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 at AA (low), the credit rating on the Senior Notes at AA (low), and its Commercial Paper at R-1 (low), all with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings consider the Fund's stand-alone credit risk profile and Morningstar DBRS' view of implicit support by British Columbia Investment Management Corporation (BCI; rated AAA, Stable by Morningstar DBRS) as the sole trustee of BQR.

The Stable trends take into consideration BQR's continued execution of its strategy over the past year, as well as its June 3, 2024, full internalization of Parkpool ($2.1 billion gross asset value at December 31, 2023), owner of Parkbridge, which owns a portfolio of manufactured housing communities (MHCs) across Canada (the Parkpool Transaction). Previously, Parkpool provided credit support to BQR by way of a guarantee, which has since been released.

BQR has continued to execute its strategy of optimizing existing assets and recycling capital by selling outright or partial non-managing interests in income-producing properties to partially fund selective acquisitions and an extensive development pipeline focused on conviction asset classes such as industrial, multifamily, and alternatives. Indeed, on November 1, 2024, BQR successfully closed on its 5th tranche transaction with Canadian Core Real Estate LP (CCRE, rated A (low), with a Positive trend, by Morningstar DBRS), involving the sale of partial interests in predominately MHC and retail assets for approximately $800 million and the purchase of CCRE's interest in several assets for approximately $175 million (the Tranche 5 Transaction). Operationally, BQR's portfolio has maintained relatively stable occupancy rates while generating modestly positive same-property net operating income growth across its portfolio.

CREDIT RATING DRIVERS
Morningstar DBRS could take a negative credit rating action if (1) BQR's total debt-to-EBITDA ratio increased above 10.0 times (x) or EBITDA interest coverage declined below 3.17x on a sustained basis, all else equal; (2) if the secured debt-to-total debt ratio increased above 40%; or (3) if Morningstar DBRS changed 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 below, a positive credit rating action is unlikely at this time.

FINANCIAL OUTLOOK
While BQR continues to outperform key credit metrics relative to Morningstar DBRS' prior expectations, Morningstar DBRS maintains its expectations for BQR's total debt-to-EBITDA and EBITDA interest coverage metrics to deteriorate in the near to medium term as a result of its growth initiatives, including debt financing acquisitions and developments. Morningstar DBRS expects BQR's total debt-to-EBITDA and EBITDA interest coverage metrics to deteriorate to the mid-9.0x range and 3.4x range, respectively (from 8.0x and 3.95x, respectively, for the last 12 months ended December 31, 2024 (LTM), or 7.8x and 4.08x, respectively, after annualizing the impact of the Parkpool Transaction). At the current credit ratings, BQR has little further tolerance for incremental leverage beyond what is 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 (QuadReal); (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) a relatively small portfolio size for the current credit ratings.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 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: Interplay of Global Corporate Finance Rating Methodologies When Analyzing Corporate Finance Transactions (February 3, 2025) 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.

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.

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