DBRS, Inc. (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 successfully refinance its upcoming debt maturities and increase its leverage in the near term, which would be more in line with DBRS Morningstar-rated pension fund real estate entity peers.
The Stable trends consider (1) IC II's continued disposition of noncore retail assets in 2022; (2) the Company’s substantial capital expenditure investments into remaining assets to maintain trophy-status quality in respective markets; (3) IC II's strong EBITDA interest coverage ratio given the Company's low debt amount and low fixed interest rates; and (4) IC II's stabilizing operating environment resulting in improved operational performance in 2022 as reflected in net rental margins, which have returned to pre-pandemic levels. As a result of recent dispositions, 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 stabilized below historical levels. These business risk assessment factors were reflected in DBRS Morningstar’s April 29, 2022, review. Increased portfolio concentration enhances property-specific risk; however, the Company’s smaller portfolio size is mitigated by the market position of the parent company, Ivanhoé Cambridge Inc. (Ivanhoé Cambridge).
The Stable trends also consider DBRS Morningstar's continued expectation of material deterioration in IC II's key financial risk metrics in the near term, including total debt-to-EBITDA and EBITDA interest coverage ratio, although they are still the strongest among the Company’s peers. DBRS Morningstar continues to expect the Company to be an active issuer of incremental unsecured debt and consider other debt financing vehicles, thus contributing to total debt to-EBITDA approaching the 5.0 times (x) range in the near term, compared with 2.3x for the last 12 months ended December 31, 2022. DBRS Morningstar anticipates a material deterioration in the EBITDA interest coverage ratio as a result of newly obtained debt financing in a higher interest rate environment; however, the ratio is expected to remain strong relative to DBRS Morningstar’s rating universe.
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 modest portfolio size as measured by EBITDA and square footage.
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; (2) the secured debt-to-total debt ratio exceeds 40% on a sustained basis (15.2% as of YE2022, inclusive of the proportionate joint venture share); or (3) IC II's key financial metrics deteriorate significantly more than currently expected (DBRS Morningstar-projected 5.0x range in 2023 and 2024), 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.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023; https://www.dbrsmorningstar.com/research/412477)
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929)
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022; https://www.dbrsmorningstar.com/research/407058)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022; https://www.dbrsmorningstar.com/research/404334)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.
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