DBRS Morningstar Changes Trend to Stable, Confirms Rating of FMB Issued by SEC LP and ARCI Ltd. (Suncor Energy Centre)

DBRS Morningstar changed the trend to Stable from Negative and confirmed the rating on the following first mortgage bonds (the Bonds) issued by SEC LP and ARCI Ltd. (collectively, the Issuer):

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

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 $450.9 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 Leadership in Energy and Environmental Design 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. Suncor is the largest tenant at the Property, occupying 80.5% of total net rentable area and generating more than 87.0% of in-place rents. The rental revenue from Suncor is sufficient to cover debt service after operating expenses, capital expenditures, and leasing costs. 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.

The overall property occupancy and net operating income (NOI) have declined since 2016. The average office occupancy rate at the Property declined to 87.6% in 2020 from 91.7% in the prior year. During the same period, the NOI declined 9.8%, primarily because of decreases in base rents and parking income. As per the March 31, 2021, rent roll, the office component of the Property was 11.3% vacant, slightly outperforming the average submarket vacancy of 16.5% for Class AA office properties in the Calgary Central Core submarket, as reported by CBRE in its “MarketView Calgary Downtown Office, Q1 2021.” However, the average in-place office rent of $32.73 per sf (psf) is higher than the average submarket rent of $22.69 psf for Class AA office properties, as reported by CBRE. According to the Issuer, as at April 8, 2021, rent collection from all office tenants was current while all retail tenants were on rent relief but remained in occupancy and were open or planning to reopen, with the exception of the two closed Starbucks stores where the landlord was negotiating a lease buyout. Despite the lower property NOI, which could be relatively temporary, and continued challenging office market conditions in Calgary, DBRS Morningstar notes that the Property continues to benefit from strong sponsorship and capable property management from Brookfield Canada Office Properties.

ESG CONSIDERATIONS
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/373262.

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 26, 2021), 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.

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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