DBRS Confirms OMERS Realty Corporation (ORC) at AA (low), Stable Trend

DBRS Limited (DBRS) confirmed OMERS Realty Corporation (ORC)’s (ORC or the Company) Senior Unsecured Notes rating at AA (low) with a Stable trend. The rating takes into consideration ORC’s stand-alone risk profile and low level of secured debt in its debt structure and DBRS’s view of the implicit support provided by OMERS Administration Corporation (OMERS; rated AAA with a Stable trend by DBRS).

The stand-alone risk profile considers the strength of ORC’s business risk assessment and financial risk assessment relative to other DBRS-rated real estate peers. The Company’s business risk assessment is supported by its high-quality real estate portfolio and strong market position in key Canadian markets, leading to cash flow stability. However, the rating also takes into consideration geographical, property and some asset-type (specifically, office) concentrations.

The Stable trend takes into account DBRS’s expectation of moderate earnings growth in F2017, driven by full-year contributions from expansion projects in 2016 and the continued lease-up of properties recently completed, partially offset by a continued challenging re-leasing environment in the Calgary office market, ongoing redevelopment of the Target Corporation space and net property sales. ORC’s earnings profile should continue to benefit from the stability and predictability of income generated from the Company’s mid-sized and high-quality real estate portfolio. In the longer term, DBRS expects EBITDA growth to be aligned with OMERS’s strategy to increase its private-market investments, with real estate being a key component.

DBRS believes that ORC will continue to maintain a conservative financial profile. The current rating takes into account the Company’s targeted leverage range of 40% to 45% on a total debt-to-market value of assets basis. DBRS expects the institutional-quality real estate portfolio to continue to generate strong levels of operating cash flow in 2017 and that any distributions (dividends or a return of capital) to OMERS will be consistent with maintaining financial metrics and financial flexibility.

The Company’s secured debt-to-total debt ratio is expected to continue to be below 40%; as at December 31, 2016, the ratio stood at 24%. As a result, a one-notch uplift has already been incorporated into the Senior Unsecured Notes rating. In addition, DBRS considered the implicit support from OMERS to ORC and believes this level of implicit support is worth a two-notch uplift. The strength of the implicit support is based on factors that motivate OMERS to support ORC, including essentiality, contractual obligations, ownership, reputation and integration.

RATING DRIVERS
DBRS would consider a negative rating action should the Company increase its debt levels beyond expectations or if operating conditions deteriorate, resulting in the ratios (including debt guaranteed by OMERS) of total debt-to-EBITDA exceeding 8.0 times (x) or EBITDA-to-interest expense falling below 3.5x over an extended period of time.

Notes:
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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Entities in the Real Estate Industry (April 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.