DBRS Confirms Markville and Chinook Shopping Centres at A (high) with a Stable Trend

DBRS has today confirmed the A (high) rating of the Series D Secured Debentures of Markville Shopping Centre (Markville) and Chinook Shopping Centre (Chinook, collectively the Properties). The Properties maintain a solid credit profile, which reflects the following factors:

(1) For F2006, net operating income increased by approximately 6.2%, driven by strong retail leasing conditions and high average commercial retail unit (CRU) rental rates at Chinook.

(2) CRU sales at the Properties continued to increase in 2006, with Chinook achieving very strong results of $830 per square foot (a year-over-year increase of 16%). Chinook benefited from strong market conditions in Calgary characterized by increased consumer spending and a strong job market as a result of the booming oil and gas industry. DBRS expects these conditions will continue to positively impact the overall performance of Chinook in 2007. Markville’s sales performance continues to lag other DBRS-rated shopping centres of comparable size ($500 to $700 CRU sales per square foot); however, DBRS expects sales to continue to grow at Markville, given its improved competitive position and a significant amount of residential development within its trade area.

(3) Bondholders have full recourse back to Ontrea Inc., one of the key real estate operating entities owned by the Ontario Teachers’ Pension Plan Board. DBRS views Ontrea Inc. as a strong investment-grade credit.

(4) The Series C Secured Debentures were repaid in March 2007, reducing the loan amount secured against the Properties by about $38 million to $75.6 million outstanding on the Series D Secured Debentures. The improved operating performance at the Properties and the reduction in the loan amount have significantly improved loan-to-value and coverage metrics for the debentures. The loan-to-value is very conservative, with only $75.6 million in outstanding debt. Correspondingly, pro forma, the paydown of the Series C Debentures interest coverage and debt service ratios improved to superior levels of 6.74 and 5.38 times, respectively.

However, DBRS notes that the current rating has already factored in the Properties’ minimal financial risk with superior coverage metrics, and the A (high) rating is limited by the following business risk constraints:

(1) The Properties’ 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 Properties’ noted credit strengths and has reflected this in the current rating category.

(2) The Properties have manageable concentrations of CRU lease expiries in 2007 and 2009, but this could still represent some re-leasing risk. However, in the near term, given current conditions, the Properties’ lease maturity schedule could provide an opportunity for further increases in average CRU rental rates.

Overall, DBRS expects the credit profile to remain solid throughout 2007 with support from stable operating fundamentals and superior financial metrics compared with other shopping centres rated by DBRS.

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