DBRS places Twelve-Fifty, company limited Under Review-Developing

DBRS has today placed the A (low) rating of Twelve-Fifty, company limited Under Review with Developing Implications for the Secured Debentures, Series A (the Debentures) as a result of the pending loan maturity in February 2010.

The Debentures are secured by a first lien on the asset 1250 Rene-Levesque Boulevard West (the Property), an office building in downtown Montreal. The Property benefits from a diverse rent roll with staggered expiries over the next four years. The Property performance has rebounded after losing its lead tenant, IBM, who was also paying rental rates in excess of market rents. This drove vacancy to above-market levels and caused net operating income to fall. According to Altus Insite, the vacancy in the building is 7.2%, which includes some space available for sublet. DBRS considers the leverage, based on the first lien, to be low at $115 psf.

In its review of the Debentures, DBRS looked at the refinance ability of the existing first lien, which took into account a projected 2009 net operating income (NOI). The DBRS calculated NOI included a leases in-place analysis with a market vacancy, historical expenses increased for inflation and the increased annual ground lease obligation. DBRS then looked at the exit debt yield, a calculation which measures capacity of debt more specifically NOI divided by outstanding debt. The resulting exit debt yield is in excess of 12%. DBRS considers this to be a healthy exit debt yield, increasing the likelihood of a successful and timely refinance.

DBRS understands the refinancing risk associated with the notes to be in line with other first mortgage bonds of similar ratings. However, the Property is encumbered by a ground lease. In years past, the borrower chose to accrue the ground lease payment. The ground lessee and ground lessor have common ownership, however the accrual has yet to be eradicated. Since the ground lease is not subordinate to the mortgage, the liability presented by the accrual gives DBRS cause for concern regarding the ability to refinance the Debentures if the ground lease is not resolved prior to maturity. If the ground lease accrual and the Debentures were to be consolidated, the exit debt yield on the consolidated loan amount would be far less attractive, below 8%.

In addition to the Property securing the Debentures, there is partial recourse to the general partners of the borrowing entity which includes OMERS Realty Corporation. Given the experience and strength of the loan sponsor and performance of the property, DBRS sees the probability of default and loss on the notes to be in line with the current rating, absent the exposure presented by the ground lease. While DBRS expects to keep the Debentures Under Review-Developing until such time as the ground lease accrual is remedied, the borrower has notified DBRS that it has obtained a commitment from a lender to refinance the Debentures and developed a formal plan to repay the accrued ground rent prior to loan maturity.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate rating.