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); and (3) Morningstar DBRS' expectation that the Company will 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. Following the ongoing integration with CDPQ, Morningstar DBRS believes IC II could become more closely aligned with CDPQ and its credit profile over the longer term.

The Stable trends consider (1) IC II's continued disposition of noncore retail assets in 2023 and early 2025, (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.

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 (32.1% as of YE2024, inclusive of the proportionate joint venture share); and (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 medium 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 higher than 7.00x in the near term, which is one of the strongest coverages in Morningstar DBRS' rated universe. As of YE2024, IC II's total debt-to-EBITDA and EBITDA Interest Coverage were 1.1x and 8.23x, respectively. 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 portfolio; (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 factor(s) 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 IC II, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of IC II, 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 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 (February 3, 2025; https://dbrs.morningstar.com/research/447186), 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 Criteria: Approach to Environmental, Social, and Governance 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429