DBRS Confirms Rating of Choice Properties Limited - 500 Bayly Street East

DBRS has today confirmed the rating on the 5.49% Mortgage Loan due June 1, 2018 (the Mortgage Loan) at “A.” The Mortgage Loan was made by a major Canadian financial institution (the Lender) to 500 Bayly Portfolio Inc. (the Original Borrower) in relation to the Loblaw Distribution Centre located in Ajax, Ontario (the Premises). The confirmation is part of DBRS’s continued effort to provide timely credit rating opinions and increased transparency to market participants.

The Mortgage Loan was advanced in May 2008 at an interest rate of 5.49% per annum, calculated monthly and compounded semi-annually, not in advance, for a term maturing on June 1, 2018. The Mortgage Loan had an initial principal balance of $95,000,000 and a 25-year amortization schedule. The principal balance has amortized by 13.6% to $82,095,693 as of July 1, 2014.

The Mortgage Loan was used by the Original Borrower for purposes of acquiring the Premises from Loblaw Properties Limited. The Original Borrower was the registered owner and held the Premises as bare trustee and nominee on behalf of the beneficial owner of the Premises, H&R REIT. In 2009, the Original Borrower and H&R REIT transferred legal and beneficial title to the Premises to Choice Properties Limited, a special-purpose entity (the Borrower). At that time, the Borrower agreed to and assumed all of the Original Borrower’s obligations under the Mortgage Loan and the security granted to secure the Mortgage Loan.
The confirmation of the rating takes into consideration the rental income of the Premises and the principal and interest payment obligations of the Borrower with respect to the Mortgage Loan, but does not take into consideration other obligations of the Borrower or any structural deficiencies that may exist in any organizational or transaction documents.
The rating confirmation is based on the following considerations:

Strengths
(1) The Premises are 100% leased to Loblaw Properties Limited, whose obligations are indemnified by Loblaw Companies Limited (rated BBB with a Stable trend by DBRS). The lease obligations more than sufficiently cover the monthly debt service obligation on the Mortgage Loan.

(2) The Mortgage Loan amortizes on a 25-year schedule and will benefit from the fact that the lease extends well beyond loan maturity in June 2018.

Challenges
(1) The Premises are of unique specialty use for the tenant.

(2) The Premises are occupied by a single tenant. However, the Premises can be sub-divided and altered for alternative use.

(3) DBRS property net cash flow assumes benefits in its vacancy and acceptance of rental rates that are consistent with a long-term investment-grade credit tenant. Loblaw is Canada’s largest food distributor, owning and operating over 1,000 stores. The Premises serve as a principal distribution facility for the Tenant, and DBRS believes the recent expansion further solidifies the Tenant’s and Loblaw’s commitment to this location. Should Loblaw’s credit rating fall below investment grade, DBRS would likely review the rating and credit analysis at that time, and would likely take into consideration market occupancy rates and the then-current market rental rates, which may affect the rating.

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 methodologies are CMBS North American Surveillance Methodology and CMBS Rating Methodology, which can be found on our website under Methodologies.