DBRS Confirms First Capital Realty at BBB (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the rating of First Capital Realty Inc.’s (First Capital or the Company) Senior Unsecured Debentures at BBB (high) with a Stable trend. The rating confirmation reflects the expected progress First Capital has made in enhancing its portfolio quality by focusing on real estate investments in growing urban markets while divesting non-strategic assets in smaller markets. The confirmation also acknowledges an improvement in EBITDA interest coverage, although this ratio remains within the lower end of the range for the current rating category. The rating continues to be supported by First Capital’s portfolio of unenclosed supermarket- and drugstore-anchored shopping centres, diverse tenant base, long-term leases with below-market rents, and strong record of development. The rating also reflects First Capital’s relatively small portfolio, geographic concentration, low coverage ratios and relatively high proportion of anchor tenants for the current rating category.

The Stable rating outlook reflects DBRS’s expectation that First Capital’s earnings profile should continue to improve within the current rating category, as the Company benefits from its enhanced portfolio quality, full-year earnings contributions from recently completed property investments and higher average rent rates on lease expiries (in-place rental rates are currently well below market rates). DBRS expects First Capital will continue to place a greater emphasis on improving asset quality through development and redevelopment projects over the next few years. DBRS also expects First Capital to continue divesting non-core properties in smaller markets (assets available for sale totalled approximately $205.1 million as at Q4 2014). In 2015, DBRS expects First Capital will fund its investments primarily with debt, equity and proceeds from asset dispositions. This should cause First Capital’s debt-to-capital ratio to remain fairly stable while EBITDA interest coverage (including capitalized interest) should improve over time to a level more in line with the current rating category (i.e., 2.50 times (x)), because of higher operating income and interest expense savings on debt refinancing activity.

Although DBRS does not anticipate a rating change in the near to medium term, a negative rating action could result from weaker operating and earnings performance and/or higher financial leverage, such that EBITDA interest coverage falls below 2.20x. On the other hand, a positive rating action would likely be a result of (1) a material increase in portfolio size and/or (2) a decrease in financial leverage that results in a sustained improvement in EBITDA interest coverage to above 3.20x.

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 methodologies are Rating Entities in the Real Estate Industry, DBRS Criteria: Guarantees and Other Forms of Explicit Support and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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