DBRS Confirms the Rating on SEC LP and ARCI Ltd. (Suncor Energy Centre)

DBRS Limited (DBRS) confirmed the rating of A (sf) on the 5.188% Series 1 Senior Secured Bonds due August 29, 2033 (the Bonds), issued by SEC LP and ARCI Ltd. (the Issuers) and secured by the Suncor Energy Centre (the Property).

The Bonds were issued on August 29, 2013, with a 20-year term, maturing on August 29, 2033, subject to a 25-year amortization schedule, with an interest rate of 5.188% per annum, compounded semi-annually. As of August 2017, the Bonds’ outstanding balance is $501.9 million and will have amortized to $172.1 million at maturity.

The Bonds are secured by a fee interest in the Suncor Energy Centre office building located at 117 – 5th Avenue SW in the downtown commercial district of Calgary, Alberta. The total gross leaseable area (GLA) is approximately 1.7 million square feet (sf). The Property is a Class AA office tower that was constructed in 1984.

The Suncor Energy Centre continues to perform well. As of June 30, 2017, the Property is 99% leased, with the largest two anchor tenants representing 86.4% of the GLA. The largest two tenants include Suncor Energy Inc. (Suncor, rated A (low) with a Stable trend by DBRS) representing 78.3% of the GLA with the lease expiring in 2028 and Cenovus Energy Inc. (Cenovus, rated BBB with a Negative trend by DBRS) representing 8.1% of the GLA with the lease expiring in 2020.

Over the next ten years, the Property’s lease expiries are insignificant with the exception of 2020 when Cenovus’ lease matures. The largest exposure will be in 2028 when Suncor’s lease expires, which is approximately five years before the Bonds’ maturity date. Suncor is required to provide a minimum of 24 months’ written notice of its intention to renew the lease, which offers a reasonable amount of lead time for the property managers to re-let a portion, if not all, of this space; however, re-leasing of this space at rent rates above or at current in-place rates will greatly depend on market conditions at that time.

The long-term nature of the Suncor’s lease, coupled with the credit quality of the tenant, provide stability and predictability of cash flows in the near term, despite currently unfavourable office market conditions. Leasing activity in the downtown office in Calgary continues to be challenging, with landlords facing elevated vacancy rates and market rents that are below the Property’s in-place rates. Under the assumption that Suncor were to extend their lease agreement at current market rental rates, the building would still provide sufficient cash flow to service the Bonds.

The Property is managed by Brookfield Office Properties Management LP, an experienced property manager with approximately $40 billion and 130 million sf managed worldwide.

The rating confirmation at A (sf) is based on the term risk of the Bonds, the DBRS Term debt service coverage ratio of 1.3 times and the DBRS loan-to-value ratio of 76%, and is supported by the quality of the Property, the stability of the cash flows provided by the rent paid by Suncor, which more than covers the debt service, the sponsorship strength and the management experience.

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