DBRS Confirms Southcentre Mall at A (low)

DBRS has today confirmed the ratings of the 6.48% First Mortgage Bonds, Series A of Southcentre Mall (Southcentre or the Shopping Centre) at A (low). The credit profile remains stable, with support from solid credit metrics and improving sales performance.

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

(1) Southcentre’s sales performance continues to strengthen with commercial retail unit (CRU) sales per square foot increasing significantly (+3%) to $718 for F2008 from $697 for the comparable period in 2007. Although growth in consumer spending levels will likely moderate in Alberta over medium term, DBRS expects Southcentre’s sales performance to continue to improve throughout 2009 and to compare favorably to other similarly rated DBRS shopping centres.

(2) Although there was a slight decrease in net operating income (NOI) levels for 2008, coverage ratios for the Shopping Centre have only slightly decreased and remain strong. For the F2008, interest coverage and debt service coverage ratios were 3.32 times and 2.07 times, down from 3.67 times and 2.37 times, respectively. Although these coverage metrics remain strong for the rating category and partially reflects the very conservative amount of debt outstanding against the Shopping Centre, Southcentre’s NOI levels are on the lower end of the range compared with higher DBRS-rated shopping centres, which generate over $30 million in NOI. Going forward, DBRS expects Southcentre to continue to exhibit NOI growth and will likely achieve higher rental rates.

(3) Southcentre has a very conservative loan-to-value ratio, with only $88.9 million in debt outstanding as at October 2009.

(4) Bondholders have full recourse to Ivanhoe Cambridge I Inc. and Ivanhoe Cambridge II Inc. (collectively, Ivanhoe Cambridge), which DBRS views as a solid, investment-grade credit.

The rating is limited by the following constraints: First, Southcentre’s anchor tenants (The Bay and Sears) continue to face significant competition from discount retailers and those that demonstrate changing trends in retail formats, such as the new power-centre layouts. DBRS believes 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 in nature given the overall quality and location of the Shopping Centre. Overall, DBRS views this risk to be manageable considering the Shopping Centre’s noted credit strengths, and has reflected this in the current rating category.

Secondly, Despite experiencing moderate growth over the past the year, the level of Southcentre’s NOI remains below higher DBRS-rated shopping centres.

Overall, DBRS expects Southcentre’s credit profile to remain stable going forward. DBRS notes that Southcentre is undergoing a $100 million renovation project (the Project), expected to be completed in 2009. The project is expected to consolidate existing CRU space to accommodate a tenant (Crate & Barrel) with larger space requirements. While the additional rent from this space will likely be minimal, the Project is expected to further enhance Southcentre’s competitive position within its market and improve overall customer appeal. In addition, the Project will be funded entirely by an equity injection and provides bondholders with additional security.

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.