DBRS Confirms Place Laurier Rating of A (low) with a Stable Trend

DBRS has today confirmed the 10.55% Series A and 7.37% Series D Secured Debentures of Place Laurier (the Shopping Centre) at A (low) with a Stable trend. The confirmation reflects that Place Laurier continues to perform well with support from good operating fundamentals and solid credit metrics.

The current rating is based on the performance of the Shopping Centre, which reflects the following: (1) Place Laurier has a prominent position within Québec City and is well located near the downtown area with good access; (2) For the year ended December 31, 2009, debt service coverage and interest coverage were 3.49 times and 4.36 times, respectively. Those figures represent a slight increase from YE2008 and are comparable or superior to similar shopping centres rated by DBRS. This is attributable to the low debt levels secured against the Shopping Centre and the stable operating income trends the property has experienced throughout the life of the issuance. (3) The Shopping Centre has an excellent loan-to-value with only $63.1 million in debt outstanding as of September 10, 2010. (4) Series A debenture holders have full recourse to Ivanhoe Cambridge Inc., who DBRS views as a solid investment-grade credit. In June 2010, Ivanhoe Cambridge II Inc. purchased the 50% interest in the property owned by OMERS and now holds 100% of the ownership interest in the property. DBRS notes that the Series D Secured Debentures have recourse to the Shopping Centre only.

The rating is also limited by the following constraints: (1) Place Laurier’s anchor tenants (The Bay, Sears and Zellers) continue to face significant competition from discount-type retailers and changing trends in retail formats, including new power centre layouts. DBRS believes this could potentially result in at least one of the noted tenants undertaking strategic changes, including possible store closures. DBRS notes, however, any potential disruption would likely be short in nature given the overall quality and location of the Shopping Centre. Overall, DBRS views this risk as manageable considering the Shopping Centre’s noted credit strengths and has reflected this in the current rating category. (2) Place Laurier’s commercial retail unit (CRU) sales performance of $494 per square foot is in line with competitors in its market. Although the Shopping Centre’s sales performance has shown year-over-year improvement over the past several years (including an improvement of 1.4% over YE2008 for YE2009), it is still below the level of other prominent Canadian regional shopping centres rated by DBRS, many of which have sales in the $500 to $700 per square foot range. (3) The Québec market provides competition for the subject in two centres located within ten kilometers of the subject property; Les Galeries de la Capitale is located ten kilometers to the north and Place Fleur de Lys is located ten kilometers to the east. Both centres offer a similar tenant mix to the subject. (4) Although CRU space only accounts for 40.2% of the total leasable area of the property, the increase in vacancy rates for that portion of the centre in 2008 and 2009 is worth noting. At YE2009, the CRU vacancy rate was at 5.9% and at YE2008 it was at 4.9%. These figures are an increase over the range of 2.1% to 3.0% CRU vacancy rates seen from 2005 to 2007. The Anchor and large non-major tenant spaces are fully occupied, with no major leases expiring until 2017. Furthermore, the increase in CRU vacancy is partially due to the reconfiguration of space at the Centre to accommodate the soon-to-be completed expansion of the property with the addition of Best Buy and a new Sports Experts/Atmosphere/Hockey combination.

Overall, DBRS expects the Shopping Centre’s credit profile to remain stable in 2010 and 2011 with underlying support from generally good leasing conditions and a relatively reasonable percentage of CRU lease expiries in 2010, which should continue to provide stability to cash flow and current operating metrics.

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 methodologies are Rating Real Estate and Canadian Structured Finance Flow-Through Ratings, which can be found on our website under Methodologies.