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

DBRS has today confirmed its BBB (high) rating of Erin Mills Town Centre (the Mall) and Erin Mills Town Plaza’s (the Plaza; collectively, the Project) First Mortgage Bonds, 7.03%, due 2013 (the Bonds). The Project continued to perform well in 2007, with sound operating parameters and improving coverage ratios.

The rating confirmation reflects the following: 1) Net operating income (NOI) increased by approximately 4% for the year ended October 31, 2007, mainly driven by higher average net rental rates on commercial retail unit (CRU) lease expiries and lower CRU vacancy levels at the Mall during the period. 2) The Project’s interest coverage and debt service coverage ratios increased to 3.29 times and 2.24 times from 3.08 times and 2.16 times, respectively, for F2007. Although these metrics are favourable for the current rating category, the Mall’s NOI levels remain in line with similar DBRS-rated shopping centres. 3) The Mall’s CRU sales performance has remained just over $500 per sq. ft. over the past several years and this level partly reflects the competitive retail trade area it shares with other dominant and super-regional malls, such as Square One Shopping Centre in Mississauga.

DBRS believes that, going forward, CRU sales will continue to benefit from the nearby residential development and the addition of new tenants in the fashion accessories category.

The rating also takes into consideration: (1) Bondholders have a first-ranking charge on the Project. Erin Mills is a well-located and prominent regional shopping centre located in Mississauga, Ontario. (2) The Cadillac Fairview Corporation Ltd. (Cadillac Fairview) and The Erin Mills Development Corporation (collectively, the Co-Owners) each own 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. (3) The Project’s loan-to-value ratio is very conservative, with $89.5 million debt outstanding as at October 31, 2007.

The rating confirmation also takes into consideration certain rating challenges. First, 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 Mall.

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 with the above-noted exposure compared with other DBRS-rated shopping centres that have additional forms of recourse.

Second, the Mall has significant exposure to re-leasing risk in the 2008 to 2009 period, when approximately 47% CRU space expires, if leasing conditions become difficult during this period. DBRS notes that Loblaws has renewed its lease at the Plaza at $20 per sq. ft., up from the previous $18 per sq. ft.

Going forward, DBRS expects NOI levels to improve just slightly above current levels in the near term, given the Mall’s current sales performance and competitive retail trade area. Overall, DBRS expects the Project’s credit profile to remain stable throughout 2008, with support from good operating metrics and nearby residential development.

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