DBRS Morningstar Confirms Rating of Mortgage Loan Made to Morguard Corporation & 131 Queen Street Limited, Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) confirmed the rating on the following mortgage loan (the 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 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 the Borrower’s leasehold interest in a mixed-use building located at 131 Queen Street, Ottawa (the Property). The Loan has a current outstanding balance of approximately $55.8 million and will mature on November 1, 2026, with a balloon balance of approximately $28.4 million. The Property, which was built in 2006, is a 13-storey mixed-used building comprising 312,484 square feet (sf) of office space; 16,776 sf of retail space; and 35 furnished residential apartments. Well located at 131 Queen Street in downtown Ottawa, the Property benefits from its close proximity to Parliament Hill, the Court House, and public transit (OC Transpo). 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 the stable real estate fundamentals in Ottawa.

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 2018 rent roll and YE2017 operating statements adjusted for DBRS Morningstar normalized vacancy, management fees, capital expenditures (capex), and leasing costs. The resulting NCF figure was $5.9 million and a cap rate of 6.93% was applied—which is blended of 7.00% for the office component and 6.00% for the residential component—resulting in a DBRS Morningstar Value of $85.7 million, a variance of -37.0% from the 2010 appraised value of $136.0 million. The DBRS Morningstar Value implies an LTV of 65.1%, as compared with the LTV on the 2010 appraised value of 41.0%. The NCF figure applied as part of the analysis represents a -20.3% variance from the Borrower’s YE2017 reported net operating income (NOI), primarily driven by normalized management fees, nonrecoverable expenses, capex, and leasing costs.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office and multifamily properties, reflective of the Property’s age and quality and market fundamentals. In addition, the 6.93% cap rate applied is above the implied cap rate of 5.48% based on the Borrower’s YE2017 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 8.50% to account for cash flow volatility, property quality, and market fundamentals. In addition, DBRS Morningstar applied additional amortization credit taking into consideration of the credit quality of the primary tenant, the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar), which occupies 85.3% of total net rentable area and generates 86.4% of in-place rents with lease expiration nearly matching the loan maturity. DBRS Morningstar notes that any change to the rating of Government of Canada during its lease terms will likely have an effect on the ratings of the Loan.

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.

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