DBRS Confirms West Edmonton Mall Property Inc. Ratings at “A”, Stable Trend

DBRS Limited (DBRS) has today confirmed its ratings of “A” with Stable trends, for the $900 million of Series B Bonds (the Bonds), comprising $350 million 4.309% First Mortgage 10-Year Interest Only Series B1Bonds and $550 million 4.056% First Mortgage 10-Year Amortizing Series B2 Bonds, issued by West Edmonton Mall Property Inc. (the Issuer) and secured by the Issuer’s interest in West Edmonton Mall (the Project or WEM) located in Edmonton, Alberta. The rating confirmation reflects WEM’s steady growth in total net operating income driven by its retail segment over the past year, and the resulting improvement in coverage ratios, which were in line with DBRS’s previous expectations.

DBRS notes that on May 15, 2015, WEM reached an agreement with the Monitor and Agent for Target Canada Co.(in CCAA) (Target, accounting for 5% of total gross leasable area) to purchase and effectively terminate Target’s lease for approximately $1 million. DBRS believes the Issuer should be able to release a majority of this space in 2016/2017. DBRS also believes there is potential for the Issuer to subdivide the former Target space into smaller units based on the current steady tenant demand at WEM, which should result in rental rates that are higher than the Target rental rates.

For the six months ended January 31, 2015 (6M 2015), WEM’s adjusted net operating income increased to $61.0 million from $53.7 million a year earlier, mainly due to retail segment’s contractual rent step ups from existing tenants, as well as rental uplifts from new tenants. Correspondingly, debt service and interest coverage ratios improved within the current rating category to 2.31 times (x) and 3.27x for 6M 2015.

Despite the uncertainty in the Alberta energy sector driven by the low oil price, consumer spending at WEM continued to grow as commercial retail unit sales increased to $759 per square foot (psf) for the last twelve months ended January 31, 2015, from $727 a year earlier. WEM also continued to display healthy tenant demand as gross rent psf increased to $68.87 for 6M 2015 from $63.72 in the comparable period a year earlier. Although DBRS does not anticipate a rating change in the near to medium term, a prolonged downturn in the energy sector that translates into lower retail sales and weaker tenant demand for WEM could result in a negative rating action.

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.

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

The applicable methodology is Rating Entities in the Real Estate Industry (Appendix: Property Financing (First Mortgage Bonds)), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.