DBRS Confirms Rating on SP Limited Partnership and SP1 Limited Partnership (Scotia Plaza) at A (high), Stable Trend

DBRS Limited (DBRS) has today confirmed its rating on the $650 million 3.21% First Mortgage Bonds (the Bonds) of SP Limited Partnership and SP1 Limited Partnership (each an Issuer and, collectively, the Issuers), secured by Scotia Plaza (the Complex), at A (high) with a Stable trend. The rating confirmation acknowledges that the property manager has yet to secure new tenants for the space being vacated by Borden Ladner Gervais LLP at the end of 2016, which accounts for approximately 187,183 square feet or 9.5% of total leasable area. In addition, the rating confirmation also takes into account the increased office supply from new or under construction buildings within Downtown Toronto over the next few years, which could put pressure on re-leasing efforts for the Complex. The A (high) rating, however, continues to be supported by Scotia Plaza’s long-term lease to a strong anchor tenant (Scotiabank), the high quality and favourable location of the Complex as well as good debt service coverage.

Over the last year, the Complex continued to perform well with strong occupancy rates (99.1% for Q2 2015). For the 12-month period ended March 31, 2015, the debt service coverage ratio and interest coverage ratio were 2.03 times (x) and 3.26x, respectively, in line with DBRS’s expectations and appropriate for the current rating category. Going forward, DBRS expects that the Complex’s financial metrics could experience moderate pressure in the near term because of lease expirations in 2015 and 2016 (totalling 13.3% of total leasable area), but still remain within the parameters of the current rating category. DBRS also expects that Dream Office REIT and H&R REIT will spend $80 million, of which most will be recoverable, on elevator modernization, common-area revitalization and LEED recertification. These major capital projects are expected to improve tenant retention, attract new tenants and reduce energy costs for the Complex.

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.

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.