DBRS Confirms Bow Centre Street Limited Partnership at “A,” Stable

DBRS has today confirmed the ratings on the Series A, Series B and Series C Secured Bonds (the Bonds) of Bow Centre Street Limited Partnership (the Issuer) secured by The Bow at “A,” with Stable trends. The rating confirmation reflects the completed occupancy of The Bow by Encana, and the effective refinancing of the revolving credit facility (secured by The Bow and guaranteed by H&R Real Estate Investment Trust (H&R REIT)) with the Series C Secured Bonds, both in accordance with DBRS’s original expectations. The repayment of the guaranteed bank debt effectively ring-fences the Issuer from the bankruptcy risk of its owner (H&R REIT), as was anticipated and required by DBRS with its initial “A” rating.

The ratings continue to be supported by the high quality and attractive location of The Bow, its 25-year lease to an investment-grade tenant (Encana; rated BBB by DBRS) and moderate level of financial leverage. The ratings also consider the exposure to Encana as the Complex’s single tenant, as well as the modest step-ups in rental rates over the term of the lease. DBRS notes that a negative rating action on the Issuer could result from a material deterioration in Encana’s credit risk profile. In terms of financial leverage, DBRS notes that total secured debt outstanding may not exceed $800 million during the term of Encana’s lease, and $365 million at the end of the lease in 2038. As of September 30, 2013, $790 million of secured bonds were outstanding with the $300 million Series C Secured Bonds, issued on June 13, 2013.

In terms of operating performance, DBRS expects the Complex to generate approximately $90 million of net operating income (NOI) in the first full year of receiving rent payments, based on an annual net rental rate of $41.77 per square foot (psf) for office space and a monthly rental rate $450 per parking stall (1,358 parking stalls in total). DBRS forecasts pro forma interest and debt service coverage ratios (DSCR) will be 3.03 times (x) and 2.61x, respectively, for this period. DBRS notes that The Bow was fully leased by Encana on March 15, 2013, while rent payments commenced on June 1, 2013. Going forward, NOI and coverage ratios are expected to improve modestly based on nominal office and parking stall rental rate increases of 0.75% and 1.50% per year, respectively, over the term of Encana’s lease.

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.

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

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