DBRS Limited (DBRS Morningstar) confirmed Ontario Teachers’ Cadillac Fairview Properties Trust’s (OT CFPT or the Trust) Senior Unsecured Debentures and Issuer ratings at AA with a Stable trend. The ratings take into consideration OT CFPT’s stand-alone risk profile, the Trust’s low level of secured debt, and DBRS Morningstar’s view of the implicit support provided by the Ontario Teachers’ Pension Plan Board (OTPPB; rated AAA with a Stable trend by DBRS Morningstar).
The ratings continue to be supported by OT CFPT’s high-quality real estate portfolio, specifically its interests in super-regional and regional shopping centres and Class A office properties principally situated in major cities across Canada, and to benefit from The Cadillac Fairview Corporation Limited’s (CFCL; a wholly owned subsidiary of OTPPB) strong market position as a leading North American property developer and manager, which, taken together, provide stability to operating metrics and earnings. OT CFPT’s conservative financial risk profile, as measured by leverage and interest coverage, and low level of secured debt-to-total debt also benefit the rating. The rating is constrained by OT CFPT’s significant property concentration, geographic concentration in the Greater Toronto Area (which is expected to increase further with development projects), and a high degree of net operating income (NOI) exposed to discretionary retail.
The Stable trends reflect DBRS Morningstar’s view that OT CFPT will maintain EBITDA approaching $1 billion (DBRS Morningstar-adjusted) over the medium term ($935 million in the last 12 months (LTM) ended April 30, 2020) resulting from same-property NOI growth and incremental income from the stabilization of properties completed as part of the Trust’s multi-year development plan. DBRS Morningstar’s expectation is that development costs will be funded with equity from OTPPB, as has been the case historically, and that the $1.8 billion of intercompany debt owed by OT CFPT will be refinanced in the capital markets over the next several years. As a result of the ongoing Coronavirus Disease (COVID-19) pandemic and related public health measures, the current trend incorporates DBRS Morningstar’s expectation that OT CFPT’s debt-to-EBITDA and EBITDA-to-interest expense ratios will deteriorate in F2020 to 6.2 times (x) and 4.21x, respectively, before starting to improve in F2021, returning to pre-pandemic levels by F2022, and being further enhanced by the large development projects, 16 York Street and 160 Front Street, both in Toronto, that will start contributing meaningfully to EBITDA in 2022 and 2023, respectively.
There is an upcoming debt maturity of $246.7 million in 2020. The Trust's liquidity position is considered sufficient as it has $348.8 million in available liquidity consisting of $103.9 million of cash, $150 million of availability under its operating credit facility, and a $94.4 million U.S. denominated credit facility for debt servicing, before giving consideration to the large pool of unencumbered assets (over $23.2 billion as at April 30, 2020). To date, no draws have been made on the credit facilities and the Trust does not anticipate the need to use the credit facilities to service debt.
Notwithstanding the recent encouraging developments with the pandemic (e.g., declining numbers of positive cases, fewer reported deaths, and staged re-openings), some potential headwinds could affect OT CFPT in the near term, including a prolonged pandemic, the occurrence of subsequent waves of infectious outbreaks, escalating tenant bankruptcies, greater-than-anticipated rent abatements, etc., all of which are challenging to predict.
DBRS Morningstar would consider a negative rating action should one or more of the following factors occur on a sustained basis: (1) debt-to-EBITDA exceeds 6.0x; (2) secured debt-to-total debt exceeds 40% (10.2% at April 30, 2020); (3) the operating environment deteriorates, leading to material declines in operating cash flow and EBITDA; or (4) DBRS Morningstar’s view on the strength and level of implicit support provided by OTPPB changes. Currently, DBRS Morningstar does not anticipate a positive rating action in the foreseeable future given OT CFPT’s concentration risks noted above.
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 (June 4, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 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 firstname.lastname@example.org.
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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