DBRS Limited (DBRS Morningstar) placed OMERS Realty Corporation’s (ORC or the Company) Issuer Rating and Senior Unsecured Notes rating, both at AA (low), Under Review with Negative Implications. These rating actions take into consideration leverage of 12 times (x) at YE2020, much worse than previously expected, combined with leverage expectations for YE2021 and YE2022 that remain elevated for the rating, notwithstanding modest expected improvements in EBITDA as the pandemic abates. The rating actions also incorporate DBRS Morningstar’s assessment of ORC’s stand-alone risk profile, its low level of secured debt in the debt stack, 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 $371 million in F2020, down from $596.6 million the year before because of government mandated pandemic-related closures as well as the 75% partial disposition of hotel properties during 2020. DBRS Morningstar notes that the Company, at the beginning of the pandemic, completed a material disposition of a 75% interest in its iconic hotels to a strategic buyer. ORC retains its 25% ownership interest in the properties, and asset management rights for the hotel properties rest with Oxford Properties Group (Oxford), ORC's affiliate and asset manager. The sale proceeds were used to repay debt and pay distributions to OMERS. The stand-alone risk profile remains supported by the unchanged Business Risk Assessment but is constrained by ORC’s high leverage and geographic and property concentration.
Despite DBRS Morningstar’s expectations of debt only growing marginally over the next few years, EBITDA is expected to grow but remain meaningfully lower than pre-pandemic levels (on a pro forma basis) as a result of the effects of the Coronavirus Disease (COVID-19), even after considering the foregone EBITDA from the partial hotel disposition. DBRS Morningstar’s view is that ORC's future EBITDA is anticipated to grow from increasing same-property net operating income (NOI), income from newly completed developments, and eventual recovery from the pandemic. Leverage, as measured by the total debt-to-EBITDA ratio, rose to 12.0 x in YE2020 but is expected to improve to 11.8x in YE2021 and 10.3x in YE2022, with further improvement thereafter. At these anticipated levels, leverage remains aggressive for the rating. EBITDA interest coverage in YE2020 was adequate at 2.55x, despite declining from 3.64x the year before. EBITDA interest coverage is expected to rise to 2.93x in YE2021 and 3.40x in YE2022, as EBITDA grows and interest rates remain low.
DBRS Morningstar would consider removing the Under Review status and confirming the ratings with a Negative trend if ORC's total debt-to-EBITDA improves to below 10.0x by YE2021, all else equal, and there is a visible and feasible path to the mid-8.0x range (which is in line with previous expectations) by YE2022, with sustainable metrics thereafter. DBRS Morningstar would consider a ratings downgrade should ORC’s total debt-to-EBITDA ratio not appear able to improve to less than 10.0x by YE2021, all else equal. 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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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