DBRS Confirms Rating on Choice Properties Limited (500 Bayly Street East)

DBRS Limited (DBRS) has today confirmed the rating on the 5.49% Mortgage Loan due June 1, 2018 (the Mortgage Loan), at “A.” The confirmation is part of DBRS’s continued effort to provide timely credit rating opinions and increased transparency to market participants.

The Mortgage Loan was made by a major Canadian financial institution (the Lender) to 500 Bayly Portfolio Inc. (the Original Borrower) in relation to the Loblaw Distribution Centre located in Ajax, Ontario (the Premises). In 2009, Choice Properties Limited (the Borrower) assumed all of the Original Borrower’s obligations under the Mortgage Loan.

The Mortgage Loan was advanced in May 2008 at an interest rate of 5.49% per annum, calculated monthly and compounded semi-annually, not in advance, for a term maturing on June 1, 2018. The Mortgage Loan had an initial principal balance of $95,000,000 and a 25-year amortization schedule. The principal balance has amortized by 18.4% to $77,525,255 as of March 31, 2016.

The confirmation of the rating takes into consideration the rental income of the Premises and the principal and interest payment obligations of the Borrower with respect to the Mortgage Loan, but does not take into consideration other obligations of the Borrower or any structural deficiencies that may exist in any organizational or transaction documents.

This rating reflects DBRS’s opinion on the first-dollar loss that may be experienced by the Lender with respect to the interest and principal payment obligations of the Borrower in relation to the Mortgage Loan, solely based on the cash flows (not necessarily considering the timing of those cash flows) generated by the Premises, as well as on the current and/or future value of such property.

The rating confirmation is based on the following considerations:

Strengths
(1) The Premises are 100% leased to Loblaw Properties Limited (the Tenant), whose obligations are indemnified by Loblaw Companies Limited (Loblaw; rated BBB with a Positive trend by DBRS). The lease obligations more than sufficiently cover the monthly debt service obligation on the Mortgage Loan.

(2) The Mortgage Loan amortizes on a 25-year schedule and will benefit from the fact that the lease extends well beyond loan maturity in June 2018.

Challenges
(1) The Premises are of unique specialty use for the tenant.

(2) The Premises are occupied by a single tenant; however, the Premises can be subdivided and altered for alternative use.

(3) DBRS property net cash flow assumes benefits in its vacancy and acceptance of rental rates that are consistent with a long-term investment-grade credit tenant. Loblaw is Canada’s largest food distributor, owning and operating over 1,000 stores. The Premises serve as a principal distribution facility for the Tenant. Should Loblaw’s credit rating fall below investment grade, DBRS would likely review the rating and credit analysis at that time and would likely take into consideration market occupancy rates and the then-current market rental rates, which may affect the rating.

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 methodologies are CMBS North American Surveillance and North American CMBS Rating Methodology, 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.