DBRS Confirms Suncor Energy Centre Bonds at “A”

DBRS has today confirmed the rating on the $550 million 5.188% Series 1 Senior Secured Bonds due August 29, 2033 (the Bonds) of SEC LP & ARCI Ltd. secured by the Suncor Energy Centre (the Complex) located in Calgary, Alberta, at “A” with a Stable trend. The rating is based on the high quality and favourable location of the Complex, a long-term lease to a high-credit-quality anchor tenant, and the strength of the sponsors and property manager. The rating also reflects the re-leasing risk in 2028, tenant exposure to the energy sector, and limited cash flow growth for the Complex over the life of the Bonds.

Since DBRS’s initial rating, the Complex has continued to perform well and was fully occupied as at Q1 2014. For the last 12 months (LTM) ended March 31, 2014, the Complex’s adjusted net operating income (NOI) increased modestly to $66.0 million from $64.3 million in YE2013, mainly due to in-place rent step-ups in several of Suncor Energy Inc.’s (Suncor) leases. Correspondingly, debt service and interest coverage ratios improved within the current rating category to 1.67 times (x) and 2.31x for LTM ended March 31, 2014, respectively. In the near term, DBRS expects the Complex to maintain strong occupancy levels due to a modest amount of lease expires until 2019. DBRS also expects NOI to modestly increase primarily due to in-place rent step-ups. As a result, coverage ratios are expected to hold relatively steady.

DBRS notes that the downtown Calgary office market has shown some signs of slowing over the last year as softening demand and an increase in sublet space have resulted in an 8.13% vacancy rate as at Q1 2014. Furthermore, the current construction of five new office buildings in downtown Calgary is likely to restrain net rental growth in the next few years. This would be exacerbated by a protracted recession in the oil and gas industry should it occur. In the event that Calgary office leasing environment continues to be challenging over the next few years, and/or the economics of the new tenant leases are less favourable to the Complex than those under current tenants’ leases, DBRS would reconsider its rating and outlook.

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 methodology is Rating Entities in the Real Estate Industry, which can be found on our website under Methodologies.