DBRS Confirms Rideau Centre Rating of A (low) with a Stable Trend

DBRS has today confirmed the ratings of the First Mortgage Bonds, Series A and B, of Rideau Centre (Rideau or the Centre), as the Centre’s credit profile remains solid with support from continued growth in net operating income (NOI) and strong operating fundamentals.

The rating confirmation reflects the following:

(1) Rideau’s pre-eminent position in the downtown Ottawa market and solid tenant profile continue to support the Centre’s strong operating fundamentals: (a) Commercial retail unit (CRU) vacancy levels have increased slightly at Q2 2010 as compared with YE2009 but are still very low at 1.21%; (b) CRU sales per square foot at YE2009 were $860, an improvement of 6.1% over the YE2008 sales per square foot of $809. For the first six months of 2010, the YTD sales of $401 psf is an improvement of 15% for the same period in 2009. These figures rank among the top urban shopping centres rated by DBRS, with CRU sales ranging from $500 to $700 psf. Rideau is also expected to continue to enhance and update its tenant mix by adding quality tenants, which should improve its market position with greater draw and customer appeal.

(2) The slightly weakened but largely sound Ottawa economy and Rideau’s strong sales performance have supported growth in NOI, with higher average rental rates on lease expires at the Centre. Correspondingly, debt service and interest coverage ratios at Q2 2010 of 2.20 times and 3.55 times, respectively, are at levels in line with YE2009. This trend is appropriate for the current rating category.

(3) The Centre has a conservative loan-to-value ratio of 32.6% (DBRS estimate), with only $119.8 million in debt outstanding as at September 1, 2010.

(4) Bondholders have full recourse to the owner and co-owners (see The Property on page 3) of their respective interests, which DBRS views as solid to adequate investment-grade credits.

The rating is limited by the following constraints:

(1) Rideau’s anchor tenant (Sears Canada Inc.) continues to face significant competition from discount-type retailers and from those that demonstrate changing trends in retail formats, such as the new power-centre layouts. DBRS believes that this could potentially result in the noted tenant undertaking strategic changes, including possible store closures. DBRS notes, however, that any potential disruption would likely be short in nature given the overall quality and location of the Centre. Overall, DBRS views this risk to be manageable considering Rideau’s noted credit strengths, and has reflected this in the current rating.

(2) The city of Ottawa had an unemployment rate of 5.9% at Q2 2010 according to Cushman and Wakefield. This is an increase over the 4.8% and 5.7% rates reported at YE2008 and YE2009, respectively. Furthermore, a possible freeze in government spending could mean an additional loss of jobs for the city in the public sector. As consumer spending is restricted by these trends in unemployment, the retail market could face challenges. DBRS expects modest growth in NOI and coverage ratios going forward for the Centre, underpinned by modest near-term lease maturities, which provide stability to cash flow.

Overall, DBRS expects Rideau’s credit profile to remain stable going forward, with support from a largely sound Ottawa economy.

For more detailed information on the Project and the DBRS analysis, please refer to the full rating report available on the DBRS web site.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Real Estate and Canadian Structured Finance Flow-Through Ratings, which can be found on our website under Methodologies.