DBRS Confirms Rideau Centre at A (low) with a Stable Trend

DBRS has today confirmed the A (low) rating of Rideau Centre’s (Rideau or the Centre) First Mortgage Bonds, as the Centre’s credit profile remains solid with support from continued growth in net operating income and strong operating fundamentals.

The rating confirmation reflects the following:

(1) Rideau’s pre-eminent position in the downtown Ottawa market and solid tenant profile continue to support the Centre’s strong operating fundamentals: (a) Commercial retail unit (CRU) vacancy levels remain low at 6.8%. (b) CRU sales per square foot ($847 as at September 30, 2008) ranks among the top urban shopping centres rated by DBRS, with CRU sales ranging from $500 to $700 per square foot. Rideau is also expected to continue to enhance and update its tenant mix by adding quality tenants, which should improve the Centre’s market position with greater draw and customer appeal.

(2) Rideau’s strong sales performance and a robust local economy have supported growth in net operating income, with higher average rental rates on lease expires at the Centre. Correspondingly, debt service and interest coverage ratios are in line with 2007 levels (1.99 times and 2.89 times, respectively, for the 11-month period ended November 30, 2008). DBRS notes, however, that these key credit metrics are still at levels below other similar DBRS-rated shopping centres.

(3) The Centre has a conservative loan-to-value ratio of 27.5% (DBRS estimate), with only $133.6 million in debt outstanding as at December 31, 2007.

(4) Bondholders have full recourse to the owner and co-owners of their respective interests, which DBRS views as solid to adequate investment-grade credits.

The rating is limited by the following constraints:

(1) Rideau’s anchor tenant (Sears Canada Inc.) continues to face significant competition from discount-type retailers and from those that demonstrate changing trends in retail formats, such as the new power-centre layouts. DBRS believes that this could potentially result in the noted tenant undertaking strategic changes, including possible store closures. DBRS notes, however, that any potential disruption would likely be short in nature given the overall quality and location of the Centre. Overall, DBRS views this risk to be manageable considering Rideau’s noted credit strengths, and has reflected this in the current rating.

(2) Rideau has a significant amount of CRU space (57%) maturing over the 2008-to-2010 period, which gives rise to potential re-leasing risk. However, DBRS believes that this should provide an opportunity to achieve further uplift in average rental rates, particularly given the strong CRU sales performance at the Centre as a whole. DBRS expects modest growth in NOI and coverage ratios for the remainder of 2008, underpinned by modest near-term lease maturities, which provide stability to cash flow.

Overall, DBRS expects Rideau’s credit profile to remain stable going forward, with support from a sound Ottawa economy and steady employment growth. DBRS rates the City of Ottawa at AA (high) with a Stable trend.

Notes:
All figures are in Canadian dollars unless otherwise noted.
The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.
This is a Corporate rating.