DBRS Limited (DBRS Morningstar) confirmed OMERS Realty Corporation’s (ORC or the Company) Senior Unsecured Notes rating at AA (low) with a Stable trend. The rating takes into consideration ORC’s stand-alone risk profile, which incorporates the economic impacts of the ongoing Coronavirus Disease (COVID-19) pandemic, its low level of secured debt, and DBRS Morningstar’s view of the implicit support provided by OMERS Administration Corporation (OMERS; rated AAA with a Stable trend by DBRS Morningstar).
The Company’s stand-alone risk profile is supported by ORC’s high-quality real estate portfolio, strong market position in key Canadian markets, and diverse tenant base, leading to its ability to generate EBITDA of $596.6 million in F2019, up from $583.3 million the year before. However, the stand-alone risk profile is constrained by geographic and property concentration, as well as ORC’s high leverage. DBRS Morningstar notes that subsequent to year end, the Company completed a material disposition of a 75% interest in its iconic hotels to a strategic buyer while maintaining management rights for the properties. The sale proceeds were used to repay debt and pay distributions to OMERS.
Despite debt being lower and EBITDA expected to be meaningfully lower (around the $500 million range, on a pro forma basis) due to the effects of the coronavirus and foregone EBITDA from the partial hotel disposition, the Stable trend reflects DBRS Morningstar’s view that ORC's future EBITDA is anticipated to grow from increasing same-property net operating income, income from newly completed developments, and eventual recovery from the pandemic. Leverage, as measured by the total debt-to-EBITDA ratio, stayed flat at 8.6 times (x) in F2019 but is expected to deteriorate to 9.0x in 2020 before returning to around the 8.5x level in 2021 and improving further thereafter. At these anticipated levels, leverage remains aggressive for the A (low) stand-alone risk profile.
DBRS Morningstar would consider a negative rating action should one or more of the following occur: (1) ORC’s total debt-to-EBITDA ratio increases, exceeding DBRS Morningstar's expectation of 9.0x by the end of 2020 and 8.5x by the end of 2021, followed by further reduction thereafter; (2) operating conditions deteriorate, resulting in material declines in operating cash flow and EBITDA; (3) secured debt-to-total debt approaches 40%; or (4) DBRS Morningstar’s view on the strength and level of implicit support provided by OMERS changes. Given the current elevated leverage levels, a positive rating action is not likely in the foreseeable future.
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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