DBRS Limited (DBRS Morningstar) confirmed Ontario Teachers’ Cadillac Fairview Properties Trust’s (OT CFPT or the Trust) Senior Unsecured Debentures rating and Issuer Rating at AA with Stable trends. The ratings confirmations take into consideration (1) OT CFPT’s stand-alone risk profile; (2) the Trust’s low level of secured debt; and (3) DBRS Morningstar’s view of the implicit support provided by the Ontario Teachers’ Pension Plan Board (OTPPB; rated AAA with a Stable trend by DBRS Morningstar).
The ratings continue to be supported by OT CFPT’s high-quality real estate portfolio, which has largely stabilized following the Coronavirus Disease (COVID-19) pandemic-related headwinds. However, DBRS Morningstar has lowered its asset quality assessment of OT CFPT from AA (low) to A (high) reflecting the Trust’s elevated exposure to the office sector, which DBRS Morningstar believes is experiencing secular changes, especially due to increasing remote and hybrid working models that could have a negative lasting impact on office demand in the near term. Nevertheless, the portfolio continues to benefit from Cadillac Fairview Corporation Limited’s (a wholly owned subsidiary of OTPPB) strong market position. OT CFPT continues to maintain a conservative financial risk profile, as measured by total debt-to-EBITDA and EBITDA interest coverage. However, the ratings are constrained by OT CFPT’s significant property concentration, geographic concentration in the Greater Toronto Area (which is expected to increase further with current development projects), secular changes within the office sector, and moderate releasing risks due to the high level of office-related lease maturities in 2024 and 2025.
The Stable trends are based on DBRS Morningstar’s expectation that (1) EBITDA growth will be driven by the modest same-property net operating income (NOI) growth and supplemented with incremental income from the stabilization of newly completed and ongoing developments; (2) development costs will be funded with equity from OTPPB, as has been the case historically; (3) the Trust will continue to maintain a large pool of unencumbered assets to support its unsecured debt liabilities; and, (4) OT CFPT’s financial risk profile will remain relatively stable. Total debt-to-EBITDA will remain at 5 times (x) for the 12 months ending April 30, 2024, and then modestly improve to the high 4x range by April 30, 2025. Similarly, EBITDA-to-interest coverage ratios are projected to remain stable in the 5.5x range over the next 12 to 24 months.
With the lower asset quality assessment, there is currently less flexibility in the current rating category relative to the prior year triggers, and as such DBRS Morningstar would consider a negative rating action if (1) OT CFPT's debt-to-EBITDA exceeds 5.3x and EBITDA-to-interest coverage ratio deteriorates by less than 5.0x on a sustainable basis, all else equal; or (2) the operating environment deteriorates, leading to material declines in operating cash flow and EBITDA; or (3) DBRS Morningstar’s view on the strength and level of implicit support provided by OTPPB changes. Currently, DBRS Morningstar does not anticipate a positive rating action in the foreseeable future, given OT CFPT’s concentration risks noted above.
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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.
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)
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: http://www.dbrsmorningstar.com/research/397223
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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.
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