DBRS Confirms Exchange Tower Ltd. at A (low), with a Stable Trend

DBRS has today confirmed the rating of the 6.83% Series A First Mortgage Bonds, due 2012, of Exchange Tower Ltd. (Exchange Tower or the Project) at A (low) with a Stable trend.

Exchange Tower’s credit profile has strengthened as fundamentals have been bolstered by improving office markets in downtown Toronto. Exchange Tower’s vacancy rate has declined to 4.9% from 8.1% last year, while net operating income (NOI) has grown by 9.3%, bolstered by the contribution from higher net rental rates on leasing activity over the past two years. Lease renewals in late 2005 with National Bank Financial and Altamira Investments (together comprise 13.2% of leasable space) helped contribute to a 1.6% increase in average in-place net-rental rates through 2006. Interest coverage improved to 2.5 times from 2.2 times, which remains reasonable for the rating.

Exchange Tower’s vacancy rate is now below the overall vacancy level in Toronto’s downtown core office market, illustrating the strength of the property. Toronto’s office market has continued to show a steady improvement with core vacancy rates declining by 270 basis points to 6.6% in Q1 2007 from 9.3% last year, while the financial-core Class A vacancy rate improved to 5.9% to end Q1 2007 from 8.5% the year before. Improved conditions have begun to result in higher net-asking rental rates, which increased between 5% to 7% year over year, while tenant inducements have moderated.

Looking forward, DBRS expects NOI and debt-service coverage levels to continue to strengthen in 2007, based on higher net rents from recent lease renewals as well as modest built-in rent steps on existing leases, while increases in operating costs have been manageable at 2% in 2006. Exchange Tower’s relatively long-term lease profile is expected to support a stable performance, given modest lease maturities averaging only 5.7% for the next five years, below average for office space. Releasing risk in 2007 is low with only 3.2% of space expiring, but the rate increases to 10.5% in 2008 when several smaller tenants come up for renewal.

DBRS expects generally solid office-market conditions to result in stable vacancy rates, given the location and prominence of Exchange Tower. Over the longer term, three new Class A projects in Toronto’s downtown core will add three million square feet between 2009 and 2011. This could have a dampening effect on the recovery in net rental rates in downtown Toronto, depending on pre-leasing success as well as market conditions over the next couple of years. Exchange Tower’s location should allow it to continue to attract quality tenants and maintain solid occupancy levels.

Exchange Tower continues to reinvest to improve the overall attractiveness of the property, with annual capital spending to average $2.0 million in 2007 and 2008.

Note:
All figures are in Canadian dollars unless otherwise noted.