DBRS Confirms Market Mall at “A” with a Stable Trend

DBRS has today confirmed its “A” rating of Market Mall’s (the Shopping Centre) 6.64% FM Bonds, Series A, due February 2014. The Shopping Centre’s credit profile remains stable with support from strong sales performance and improving credit metrics.

The current rating is based on the performance of the Shopping Centre and reflects the following factors:

(1) The Shopping Centre achieved year-over-year growth in sales performance with an uplift in commercial retail unit (CRU) sales per square foot to $856, representing an increase of 7.6%. This level of sales performance ranks near the top when compared with other regional shopping centres rated by DBRS. Although the pace of sales growth will likely be moderate over the next two years, given market conditions, DBRS expects the demand for retail space in Calgary will continue in the near term.

(2) The Shopping Centre’s improved sales performance and low vacancy rates continue to drive higher average CRU net rental rates. This improvement is highlighted by the increase in net interest income (NOI) levels and coverage ratios for the Shopping Centre. For F2008, interest coverage and debt service ratios were 4.11 times and 2.68 times, respectively, and compare favourably with other shopping centres rated by DBRS.

(3) Bondholders have full recourse back to (a) The Cadillac Fairview Corporation Ltd. (CFCL) for 50%; and (b) Ivanhoe Cambridge I Inc. and Ivanhoe Cambridge II Inc. (together Ivanhoe Cambridge) 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 $110.4 million in outstanding debt as of September 2009.

The rating is also limited by certain constraints. First, Market Mall’s anchor tenants (The Bay and Zellers) continue to face competition from discount retailers and changing trends in retail formats, including new power centre layouts. DBRS believes that this could result in the noted tenants undertaking changes. DBRS notes, however, that any potential disruption would likely be short term in nature, given the overall quality and location of the Shopping Centre. Overall, DBRS views this risk as manageable considering the Shopping Centre’s noted credit strengths and its ability to maintain and sign quality tenants.

Second Calgary remains one of the most competitive retail cities in Canada, however there are many well-performing regional shopping centres, including Chinook and Southcentre Mall. Additionally, the Canadian retail sector overall has suffered the effects of rising unemployment and a changing economic environment. DBRS views this risk as manageable, given the Shopping Centre's strong performance and the Calgary retail market’s ability to perform, given a stressed economic environment. According to Colliers, rising unemployment and falling commodity prices have yielded declining costs for producers. Additionally, StatCan states that the unemployment rate for the Calgary metropolitan area is 4.0%, compared with the Alberta average of 4.3% and the national average of 8.7%.

Overall, DBRS expects that Market Mall will likely continue to exhibit a strong level of NOI and solid operating metrics, providing underlying support to the credit profile going forward.

Note:
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.