DBRS Confirms Galeries D’Anjou Shopping Centre at BBB (high) with a Stable Trend

DBRS has today confirmed the BBB (high) rating of Galeries D’Anjou’s (D’Anjou or the Shopping Centre) First Mortgage Bonds. The credit profile remains stable with modestly improving operating fundamentals and stable credit metrics. The current rating is based on the performance of the Shopping Centre and reflects the following:

(1) Commercial retail unit (CRU) sales continued to trend upwards, increasing to $459 per square foot (+4%) in 2006. This improvement was partly due to good consumer spending levels and the recent re-development and leasing activities taken over the past few years to improve the Shopping Centre’s tenant profile (including the addition of The Brick, Old Navy and more recently H&M). However, DBRS notes that D’Anjou’s CRU sales performance is at a level below comparable shopping centres ($500 to $600 per square foot) rated by DBRS. Going forward, CRU sales are expected to continue to modestly improve and should benefit from the Shopping Centre’s enhanced tenant profile.

(2) Net operating income (NOI) growth has remained relatively slow over the past two years due to stable rental rates and low vacancy rates of 4.1% as at October 31, 2006. Although lower than prior years (due to a higher interest associated with the retraction option in 2004), the interest coverage ratio of 2.39 times is still in line with the current rating and comparable with similarly rated shopping centres.

(3) Bondholders have full recourse back to (a) The Cadillac Fairview Corporation Ltd. for 50%; and (b) Ivanhoe Cambridge I Inc. and Ivanhoe Cambridge II Inc. for 50% (collectively, the Co-Owners) on a several basis, in proportion to their respective interests. DBRS views the Co-Owners as solid investment-grade credits.

(4) The Shopping Centre’s loan-to-value is conservative, with $102 million debt outstanding as at October 31, 2006.

The rating is also limited by the following constraints:

(1) D’Anjou’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 properties. Overall, DBRS views this risk as manageable considering the Shopping Centre’s noted credit strengths and has reflected this in the current rating category.

(2) D’Anjou has a significant amount of lease maturities over the 2008 and 2009 period, rolling an average of 19.5% CRU space per year. This could present a re-leasing risk should market conditions become difficult. Overall, DBRS expects D’Anjou’s interest coverage ratio and NOI levels to remain in line with 2006 levels given an already low vacancy rate and a limited ability to meaningfully increase rental rates on 2007 lease rollovers. DBRS expects the credit profile to remain stable, supported by D’Anjou’s stable operating metrics and the expectation of favourable economic conditions in Montréal during 2007.

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