Morningstar DBRS Confirms BCI QuadReal Realty at AA (low), Stable

DBRS Limited (Morningstar DBRS) confirmed BCI QuadReal Realty’s (BQR or the Fund) Issuer Rating and Senior Notes credit rating at AA (low) and its Commercial Paper credit rating at R-1 (low), all with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings consider BQR’s stand-alone credit risk profile, which encompasses Parkpool as guarantor of the Senior Notes, and Morningstar DBRS’ view of implicit support by British Columbia Investment Management Corporation (BCI; rated AAA, Stable by Morningstar DBRS) as sole trustee of BQR. The Stable trends take into consideration changes to BQR’s business risk assessment (BRA) and changes to Morningstar DBRS’ analytical approach to assessing BQR affecting its financial risk assessment (FRA) and overlay factors.

Morningstar DBRS has revised its analytical approach to assessing BQR’s BRA, FRA and overlay factors as result of the increasing materiality of other revenue sources such as interest income and dividend income from affiliates. Morningstar DBRS has removed interest income and dividend income from affiliates from its Morningstar DBRS-adjusted EBITDA figures and increased the size of the Other Revenues overlay factor in consideration of these income sources as well as others (e.g., realized gains on programmatic dispositions and profits on condominium sales).

As a result, Morningstar DBRS has revised its assessment of BQR’s BRA; portfolio size has been revised lower largely as a result of lower EBITDA, as described above. Morningstar DBRS has also revised BQR’s following BRA factors: (1) asset quality has been revised lower largely as a reflection of the Fund’s exposure to office assets, which continue to face secular headwinds (e.g., oversupply, obsolescence, and work-from-home dynamics) that have put downward pressure on occupancy and rental rates; and (2) diversification has been revised higher with continued improvement in BQR’s diversification across the real estate subsectors and alternatives (e.g., office, multifamily, industrial, manufactured housing, and retail). The net impact of these changes to BQR’s BRA, FRA, and overlay factors is that BQR’s credit profile has deteriorated modestly within its current credit ratings.

CREDIT RATING DRIVERS
Morningstar DBRS could take a negative credit rating action if (1) BQR’s total debt-to-EBITDA ratio increases above 10.0 times (x) or EBITDA interest coverage declines below 3.17x on a sustained basis, all else equal; (2) if the secured debt-to-total debt ratio increases above 40%; or (3) if Morningstar DBRS changes its view on the level and/or strength of implicit support provided by BCI and the credit enhancement provided by the Fund’s other revenue sources. Given the constraints noted above, a positive credit rating action is unlikely at this time.

FINANCIAL OUTLOOK
Morningstar DBRS has revised its assessment of the Fund’s FRA, including total debt-to-EBITDA and EBITDA interest coverage metrics. Morningstar DBRS expects BQR’s total debt-to-EBITDA and EBITDA interest coverage metrics to deteriorate to the high 9.0x range and 3.3x range, respectively, in the near to medium term (from 7.6x and 5.84x, respectively, for the last 12 months ended December 31, 2023). The significant increase in BQR’s debt-to-EBITDA metric is based on Morningstar DBRS’ expectation that the Fund will look to debt finance various growth initiatives of BCI. At the current credit ratings, BQR has little further tolerance for incremental leverage beyond what’s already included in Morningstar DBRS’ above-noted expectations.

CREDIT RATING RATIONALE
BQR's credit ratings continue to be supported by (1) a strong market position that benefits from the reputation and market leadership of the manager of BCI’s leading global real estate platform, QuadReal Property Group Limited Partnership; (2) superior asset type diversification with a diversified tenant base; (3) its high-quality multifamily and retail real estate assets; (4) a strong EBITDA interest coverage metric as a result of the Fund’s highly competitive cost of funds; and (5) other considerations such as implicit support from BCI, a predominately unsecured debt stack, and other revenue sources such as interest and dividend income from affiliates, realized gains from programmatic dispositions, and profits on condominium sales. BQR's credit ratings are constrained by (1) elevated leverage for the credit ratings, as measured by total debt-to-EBITDA; (2) a relatively short lease maturity profile; and (3) as a result of Morningstar DBRS’ revised analytical approach noted above, Morningstar DBRS assesses BQR’s portfolio as relatively small for the current credit ratings.

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 BQR, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of BQR, 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 BQR, 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 of 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 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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