DBRS Places Centennial Place First Mortgage Bonds Under Review with Developing Implications

DBRS Limited (DBRS) placed the Centennial Place Series A and Series B First Mortgage Bonds (collectively, the Bonds) issued by OMERS Realty Corporation (ORC; rated AA (low) with a Stable trend by DBRS), 9856889 Canada Inc., and Canada Pension Plan Investment Board Real Estate Holdings Inc. (CPPIB REH) Under Review with Developing Implications. The $210 million Centennial Place 3.666% Senior Series A Secured Bonds due 2022 and the $210 million Centennial Place 3.04% Senior Series B Secured Bonds due 2017 (the Series B bonds) are secured by Centennial Place (the Property) and have a current outstanding balance of $191.1 million and $189.3 million, respectively. Recourse is limited to the Property only.

The current rating action reflects the Developing Implications of the Series B bonds, which are scheduled to mature in December 2017.

As of the July 2017 rent roll, the property is 98.3% leased; however, the actual occupancy level is 87.8%. DBRS noted that the average in-place office net rents at the Property of $32.75 per square foot (psf) is significantly higher than the achieved rental rates of recent new and renewal leases of $18.06 psf to $23.42 psf and the average market rent of $23.07 psf for Calgary downtown Class AA office properties reported by CBRE. Although near-term lease rollover at the Property is limited, leases representing 42.7% of the total net rentable area will expire between 2021 and 2022. According to the CBRE 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 because of new supply in the form of the 1.4 million sf Brookfield Place East. With a slow recovery of oil prices and the uncertainty of the white-collar job market, sublease availability at the Property is likely to rise. However, the Property benefits from strong sponsorship from ORC and CPPIP REH as well as experienced property management by Oxford Properties Group. Based on the DBRS net cash flow and implied cap rate, the Bonds represent a current total DBRS loan-to-value (LTV) ratio of 83.5%. At the time of the maturity of the Series B bonds, the total LTV ratio will be 83.0% with an Exit Debt Yield of 9.3% if the Series B bonds are renewed, or a DBRS LTV of 41.4% with an Exit Debt Yield of 21.6% if the Series B bonds are retired.

DBRS intends to resolve the Under Review with Developing Implications status within the next few months as more is known about the issuer’s plan for the Series B bonds.

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 access to the accounts and other relevant internal documents of the rated entity or its related entities.