DBRS Confirms Rating of Morguard Corporation (131 Queen Street)

DBRS Limited (DBRS) has today confirmed the rating of Morguard Corporation (131 Queen Street)’s 5.31% Mortgage Loan Due November 1, 2026 (the Mortgage Loan) at AAA. The Mortgage Loan was made by a major Canadian financial institution (the Lender) to Morguard Corporation (the Borrower) in relation to the permanent financing following the construction of a building at 131 Queen Street, Ottawa (the Premises). 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 advanced on October 2, 2006, at an interest rate of 5.31% per annum, calculated monthly and compounded semi-annually, not in advance, for a term maturing on November 1, 2026. The Mortgage Loan had an initial principal balance of $90.0 million and a 25-year amortization schedule. The principal balance has amortized to $68.1 million as of July 1, 2016. The Mortgage Loan was used by the Borrower for the purposes of providing permanent financing following the construction of the commercial component (divided between retail and office space with a parking component) and a residential component on the Premises.

The confirmation of the rating considers the current and future rental income of the Premises, the Government of Canada’s rating as well as the Borrower’s principal and interest payment obligations with respect to the Mortgage Loan, but does not consider the Borrower’s other obligations, the Borrower’s insolvency or any structural deficiencies that may exist in any organizational or transaction documents.

The rating confirmation is based on the following considerations:

Strengths
(1) More than 85% of the space at the Premises is leased by the federal government with the lease term nearly matching the term of the Mortgage Loan. This ensures a certain amount of income to the Borrower to cover its ongoing loan obligations.

(2) The Borrower has multiple other sources of income from the Premises (retail, apartments and parking) to cover non-recoverable expenses, the ground lease payments and any unforeseen costs.

(3) The Premises is in an ideal location in downtown Ottawa with access to public transit and in close proximity to Parliament Hill.

Challenges

(1) Since the 20-year loan amortizes over 25 years, there will be a projected balance of $28.4 million of principal remaining when the term ends in 2026. The Borrower will need to refinance at that time to repay the Mortgage Loan.

(2) HSBC Bank Canada (HSBC) has the ability to terminate its lease at no cost in 2021. This is a notable risk because HSBC leases more space than the other retail tenants combined. The risk is mitigated by the location of the building and the high volume of pedestrian traffic, which DBRS expects would elevate the demand for that retail space should a replacement tenant be necessary.

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 (December 2015) and North American CMBS Rating Methodology (March 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.