DBRS Confirms Suncor Energy Centre Bonds at “A,” Stable

DBRS Limited (DBRS) has confirmed its rating on the $550 million 5.188% Series 1 Senior Secured Bonds due August 29, 2033 (the Bonds) of SEC LP and ARCI Ltd., secured by the Suncor Energy Centre (the Complex) located in Calgary, Alberta, at “A” with a Stable trend. The rating confirmation acknowledges the currently challenging office leasing environment in downtown Calgary because of low oil prices. The confirmation, however, reflects the Complex’s long-term lease profile, which helps to limit its exposure to changes in market conditions. The rating continues to be based on the high quality and favourable location of the Complex, a long-term lease to a high-credit quality anchor tenant (Suncor Energy Inc. (Suncor), rated A (low) by DBRS) 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.

For the last 12 months ended March 31, 2015 (LTM Q1 2015), net operating income (NOI) increased moderately by 6.7% to $68.6 million from $64.3 million for the year ended 2013 (YE2013). This was mainly because of in-place rent step-ups from Suncor (accounting for 77.2% of total leasable area), resulting in higher rental income. As a result, debt service coverage and interest coverage increased to 1.74 times (x) and 2.45x for LTM Q1 2015 from 1.63x and 2.25x, respectively, for YE2013.

DBRS expects leasing activity in the downtown Calgary office market to remain slow in the near term, mainly as a result of 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 square feet of new supply from five office buildings which still require moderate leasing efforts. DBRS, however, expects the Complex to maintain strong occupancy levels in the near to medium term because of a modest amount of lease expires until the end of 2018 (totalling approximately 1.6% of total leasable area). DBRS also expects NOI to increase modestly by 2.3% in 2015 and 2016 primarily as a result of higher rental income from in-place rent step-ups and previously committed lease renewals. As a result, coverage ratios are expected to improve within the parameters of the current rating category.

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.