DBRS Morningstar Confirms Rating of Mortgage Loan Made to Albert & Lyon Equities Inc., Albert & Lyon Properties LP and Canderel CSQ Ottawa LP – Constitution Square, Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) confirmed the rating on the following mortgage loan made to Albert & Lyon Equities Inc., Albert & Lyon Properties LP and Canderel CSQ Ottawa LP (collectively, the Borrowers) by a major Canadian financial institution:

-- Mortgage Loan at A (low)

The trend is Stable. The rating has been removed from Under Review with Developing Implications, where it was placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The mortgage loan is secured by Constitution Square, a Class A office and retail complex located in Ottawa’s central business district. The DBRS Morningstar net cash flow (NCF) derived at the initial rating was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The DBRS Morningstar NCF applied as part of the analysis represents a -17.7% variance from the borrower’s YE2018 reported net operating income (NOI), primarily driven by higher vacancy, normalized capital expenditure, and leasing costs. DBRS Morningstar applied a cap rate of 6.75% to the resulting NCF to derive a DBRS Morningstar Value that indicated a variance of -48.5% from the 2017 appraised value. The DBRS Morningstar Value implies an LTV of 76.9%, as compared with the LTV on the 2017 appraised value of 48.3%.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the property’s age and quality and market fundamentals. In addition, the 6.75% cap rate applied is substantially above the implied cap rate of 4.2% based on the Borrowers’ 2018 reported NOI and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 10.5% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

This rating was initiated at the request of the lender.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar 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.dbrsmorningstar.com or contact us at [email protected].

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