Morningstar DBRS Confirms Credit Rating on Mortgage Loan Made to Morguard Corporation & 131 Queen Street Limited

DBRS Inc. (Morningstar DBRS) confirmed the credit rating on the following mortgage loan made to Morguard Corporation & 131 Queen Street Limited (the Borrower) by a major Canadian financial institution:

-- 5.31% Mortgage Loan Due November 1, 2026, at AAA

The trend is Stable.

The credit rating confirmation reflects the overall stable performance of the underlying collateral, which is performing in line with Morningstar DBRS' expectations. The transaction exposes investors to refinance risk given the quasi-credit tenant lease nature of the transaction, therefore, Morningstar DBRS' credit rating considers a dark-value analysis, which supports the credit rating confirmation.

The loan is secured by the Borrower's leasehold interest in a mixed-use building at 131 Queen Sreet in Ottawa. The 13-storey property was built in 2006 and comprises 312,486 square feet (sf) of office space, 16,776 sf of retail space, and 36 furnished residential apartments. The property is strategically located in downtown Ottawa, benefitting from its proximity to Parliament Hill, the Courthouse, and public transit. The primary tenant at the subject property is the Government of Canada (rated AAA with Stable trend by Morningstar DBRS), which fully occupies the office component of the property. The tenant is on a triple net lease through August 2026, two months prior to the loan maturity date.

Given that the lease guaranty from an investment-grade tenant will remain even if the tenant subleases all or a portion of the space, the primary credit risk associated with the transaction is refinance risk as the tenant may elect to leave its space upon lease expiration, leaving the property vacant with an outstanding loan balance. As a result, Morningstar DBRS conducted a dark-value analysis, assuming the credit tenant does not renew its lease and found that the dark value sufficiently covered the unamortized loan amount.

In its analysis, Morningstar DBRS assumed the property to be fully vacant upon the maturity of the loan, with a six-month lease-up period to market occupancy. Given that the property includes office, retail, and residential components, Morningstar DBRS used a blended approach to determine market vacancy. Since the last credit rating action, market vacancies have remained mostly stable, therefore, Morningstar DBRS maintained the same assumptions and concluded a dark value of $59.3 million. This implies a balloon loan-to-value ratio of 47.9% based on the certificate maturity amount of $28.4 million. Morningstar DBRS also maintained a qualitative adjustment of 6.5% that was applied for the subject's above-average property quality and strong market fundamentals.

Morningstar DBRS' credit rating addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

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

The principal methodology is North American CMBS Surveillance Methodology (December 13, 2024) https://dbrs.morningstar.com/research/444617.

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

The credit rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (December 13, 2024)
https://dbrs.morningstar.com/research/444612

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024)
https://dbrs.morningstar.com/research/439702

-- Legal and Derivatives Criteria for Canadian Structured Finance (August 12, 2024)
https://dbrs.morningstar.com/research/437761

-- Global Methodology for Rating Credit Tenant Leases (November 19, 2024)
https://dbrs.morningstar.com/research/443200

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024)
https://dbrs.morningstar.com/research/438283

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.