DBRS Morningstar Confirms Rating on First Mortgage Bonds Issued by Fifth Avenue LP & ARI 5AP Investments LP, Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) confirmed the rating on the following first mortgage bonds (the Bonds) issued by Fifth Avenue LP & ARI 5AP Investments LP:

-- First Mortgage Bonds at A (low) (sf)

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 Bonds are secured by the Issuer’s ownership interest in Fifth Avenue Place (the Property) and have a current outstanding balance of $272.8 million, which will mature on August 5, 2021. Recourse to the Issuer is limited to the Property only. The Property is an office complex comprising approximately 1.5 million square feet (sf) of rentable area in Calgary’s central business district. Built in 1981 and substantially renovated since 1996, the property achieved Leadership in Energy and Environmental Design Gold status in 2012. The overall property occupancy and net operating income (NOI) have improved since 2016. As per the December 31, 2019, rent roll, the office component of the property was only 82.9% leased and the average in-place office rent was $30.50 per sf (psf). However, as per CBRE Limited’s Calgary Downtown Office Marketview Q1 2020, the market vacancy and market rent for Class AA office in Calgary’s central core submarket were 14.8% and $21.94 psf, respectively.

The DBRS Morningstar net cash flow (NCF) was based on the December 31, 2019, rent roll and YE2019 operating statement adjusted to reflect current market vacancy and market rent for non-long-term credit tenants, and further adjusted for DBRS Morningstar normalized management fees, capital expenditures (capex), and leasing costs. The resulting NCF figure was $40.9 million and a cap rate of 7.25% was applied, resulting in a DBRS Morningstar Value of $564.4 million, a variance of -6.9% from the Issuer estimated 2019 fair market value of $606.3 million or -7.6% from the 2011 appraised value of $611.0 million. The DBRS Morningstar Value implies an LTV of 48.3%, as compared with the LTV on the Issuer’s estimated 2019 fair market value of 45.0%. The NCF figure applied as part of the analysis represents a -19.8% variance from the Issuer’s reported YE2019 NOI, primarily driven by lower rental income as DBRS Morningstar is concluding to office market rent between $22.00 psf and $24.50 psf (as compared with in-place rents, which are in excess of $30 psf), higher vacancy, normalized capex, and leasing costs.

The cap rate applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the age and quality of the property and market fundamentals. In addition, the 7.25% cap rate applied is lower than the implied cap rate of 7.5% based on the Issuer’s 2019 reported NOI and estimated fair market value.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling -1.00% to account for property quality and market fundamentals. However, DBRS Morningstar made other positive adjustments of 4.00% to account for amortization credit. The DBRS Morningstar rating is five 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 first mortgage bond transaction and the extremely weak market conditions in Calgary.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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