DBRS Limited (DBRS Morningstar) confirmed the ratings on bcIMC Realty Corporation’s (bcIMC Realty or the Company) Medium-Term Notes (MTNs) at AA (low) and Commercial Paper (CP) at R-1 (middle). All trends are Stable. The rating confirmations consider the heightened level of uncertainty in bcIMC Realty's operating environment because of the ongoing Coronavirus Disease (COVID-19) pandemic and related economic slowdown. The confirmations also consider the closing of the Company's first tranche (Q4 2019) sale of assets to the partnership between RBC Global Asset Management (RBC GAM) and QuadReal Property Group Limited Partnership (QuadReal; the RBC GAM Transaction). For more detail, please see DBRS Morningstar’s press release dated April 29, 2019.
The Stable trends consider bcIMC Realty's ample access to liquidity of $258 million, including cash; availability on its senior unsecured revolving credit facility (RCF) and CP program (pro forma reducing its RCF by $500 million in February 2020); access to equity capital via its owner, British Columbia Investment Management Corporation (BCI); and an unencumbered asset pool with an estimated value of $11.3 billion at December 31, 2019, that the Company can pledge as security for loans, if needed. This access to liquidity compares favourably with limited maturities of senior unsecured debt as bcIMC Realty’s next maturity is not until the $345 million Series 12 MTNs come due in June 2021. While the Company has been funding in the short-term market with $848 million in CP outstanding at December 31, 2019, this is fully backstopped by its $1.0 billion RCF.
The ratings consider bcIMC Realty's elevated execution risks with respect to its transformative transactions and developments, particularly in the current environment. These execution risks stem from (1) the RBC GAM Transaction and resulting dispositions, which will reduce cash flows in the short term and put upward pressure on debt-to-EBITDA without a corresponding debt reduction; (2) the Company's capital-intensive development pipeline, which will require ample funding and thus make any debt reduction unlikely, at least in the near to medium term; and (3) DBRS Morningstar’s expectation for a challenging operating environment with elevated tenant rent deferrals and write-offs resulting from the coronavirus, thus putting downward pressure on net operating income and other ancillary income (e.g., parking revenues). As a result, DBRS Morningstar anticipates that total debt-to-EBITDA will increase to the 8.0 times (x) range through 2021 from 6.7x for the last 12 months ended December 31, 2019. This materially higher leverage may limit bcIMC Realty’s financial flexibility for the current rating.
DBRS Morningstar’s current expectation for materially increased leverage contrasts with the previous prospect for reduced leverage when DBRS Morningstar last confirmed the ratings on April 29, 2019, which largely depended on how the RBC GAM Transaction unfolded. DBRS Morningstar now expects the RBC GAM Transaction to progress more slowly than previously expected with measured mortgaging of assets within the fund and increasing leverage further exacerbated by the negative effect of the coronavirus on EBITDA, while the ratings will continue to be supported by low secured debt levels in the Company’s capital structure (secured debt-to-total debt ratio of 33.2% at December 31, 2019).
The ratings also continue to be supported by (1) DBRS Morningstar’s view of implicit support from bcIMC Realty’s owner, BCI; (2) the Company’s high-quality real estate portfolio with exposure in all four core real estate subsectors; (3) strong market position through BCI’s leading global real estate management platform, QuadReal, notwithstanding DBRS Morningstar’s expectation for bcIMC Realty's portfolio to shrink largely because of the RBC GAM Transaction; and (4) diversified tenant base. In addition to elevated execution risks, geography and property concentration risks as well as disproportionate exposure to the Calgary office market continue to constrain the ratings.
DBRS Morningstar may take a negative rating action if bcIMC Realty’s secured debt-to-total debt ratio increases above 40% or if its total debt-to-EBITDA ratio increases above 8.5x on a sustained basis, all else equal, or if DBRS Morningstar changes its views on the level of implicit support from BCI. Given the constraints noted above, such as elevated execution risks, a positive rating action is unlikely at this time.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2019), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at firstname.lastname@example.org.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577