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

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).

The current rating is based on the performance of the Project and the low leverage associated with the secured debentures, which reflects the following:

(1) The Exchange Tower complex is a prominent and well-located office tower in the financial core of downtown Toronto, which is reflected in its historically low vacancy levels. The Project is integrated with the prestigious First Canadian Place and shares vehicular access through the parking levels and pedestrian access through the retail mall located on the concourse level and ground floor.

(2) Credit metrics have strengthened, with interest coverage and the debt service coverage ration (DSCR) improving to 3.33 times and 2.35 times, respectively, driven by steady improvement in net operating income (NOI) and a reduction in outstanding debt. Coverage ratios are consistent with similar office properties rated by DBRS.

(3) Exchange Tower has a low loan-to-value (LTV) that is estimated using conservative cap rates to be less than 35%, providing additional security to bond holders.

The rating is also limited by the following constraints:

(1) The Toronto office market experienced difficulties in 2009 that have continued into the first two quarters of 2010. For the downtown GTA, vacancy rates have climbed from 9.3% for YE2009 to 11.9% as of Q1 2010 (these figures include vacant sublease space), per Colliers. Furthermore, average asking rents in the financial core declined by 8.0% from Q1 2009 to Q1 2010.

(2) Part of the Project is on leasehold land, with a ground lease and a ground sublease, both with very long terms until expiry. Further detail of the ground lease and ground sublease is found in the Freehold/Leasehold Interests sections.

(3) There is significant lease expiry exposure in 2012 and 2013, with 40.4% of existing leases, as of July 2010, scheduled to roll in those two years. In the year the Bonds mature, 2012, 18.8% of the NRA is scheduled to expire. This introduces a certain level of refinance risk, as cash flows for the property would be impacted should those tenants vacate the property.

Overall, DBRS expects the Project’s credit profile to remain stable in 2010 and 2011 with improvements in market conditions and a prominent location in a submarket that has been historically healthy.

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

Notes:
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.