DBRS Confirms Bankers Hall Bonds at A (low)

DBRS Limited (DBRS) has today confirmed the rating on the $300 million 4.377% Senior Secured Bonds (the Bonds) secured by Bankers Hall LP’s (the Issuer) 50% interest in Bankers Hall (the Complex) located in Calgary, Alberta, at A (low) with a Stable trend. The confirmation incorporates DBRS’s estimation that the debt service coverage ratio (DSCR) could decline to as low as 1.50 times (x) in the near term, which is representative of the lower end of the A (low) rating category. This is based on DBRS’s view that the currently challenging leasing environment in downtown Calgary will likely hinder leasing prospects for the Complex’s future expiring leases.

For the last 12 months ended March 31, 2015 (LTM Q1 2015), net operating income (NOI) decreased moderately to 29.8 million from 32.4 million for the year ended 2013 (YE2013). This was mainly due to a decline in occupancy from two expiring leases comprising approximately 110,000 square feet (sf) or 5.1% of gross leasable area (GLA). As a result, DSCR and interest coverage ratio have decreased moderately to 1.65x and 2.27x for LTM Q1 2015 from 1.80x and 2.47x, respectively, for YE2013.

DBRS expects leasing activity in the downtown Calgary office market to remain slow in the near term, mainly due to weakening demand for space as the energy sector contends with low oil prices. In addition, the downtown Calgary office market has approximately 3.8 million sf of new supply from five office buildings which still require moderate leasing efforts. As such, DBRS believes it will be difficult for the property manager to re-lease current vacant space and upcoming lease maturities (totalling approximately 3.9% of GLA maturities in 2015 and 2016). DBRS notes, however, that the magnitude of the lease expirations beyond 2016 are modest, with no more than 5.6% of GLA maturing per year over the remainder of the term of the Bonds. This could provide moderate downside protection to the Complex’s cash flow in a challenging leasing environment. Nevertheless, if this challenging leasing environment persists beyond 2016 and results in deterioration of the DSCR to below 1.50x, a negative rating action could occur.

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 (May 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.