DBRS Finalizes Provisional Rating for Fifth Avenue Place, First Mortgage Bonds

DBRS has today finalized the provisional rating of “A” with a Stable trend on the $350 million 4.71% First Mortgage Bonds (the Bonds) secured by Fifth Avenue Place office complex in Calgary. The Bonds will be direct obligations of the issuer, a 50-50 joint venture between a wholly owned subsidiary of Brookfield Office Properties Canada (Brookfield) and 1023803 Alberta Ltd., which is managed by Alberta Investment Management Corp. (AIMCo) on behalf of certain government of Alberta funds and endowments and certain Alberta public-sector pension plans (AIMCo’s clients), with recourse limited to the Fifth Avenue Place property. The Bonds will be subject to a ten-year term and a 25-year amortization schedule.

The loan represents an initial loan per square foot (psf) of $237 that amortizes throughout the term to $173 psf. This is substantially less than the cost to construct, excluding land costs, which is reported to be as high as $600 psf to $700 psf, depending on the cost to construct, land costs, developer profit and tenant improvements. The recent valuation provided by Altus InSite gives a value for the property ranging between $605 million and $633 million, or more than $400 psf. In addition, comparable property sales in Calgary, as evidenced by sales that have occurred in the last year, range from a low of $372 psf to a high of $384 psf, according to the appraisal; however, the comparable sales used in the appraisal are limited to two properties, which DBRS considers to be inferior in both location and quality.

DBRS derived a stabilized net cash flow (NCF) for the property of $37.5 million, which translates into stable term and refinance debt service coverage ratios (DSCRs) of 1.56 times (x) and 1.60x, respectively. The refinance DSCR is reflective of the 9.14% constant that DBRS applied to the balloon balance of the Bonds to account for an increased cost of capital upon maturity. The DBRS loan-to-value going in is 72.3% and 52.8% at maturity (as evidenced by a 7.75% capitalization rate applied to the DBRS stabilized NCF, without giving credit to cash flow growth over the term of the mortgage).

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

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