DBRS, Inc. (DBRS Morningstar) changed the trends for OMERS Realty Corporation's (ORC or the Company) Issuer Rating and Senior Unsecured Notes rating to Stable from Negative, while also confirming the ratings at AA (low). The ratings confirmations 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.
The trend changes reflect DBRS Morningstar’s expectation that the financial risk profile improvement will be maintained; the successful refinancing of debt maturities in 2023 and 2024; and effective releasing due to the high level of lease maturities in 2024.
ORC entered a stabilization period in 2022 following Coronavirus Disease (COVID-19) pandemic-related financial impacts resulting in total debt-to-EBITDA and EBITDA interest coverage that met DBRS Morningstar's projections. The Company has demonstrated a visible path to achieving and maintaining a total debt-to-EBITDA below 8.6 times (x) while maintaining its EBITDA interest coverage above 3.17x-range on a sustained basis. For YE2022, debt-to-EBITDA and EBITDA interest coverage were 8.1x and 3.84x, respectively. DBRS Morningstar projects the debt-to-EBITDA to stabilize at approximately 8.4x by YE2023. Debt-to-EBITDA is then forecast to be near the 8.0x-range for YE2024 but improve to the high 7.0x-range over the medium term initiated by same-property net operating income growth.
The rating actions also consider DBRS Morningstar's expectation the Company (1) successfully refinances its upcoming debt maturities that include the $400 million Series 12 - 1.298% Senior Unsecured Debentures due in September 2023 and the $550 million Series 7 - 2.858% Senior Unsecured Debentures due in February 2024; and, (2) successfully manages its relatively high lease rollover risk among its pension fund peers with 16.2% of square feet (sf) expiring in 2024.
The ratings are supported by (1) ORC's high-quality real estate portfolio; (2) Oxford Properties Group's (Oxford; ORC's affiliated asset manager) strong global market position, particularly in key Canadian markets; (3) tenant and asset type diversification; and (4) the Company’s high-quality tenant roster. The ratings are constrained by (1) ORC's elevated leverage levels compared with other DBRS Morningstar-rated pension-plan peers; (2) the portfolio's property and geographic concentration relative to the DBRS Morningstar-rated universe; (3) a relatively short lease maturity profile among its pension fund peers; and (4) its relatively small portfolio for the subject rating category.
DBRS Morningstar would consider negative rating actions should (1) the Company fail to maintain a total debt-to-EBITDA of 8.6x or less or an EBITDA interest coverage ratio of 3.17x or greater, all else equal; or (2) DBRS Morningstar changes its view on the level of implicit support provided by OMERS. Given the current financial risk profile, a positive rating action is not contemplated 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 at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
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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