DBRS Confirms Bankers Hall Bonds at A (low), Stable

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 50% interest in Bankers Hall (the Property), located in Calgary, Alberta, at A (low) with a Stable trend. The confirmation acknowledges the currently challenging office leasing environment in downtown Calgary, which will likely continue to put pressure on the Property’s occupancy levels and hinder leasing prospects for the Property’s near-term lease expiries. As such, DBRS estimates the debt service coverage ratio (DSCR) could decline to as low as 1.50 times (x), assuming current vacant space and leases maturing in 2016 and 2017 remain uncommitted. However, this level of debt service coverage is still representative of the lower end of the A (low) rating category.

For the last 12 months ended March 31, 2016 (LTM Q1 2016), net operating income increased modestly by 2.0% to $30.6 million, from $30.0 million for the year ended December 31, 2015 (YE2015). This was largely because of contractual rent step-ups from in-places leases, which were partially offset by a moderate decline in occupancy. As such, DSCR has increased modestly to 1.69x for LTM Q1 2016, from 1.66x for YE2015.

DBRS, however, expects leasing activity in the downtown Calgary office market to remain slow in the near term, mainly because of weak demand for space as the energy sector continues to contend with low oil prices. In addition, over the next two years, the downtown Calgary office market will add approximately 3.0 million sf of new supply from four office buildings, which still require substantial leasing efforts. As such, DBRS believes it will be difficult for the property manager to re-lease current vacant space, 7.2% of total area, and upcoming lease maturities should existing tenants at the Property choose not to renew their leases. DBRS notes, however, that the magnitude of the lease expiries during the term of the Bonds is modest. Over the next two years, total lease maturities account for only 3.2% of total area. Furthermore, there are no more than 5.6% of total area maturing each year over the remainder of the term of the Bonds. This could provide moderate downside protection to the Property’s cash flow from unfavourable changes in market conditions.

RATING DRIVERS
A negative rating action could occur if the Property encounters any deterioration in cash flow caused by tenant departures and/or the unsuccessful leasing efforts, resulting in DSCR falling below 1.50x on a sustained basis.

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 methodology is Rating Entities in the Real Estate Industry (May 2015), which can be found on our website under Methodologies.