DBRS Morningstar Downgrades Rating on Bankers Hall LP, Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) downgraded the following first mortgage bonds issued by Bankers Hall LP:

-- 4.377% Senior Secured Bonds to BBB (low) (sf) from A (low) (sf)

The trend is Negative. 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 bonds are secured by the Issuer’s 50.0% interest in Bankers Hall (the Property) and have a current outstanding balance of $266.6 million, which will mature on November 20, 2023. Recourse to the Issuer is limited to the Property only. The Property is a 2.2 million-square-foot (sf) office complex in Calgary’s central business district and was built between 1989 and 2000. The complex is a certified green building with Leadership in Energy and Environmental Design Gold certification. The overall property occupancy and net operating income (NOI) have improved over the past couple of years. As per the December 31, 2019, rent roll, the property had an overall physical vacancy of 5.4%, which includes 5.2% for the office component and 7.8% for the retail component. The average in-place office rent was $27.26 per sf (psf). However, as per CBRE Limited’s “Calgary Downtown Office Marketview Q1 2020,” the market vacancy and market rent for Class AA office in Calgary’s central core submarket were 14.8% and $21.94 psf, respectively.

The DBRS Morningstar net cash flow (NCF) was based on the December 31, 2019, rent roll and YE2019 operating statement adjusted to reflect current market vacancy and market rent for non-long-term credit tenants, and further adjusted for DBRS Morningstar normalized management fees, capital expenditure (capex), and leasing costs. The resulting NCF figure was $45.4 million and a cap rate of 7.25% was applied, resulting in a DBRS Morningstar Value of $616.9 million for the 100.0% ownership interest or $313.4 million for the 50.0% ownership interest, a variance of -41.5% from the Issuer’s 2019 reported fair market value of $535.8 million for the 50.0% ownership interest, or -51.8% from the 2013 appraised value of $650.0 million for the 50.0% ownership interest. The DBRS Morningstar Value implies an LTV of 85.1%, as compared with the LTV on the 2019 reported fair market value of 49.8%. The NCF figure applied as part of the analysis represents a -29.6% variance from the Issuer’s YE2019 reported NOI, primarily driven by lower rental income as DBRS Morningstar determined an office market rent between $19.50 psf and $24.50 psf (as compared with in-place rents which are in excess of $27.00 psf), higher vacancy, normalized capex, and leasing costs.

The cap rate applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the age and quality of the property and market fundamentals. In addition, the 7.25% cap rate applied is above the implied cap rate of 6.0% based on the Issuer’s 2019 reported NOI and estimated fair market value.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling -0.5% to account for property quality and market fundamentals. However, DBRS Morningstar made 4.5% positive adjustments to account for amortization credit. The DBRS Morningstar rating is three notches higher than the final LTV sizing benchmarks after all adjustments because the debt exposure of $246.00 psf is likely well below replacement costs, strong sponsorship support for the assets, and capable property management from Brookfield Canada Office Properties.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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].

The rated entity or its related entities did 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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