DBRS Confirms First Capital Realty at BBB, Changes Trend to Positive

DBRS has today confirmed the rating of First Capital Realty Inc. (First Capital or the Company) at BBB and has changed the trend to Positive. The trend change is supported by DBRS’s expectation that First Capital will continue to grow its portfolio of supermarket- and drugstore-anchored shopping centres in high barrier-to-entry major urban markets across Canada, and will remain committed to reducing the level of secured debt within its capital structure, while improving its key credit metrics to levels that are more in line with the BBB (high) rating category.

Since DBRS’s rating upgrade in 2007, the size and market position of First Capital’s portfolio has been gradually improving, thanks to the Company’s focused strategy of acquiring and developing: (1) quality properties in high barrier-to-entry major growing urban markets in Canada; (2) well-located underperforming urban properties with repositioning and redevelopment opportunities; and (3) land parcels/income-producing properties that are adjacent to existing properties/sites and properties with site intensification opportunities. In addition, asset quality is improving and is expected to continue in 2012 as First Capital disposes of its non-strategic properties located in smaller markets and reinvests into development and acquisition opportunities located in high barrier-to-entry major urban markets. Going forward, this strategy will likely continue to enhance the stability of First Capital’s earnings profile. DBRS also expects continued growth in cash flow from positive re-leasing activity (current in-place rental rates are well below market rates), development projects coming on line and full-year cash flow contributions from property acquisitions and completed development projects in 2011 and Q1 2012.

From a financial perspective, First Capital has made significant progress in growing its unencumbered asset pool and reducing secured debt. Secured debt levels have declined to 47.4% on a total debt basis in Q1 2012, from 63.7% in 2007, and further declines in this ratio would continue to enhance the Company’s financial flexibility. DBRS expects First Capital to fund development, redevelopment and, to a lesser extent, property acquisitions in 2012 and 2013 mainly with proceeds from asset dispositions (approximately $250 million). As a result, DBRS expects debt levels to remain fairly stable and for coverage ratios (including capitalized interest) to improve modestly in 2012 due to higher cash flow levels as a result of completed investment activity and organic cash flow growth. Taking into consideration the defensive nature of the Company’s portfolio, DBRS would view an improvement in the EBITDA interest coverage ratio (including capitalized interest) above 2.25 times as more in line with the BBB (high) rating category.

First Capital has more than sufficient financial flexibility and liquidity, mainly consisting of unused credit facilities and planned asset dispositions to fund its upcoming capital requirements and development costs. Recently, liquidity has been enhanced with the $175 million and $100 million of Series N and Series O senior unsecured debentures, respectively. DBRS also notes that protection measures for the senior unsecured debenture holders are further enhanced by the Company’s large unencumbered asset pool ($2.8 billion as at Q1 2012, including unencumbered properties under development totalling $300 million), which continues to positively differentiate First Capital from other DBRS-rated real estate entities.

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.