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

DBRS has today confirmed its BBB (high) rating of Galeries D’Anjou’s (D’Anjou or the Shopping Centre) First Mortgage Bonds, due 2012, with a Stable trend. The Shopping Centre’s credit profile remains stable, with modestly improving operating fundamentals and a satisfactory interest coverage ratio.

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 $469 per square foot (+2%) in 2007. This improvement was partly due to good consumer spending levels and the Shopping Centre’s good tenant profile, which has improved over the past several years. However, DBRS notes that D’Anjou’s CRU sales performance is at a level below comparable DBRS-rated shopping centres in eastern and central Canada ($500 to $600 per square foot). Going forward, DBRS expects the Shopping Centre’s CRU sales performance to continue to modestly improve and remain competitive within its market.

(2) Net operating income (NOI) growth has been reasonable over the past two years due to modest growth in rental rates and a low CRU vacancy rate of 3.2% as at October 31, 2007. Although lower than in prior years (due to a higher interest associated with the retraction option in 2004), the interest coverage ratio of 2.46 times is still in line with the current rating category and satisfactory for a shopping centre of D’Anjou’s calibre.

(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 ratio is very conservative, with $102 million debt outstanding as at October 31, 2007.

The rating is also limited by certain rating constraints. First, 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 D’Anjou. Overall, DBRS views this risk as manageable, considering the Shopping Centre’s noted credit strengths, and has reflected this in the current rating category.

Second, D’Anjou has a significant amount of lease maturities over the 2008 and 2009 period (an average of almost 21% CRU space per year) with two large non-major tenants (Mark’s Work Warehouse and Old Navy) both expiring in 2009. Although DBRS does not anticipate any re-leasing challenges with these two large tenants, the amount of CRU space expiring could present a re-leasing risk should market conditions become difficult. Yet DBRS does expect a reasonable uplift in rental rates on near-term expiring CRU space as leasing conditions continue to remain favorable and the Shopping Centre’s vacancy levels are low.

Overall, D’Anjou’s credit metrics will likely remain in a satisfactory range for the current rating category, with support from reasonable consumer spending levels projected for the Montréal area in 2008.

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