DBRS Finalizes Ratings on Centre Street Trust (The Bow) First Mortgage Bonds

DBRS has today finalized its provisional rating of “A” on the Series A Secured Bonds and the Series B Secured Bonds (collectively, the Bonds) of Centre Street Trust (the Issuer). The 3.690% Series A Secured Bonds were issued with an initial amount of $250 million, with a term of nine years subject to payments of interest only. The 3.693% Series B Secured Bonds were also issued with an initial amount of $250 million and a term of ten years subject to a 30-year amortization schedule.

The Bonds will be the first offering of an aggregate of up to $800 million to be issued by the Issuer, with recourse limited to the property, The Bow, in Calgary, Alberta. During the final phases of construction, following the issuance of the Bonds, the bondholders will have the benefit of a full recourse guarantee by H&R REIT, until such time as the tenant, Encana Limited Partnership (Encana), starts paying full rent under its lease. Encana has entered into a 25-year lease. The tenant will begin paying rent for the premises delivered to it within two months of taking occupancy of each tranche of the building. Following commencement of payment of full rent by the tenant, recourse to H&R REIT will be reduced to a limited recourse indemnity for certain activities of the Issuer. The net proceeds from the Bonds will be used by the Issuer to fund the Debt Service Escrow Account and to repay outstanding indebtedness of the Issuer, including the amounts owed to the Revolver Lenders for the construction of the property. The total fixed-rate debt package is up to a maximum of $800 million that can be issued and must have an amortized maturity amount of not more than $365 million in year 25, corresponding with the end of the initial term of the Encana Lease.

Under the terms of the trust indenture, up to $800,000,000 aggregate principal amount of senior secured term bonds may be issued or refinanced in multiple series for varying terms and for varying amortization periods, including interest only tranches, until the end of the initial term of the Encana Lease. The maximum issuance of $800 million, based on a total rentable area of 2.0 million square feet, represents an initial loan per square foot (psf) of $395. This is substantially less than the cost of construction, which was reported to be approximately $696 psf, excluding land costs. The most recent appraised value obtained on March 1, 2012, is approximately $1.725 billion, or over $852 psf, in value. DBRS considered the building’s position within the market, the long-term lease, the valuation, the cash flow over the term of the 25 year issuance inclusive of interest rate stresses applied to the refinance of the various series of issuances, and the structure of the transaction and the organization of the Issuer, all of which support the rating assigned.

The Bow is an approximately two million square foot 58-storey Class AA office tower currently in the final stages of construction in downtown Calgary (including approximately 21,500 square feet (sf) of retail space and 700 underground parking stalls) as well as the below-grade parking and infrastructure of an adjoining parcel of land (the South Block) containing a connected parking garage with approximately 660 underground parking stalls (the South Block Parking Component). DBRS’s initial term debt service coverage ratio for the Bonds is high, averaging 2.56x, which was calculated assuming a market-rate coupon of approximately 4.25% for the remaining $300 million of maximum issuance up to $800 million of the Bonds. The loan to appraised value is low at 46% and the DBRS exit loan to value ranges from 41.3% to 53.5%.

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

DBRS ratings for single-purpose real estate credits include consideration for the asset’s position within the market, the lease profiles, the valuation, the cash flow over the term of the issuance, the refinance position of the asset and the structure of the transaction including the organization of the Issuer. For more information on the property underwriting, DSCR and LTV guidelines that DBRS uses, please see the CMBS Rating Methodology. In addition, for this asset, DBRS used its Unified Interest Rate Model for U.S. and European Structured Credit methodology for future interest rate stresses.