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 B1 Bonds 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 Mall or WEM), located in Edmonton, Alberta.

The ratings acknowledge a weak consumer spending environment and above-national average unemployment levels in Alberta as a result of low oil prices. DBRS expects this environment to persist in the near to medium term, which will likely dampen the Mall’s sales performance (particularly for retailers selling non-discretionary-type goods), rental rate growth on leasing activity, and hotel revenues. DBRS notes WEM’s retail sales and hotel revenue for the three months ended July 31, 2016, are expected to temporarily benefit from the recent relocation of the Fort McMurray residents affected by the wildfire to the Edmonton region.

Notwithstanding a challenging operating environment in Alberta, the rating confirmations reflect DBRS’s projection of continued solid coverage ratios and moderate net operating income (NOI) growth in the near term, driven primarily by signed leases for recently constructed space (104,984 sf, or 4.0% of total retail GLA as at June 30, 2016), in-place contractual rent step-ups and the expectation that a portion of the former Target space (126,314 sf, or 4.8%) will be leased in 2017. DBRS notes the property manager is in advanced negotiations with several new tenants to lease the former Target space. DBRS expects these tenants will take possession of this space in late 2016 and throughout 2017.

For the last twelve months ended April 30, 2016, commercial retail unit (CRU) sales declined to $753 per square feet (psf) from $763 psf for the year ended July 31, 2015. Despite some softness in CRU sales, WEM has performed satisfactorily over the past year as measured by its NOI. For the nine months ended April 30, 2016 (9M 2016), DBRS adjusted NOI increased by 1.7% to $90.8 million from $89.3 million a year earlier. This modest increase was mainly due to the retail segment’s in-place contractual rent step-ups and higher rental rates on new retail leases signed, which were partially offset by the previously anticipated decline in occupancy, primarily caused by Target’s departure. Correspondingly, debt service coverage ratio (DSCR) has improved slightly within the parameters of its current rating category to 2.29 times (x) for 9M 2016, from 2.25x a year earlier.

RATING DRIVERS
Although DBRS does not anticipate a rating change in the near to medium term, a negative rating action could occur if DSCR were to fall below 1.90x on a sustained basis, caused by an increase in vacancies from tenant departures and/or the unsuccessful leasing of future lease expires.

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 Entities in the Real Estate Industry (June 2016), which can be found on our website under Methodologies.