DBRS Morningstar Confirms Rating on First-Mortgage Bonds Issued by Bankers Hall LP

DBRS Limited (DBRS Morningstar) confirmed the rating on the following first-mortgage bonds (the Bonds) issued by Bankers Hall LP (the Issuer):

-- 4.377% Senior Secured Bonds at BBB (low) (sf)

The trend is Stable.

The rating confirmation and Stable trend reflect the overall performance of the transaction, which remains in line with DBRS Morningstar’s expectations.

DBRS Morningstar changed the trend to Stable from Negative in May 2022, echoing the underlying loan’s strong performance. Previously, there had been concerns about the challenging office market fundamentals in Calgary, which were further compounded by the Coronavirus Disease (COVID-19) pandemic. Consequently in July 2020, DBRS Morningstar downgraded the Bonds to BBB (low) (sf) with a Negative trend from A (low) (sf). Although the Calgary office market remains stressed, the property has continued to perform well year over year, a trend that has persisted through several years of significantly increased vacancy rates within the submarket given the subject’s favourable location, superior property quality, and experienced loan sponsor and property manager. In addition, as of Q4 2022, Avison Young reported that the highest-class and best-located office buildings are performing at pre-pandemic levels. Given these factors, DBRS Morningstar expects the property’s performance will continue to outpace the submarket, further supporting the rating confirmation.

The Bonds are secured by the Issuer’s 50% interest in Bankers Hall, a Class AA office complex in Calgary’s downtown Central Core submarket. The complex consists of approximately 2.2 million square feet (sf) of net rentable area (NRA) and comprises twin 52-storey office towers sitting above a seven-storey office/retail podium and an adjacent 26-storey building occupied by Royal Bank of Canada. The Bonds mature in November 2023, and there is no recourse to the borrower. The sponsor is Brookfield Canada Office Properties (BCOP), which retains a 50% ownership stake in the asset. As of November 2022, the Bonds have a current outstanding balance of $246.4 million (representing $113.95 per square foot (psf) based on 50.0% ownership interest).

The three largest tenants, representing more than 55.0% of NRA, have leases extending beyond the November 2023 loan maturity. These tenants are Canadian Natural Resources Limited (CNRL; 26.6% of total NRA; expiring September 2026), Repsol Oil & Gas Canada Inc. (Repsol; 20.6% of total NRA; expiring February 2025), and Bennett Jones LLP (Bennett Jones; 8.0% of total NRA; expiring May 2027). There is moderate tenant rollover within the next 12 months, with leases representing 9.1% of total NRA scheduled to roll. The majority of rolling tenants have lease extension options. Although there is a concentration risk related to tenants in the oil and gas sector, which has experienced varying degrees of volatility since 2015, the presence of long-term investment-grade tenants, including CNRL (rated A (low) with a Stable trend DBRS Morningstar), Royal Bank of Canada (rated AA (high) with a Stable trend by DBRS Morningstar), and Canadian Imperial Bank of Commerce (rated AA with a Stable trend by DBRS Morningstar) reduces the overall risk profile of the loan. These tenants constitute approximately 40% of total NRA.

According to the September 2022 rent roll, the property was 90.0% occupied, a decline from the YE2021 and YE2020 occupancy rates of 94.7% and 95.4%, respectively. The office component, which constitutes approximately 2.0 million sf of NRA, was 91.7% occupied, while the retail portion, comprising approximately 213,000 sf of NRA, was 74.3% occupied. These compare with the YE2021 office and retail component occupancy rates of 97% and 74.1%, respectively. As of the YE2022 financials, net operating income was $58.9 million, up from $57.9 million at YE2021. The property’s average in-place rental rate of $27.93 psf is significantly higher than the CBRE-reported Calgary Central Core submarket Class AA Q4 2022 effective average rental rate of $22.95. The submarket’s Class AA vacancy rate of 17.6% is significantly lower than the 39.8% for Class A properties. The wide difference in vacancy rates is mainly attributable to the flight-to-quality paradigm, with tenants seeking modernized and amenity-rich spaces.

Although vacancy rates for Class AA office space in Calgary remain elevated, 50.2% of available space is currently offered on a sublease basis and 2022 marked the first year of positive net absorption since the start of the pandemic. As a result of elevated commodity prices, oil and gas companies have increased headcount, subsequently demanding additional office space, consequently leading to reclaiming previously subleased office space, and the signing of new leases. The subject property continues to benefit from its high quality, location, and an experienced property management team in BCOP.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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 the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

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

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023;
https://www.dbrsmorningstar.com/research/410191)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for Canadian Structured Finance (June 22, 2022;
https://www.dbrsmorningstar.com/research/398729)

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