DBRS Limited (DBRS Morningstar) assigned a provisional rating of AA (low) with a Stable trend to BCI QuadReal Realty’s (BQR) Senior Debentures. At the present time, BQR has no Senior Debentures outstanding; if BQR were to issue Senior Debentures in the future, DBRS Morningstar expects the issuance to be on terms and conditions consistent with market practice and satisfactory to DBRS Morningstar. The rating takes into consideration: (1) BQR’s stand-alone credit risk profile, (2) the expected low level of secured debt in its capital structure, (3) expected mitigants to structural subordination to material prior ranking debts, and (4) DBRS Morningstar’s view of implicit support by British Columbia Investment Management Corporation (BCI). DBRS Morningstar notes that the stand-alone credit risk profile of BQR encompasses the results of BQR and the initial guarantor, Parkpool, on a combined basis and that the guarantee provided by Parkpool complies with DBRS Morningstar's criteria for guarantees. All references to BQR shall mean BQR and Parkpool on a combined basis.
The stand-alone credit risk profile is supported by: (1) the high-quality real estate portfolio with exposure across multiple asset classes, including office, retail, industrial, multifamily residential, and manufactured housing; (2) a strong market position that benefits from the reputation and market leadership of its manager, QuadReal Property Group Limited Partnership, BCI’s leading global real estate management services platform with over $30 billion in assets under management; and (3) diversified tenant base with low counterparty risk, where the top 10 tenants only represent 21.9% of gross revenues and six of these tenants have investment-grade ratings from DBRS Morningstar, albeit five have either a negative trend or under review with negative implications status primarily on account of exposure to the oil and gas industry.
The stand-alone credit risk profile is constrained by: (1) the execution risks around the RBC Global Asset Management transaction, the current development pipeline, and elevated rent deferrals and loss of ancillary income related to the Coronavirus Disease (COVID-19); (2) geographic concentration in Alberta, representing 31.1% of net operating income (NOI) for F2019; (3) property concentration, with 32.3% of NOI for F2019 derived from its top 10 assets; and (4) anticipated increase in leverage over the next few years on account of debt levels rising while EBITDA declines.
The Stable trend takes into consideration BQR’s good liquidity position with $171 million cash and access to $653 million in available credit lines. Despite high debt maturities in 2020, this level of liquidity is considered adequate given that the bulk of the maturities relate to Canada Mortgage and Housing Corporation mortgages (of which $821 million were refinanced May 1, 2020) and commercial paper, two important capital markets that remain available to entities like BQR that have good quality assets, including unencumbered assets, and strong credit profiles.
BQR’s ratio of secured debt-to-total debt at the end of F2019 was 33.8%, which is below the 40% threshold. This combined with an investment-grade leverage profile allows BQR to receive the benefit of a one-notch rating uplift for a low level of secured debt in the debt stack.
The Senior Debentures will be secured by back-to-back intercompany loans to subsidiary bcIMC Realty Corporation (BRC; rated AA (low) with a Stable trend by DBRS Morningstar) that contain essentially the same terms and conditions as BRC’s medium-term notes, which allows the Senior Debentures to carry the same AA (low) rating as BRC’s medium-term notes due to the equivalency of the two debt instruments. The Senior Debentures rank pari passu with the senior unsecured debt of BRC in terms of interest payments and claims, and as such, mitigates concerns regarding structural subordination to debt lower in the organizational structure. It should be noted that under certain conditions in the future, this collateral may be released.
While DBRS Morningstar does not anticipate that BCI will provide explicit support to the Senior Debentures issued by BQR, DBRS Morningstar believes that certain factors would motivate BCI to provide implicit support to BQR, including essentiality, contractual obligations, reputation, and integration. DBRS Morningstar considers the strength of the implicit support to be medium/high. As a result, DBRS Morningstar determined that the value of implicit support warranted a two-notch rating uplift, consistent with other DBRS Morningstar-rated pension plan real estate entities.
BQR’s leverage (total debt-to-EBITDA) and coverage (EBITDA-to-Interest) metrics, as calculated by DBRS Morningstar, were 6.1 times (x) and 6.79x, respectively, at year-end 2019. In the near to medium term, leverage is anticipated to rise due to higher levels of overall debt and interest coverage is anticipated to decline but remain at levels appropriate for the rating category.
A negative rating action could result if BQR’s total debt-to-EBITDA ratio increases above 7.3x on a sustained basis, all else equal, or if DBRS Morningstar changes its views on the level and/or strength of implicit support provided by BCI. Given the constraints noted above, 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: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), 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.
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