DBRS Confirms First Capital Realty Inc. at BBB with a Stable Trend

DBRS has today confirmed the Senior Unsecured Debentures rating of First Capital Realty Inc. (First Capital or the Company) at BBB with a Stable trend. First Capital continues to maintain a sound credit profile, with support from: a large portfolio of neighbourhood and community shopping centres that are well located in densely populated urban residential areas across Canada, reasonable credit metrics and ample liquidity to meet its near-term capital obligations.

The rating confirmation incorporates the defensive features of First Capital’s portfolio, including a stable core of grocery anchored neighbourhood and community shopping centres, a large and diversified tenant base with a focus on non-discretionary type retailers, such as national/regional grocery and drugstore chains. These types of tenants are generally less sensitive to recessionary periods compared to fashion-oriented tenants. In addition, First Capital has well-located properties with high barriers to entry in densely populated markets across Canada, which is reflected in the Company’s consistently high occupancy levels (96% as at Q1 2009). First Capital continues to generate cash flow growth with support from completed development/redevelopment projects, positive releasing activity (+9.9% uplift on average rental rates on 269,000 sq. ft. lease renewal space) and, to a lesser extent, property acquisitions.

Going forward, First Capital has modest lease maturities with current in place rents below market rents, which should provide stability to cash flow. Nevertheless, DBRS expects broader economic conditions to remain challenging throughout 2009, which could put pressure on the Company’s smaller, and/or lower quality tenants and retail market rental rates. However, DBRS believes these concerns are manageable given the quality and stability of First Capital’s portfolio.

In terms of financial profile, First Capital continues to demonstrate ample financial flexibility and liquidity to fund its upcoming capital requirements and development costs. During Q1 2009, First Capital replaced its unsecured revolving credit facility with a new three-year $450 million secured revolving credit facility. In addition, the Company completed a three-year $75 million secured revolving credit facility maturing in January 2012. As a result, First Capital has approximately $257 million of available liquidity, including undrawn amounts totalling $249.2 million on these credit facilities and $8.1 million in cash balances as at Q1 2009. This amount is more than sufficient to fund contractual obligations of $125.4 million for the remainder of 2009.

Financial flexibility is also enhanced by the Company’s positive free cash flow position and low payout ratio of 75% (DBRS adjusted for maintenance capex and leasing costs) for the 12 month period ended Q1 2009. DBRS also notes that protection measures for the senior unsecured debenture holders are further enhanced by the Company’s large unencumbered asset pool ($854 million as at Q1 2009, excluding properties under development), which continues to positively differentiate First Capital from other DBRS-rated real estate entities.

The rating confirmation also takes into consideration First Capital’s recent announcement to spin off, by way of a dividend-in-kind, its 16.4% (post Q1 2009) indirect ownership stake (14.1 million shares) in Equity One Inc. (Equity One) held through a Canadian holding company (First Capital America Holding Corp. (FCAH)) The proposed transaction would effectively create a new Canadian holding company, Gazit America Inc. (formerly FCAH), which will own First Capital’s ownership interest in Equity One, along with the US$99.8 million of debt secured by the Equity One shares and other liabilities, including inter-company debt of US$36 million. In the context of the transaction, FCAH and its wholly owned subsidiaries, which own the Equity One shares, will be released from guarantees for the unsecured debentures.

Overall, DBRS views this proposed transaction as having a neutral impact on First Capital’s credit profile. DBRS estimates a slightly positive effect on leverage given that the Equity One investment is leveraged higher compared to the Company’s remaining assets. In the near term, DBRS notes the elimination of dividend income from the Equity One investment could have a slightly negative impact on cash flow levels. However this will likely be offset by cash flow growth from completed development/redevelopment projects in 2009.

Going forward, DBRS expects First Capital to use a higher proportion of debt to fund portfolio growth and expects debt levels to increase slightly to the 55% to 60% range on a gross book value basis. This range of debt is reflected in the current rating category. Overall, DBRS expects First Capital’s credit profile to remain stable into 2010 and believes the Company has appropriately managed its balance sheet with a prudent level of financial strength, which should position it well for growth opportunities when economic conditions show signs of stability.

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.