DBRS Confirms Markville and Chinook Shopping Centres at A (high) with a Stable Trend

DBRS has today confirmed its A (high) rating of Markville Shopping Centre and Chinook Centre (Markville and Chinook or the Properties), as the Properties maintain a solid credit profile. The confirmation takes into consideration the fact that Chinook is currently undergoing a $280 million expansion project that will include approximately 180,000 square feet of additional commercial retail unit (CRU) space and a two-level underground parkade with 1,205 parking stalls. The expansion project will occur at the north end of Chinook and will feature additional retail space in a two-level racetrack configuration. The project is expected to contribute additional net operating income (NOI) and provide greater security for bondholders with the additional equity invested into Chinook. The project, which is expected to be completed in the fall of 2010, should further enhance Chinook’s market position in Calgary and provide additional draw, resulting in increased customer traffic.

The current rating category also takes into consideration:

(1) For F2008, NOI increased by approximately 3% (Chinook and Markville account for 63% and 37% of the total NOI, respectively.)

(2) CRU sales at the Properties continued to increase in 2008, with Chinook achieving very strong sales results of $900 per square foot (a year-over-year increase of .5%.) DBRS expects that these conditions will continue to positively affect the overall performance and re-leasing rental rates at Chinook in 2008. However, DBRS expects that the pace of sales growth will likely moderate over the medium term and that the expansion project could disrupt sales performance until it is completed.

(3) Bondholders have recourse to Ontrea Inc. (Ontrea), in addition to a first call on the two properties securing the Series D debentures. As well, the Properties are cross-collateralized.

(4) Over the past several years, the Properties improved operating performance and the reduction in the outstanding loan amount have significantly improved the loan-to-value ratio and coverage metrics for the debentures. The loan-to-value is superior, with only $68.7 million in outstanding debt. Correspondingly, interest coverage and debt service ratios improved to superior levels of 7.63 and 5.74 times, respectively.

However, DBRS notes that the current rating has already factored in the Properties minimal financial risk with superior coverage metrics and the A (high) rating is limited by the following constraints:

First, the Properties’ 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 the Properties. Overall, DBRS views this risk as manageable considering the Properties noted credit strengths and has reflected this in the current rating category.

Second, Markville has over 20% of CRU space set to expire from 2010 through 2012. This could result in potential re-leasing risk if conditions deteriorate during this period.

Overall, DBRS expects the Properties credit profile to remain stable going forward given the superior financial metrics compared with other shopping centres rated by DBRS

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.