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 August 26, 2013 (the Bonds). The Project has continued to perform well with stable coverage ratios.

The rating confirmation reflects the following: 1) Although net operating income (NOI) decreased slightly for the year ended October 31, 2008, it remains in line with 2007. 2) Correspondingly, the Project’s interest coverage and debt service coverage ratios (DSCR) were reported at 2.20 times and 3.32 times, respectively, for the F2008. Although these metrics are favorable for the current rating category, the Mall’s NOI levels remain comparable with similar DBRS-rated shopping centres. 3) The Mall’s commercial retail unit (CRU) sales performance has remained near $500 psf over the past several years ($495, as of April 2009) and this level partly reflects the competitive retail trade area it shares with other dominant and super-regional malls

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

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. 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.

Going forward, DBRS expects NOI levels to remain stable 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 appropriate for the current rating category throughout 2009, with support from good operating metrics and nearby residential development.

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.