DBRS Confirms the Rating of Fifth Avenue Place First Mortgage Bonds at A (low) (sf), Stable Trend

DBRS Limited (DBRS) confirmed the rating of the First Mortgage Bonds (the Bonds) of Fifth Avenue LP & ARI 5AP Investments LP at A (low) (sf) with a Stable trend. The Bonds are secured by Fifth Avenue Place (the Property) and have a current outstanding balance of $298.8 million that will mature on August 5, 2021. Recourse is limited to the Property only.

The current rating reflects the performance of the Property. As of the August 31, 2017, rent roll, the property was 77.6% leased and approximately 51.6% of the total net rentable area (NRA) was leased to long-term credit tenants including Enbridge Inc. (rated BBB (high) with a Stable trend by DBRS), which leases 26.3% of the total NRA and generates 30.1% of rents with a lease expiry in 2028, and TransCanada Pipelines Limited (rated A (low) with a Stable trend by DBRS), which leases 25.4% of the total NRA and generates 34.1% of rents with a lease expiry in 2027. Lease rollovers within the next five years are minimal ranging from 0.0% to 8.4% per annum. In addition, more than 125,000 square feet (sf) of existing vacant space has been leased to WSP Canada Inc. on 13-year lease term commencing December 1, 2018, with an initial net rental rate of $24.00 per square foot (psf), however, this future rental income is currently excluded from DBRS net cash flow (NCF). Although the average in-place office net rent of $31.05 psf at the Property is significantly higher than the average market rent of $23.07 psf for downtown Calgary Class AA office properties reported by CBRE, it is lower than the recently achieved initial net rental rates from new leases of TransCanada Pipelines Limited which range from $32.25 psf to $34.00 psf. According to CBRE’s MarketView Q2 2017 report, the overall vacancy of Class AA office properties in downtown Calgary’s central core submarket rose to 23.4% from 16.2% in the previous quarter primarily as a result of the new supply of 1.4 million sf at Brookfield Place Calgary’s East Tower. Despite the Property’s current 22.3% direct vacancy, it benefits from strong sponsorship from Brookfield Canada Office Properties (Brookfield, rated BBB with a Stable trend by DBRS) and Alberta Investment Management Corporation as well as capable property management provided by Brookfield. Based on DBRS NCF and implied cap rate, the Bonds represent current and maturity loan-to-value ratios of 65.5% and 56.1%, respectively.

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 principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies.

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