DBRS Confirms Rating of Market Mall FMBs at A (high), Stable

DBRS has today confirmed the rating on the Series A First Mortgage Bonds (the Bonds) of Ivanhoe Cambridge I Inc., Ivanhoe Cambridge II Inc. and The Cadillac Fairview Corporation Ltd. (CFCL) secured by Market Mall (the Shopping Centre) at A (high) with a Stable trend. The confirmation reflects the following: (1) continued improvement in key credit metrics; (2) nominal exposure to re-leasing risk until the end of 2013; and (3) enhanced tenant profile with the arrival of Target in 2013. The rating confirmation also takes into consideration a decline in sales performance in 2011.

The A (high) rating is supported by the following: (1) Market Mall is a well-located regional shopping centre in northwest Calgary with commercial retail unit (CRU) sales per square foot (psf) near the top of DBRS-rated shopping centres; (2) coverage ratios are at strong levels for the current rating category; (3) strong ownership of CFCL and Ivanhoe Cambridge; and (4) very conservative DBRS Refi loan-to-value ratio of 23.3%. The rating also takes into consideration the following challenges: (1) Market Mall faces competition from other well-performing shopping centres in Calgary; (2) its key anchor tenant, The Bay, continues to face competition from discount-type retailers; and (3) there are significant tenant lease expiries in 2014, the year of the Bonds’ maturity.

Following strong growth over the last several years, Market Mall’s sales performance declined in 2011, mainly due to poor apparel and electronics sales. However, even with the decline, the CRU sales level of $821 psf is still one of the highest among shopping centres rated by DBRS. Market Mall also achieved reasonable net operating income (NOI) growth of 2.5%, with NOI increasing to $37.1 million in 2011 from $36.2 million in 2010. This improvement can be mainly attributed to higher net rental rates, partially offset by a slightly higher CRU vacancy rate than what had been achieved over the past several years. As a result, interest coverage and debt service coverage ratios have improved to 5.36 times (x) and 3.10x, respectively, which are strong for the current rating category. Market Mall also has a nominal exposure to re-leasing risk, with only 2.2% of the leases coming due before the end of 2013. While 2014 presents some exposure to re-leasing risk, DBRS considers this manageable and does not anticipate any leasing challenges given the Shopping Centre’s strong operating performance. In the near term, DBRS expects NOI to improve modestly from the in-place rental rate lifts while key operating metrics will likely stay in line with historical results. Furthermore, DBRS expects Market Mall will benefit from increased customer traffic with the addition of Target, which is expected to open in 2013 in the space formerly occupied by Zellers.

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.