DBRS Confirms Exchange Tower Limited at A (low)

DBRS has confirmed the rating of the 6.83% Series A First Mortgage Bonds, due 2012 (the Bonds) of Exchange Tower Limited (Exchange Tower) at A (low) with a Stable trend. Exchange Tower issued the Bonds that are secured by the owners’ interest in the Exchange Tower office complex (the Project).

Exchange Tower continued to perform well through 2008. Net operating income (NOI) grew by 7% in 2008, correspondingly, 2008 Interest coverage improved to 3.18 times from 2.81 times in 2007, while 2008 debt service coverage grew to 2.23 times from 2.09 times for 2007. These metrics are solid in the context of the historical performance for Exchange Tower.

As of the October 2009 occupancy report, occupancy at the Project is currently 99%, which is up from 97% in 2007. Additionally, average in-place office rental rates increased by 8% from 2007 to 2008. Leasing activity for 2008 was strong with approximately 137,000 sf of space being renewed or leased, as compared with approximately 75,000 sf for 2007. The majority of this space can be attributed to lease renewals and is seen as positive for Exchange Tower.

The Exchange Tower office complex vacancy rate remains below the overall vacancy level in Toronto’s downtown core office market, illustrating the strength of the property. According to Colliers, the Q3 2009 overall vacancy rate for the downtown Toronto office market was 5.2%, while the financial-core Class A vacancy rate was 3.4%. Additionally, average asking net rental rates for the overall downtown Toronto office market were $24.02 psf, as of Q2 2009, and financial-core Class A average asking net rental rates were $27.09 psf.

Looking forward, DBRS expects NOI growth to continue, driven by higher net rents from recent lease renewals as well as modest rent steps provided for in existing leases.

The Project’s relatively long-term lease profile is expected to support stable cash flows. While there is always concern over lease expiries with office properties, re-leasing risk over the next two years is moderate, with only 9.2% of space expiring in 2010 and 1.9% in 2011. Additionally, the Project’s location should allow it to continue to attract quality tenants and maintain solid occupancy levels. It is also positive that the property has continued to attract and maintain quality tenants who have extended their leases and continue to operate at the subject property.

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.