DBRS Confirms Rating on Choice Properties Limited (500 Bayly Street East)

DBRS Limited (DBRS) confirmed the rating on the 5.49% Mortgage Loan due June 1, 2018 (the Mortgage Loan), at “A.” 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 made by a major Canadian financial institution (the Lender) to 500 Bayly Portfolio Inc. (the Original Borrower) in relation to the Loblaw Distribution Centre located in Ajax, Ontario (the Premises). In 2009, Choice Properties Limited (the Borrower) assumed all of the Original Borrower’s obligations under the Mortgage Loan.

The Mortgage Loan was advanced in May 2008, at an interest rate of 5.49% per annum, calculated monthly and compounded semi-annually, not in advance, for a term maturing on June 1, 2018. The Mortgage Loan had an initial principal balance of $95 million and a 25-year amortization schedule. The principal balance has amortized by 24.7% to $71.5 million as of May 1, 2018.

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

This rating reflects DBRS’s opinion on the first-dollar loss that the Lender may experience with respect to the Borrower’s interest and principal payment obligations in relation to the Mortgage Loan, solely based on the cash flows (not necessarily considering the timing of those cash flows) generated by the Premises as well as on the current and/or future value of such property.

The rating confirmation is based on the following considerations:

Strengths
(1) The Premises is 100% leased to Loblaw Properties Limited (the Tenant), whose obligations are indemnified by Loblaw Companies Limited (Loblaw; rated BBB with a Stable trend by DBRS). The lease obligations more than sufficiently cover the monthly debt service obligation on the Mortgage Loan.

(2) The Mortgage Loan amortizes on a 25-year schedule and will benefit from the fact that the lease extends well beyond loan maturity in June 2018.

Challenges
(1) The Premises is of unique specialty use for the Tenant.

(2) The Premises is occupied by a single tenant; however, the Premises can be subdivided and altered for alternative use.

(3) DBRS property net cash flow assumes benefits in its vacancy and acceptance of rental rates that are consistent with a long-term investment-grade credit tenant. The Premises serve as a principal distribution facility for the Tenant. Should Loblaw’s credit rating fall below investment grade, DBRS would review the rating and credit analysis at that time and consider market occupancy rates as well as the then-current market rental rates, which may affect the rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is North American Single-Asset/Single-Borrower Methodology (January 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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