DBRS Morningstar Confirms Rating on First Mortgage Bonds Issued by SEC LP and ARCI Ltd. (Suncor Energy Centre)

DBRS Limited (DBRS Morningstar) confirmed the following rating on the first mortgage bonds (the Bonds) issued by SEC LP and ARCI Ltd. (Suncor Energy Centre) (collectively, the Issuer):

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

The trend on the rating is Stable.

The rating confirmation reflects the overall stable performance of the transaction since DBRS Morningstar’s 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 $423.5 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 LEED 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. 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. Suncor is the largest tenant at the Property, occupying 80.5% of total net rentable area (NRA) and generating more than 81.0% of in-place rents. The rental revenue from Suncor remains sufficient to cover debt service after operating expenses, capital expenditures, and leasing costs.

The overall property occupancy and net operating income (NOI) have continued to decline since 2016, following several years of difficult market conditions for local office properties from both a tenant- and investor-demand perspective as a result of the sustained strain on the oil market and, more recently, the general stress on the Canadian economy amid the Coronavirus Disease (COVID-19) pandemic. As of YE2021, the property reported an NOI of $57.8 million, reflecting a 9.0% decline compared with the previous year’s figure of $63.5 million, primarily driven by decreases in base rents, reimbursements, and parking income. In May 2020, Cenovus Energy Inc. (rated BBB with a Stable trend by DBRS Morningstar), which accounted for approximately 8.2% of the NRA, departed upon its lease expiration. The overall property occupancy was 88.6% as of March 2022, in line with the YE2020 figure of 88.7%, but a significant decline from 98.0% at the beginning of 2020. Office rents as of the March 2022 rent roll averaged $32.54 per sf (psf).

Despite the decline in performance and occupancy, the property continues to outperform other Class AA office properties in the downtown Calgary office submarket, which according to Avison Young reported a 14.9% vacancy rate as of Q1 2022, a 2.5% decline from Q4 2022. Avison Young’s Q1 2022 Calgary Office Market Report notes that nearly 200,000 sf of space was absorbed during the quarter. During the same period, rental rates ranged from $24.00 psf to $30.00 psf, averaging out at $27.00 psf. The subject’s March 2022 rent roll shows minimal scheduled rollover in the next 12 months, with only five retail leases, representing 0.3% of the NRA, scheduled to expire. In addition to the Property’s general desirability given its Class AA status and prime location within Calgary, DBRS Morningstar also notes that the transaction continues to benefit from strong sponsorship and capable property management from Brookfield Canada Office Properties.

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 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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