DBRS Morningstar Confirms Rating on First-Mortgage Bonds Issued by Bankers Hall LP, Changes Trend to Stable from Negative

DBRS Limited (DBRS Morningstar) confirmed the rating on the following first-mortgage bonds (the Bonds) issued by Bankers Hall LP (the Issuer):

-- 4.377% Senior Secured Bonds at BBB (low) (sf)

DBRS Morningstar also changed the trend to Stable from Negative.

The rating confirmation reflects the overall stable performance of the transaction since DBRS Morningstar’s last rating action. The revision to a Stable trend follows a period of consistently strong performance for the underlying property, despite previous concerns the weakening submarket could place negative pressure on occupancy and cash flow.

DBRS Morningstar downgraded the Bonds to BBB (low) (sf) from A (low) (sf) with a Negative trend in July 2020 to reflect concerns associated with challenging office market fundamentals in Calgary, which were further compounded by the Coronavirus Disease (COVID-19) pandemic. Although the Calgary office market remains stressed, the property continues to perform well year over year, a trend that has persisted through several years of significantly increased vacancy rates within the submarket given the subject’s favourable location, superior property quality and experienced loan sponsor and property manager. In addition, Avison Young has reported that the year-end 2021 numbers showed a decline in the overall vacancy rate for the first time since the pandemic’s onset in North America in 2020. Given these factors, DBRS Morningstar expects the property’s performance will continue to outpace the submarket, further supporting the change to a Stable trend for this rating.

The Bonds are secured by the Issuer’s 50% interest in Bankers Hall, a Class AA office complex in Calgary’s downtown Central Core submarket. The complex consists of approximately 2.2 million square feet (sf) of net rentable area (NRA) and comprises twin 52-storey office towers, sitting above a seven-storey office/retail podium and an adjacent 26-storey building occupied by Royal Bank of Canada. The Bonds mature in November 2023, and recourse to the Issuer is limited to the property only. The sponsor is Brookfield Canada Office Properties (BCOP), which retains a 50% ownership stake in the asset. As of November 2021, the Bonds have a current outstanding balance of $253.4 million (representing $116.90 per square foot based on 50.0% ownership interest).

The largest tenants at the property are Canadian Natural Resources Limited (CNRL; 26.6% of total NRA), Repsol Oil & Gas Canada Inc. (Repsol; 20.6% of total NRA), and Bennett Jones LLP (Bennett Jones; 8.0% of total NRA). CNRL and Bennett Jones renewed their leases to September 2026 and May 2027, respectively, and Repsol has a lease expiration date in 2025. As such, the three largest tenants representing more than 55.0% of NRA have leases extending beyond the November 2023 loan maturity. There is moderate tenant rollover within the next 12 months, with leases representing 9.3% of total NRA set to roll. Although there is concentration risk related to tenants in the oil and gas sector, which has experienced varying degrees of volatility since 2015, the presence of long-term investment-grade tenants, including CNRL (rated BBB (high) with a Stable trend DBRS Morningstar), Royal Bank of Canada (rated AA (high) with a Stable trend by DBRS Morningstar), and Canadian Imperial Bank of Commerce (rated AA with a Stable trend by DBRS Morningstar), reduces the overall risk profile of the loan. These tenants constitute approximately 40% of total NRA.

According to the December 2021 rent roll, the property was 94.7% occupied, in line with the YE2020 and YE2019 occupancy rates of 95.4% and 94.9%, respectively. The office component, composed of approximately 2.0 million sf of NRA, was 97.0% occupied, while the retail component, composed of approximately 213,000 sf of NRA, was 74.08% occupied. Despite stable occupancy, the YE2021 net operating income (NOI) of $57.9 million reflected an 8.0% decline from the YE2020 NOI of $63.1 million, but generally remains in line with the DBRS Morningstar figure at issuance. The decline in NOI was primarily driven by a decrease in total rental income and an increase in operating expenses. The property has historically outperformed its competitive set as evidenced by the in-place office vacancy rate of 3.0%, which is significantly lower than the average submarket vacancy of 18.6% for comparable Class AA office properties in Calgary’s Central Core submarket, as reported by CBRE Group, Inc. (CBRE) in its Q1 2022 market report.

Although vacancy rates for Class AA office space in Calgary remains high at 18.6%, 52.5% of available space is currently offered on a sublease basis and Q1 2022 marked the first quarter of positive absorption since the start of the pandemic. Moreover, should energy prices remain elevated throughout 2022, tenants in the oil and gas sector will likely maintain or expand their physical office footprint. The property continues to benefit from strong sponsorship and capable property management from BCOP, which continues to remain committed to the asset.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loan including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577