DBRS Upgrades First Capital Realty Inc. to BBB (high)

DBRS has today upgraded the Senior Unsecured Debentures of First Capital Realty Inc. (First Capital or the Company) to BBB (high) from BBB, with a Stable trend. This action follows DBRS’s June 27, 2012, trend change to Positive on the Company’s rating.

The rating upgrade acknowledges First Capital’s progress in terms of enhancing the quality, size and market position of its portfolio of supermarket- and drugstore-anchored shopping centres in high barrier-to-entry major urban markets across Canada. In addition, the Company has meaningfully reduced the proportion of debt in its capital structure and improved key credit metrics to levels that are more in line with the BBB (high) rating category.

Since DBRS’s rating upgrade of First Capital in 2007, the size and market position of its portfolio has improved as a result of the Company’s focused strategy of acquiring and developing: (1) quality properties in high barrier-to-entry major urban growth markets in Canada; (2) well-located underperforming urban properties with repositioning and redevelopment opportunities; and (3) land parcels/income-producing properties that are adjacent to existing properties and properties with site intensification opportunities. In addition, asset quality is expected to continue to improve into 2013 as First Capital disposes of its non-strategic properties located in smaller markets and reinvests the proceeds into development and acquisition opportunities. Going forward, this strategy will likely continue to enhance the stability of First Capital’s earnings profile.

From a financial perspective, First Capital has reduced leverage levels and improved key coverage metrics. As at September 30, 2012, total debt-to-capital (DBRS adjusted) declined to 48.5% from 55.3% in Q3 2011, which was mainly due to an equity issuance of $288 million during Q3 2012. Taking into consideration the defensive nature of the Company’s portfolio, DBRS views this level of leverage as in line with the BBB (high) rating category and expects the Company to maintain credit metrics that are commensurate with the current rating category.

First Capital has also made significant progress in growing its unencumbered asset pool and reducing secured debt. Secured debt levels declined to 49.3% on a total debt basis in Q3 2012, from 63.7% in 2007, and further declines in this ratio would continue to enhance the Company’s financial flexibility.

DBRS expects First Capital to fund development, redevelopment and, to a lesser extent, property acquisitions in 2013, mainly with proceeds from planned asset dispositions (approximately $298 million of assets held for sale as at Q3 2012). As a result, DBRS expects debt levels to remain fairly stable and for coverage ratios (including capitalized interest) to improve modestly in 2013 within the current rating category due to higher cash flow levels as a result of completed investment activity and organic cash flow growth.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Real Estate Entities (April 2011), which can be found on our website under Methodologies.