DBRS Morningstar Confirms Rating of Mortgage Loan Made to Morguard Realty Holdings Inc. & Bay Bloor Equities Inc. (77 Bloor Street West), Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) confirmed the rating on the following mortgage loan (the Loan) made to Morguard Realty Holdings Inc. & Bay Bloor Equities Inc. (77 Bloor Street West) (the Borrower) by a major Canadian financial institution:

-- 4.964% Mortgage Loan due September 1, 2020 at A (high)

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 Loan is secured by a freehold interest in a 21-storey Class B office building with street-level retail located at 77 Bloor Street West in Toronto (the Property). The Loan has a current outstanding balance of approximately $18.7 million and will mature on September 1, 2020, with a balloon balance of approximately $18.4 million. Built in 1969 and renovated in 1996, the Property is a 21-storey Leadership in Energy and Environmental Design Gold-certified office building with street-level retail located at the southwest corner of Bay Street and Bloor Street West in the Bloor/Yonge submarket within Toronto’s Midtown office market. This neighbourhood is one of the premier shopping districts in Canada. As at February 28, 2019, the Property was 98.7% leased and had been maintained above a 97.0%-leased rate since 2013 with the exception of 2017. The reported annual net operating income (NOI) has been increasing since 2015. Additionally, the Property continues to benefit from experienced property management from Morguard Corporation (rated BBB (low) with a Stable trend by DBRS Morningstar) as well as a stable office market in Toronto.

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” incorporating updated data from February 2019 rent roll and YE2018 operating statements adjusted for DBRS Morningstar normalized vacancy, management fees, capital expenditures (capex), and leasing costs. The resulting NCF figure was $10.2 million and a cap rate of 7.00% was applied, resulting in a DBRS Morningstar Value of $146.2 million, a positive variance of 49.5% from the 2010 appraised value of $97.8 million. The DBRS Morningstar Value implies an LTV of 12.8%, as compared with the LTV on the 2010 appraised value of 19.1%. The NCF figure applied as part of the analysis represents a -5.4% variance from the Borrower’s YE2018 reported NOI, primarily driven by normalized capex and leasing costs.

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 7.00% cap rate applied is substantially below the implied cap rate of 11.06% based on the Borrower’s YE2018 reported NOI and the 2010 appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 6.50% to account for cash flow volatility and market fundamentals. The DBRS Morningstar rating is six notches lower than the final LTV sizing benchmarks after all adjustments because of the lack of liquidity in the form of servicer advancing in a commercial mortgage transaction.

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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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