DBRS Confirms Rideau Centre at A (high), Stable

DBRS has today confirmed the A (high) ratings, with a Stable trend, on the 6.75% First Mortgage Bonds, Series A, and the 7.35% First Mortgage Bonds, Series B, both due March 2014 (collectively, the First Mortgage Bonds) of Viking Rideau Corporation secured by Rideau Centre (Rideau or the Shopping Centre). The confirmation reflects the Shopping Centre’s solid sales performance and significant net operating income (NOI) growth in 2011, while also taking into consideration potential exposure to re-development risk related to Sears space that was bought out, and an above-average number of lease expirations in 2013 and 2014.

The A (high) ratings are supported by the following: (1) Rideau has a preeminent position in downtown Ottawa; (2) the commercial retail unit (CRU) vacancy rate has been relatively low historically; and (3) DBRS Refi loan-to-value is very conservative at 26.8%. The ratings also take into consideration the following challenges: (1) Rideau has an above-average amount of leases expiring in 2013 and 2014. This could expose the Shopping Centre to re-leasing risk if retail fundamentals weaken during this period.

In April 2012, The Cadillac Fairview Corporation Limited (CFCL) bought out the lease for the Sears space prior to its lease expiry, and consequently Sears will be closing the store at this location on October 31, 2012. Currently, the property manager is in negotiation with possible candidates to take over the space. In the meantime, there is a $75 million redevelopment plan approved for the space to create a new anchor store and 67,000 square feet of new CRU space. Rideau continues to achieve solid growth in sales with CRU sales per square foot (psf) increasing to $993 for the year ended October 31, 2011 (YE2011). This level of sales performance is one of the highest among shopping centres rated by DBRS, and is driven by Rideau’s preeminent position in the downtown Ottawa market and solid tenant base comprising high-end fashion and nationally recognized retailers.

Rideau experienced significant NOI growth of 16% in 2011, mainly due to higher rental rates from re-leasing activities, higher parking revenue, and higher rent from the Westin Hotel following the completion of the renovation of the parking lot and adjacent Westin Hotel. As a result, the debt service coverage and interest coverage ratios have improved to 2.88 times (x) and 4.86x, respectively, for YE2011, which are levels appropriate for the current rating category. Although in the near term NOI and coverage ratios are expected to decline modestly due to the loss of Sears rent during the downtime to redevelop the space, these metrics will remain within the parameters of the current rating category and could benefit from a potential uplift in rental rates on lease expiries in 2013 and 2014.

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.