DBRS Confirms Ivanhoe Cambridge I Inc. (Montreal Eaton Centre) at A (high)

DBRS has confirmed the rating on the Montréal Eaton Centre (the MEC or the Shopping Centre) at A (high) with a Stable trend. The confirmation reflects (1) strong sales performance; (2) minimal near-term re-leasing risk; and (3) very conservative leverage and strong debt service ratio. As a result, DBRS does not anticipate any refinancing risk for the 10.18% Series III Secured Debentures due March 31, 2013 (the Debentures).

The A (high) rating is supported by the following: (1) well located in the busy Montréal downtown core; (2) strong debt service coverage; and (3) strong ownership of Ivanhoe Cambridge Inc. The rating also takes into consideration the following challenges: (1) difficulty leasing out the higher floors; (2) high coupon rate of 10.18% on the Debentures; and (3) competition from street-level retail nearby.

MEC continues to achieve steady sales growth, with $671.6 per square foot (sq. ft.) of commercial retail unit sales for the year ended December 31, 2011. This level of sales performance compares very well with similar regional centres rated by DBRS and reflects MEC’s strong location in the retail district of Montréal’s downtown core. However, MEC is subject to intense competition in the Montréal retail market, particularly from nearby retailers on Sainte Catherine Street and the surrounding downtown area, which could limit sales performance growth and leasing initiatives going forward. In 2012, occupancy declined to a level that is slightly higher than historical results due to temporary space reconfiguration. While the higher floors of MEC are a leasing challenge, DBRS expects that the overall occupancy in the near future will improve as Grévin Museum, a wax museum from Paris, France, has recently signed a lease for the fifth floor. The museum is expected to open early next year.

For the year ended December 31, 2011, DBRS-adjusted net operating income (NOI) was stable at $16.4 million, mainly due to higher maintenance capital expenditures, which offset modest revenue growth due to higher average rental rates on re-leasing activity during the year. As a result, debt service coverage remains strong (2.95 times) for the rating category. In the near term, DBRS expects a modest improvement in NOI, mainly due to solid leasing activity year to date. The largest tenant at MEC, GAP (accounting for 5.4% of total leasable area), has recently renewed its lease for additional 15 years and at a higher rent rate (approximately 8% lift in base rents). In addition, MEC has no major tenant leases up for renewal for the remainder of 2012, which supports cash flow stability for the remaining term of the Debentures.

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.