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 November 1, 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 $472 per square foot (+2%) over $469 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 psf). 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 years due to modest growth in rental rates and a low CRU vacancy rate of 4.3% as at October 1, 2009. Although lower than in prior years (due to a higher interest associated with the retraction option in 2004), the 2008 interest coverage ratio of 2.47 times is still in line with the current rating category and satisfactory for a shopping centre of D’Anjou’s caliber.

(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 $102 million debt outstanding as at October 1, 2009.

The rating is also limited by the following constraints:

(1) Despite consistent year-over-year improvement, sales performance continues to lag comparable shopping centres in eastern and central Canada rated by DBRS. This can be attributed to the competition in the retail area, specifically with Place Versailles.

(2) The Bonds are interest only, meaning their principal amount does not amortize over the term of the issue. The Bonds mature November 1, 2012, with a balloon payment of $102 million (assuming no prepayment), and will either have to be paid out, or new financing terms arranged. This introduces refinancing risk, the full impact of which will not be known until closer to 2012.

(3) D’Anjou’s anchor tenants (The Bay, Sears and Zellers) continue to face significant competition from discount 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 D’Anjou.

Overall, DBRS views these risks as manageable, considering the Shopping Centre’s noted credit strengths, and has reflected this in the current rating category. Going forward, DBRS believes D’Anjou’s credit metrics will remain in a satisfactory range for the current rating category 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.