DBRS Confirms Ratings of the First Mortgage Bonds Issued by Bow Centre Street Limited Partnership

DBRS Limited (DBRS) confirmed the ratings of the Series A, Series B and Series C First Mortgage Bonds (collectively, the Bonds) issued by Bow Centre Street Limited Partnership and secured by The Bow (the Property) at A (sf) with Stable trends. The Series A and C Bonds were structured with interest-only payments, while the Series B Bonds were structured with principal and interest payment subject to an amortization schedule of 30 years. The Bonds have a current outstanding balance of $250.0 million, $213.5 million and $300.0 million, respectively, which will mature in June 2021, June 2022 and June 2023, respectively. Recourse is limited to the Property only.

The current rating reflects the credit quality of the Bonds as supported by the anticipated stable rental income from the long-term credit tenant (LTCT) of Encana Corporation (rated BBB with a Stable trend by DBRS), which leased the entire Property until May 2038; however, 50% of the office space is subleased to Cenovus Energy Inc. (rated BBB with a Stable trend by DBRS). Based on a net cash flow of $91.7 million, which was 7.9% lower than the reported YE2019 net operating income, and a cap rate of 7.75%, the Bonds represent a current total loan-to-value ratio of 64.6% and a DBRS Exit Debt Yield of 12.2% as at June 2021, when the Series A Bonds are due.

The Property is a high-quality office building in downtown Calgary and benefits from strong sponsorship from H&R Real Estate Investment Trust (rated BBB (high) with a Stable trend by DBRS). As of June 2019, nine floors, totalling approximately 327,000 square feet, were reportedly physically vacant (16.4% of total office net rentable area) while two floors were occupied by a subtenant, CIBC. Although the current average in-place office net rent of $43.83 per square foot (psf) at the property is significantly higher than the average market rent of $22.64 psf for Class AA office properties in the Calgary Central Core submarket as reported by CBRE, DBRS accepted the contractual rents of the LTCT. However, it should be noted that any deterioration of the credit quality of Encana Corporation will have a negative impact on the sustainability of the rental income and consequential ratings of the Bonds.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 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.

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