DBRS Limited (DBRS Morningstar) removed OMERS Realty Corporation’s (ORC or the Company) Issuer Rating and Senior Unsecured Notes rating from Under Review with Negative Implications and confirmed both ratings at AA (low) with Negative trends. These rating actions resolve the Under Review with Negative Implications status placed on July 16, 2021. The ratings consider (1) the stand-alone credit assessment of ORC; (2) the implicit support of OMERS Administration Corporation (OMERS; rated AAA with a Stable trend by DBRS Morningstar), ORC's parent; and (3) the low proportion of secured debt in ORC's capital structure.
DBRS Morningstar has removed the Under Review with Negative Implications status to reflect the overall improvement in ORC's operating environment and robust recovery in financial performance during F2021 despite continued pandemic-related headwinds, as well as recent transaction activity that occurred subsequent to year end. Subsequent to year end, ORC disposed of its share in two assets: Royal Bank Plaza and Quartier DIX30. As a result, pro forma these transactions, DBRS Morningstar estimates ORC's total debt-to-EBITDA at approximately 9.7 times (x) from 10.2x at YE2021 (EBITDA interest coverage at 3.29x), which is a significant improvement relative to DBRS Morningstar’s prior expectations as outlined in its July 16, 2021, press release.
The rating actions also consider (1) DBRS Morningstar's current expectations for continued robust growth in ORC's EBITDA as operations continue to normalize following the pandemic and with strong tailwinds supporting rent growth in its industrial portfolio, resulting in ORC's total debt-to-EBITDA improving to the mid-8.0x range by YE2022, with continued improvement expected thereafter, and (2) DBRS Morningstar's upwardly revised assessment of ORC's market position, giving greater consideration to ORC's global leading real estate services platform and bringing it in line with peers. However, the Negative trends reflect DBRS Morningstar's view that ORC's leverage continues to be elevated for the ratings, and some uncertainty remains regarding forward expectations.
The ratings continue to be supported by (1) ORC’s high-quality real estate portfolio; (2) Oxford Properties Group's— ORC's affiliated asset manager—strong global market position, particularly in key Canadian markets; (3) tenant and asset type diversification; and (4) its high-quality tenant roster. The ratings continue to be constrained by (1) ORC’s elevated leverage levels compared with the other pension-plan peers rated by DBRS Morningstar; (2) property and geographic concentration; (3) a relatively short lease maturity profile; and (4) a relatively small portfolio for the rating as measured by EBITDA.
DBRS Morningstar would consider restoring the Stable trends if ORC's total debt-to-EBITDA were to improve to below 8.0x or EBITDA-interest coverage were to improve above 3.35 (x) on a sustained basis, all else being equal. DBRS Morningstar would consider downgrading the ratings should ORC fail to demonstrate the expected improving trend in total debt-to-EBITDA, all else being equal. Given the current elevated leverage levels, a positive rating action is not likely in the foreseeable future.
ENVIRONMENTAL, SOCIAL, and GOVERNANCE CONSIDERATIONS
There were no environmental, social, or governance factors that had a significant or relevant effect on the credit analysis.
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/396929.
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/395563) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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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