DBRS Limited (DBRS Morningstar) confirmed BCI QuadReal Realty’s (BQR or the Fund) Issuer Rating and Senior Notes ratings at AA (low) and its Commercial Paper (CP) rating at R-1 (low), all with Stable trends. The ratings consider BQR’s stand-alone credit risk profile, which encompasses Parkpool as guarantor of the Senior Notes, and DBRS Morningstar’s view of implicit support by British Columbia Investment Management Corporation (BCI) as sole trustee of BQR.
Similar to DBRS Morningstar’s April 28, 2023, rating action on BQR’s primary subsidiary, bcIMC Realty Corporation (BRC; rated AA (low) with a Stable trend by DBRS Morningstar), the Stable trends take into consideration changes to BQR’s business risk assessment (BRA), financial risk assessment (FRA), and overlay factors, including the following:
(1) DBRS Morningstar has revised BQR’s BRA, namely market position, which is now stronger, reflecting the continued growth and global reach of BCI’s real estate platform, and the demonstrated ability of its manager, QuadReal Property Group Limited Partnership (QuadReal), to source and execute advantageous transactions.
(2) DBRS Morningstar has revised lower its assessment of the Fund’s FRA, including total debt-to-EBITDA and EBITDA interest coverage. Deterioration in the Fund’s FRA reflects DBRS Morningstar’s updated expectations for BQR’s total debt-to-EBITDA to deteriorate to the mid-to-high 7.0 times (x)-range in the near term (from 6.2x for the last 12 months ending December 31, 2022 (LTM)), as well as a deterioration in EBITDA interest coverage to the 4.0x-range (from 6.71x LTM) in the near to medium term.
(3) DBRS Morningstar is also of the view that an additional modestly positive overlay factor is warranted in consideration of other revenues received through BQR’s programmatic disposition strategy largely by way of the strategic partnership between RBC Global Asset Management (RBC GAM) and QuadReal whereby nonmanaging, partial interests in stabilized income-producing properties (IPP) are vended into Canadian Core Real Estate LP (rated A (low) with a Stable trend by DBRS Morningstar). DBRS Morningstar is of the view that these other revenue sources warrant 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 Fund 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.
Taken together, the above-noted changes to BQR’s credit assessment provide incrementally more tolerance for leverage (i.e., total debt-to-EBITDA) for a given rating, while BQR’s credit assessment has weakened very modestly.
BQR's ratings continue to be supported by (1) its high-quality real estate portfolio with exposure across multiple asset classes; (2) a strong and strengthened market position that benefits from the reputation and market leadership of the manager of BCI’s leading global real estate platform, QuadReal Property Group Limited Partnership (QuadReal); and (3) a diversified tenant base with low counterparty risk, albeit with some exposure to the oil and gas (O&G) industry. BQR's ratings are constrained by (1) the execution risks stemming from the Fund's capital recycling initiatives and capital-intensive development pipeline, notwithstanding BQR transferring some of the development risk over time; (2) geographic concentration in Alberta; (3) property concentration from its top 10 assets; and (4) BQR's relatively short lease maturity profile.
DBRS Morningstar could take a negative rating action if (1) BQR’s total debt-to-EBITDA ratio increases above 8.0x on a sustained basis, all else equal; (2) if the secured debt-to-total debt ratio increases above 40%; (3) or if DBRS Morningstar changes its view on the level and/or strength of implicit support provided by BCI and the credit enhancement provided by QuadReal’s programmatic dispositions strategy. Given the constraints noted above, 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, 2022) 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
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 24, 2023)
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022)
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 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 firstname.lastname@example.org.
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 email@example.com.
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