DBRS Confirms First Capital Realty at BBB, Stable Trend

DBRS has today confirmed the rating of First Capital Realty Inc. (First Capital or the Company) at BBB with a Stable trend. The rating confirmation takes into consideration moderate portfolio growth, reasonable credit metrics, above average lease expiries in 2011, and more than sufficient liquidity to meet its near-term capital obligations.

First Capital continued to achieve growth in operating income mainly due to cash flow contributions from completed developments/redevelopment projects (383,700 square feet (sq. ft.) in 2010) and property acquisitions in 2010 and 2009. Same portfolio net operating income growth was reasonable during the year and benefited from an average increase of 11.3% in net rental rates on lease renewals (858,000 sq. ft. completed during the year). Portfolio occupancy level remains strong at 96.4% and reflects the long-term tenancy of First Capital’s core grocery retail tenants, and well-located properties in densely populated urban residential areas across Canada.

First Capital invested a total of $315 million in development/redevelopment and acquisitions in 2010. These investments were funded by a higher proportion of debt than equity and free cash flow to fund, which resulted in the Company’s debt-to-gross book value assets ratio increasing to 52.2% from 50.3% a year earlier (leverage was also impacted by the spinout of equity one and the timing of financing at the end of 2009). As such, EBITDA interest coverage remained stable at 2.13 times, considered to be at the lower end of the rating category. The lower than normal coverage in part reflects the interest costs on debt incurred to fund First Capital’s internal development projects before they are income producing. First Capital’s BBB rating is underpinned by the following credit strengths: (1) a large portfolio of stable enclosed supermarket- and drugstore-anchored neighbourhood and community shopping centres; (2) diversification by property and economies of scale in key Canadian urban markets; and (3) a diverse tenant base with a focus on non-discretionary type retailers, such as national/regional grocery and drugstore chains.

The rating also reflects the following challenges: (1) high proportion of anchor tenants, impacting rental revenue; (2) concentration in the GTA and Montréal; (3) coverage ratios at the lower end of rating category parameter.

The stable rating outlook takes into consideration DBRS’s expectation for reasonable growth in operating income in 2011 due to a full-year cash flow contribution from more modest acquisitions expected in 2011 given current property valuations and completed development/redevelopment projects in 2011 and 2010. Over the next couple years, active development/redevelopment and expansion projects are expected to add 379,300 sq. ft. gross leasable area. In addition, First Capital has an above average amount of lease maturities set to expire in 2011, with 12.2% of total leasable area maturing at an average in-place rental rate of $14.22 (well below current market rent rates in the low $20 range). DBRS believes that this combined with generally improving economic conditions and increasing demand for retail space, particularly from U.S.-based retailers, should provide an opportunity for First Capital to achieve higher average rent rates on lease expiries over the next few years.

DBRS expects First Capital to fund portfolio growth with debt financings and to manage leverage between 55% and 60% of gross book value looking forward, which is well within its indenture limit of 65% and acceptable for the rating category. That said, DBRS expects EBITDA interest coverage ratio to remain fairly steady in the 2.1 times to 2.2 times range. First Capital has more than sufficient financial flexibility and liquidity ($313.1 million of cash and unused credit facilities as at Q4 2010) to fund its upcoming capital requirements and development costs. Recently, liquidity has been enhanced with the $150 million of Series L senior unsecured debentures and $110 million of Series M senior unsecured debentures. DBRS also notes that protection measures for the senior unsecured debenture holders are further enhanced by the Company’s large unencumbered asset pool ($1.5 billion as at Q4 2010, excludes properties under development), which continues to positively differentiate First Capital from other DBRS-rated real estate entities.

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.