DBRS Confirms Lime Ridge Mall Rating at A (low), Stable

DBRS has today confirmed the rating on the 5.317% First Mortgage Bonds (the Bonds) of Ontrea Inc. secured by Lime Ridge Mall (Lime Ridge or the Shopping Centre) at A (low) with a Stable trend. The confirmation reflects the following: (1) a reasonable recovery in sales performance; (2) stable financial performance; and (3) a temporary increase in the commercial retail unit (CRU) vacancy rate to 10% in 2011 from 8.7% in 2010.

The A (low) rating is supported by the following: (1) Lime Ridge is well located in the Hamilton region, with limited direct competition from shopping centres nearby; (2) the Shopping Centre has displayed good financial performance and a strong interest coverage of 2.75 times (x) and; (3) the Shopping Centre benefits from the strong property management expertise of The Cadillac Fairview Corporation Ltd. (Cadillac Fairview). The rating also takes into consideration the following challenges: (1) Lime Ridge’s anchor tenants (The Bay and Sears) continue to face significant competition from discount-type retailers; (2) a higher-than-average occupancy cost ratio at 19.3% as of June 30, 2012 due to higher property taxes; and (3) potential refinancing risk, with a $181 million bullet payment in 2020.

Although Lime Ridge’s sales recovered to $538 per square foot (psf) of CRU sales as of the year ended October 31, 2011 (YE2011), it remains below levels achieved prior to 2010. Nevertheless, Lime Ridge’s sales performance is still in line with the A (low) rating category and comparable with other DBRS-rated shopping centres achieving CRU sales of $400 psf to $500 psf. Lime Ridge’s CRU vacancy levels temporarily increased to 10% in 2011, mainly due downtime associated with remerchandising activities. DBRS notes that Lime Ridge is undertaking a $22 million re-development project, which consists of a major remerchandising program and renovation of the front façade and food court. The project is scheduled to be completed in the fall of 2013 and will introduce a number of well-known retailers, including Forever 21 and BCBG. DBRS expects this project will help improve its sales performance and return CRU vacancy rates to more normal operating levels in the next two to three years. Lime Ridge generated net operating income (NOI) of $26.5 million for the YE2011, a slight decline from the previous fiscal year-end of $26.8 million. The decline in NOI was mainly driven by remerchandising activities. Correspondingly, Lime Ridge’s interest coverage ratio has declined modestly to 2.75x, but is still at a level that is strong for the A (low) rating category. Going forward, DBRS expects modest growth in NOI driven by an improvement in vacancy levels and positive re-leasing activity. Approximately 60% of the leases coming due in 2013 have been re-leased.

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.