DBRS Confirms Fifth Avenue LP & 1023803 Alberta Ltd. at “A”, Stable

DBRS has today confirmed the rating on the First Mortgage Bonds (the Bonds) of Fifth Avenue LP & 1023803 Alberta Ltd. secured by Fifth Avenue Place (FAP or the Complex) at “A” with a Stable trend. The rating confirmation reflects the following: (1) good net operating income (NOI) growth driven by in-place rental rate step-ups in 2011; (2) high occupancy levels with a minimal amount of leases expiring until 2016; and (3) improvement in coverage ratios; however, these ratios remain at the low end of the “A” rating category range.

The “A” rating is supported by the following: (1) FAP is a well-located Class A office complex in the central core of downtown Calgary; (2) a majority of the Complex is occupied by investment-grade tenants under long-term leases; (3) current in-place rental rates are well below current market rates; and (4) FAP has good sponsorship. The rating also takes into consideration the following challenges: (1) potential re-leasing risk with Imperial Oil Limited (Imperial Oil) leases expiring in 2016; (2) tenants are largely dependent on the energy sector; and (3) minimal near-term rental rate growth opportunities given the long-term nature of the tenant leases.

Over the 12 month period ended March 31, 2012, FAP continued to perform well with NOI increasing to $41.2 million. The improvement in NOI was mainly due to in-place rental rate step-ups built in certain leases. In addition, occupancy levels at the Complex remained very strong at 99.8% as at March 31, 2012. The increase in NOI has allowed debt service and interest coverage ratios to improve to 1.72 times (x) and 2.51x, respectively. However, theses metrics remain at the low end of the “A” rating category range. In the near term, DBRS expects FAP to maintain occupancy levels in the 99% range due to a minimal amount of lease expiries until 2016. DBRS also expects the coverage ratios to remain stable as NOI in the near term should stay around the low $40 million range, with any increases due to lifts in rental revenue attributed to in-place rent step-ups built into existing leases.

While there are significant re-leasing risks in 2016 due to the Imperial Oil lease expiration, DBRS believes that this risk is softened by the following: (1) the long lead time of three years needed for the landlord to find new tenants and (2) strong demand for space in the Calgary downtown office market and limited Class A/AA availability. In addition, Imperial Oil currently pays below-market rental rates, lower than the $35 psf to $40 psf in the Calgary Class AA office market, and well below the minimum asking base rental rate of $40 psf for new construction, making renewal an attractive option. Going forward, DBRS expects the credit profile to remain stable based on the long-term leases of FAP’s key tenants, minimal lease maturities until 2016 and the Complex’s strong location in downtown Calgary, which should provide cash flow stability.

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.