DBRS Confirms Fifth Avenue Place Bonds at “A”

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 confirmation follows the property manager’s recent announcement that it has signed a new ten-year lease with TransCanada PipeLines Limited (TransCanada; rated A (low) with a Stable trend by DBRS) for approximately 290,000 square feet (sf) and a new eight-year lease to an oil and gas company for approximately 23,000 sf. As a result, these new leases will backfill approximately 41% of the Imperial Oil Limited (Imperial Oil) expiry in 2016. While this new lease was signed under favourable terms (i.e., higher average rental rate and long duration), DBRS recognizes that the re-leasing risk in 2016 is still significant given that the property manager has yet to secure new tenants for the remaining 59% of the space being vacated by Imperial Oil in 2016 (approximately 404,000 sf or 28.3% of total leasable office area).

The Stable trend reflects DBRS’s view that the property manager would be able to re-lease a majority of the remaining Imperial Oil space before 2016 at a minimum of Imperial Oil’s in-place rental rate, which would preserve the current credit rating. This view is supported by the good location and high quality of the Complex and Imperial Oil’s below-market rental rates. DBRS, however, 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 the 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 tenant’s leases, DBRS would reconsider its rating and outlook.

The “A” rating continues to be supported by FAP’s good location in downtown Calgary, long-term investment-grade tenant profiles, below-market in-place rent rates and the strength of the sponsors. The rating continues to be limited by the re-leasing risk in 2016, tenant exposure to the energy sector, volatility of the Calgary office market and nominal growth in rental rates at the Complex.

Over the last 12 months (LTM) ended March 31, 2014, FAP’s adjusted net operating income increased modestly to $43.0 million from $41.7 million in YE2012, mainly due to in-place rent step-ups in two leases (Enbridge Inc., rated A (low) with a Stable trend by DBRS, and Inter Pipeline Fund). Correspondingly, debt service and interest coverage ratios improved within the rating category to 1.79 times (x) and 2.70x for LTM ended March 31, 2014, respectively. In the near term, DBRS expects FAP to maintain strong occupancy levels due to a modest amount of lease expires until 2016. DBRS also expects coverage ratios to remain stable in the near term with increases primarily attributed to in-place rent step-ups.

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

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