DBRS Morningstar Confirms Rating on First Mortgage Bonds Issued by SEC LP and ARCI Ltd. (Suncor Energy Centre)

DBRS Limited (DBRS Morningstar) confirmed the following rating on the first mortgage bonds (the Bonds) issued by SEC LP and ARCI Ltd. (Suncor Energy Centre) (collectively, the Issuer):

-- 5.188% Series 1 Senior Secured Bonds due August 29, 2033, at A (low) (sf)

The trend on the rating is Stable.

The rating confirmation reflects the overall performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last review. The Bonds are secured by the Issuer’s ownership interest in Suncor Energy Centre (the Property) and have a current outstanding balance of $417.3 million, with a maturity date of August 29, 2033. Recourse to the Issuer is limited to the Property only. The Property is a 1.7 million square foot (sf) office complex in Calgary’s central business district. Built in 1984, the complex is a certified green building with LEED Gold certification.

DBRS Morningstar notes that the rating on the Bonds is supported by the credit quality of Suncor Energy Inc. (Suncor; rated A (low) with a Stable trend by DBRS Morningstar) during its lease term that will expire on November 30, 2028. DBRS Morningstar notes that any change to the rating of Suncor during its lease term will likely have an effect on the rating of the Bonds. Suncor is the largest tenant at the Property, occupying 80.5% of total net rentable area (NRA) and generating more than 80.0% of in-place rents. The rental revenue from Suncor remains sufficient to cover debt service after operating expenses, capital expenditures, and leasing costs.

As of year-end (YE) 2022, the property reported a net operating income of $60.6 million, reflecting a 4.8% increase compared to the previous year’s figure of $57.8 million, primarily driven by increases in base rents, reimbursements, and parking income. In May 2020, Cenovus Energy Inc. (Cenovus; rated BBB (high) with a Stable trend by DBRS Morningstar), which accounted for approximately 8.2% of the NRA, departed upon its lease expiration. The overall property occupancy was 86.3 % as of December 2022, in line with the YE2021 figure of 88.6%, but a significant decline from 98.0% prior to the departure of Cenovus. As of YE2022, the property reported an average rental rate of $32.88 per square foot (psf), in line with the YE2021 average rental rate of $32.54 psf.

The property continues to outperform other Class AA office properties in the Downtown Calgary Office submarket, which reported a 16.6% vacancy rate as of Q1 2023, a 1.4% increase from Q1 2022, according to Avison Young’s Q1 2023 Calgary Office Market Report. According to the YE2022 rent roll, rollover is minimal in the next 12 months, with only six retail leases, representing 0.3% of the NRA, scheduled to expire.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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 methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153

Legal Criteria for Canadian Structured Finance (June 22, 2022)
https://www.dbrsmorningstar.com/research/398729

North American Structured Finance Flow-Through Ratings (November 22, 2022)
https://www.dbrsmorningstar.com/research/405619

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