DBRS Finalizes Rating on SP Limited Partnership and SP1 Limited Partnership (Scotia Plaza) First Mortgage Bonds

DBRS has today finalized its provisional rating of A (high) on the $650 million 3.21% First Mortgage Bonds (the Bonds) secured by Scotia Plaza (the Complex) located in Toronto.

The rating is based on the following credit strengths: the quality of the asset; the stability of the cash flow, with two long-term leases to the Bank of Nova Scotia (Scotiabank) extending well beyond the Bonds’ maturity; reasonable sponsorship strength; and management experience. In addition, DBRS derived a refinance debt service coverage ratio (DSCR) of 1.39 times (x) for the property. The refinance DSCR is reflective of an 8.125% constant that DBRS applied to the balloon balance of the Bonds to account for an increased cost of capital upon maturity. The DBRS exit loan-to-value (LTV) is 64.4% at maturity (as evidenced by a 7.25% capitalization rate applied to the DBRS stabilized net cash flow) compared to the going-in loan-to-acquisition value of approximately 51.3%. Overall, DBRS views the refinance DSCR of 1.39x and exit LTV of 64.4% in its stressed scenario to be supportive of the A (high) rating category.

The rating also takes into consideration the following credit challenges: a meaningful lease exposure in 2016 (a national law firm, which is the second largest tenant at Scotia Plaza and accounts for 10.3% of total leasable area) and limited cash flow growth over the term of the Bonds.

The Bonds will be direct obligations of SP Limited Partnership and SP1 Limited Partnership (each an Issuer and collectively, the Issuers), with recourse limited to Scotia Plaza. The general partners of the Issuers are SP General Partner Inc. and SP 1 General Partner Inc., respectively, each of which is a wholly-owned subsidiary of Dundee Properties Limited Partnership (DPLP) and H&R Real Estate Investment Trust (H&R; collectively with DPLP, the Sponsors). DPLP is a limited partnership controlled by Dundee Real Estate Investment Trust (Dundee). DPLP will own a 66 2/3% interest in each of the Issuers and H&R will own a 33 1/3% interest in each of the Issuers.

The net proceeds from the Bonds will be used by the Issuers to pay a portion of the purchase price for the acquisition of Scotia Plaza. The Bonds have a seven-year term from the closing date, subject to a 30-year amortization schedule, with an interest rate of 3.21% per annum, compounded semi-annually.

Notes:
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.