DBRS Limited (DBRS Morningstar) confirmed bcIMC Realty Corporation’s (bcIMC Realty or the Company) Issuer Rating and Medium-Term Notes (MTNs) rating at AA (low) with Stable trends. The ratings consider (1) the stand-alone credit assessment of bcIMC Realty; (2) implicit support of British Columbia Investment Management Corporation (BCI) as sole trustee of bcIMC Realty's parent, BCI QuadReal Realty (BQR; rated AA (low) with a Stable trend by DBRS Morningstar); and (3) additional credit enhancement provided by Parkpool, owner of Parkbridge Lifestyle Communities Inc., as a guarantor of the MTNs under the Trust Indenture (the Parkpool Guarantee).
The Stable trends consider changes to bcIMC’s Realty’s business risk assessment (BRA), financial risk assessment (FRA), and overlay factors that have become apparent since DBRS Morningstar’s prior review. DBRS Morningstar has revised bcIMC Realty’s BRA factors, including asset quality and market position. Asset quality has been revised lower and market position has been revised higher. DBRS Morningstar has also revised its assessment of the Company’s FRA lower, namely bcIMC Realty’s total debt-to-EBITDA. DBRS Morningstar is also of the view that an additional modestly positive overlay factor is warranted in consideration of other revenues received through the Company’s programmatic disposition strategy. Taken together, these revisions are modestly credit positive and provide incrementally more tolerance for leverage (i.e., total debt-to-EBITDA) for a given rating.
DBRS Morningstar’s lower assessment of bcIMC Realty’s asset quality reflects the Company’s elevated exposure to office assets, in particular Calgary office assets. DBRS Morningstar is of the view that headwinds facing the office sector (e.g., oversupply, obsolescence, and work from home dynamics) are secular and the sector will take longer to recover than during normal cyclical lows, particularly in weaker markets (e.g., Calgary), as evidenced by high vacancies, declining rents, and tempered transaction activity. On the other hand, market position has been revised higher reflecting the continued growth and global reach of BCI’s real estate platform and the demonstrated ability of QuadReal Property Group Limited Partnership (QuadReal) to source and execute advantageous transactions.
In contrast to prior expectations of stable total debt-to-EBITDA in the high 8 times (x) range, DBRS Morningstar now expects bcIMC Realty’s total debt-to-EBITDA to deteriorate further to the mid to high 9x range through YE2024, from 9.1x for the last 12 months ending December 31, 2022 (LTM). DBRS Morningstar expects bcIMC Realty’s EBITDA interest coverage will continue to deteriorate to the low 4x range through YE2024, from 5.0x LTM. Based on DBRS Morningstar’s revised expectations, the Company has little additional financial flexibility within the current rating.
DBRS Morningstar favourably views bcIMC Realty’s ongoing programmatic disposition program, largely by way of the strategic partnership between RBC Global Asset Management (RBC GAM) and QuadReal whereby non-managing, partial interests in stabilized income-producing properties are vended into Canadian Core Real Estate LP (rated A (low) with a Stable trend by DBRS Morningstar) (the RBC GAM Transaction). DBRS Morningstar is of the view that bcIMC Realty’s programmatic disposition program is modestly credit positive and thus warrants a positive overlay because (1) it is strategic in nature and provides a recurring source of funds (including realized gains); (2) it provides an additional source of equity capital and thus financial flexibility; (3) it affords the Company an increased ability to adjust its portfolio mix as it sees fit; and (4) QuadReal’s strategic partnership with RBC GAM is relatively unique in the sector.
The ratings continue to be supported by (1) DBRS Morningstar’s view of implicit support from BCI as sole trustee of bcIMC Realty's parent, BQR; (2) the Company’s high-quality real estate portfolio, notwithstanding DBRS Morningstar’s lower assessment as noted above, with exposure to all four core real estate subsectors; (3) strengthening market position through BCI’s leading global real estate platform managed by QuadReal; (4) a well-diversified tenant base with low counterparty risk; and (5) a low level of secured debt (secured debt-to-total debt ratio of 27.1% at December 31, 2022) and a large pool of unencumbered assets with an estimated value of approximately $10.6 billion at December 31, 2022, that could be pledged as security for loans, if needed.
The ratings continue to be constrained by (1) bcIMC Realty's elevated leverage and execution risks stemming from the Company's capital recycling initiatives and capital-intensive development pipeline that will require ample funding and continued support from BCI and BQR; (2) concentration risks by several measures, including property and geography; and (3) relatively elevated re-leasing risk.
DBRS Morningstar would consider a negative rating action if (1) bcIMC Realty's total debt-to-EBITDA ratio increases above 9.8x or EBITDA interest coverage declines below 4.0x on a sustained basis, all else being equal; (2) bcIMC Realty’s secured debt-to-total debt ratio increases above 40%; or (3) DBRS Morningstar changes its views on the level of implicit support from BCI or the credit enhancement provided by the Parkpool Guarantee and the realized gains from QuadReal's programmatic dispositions strategy. Given the constraints noted above, such as elevated leverage, a positive rating action is unlikely at this time.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) 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 (May 17, 2023) at https://www.dbrsmorningstar.com/research/396929.
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023) https://www.dbrsmorningstar.com/research/412477
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
The following methodologies have also been applied:
-- 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.
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The rated entity or its related entities did participate in the rating process for this rating action.
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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.
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