Morningstar DBRS Confirms AA (low) Credit Ratings on OMERS Realty Corporation, Maintains Negative Trends

DBRS, Inc. (Morningstar DBRS) confirmed its AA (low) Issuer Rating and Senior Unsecured Notes rating on OMERS Realty Corporation (ORC or the Company). The trends on the credit ratings remain Negative.

KEY CREDIT RATING CONSIDERATIONS
The Negative trends reflect Morningstar DBRS expectation that the combined financial risk metrics will not improve or deteriorate into the next credit rating category over YE2025. The EBITDA Interest Coverage for YE2025 is now projected to be slightly below previous expectations (low-3.00x range at Morningstar DBRS' last review on December 18, 2023) because of greater interest expenses, which is countered by Morningstar DBRS' current expectation of Total Debt-to-EBITDA being better than the previously expected 7.5x.

CREDIT RATING DRIVERS
All else remaining equal, the credit ratings may be downgraded if Total Debt-to-EBITDA remains at 7.3x or worse on a sustained basis after YE2024, or EBITDA Interest Coverage remains below 3.00x on a sustained basis after YE2025. Downgrades are also likely if there is any deterioration in the business risk assessment (BRA) factors, notably the Diversification BRA factor, as the portfolio becomes more concentrated by geography and property-level. Additionally, credit rating downgrades may also occur should Morningstar DBRS change its view on the level of implicit support provided by ORC's parent OMERS Administration Corporation (OMERS; rated AAA with a Stable trend by Morningstar DBRS). All else remaining equal, Morningstar DBRS would likely restore the Stable trends should Total Debt-to-EBITDA remain at or fare better than 7.3x and EBITDA Interest Coverage remains above 3.00x on a sustained basis.

FINANCIAL OUTLOOK
Morningstar DBRS projects Total Debt-to-EBITDA to deteriorate to the high-7.0x range by YE2024, relative to the last 12 months (LTM) ended June 30, 2024, Total Debt-to-EBITDA of 7.1x. The deterioration will be driven by continued income loss from the dispositions recorded throughout the second half of 2023 and 2024. Total Debt-to-EBITDA is expected to further improve to the 7.0x range by YE2025 and remain stable through YE2026 as a result of EBITDA growth by way of stabilization of recently acquired assets and same-property net operating income growth.

Morningstar DBRS believes EBITDA Interest Coverage (including capitalized interest) will deteriorate to the high-2.00x range by YE2024 from 3.17x as of June 30, 2024, due to the dispositions. EBITDA Interest Coverage is expected to remain in the high-2.00x range through YE2025 before surpassing 3.00x by YE2026 by way of EBITDA growth.

CREDIT RATING RATIONALE
The credit 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 Toronto and Vancouver; (3) tenant and asset type diversification; and (4) the Company's high-quality tenant roster. The credit ratings are constrained by (1) ORC's elevated leverage levels compared with other Morningstar DBRS-rated pension-plan peers; (2) the portfolio's property and geographic concentration relative to the Morningstar DBRS-rated universe; (3) a relatively short lease maturity profile among its pension fund peers; and (4) its relatively small portfolio for the subject credit rating category. The credit rating confirmations consider (1) the stand-alone credit assessment of ORC; (2) the implicit support of OMERS; and (3) the low proportion of secured debt in ORC's capital structure.

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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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

(B) Weighting of FRA Factors
In the analysis of ORC, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of ORC, 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 methodologies have also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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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