DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of A (low) with a Stable trend to Canadian Core Real Estate LP (CCRE or the Fund). As of December 16, 2021, CCRE had no rated senior unsecured debt outstanding. If CCRE were to issue senior unsecured debt in the future, DBRS Morningstar would expect the issuance to be on terms and conditions consistent with market practice and satisfactory to DBRS Morningstar.
The rating takes into consideration CCRE's business plan to leverage its strategic relationship with the British Columbia Investment Management Corporation (BCI) in its role as sole trustee for BCI QuadReal Realty (BQR; rated AA (low) with a Stable trend by DBRS Morningstar), which wholly owns bcIMC Realty Corporation (bcIMC Realty; rated AA (low) with a Stable trend by DBRS Morningstar) to grow its portfolio of core Canadian commercial and multifamily real estate assets. The growth will primarily be affected by way of a tranched transaction structure whereby BQR and related entities will sell partial interests in select assets to CCRE (or its subsidiaries) in five tranches (Tranches One through Five) occurring through 2023. BCI's global real estate operating platform, QuadReal Property Group Limited Partnership and its affiliates (QuadReal), will continue to provide asset management and property management services for the assets jointly owned with CCRE. Each Tranche has been structured such that CCRE purchases, or has purchased, a 5% or greater interest in a diversified portfolio of Canadian assets so that, following the purchase of Tranche Five, CCRE will predominantly own a 50% beneficial interest in a diversified portfolio of Canadian assets with BQR being the co-owner of each asset.
CCRE closed on Tranche Three on October 29, 2021. Tranche Three represents an increase in ownership to between 15% and 50% (from 10%) of select previously owned assets as well as a 15% purchase of 12 new assets from the bcIMC Realty (and related entities) portfolio. The subsequent Tranches Four and Five will top up CCRE's ownership of existing assets to 50%. While CCRE can add incremental assets in the future, either from BQR or from external sources, DBRS Morningstar anticipates that the strategic relationship, including the co-ownership strategy with BQR, will be maintained as new assets are added. With each new tranche, DBRS Morningstar expects CCRE to experience substantial growth and improved diversification, further solidifying the Fund's business risk assessment.
The Stable trend considers DBRS Morningstar's expectation that Tranches Four and Five will be funded by a combination of equity and debt, similar to prior tranches, such that the Fund will be able to maintain total debt-to-EBITDA less than 6.6 times (x) range over the near to medium term, all else equal. In addition to growing its asset base, in DBRS Morningstar’s view CCRE will begin to benefit from accelerated same-property net operating income (NOI) growth, which has been negatively affected as a result of the ongoing Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar expects CCRE's total debt-to-EBITDA and EBITDA-to-interest expense ratios will fluctuate with the timing and funding of the remaining tranches of asset purchases (i.e., Tranches Four and Five) through 2023 before the portfolio and metrics stabilize in the longer term.
Pro forma Tranche Three, the rating is supported by (1) the Fund's high-quality real estate portfolio with exposure to all four core real estate subsectors, (2) a superior market position as a result of the Fund's ability to leverage QuadReal's deep real estate expertise and breadth as a global real estate operator, and (3) a conservative balance sheet with plans to operate with debt-to-EBITDA below 6.6x. The rating is principally constrained by a smaller and more concentrated portfolio with EBITDA anticipated to be in the $150 million range (note EBITDA of $121.6 million for the last 12 months (LTM) ended September 30, 2021), which results in (1) some concentration in Calgary office space, comprising approximately 16% of NOI pro forma Tranche Three; (2) some concentrated exposure to oil and gas (O&G) tenants; and (3) some property concentration with the top 10 properties contributing 54.0% of NOI pro forma Tranche Three.
While DBRS Morningstar understands that CCRE may transition toward an unsecured debt stack over time as the Fund looks to borrow in the unsecured debt market, DBRS Morningstar does not currently expect CCRE's secured debt-to-total debt ratio to be below 40% in the near to medium term.
DBRS Morningstar would consider a positive rating action should CCRE successfully transition to a predominately unsecured debt stack with a sizable pool of quality unencumbered assets such that secured debt-to-total debt can be reasonably expected to be below 40% on a sustained basis, all else equal. DBRS Morningstar would consider a negative rating action should CCRE's total debt-to-EBITDA exceed 6.6x on a sustained basis, all else equal.
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 methodology is Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358) 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 Rating (February 3, 2021; https://www.dbrsmorningstar.com/research/373262. .
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.
The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting 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