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

DBRS Limited (DBRS) has today confirmed its rating of “A” with a Stable trend 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 Property) located in Calgary, Alberta. The rating confirmation acknowledges the Property’s steady operating performance and modestly improving financial metrics over the past year, despite the currently challenging office leasing environment in downtown Calgary. For the last 12 months ended March 31, 2016 (LTM Q1 2016), net operating income (NOI) increased modestly by 1.3% to $69.5 million from $68.6 million for the YE2014 mainly because of contractual rent step-ups from PWC Management Services LP (accounting for 5.5% of total net rentable area (NRA)). As such, the debt service coverage ratio (DSCR) increased to 1.76 times (x) for LTM Q1 2016 from 1.73x for YE2014.

The Stable trend considers DBRS’s expectation that the long-term nature of Suncor Energy Inc.’s lease (Suncor; representing 77.1% of total NRA) with built-in contractual rental rate increases should continue to provide stability and predictability to cash flow as well as good protection from unfavourable changes in market conditions. DBRS expects leasing activity in the downtown Calgary of¬fice market to remain slow in the near term, mainly as a result of weakening demand for space as the energy sector contends with sustained low oil prices. In addition, over the next two years, the downtown Calgary office market will absorb approximately 3.0 million square feet (sf) of new supply from four office buildings, which still require substantial leasing efforts. DBRS, however, expects the Property to maintain strong occupancy levels in the near to medium term because of a modest amount of lease expires until the end of 2019. DBRS notes that, over the last year, the property manager has successfully re-leased and renewed approximately 25,746 sf of the space originally scheduled to mature in 2019. As such, uncommitted lease maturities from 2016 to 2019 now only represent approximately 4.3% of total NRA. DBRS also expects low-single digit NOI growth in 2016 and 2017 primarily as a result of higher rental income from in-place rent step-ups and lease renewals. As a result, the DSCR is expected to continue to improve within the parameters of the current rating category.

DBRS notes its recent trend change to Negative from Stable on Suncor’s rating. DBRS does not expect a downgrade by one notch of Suncor’s rating to have any credit implications for the Bonds, but notes that a negative rating action could occur if there is a more material deterioration in Suncor’s credit risk profile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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The applicable methodology is Rating Entities in the Real Estate Industry, which can be found on our website under Methodologies.

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