DBRS Confirms Erin Mills Town Centre at BBB (high) with a Stable Trend

DBRS has today confirmed the BBB (high) rating of the First Mortgage Bonds (the Bonds) of Erin Mills Town Centre (the Mall) and Erin Mills Town Plaza (the Plaza, collectively the Project). The credit profile remains stable with support from stabilizing credit metrics and a slight improvement in operating fundamentals.

Despite the modest improvement in 2006, the rating confirmation takes into consideration the following concerns.

(1) The Mall’s anchor tenants (The Bay, Sears and Zellers) continue to face significant competition from “discount” type retailers and changing trends in retail formats, including new “power centre” layouts. DBRS believes that this could potentially result in at least one of the noted tenants undertaking strategic changes, including possible store closures. DBRS notes, however, that any potential disruption would likely be short term in nature given the overall quality and location of the shopping centre. Overall, DBRS views this risk as manageable, but notes that the recourse of the Bonds is to the Project only and thus there is greater concern about the above-noted exposure compared with other shopping centres that have additional forms of recourse.

(2) The Mall has significant exposure to re-leasing risk in the 2008 to 2009 period, when approximately 46% of commercial retail unit (CRU) space expires if leasing conditions deteriorate over this time. In addition, the Loblaws lease (45,494 square feet) is set to expire in 2008 at the Plaza. However, DBRS does not anticipate any difficulty in renewing this lease.

The rating also reflects the following strengths:

(1) For F2006, net operating income (NOI) and coverage metrics improved compared with the previous year, mainly due to higher average CRU rental rates at the Mall. These key rating metrics remain at levels that compare favourably with other shopping centres.

(2) The Mall continues to achieve consistent growth in sales performance with CRU sales per square foot of $509 as of F2006. This level remains in line with other similarly rated shopping centres. DBRS believes that, going forward, CRU sales will continue to benefit from the addition of new tenants in the fashion accessories category, which have been introduced to the Mall over the past few years.

(3) The Project’s loan-to-value is conservative with $92.4 million debt outstanding as at October 31, 2006.

(4) The Cadillac Fairview Corporation Ltd. (Cadillac Fairview) and The Erin Mills Development Corporation (collectively the Co-Owners) each owns 50% of the shopping centre. Notwithstanding the Project’s strong sponsorship in Cadillac Fairview and its parent, the Ontario Teachers’ Pension Plan, the rating recognizes the fact that bondholders’ recourse is to the Project only. DBRS expects NOI levels to improve just slightly above current levels in the near term, as only modest gains can be achieved with the amount of space maturing in 2007. Overall, DBRS expects the Project’s credit profile to remain stable throughout 2007 with support from good operating metrics, nearby residential development and a favourable regional economic outlook.

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