DBRS Confirms Calloway Real Estate Investment Trust Stability Rating at STA-3 (high)

DBRS has today confirmed the stability rating of Calloway Real Estate Investment Trust (Calloway or the Trust) at STA-3 (high). Calloway’s STA-3 (high) rating reflects the following strengths: (1) Calloway has the second largest retail portfolio in Canada, comprising approximately 25.5 million square feet (sq. ft.) of new-format unenclosed retail properties, many of which are anchored by Wal-Mart Canada (Wal-Mart, accounting for 26.0% of gross rental revenue); (2) Calloway has a long lease profile, with an average lease term to maturity of 8.2 years (Wal-Mart at 11.0 years); (3) consistently high occupancy rates (close to or greater than 99%); and (4) relatively new properties with 72.3% of the portfolio developed since 2002, which minimizes capital requirements over the medium term. The rating also takes into consideration the following challenges: (1) a significant number of the Trust’s retail properties are located in smaller, secondary Canadian markets that rely heavily on Wal-Mart to attract customers and other tenants; (2) low interest coverage ratio; and (3) a high proportion of anchor tenants. Calloway has achieved moderate growth in operating income mainly as a result of cash flow contributions from completed development projects, earn-outs from SmartCentres and property acquisitions in 2011 and 2010. Same-property net operating income growth was more modest for the year (+1.2%) and benefited from positive re-leasing activity, contractual rent step-ups on existing leases and the lease-up of vacant space.

Occupancy levels for Calloway’s portfolio held steady during the year and remain very strong at 99.0%. From a financial standpoint, Calloway mainly used equity proceeds to fund investments in 2011, which resulted in the Trust’s debt-to-gross book value ratio (including convertible debentures) declining to 52.3% from 54.9% a year earlier. As a result, Calloway’s EBITDA interest coverage increased meaningfully to 2.17 times (including capitalized interest). However, this metric remains at the lower end of the range for the current rating category. DBRS notes that this metric is also affected by the fact that Calloway incurs interest costs prior to cash flow contributions from completed projects coming online.

Going forward, DBRS expects continued improvement in EBITDA interest coverage (including capitalized interest) that is more in line with the BBB rating category. Calloway is expected to experience further growth in cash flow from acquisitions and completed development projects and earn-outs in 2012 and 2011. Developments and earn-outs in 2012 are expected to add approximately 475,172 sq. ft. of leasable space to the portfolio and approximately $9.7 million in income. In addition, EBITDA interest coverage will likely benefit from a lower cost of capital over the near term, which could make potential acquisitions and completed developments and earn-outs more accretive compared with previous years. Modest near-term lease maturities (2.5% of gross leasable area in 2012) should also provide underlying stability to cash flow. Calloway has adequate liquidity, from a variety of capital sources, to fund capital commitments that will total $250.3 million by the end of 2012.

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

The applicable methodology is Rating Real Estate Entities, which can be found on our website under Methodologies.

This rating did not include issuer participation and is based solely on publicly available information.