, including property and geography; and (3) relatively elevated re-leasing risk.

Morningstar DBRS continues to provide an additional modestly positive overlay factor in consideration of other revenues received through the Company’s programmatic disposition strategy largely by way of the strategic partnership between RBC Global Asset Management (RBC GAM) and QuadReal whereby nonmanaging, partial interests in stabilized income-producing properties are vended into Canadian Core Real Estate LP (rated A (low) with a Stable trend by Morningstar DBRS) (the RBC GAM Transaction).

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 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 bcIMC Realty Corporation, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of bcIMC Realty Corporation, 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 bcIMC Realty Corporation, the BRA carried more 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

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 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 info-DBRS@morningstar.com.

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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