DBRS Limited (DBRS Morningstar) confirmed Ivanhoé Cambridge II Inc.’s (IC II or the Company) Issuer Rating and Senior Unsecured Debentures rating at AA (low) with Stable trends. The ratings consider (1) the stand-alone credit assessment of IC II, (2) the implicit support of Caisse de dépôt et placement du Québec (CDPQ; rated AAA with a Stable trend by DBRS Morningstar), and (3) DBRS Morningstar's expectation that the Company will build out a maturity ladder in the senior unsecured debt market while distributing excess cash to its parent Ivanhoé Cambridge Inc. (Ivanhoé Cambridge), resulting in increased leverage while maintaining relatively low secured debt in its debt stack.
The Stable trends consider (1) IC II's recent transaction activity, including (a) the partial sale of Guildford Town Centre and outright sales of noncore retail and office assets (e.g., Mayfair Shopping Centre and 1000 de la Gauchetière) and (b) acquisitions of office and retail assets, including trophy property such as 81 Bay (first phase of CIBC Square) and the Montreal Eaton Centre, which were vended into the Company's portfolio by way of its parent, Ivanhoé Cambridge; and (2) IC II's strengthening operating environment resulting in strong operational performance in 2021 as reflected in net operating income (NOI) increasing approximately 50% year over year. As a result of transaction activity, IC II's portfolio has become more concentrated, as measured by property and tenant diversification, while the Company's portfolio size, as measured by EBITDA, has increased as a result of NOI growth. Together, declining portfolio diversification and increasing portfolio size are modestly credit negative.
The Stable trends also consider DBRS Morningstar's continued expectation of material deterioration in IC II's key financial risk metrics, including total debt-to-EBITDA and EBITDA interest coverage. DBRS Morningstar continues to expect the Company to be a regular issuer of incremental unsecured debt, thus contributing to total debt to-EBITDA approaching the range of 5.0 times (x) in the near to medium term, from 2.2x for the last 12 months ended December 31, 2021 (LTM).
The ratings continue to be supported by (1) DBRS Morningstar’s view of implicit support from IC II’s ultimate parent, CDPQ; (2) IC II's strong market position through Ivanhoé Cambridge, CDPQ’s leading global real estate management platform; (3) the Company’s high-quality real estate portfolio; (4) the Company's well-laddered lease profile with a diversified above average quality tenant roster; and (5) IC II’s solid balance sheet with a low proportion of secured debt in the capital structure. The ratings continue to be constrained by (1) concentration risks in the form of significant property concentration, geographic concentration, and asset type concentration; and (2) a relatively small portfolio as measured by EBITDA.
DBRS Morningstar would consider a negative rating action if one or more of the following factors occur on a sustained basis: (1) DBRS Morningstar changes its view on the level of implicit support provided by CDPQ, or (2) the secured debt-to-total debt ratio exceeds 40%, or (3) IC II's key financial metrics deteriorate significantly more than currently expected, resulting in total debt-to-EBITDA greater than 7.3x on a sustained basis, all else equal. A positive rating action is unlikely at this time as it would require a sustained change in business risk and/or financial risk relative to expectations.
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 20, 2022; https://www.dbrsmorningstar.com/research/395565) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394684), 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).
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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