DBRS Confirms Erin Mills Town Centre at A (low), Stable

DBRS has today confirmed the A (low) rating, with a Stable trend, on the 7.03% First Mortgage Bonds (the Bonds) due August 26, 2013, of Ontario Pension Board, secured by Erin Mills Town Centre (the Mall) and Erin Mills Town Plaza (the Plaza; collectively, the Project). The confirmation reflects some slight deterioration in operating and financial metrics within the parameters of the rating and potential benefits from the addition of Target in 2014/2015, while noting the recent renewal of the Loblaws lease for five years, bringing expiration to 2018. As a result, DBRS anticipates minimal refinancing risk for the Bonds.

The A (low) rating is supported by the following: (1) the Mall is a prominent regional shopping centre and well located in the southwest region of Mississauga; (2) favourable debt service coverage ratio (DSCR) of 2.15 times (x); and (3) very conservative DBRS refinancing loan-to-value (Refi LTV) of 36.8%. The rating also takes into consideration the following challenges: (1) the Mall’s anchor tenants (The Bay and Sears) continue to face significant competition from discount-type retailers such as Wal-Mart; (2) there is some re-leasing risk in 2013, when 9.2% of total leasable area matures; (3) significant competition from nearby dominant and super-regional malls; and (4) recourse is limited to the OPB’s interest in the Project.

In 2011, Erin Mills Town Centre generated $20.2 million of net operating income, a 6.9% decline from the year ended October 31, 2009 (FYE2009), the last comparable full year. The decline was mainly driven by higher operating expenses that resulted in lower net rent. Although the DSCR decreased to 2.15x (YE2011) from 2.31x (FYE2009), DBRS’s concern is mitigated by the fact that the coverage ratio remains reasonable for the rating category and the Project possesses very conservative leverage, with the Bonds maturing in 2013. In terms of lease maturity profile, there is minimal re-leasing risk for the rest of 2012, with only 2.2% of total leasable area expiring. Recently, Loblaws renewed its lease for an additional five-year term to March 2018, and this will provide some stability to future cash flow. In 2013, the year of the Bonds’ maturity, there is an above-average amount of leases maturing, mainly attributable to the expiration of the SportChek leases. However, DBRS expects the expiring leases to be renewed by SportChek as it is a well-performing location for the retailer. In addition, H&M and the property managers are in litigation for H&M’s attempt to terminate its lease before expiration in 2016. DBRS expect the outcome of the ruling to have no impact on the rating as the H&M lease represents only 2.6% of total leasable area.

DBRS expects the credit profile of the Project to remain consistent for the current rating through the maturity of the Bonds, based on adequate operating performance and very conservative debt levels.

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.