DBRS Upgrades Twelve-Fifty, company limited to A (low) with a Stable Trend

Dominion Bond Rating Service (“DBRS”) has today upgraded the rating of Twelve-fifty, company limited (“1250” or the “Partnership”) as indicated above.

Despite the potential for deterioration in the financial performance of 1250 in 2006 and 2007, the rating upgrade is supported by the recourse to OMERS Realty Corporation (“ORC”) in place of Oxford Properties Group Inc. (“OPGI”) after the sale of OPGI’s 50% interest to ORC. The recourse to ORC is on a joint and several basis as a general partner in 1250, along with the other general partner, 1250 Rene Inc., which is owned by Canadian Realty Holdings Pte Ltd. (previously GSIC Realty Corporation), a wholly owned subsidiary of the government of Singapore. The recourse to the general partners exists to the extent that there is a shortfall upon realization of the other security.

ORC owns a substantial portfolio of office and retail properties, diversified primarily across Canada, and has a strong financial profile that supports the current upgrade of 1250’s rating. ORC is owned by Ontario Municipal Employees Retirement System (“OMERS”) (currently rated AAA by DBRS), one of the largest pension funds in Canada (note that the debentures do not have recourse to OMERS).

The rating is also supported by the following:

(1) A guarantee by OPGI for 50% of the amount outstanding on a several basis.

(2) Letters of guarantee having a value of 50% of the outstanding amount of debentures (approximately Cdn$57.9 million of the Cdn$115.7 million outstanding) from United Overseas Bank Limited for 41.7% and Canadian Imperial Bank of Commerce for 8.3%.

(3) A first call on the asset, 1250 René-Lévesque Boulevard West (the “Property”), a prominent office tower in downtown Montréal.

The Property:
Although the Property achieved stable performance in 2005, with year-end vacancy of 2.6% and interest coverage of 1.85 times, several factors could lead to deterioration in performance in 2006 and 2007:

(1) Lease maturities are substantial in 2006 and 2007, including the 302,588 square feet, or 28.9%, leased by IBM Canada Limited (“IBM”), which expired in April 2006. To date, approximately 205,000 square feet of the IBM space has been re-leased, resulting in a current vacancy of 11%. In 2007, another 308,000 square feet, or almost 30% of space, is coming up for renewal, of which 165,000 square feet, or almost 16% of space, has been renewed to date. Depending on further re-leasing efforts through 2006, there is the potential for vacancy rates to rise closer to 20% during 2007. This could potentially result in interest coverage declining to approximately 1.2 times.

(2) IBM’s embedded net rental rate is materially above market rates, which will result in a decline in net operating income (NOI) and depress coverage ratios, even if all of the space is leased to new tenants.

(3) The Montréal downtown office market remains weak because of competing space from developments in recent years and sublease space on the market. While vacancy rates levelled off in Montréal’s downtown core (ending 2005 at less than 14%), the substantial lease expiries are expected to result in a decline in NOI.

While the challenges are significant, the Property is one of the more prestigious office towers in downtown Montréal.