DBRS Assigns Provisional Rating of “A” to Suncor Energy Centre, Senior Secured Bonds

DBRS has today assigned a provisional rating of “A,” with a Stable trend, to the $550 million *% Series 1 Senior Secured Bonds (the Bonds) secured by Suncor Energy Centre (the Complex) located in Calgary, Alberta. The Bonds will have a 20-year term from the offering’s closing date, subject to a 25-year amortization schedule, with an interest rate of *% per annum, compounded semi-annually.

The rating is based on the quality and location of the Complex, a long-term lease to a high-credit-quality anchor tenant and the strong sponsorship and property management experience of the operator, Brookfield Properties Management Corporation (BPMC). The rating also considers that a significant portion of the Complex’s leases expire prior to the Bonds’ maturity date, that a high concentration of tenants are in the oil and gas sector and there is limited cash flow growth for the Complex over the life of the Bonds.

In terms of cash flow analysis and loan sizing, DBRS has assessed the refinance debt service coverage ratio (DSCR) and refinance loan-to-value (LTV) ratio for Year 15 (2028) of the Bonds’ term, when DBRS believes the Bonds will have the greatest refinancing risk, due to the lease maturity of Suncor Energy Inc. (Suncor; accounts for 75.1% of total leasable area). In DBRS’s base case scenario, DBRS assumes Suncor will vacate the Complex in 2028, and that its vacated space will be re-leased to new tenants at Suncor’s expiring rent in Year 15. From these assumptions, DBRS derives a refinance DSCR of 1.97 times (x) for the Complex, which assumes a 9.140% constant to be applied to the outstanding debt balance in Year 15 (2028) of the Bonds’ term.

In the base case scenario, the DBRS refinance LTV is 55.6% at 2028, after applying a 10.0% capitalization rate to the DBRS base case net cash flow. The loan represents an initial loan per square foot (psf) of $318 that amortizes to $175 psf at Year 15 (2028), which is much lower than $693 psf, the current appraisal price of the Complex. Overall, DBRS views the refinance DSCR of 1.97x and refinance LTV of 55.6% under the base case scenario to be supportive of the “A” rating category.

The Bonds will be direct joint and several obligations of SEC LP and Arci Ltd. (collectively, the Issuers), with recourse limited to the Complex. The registered interest of SEC LP in the Complex is held by SEC GP, its general partner. SEC GP is wholly owned by BOPC LP, whose general partner is BOPC GP Inc., a wholly owned subsidiary of Brookfield Canada Office Properties. Arci Ltd. is an Alberta Corporation wholly owned by a private investor.

In accordance with the terms of the Trust Indenture, SEC LP, SEC GP and Arci Ltd. will be single-purpose entities. The Issuers and SEC GP are subject to customary separateness covenants under their respective organizational documents and each is organized as a single-purpose entity for the limited purpose of owning, operating and managing the Complex.

The net proceeds from the Bonds will be used by the Issuers to redeem existing debt secured by the Complex with the remainder, if any, being used for general corporate purposes.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Real Estate Entities and CMBS Rating Methodology, which can be found on our website under Methodologies.