DBRS Confirms Petro-Canada Centre at A (low) with a Stable Trend

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of Petro-Canada Centre (“PC Centre”) as indicated above.

PC Centre’s credit profile has strengthened as net operating income (NOI) and interest coverage ratios continue an upward trend, driven by robust demand for office space in Calgary. Interest coverage for the First Mortgage Bonds increased to 3.2 times (x), while debt service coverage was strong at 2.3x in 2005, which compares well to other similar properties rated by DBRS. However, tenant concentration risk is a constraining factor for the rating.

Vacancy was negligible at year-end 2005 at 0.1%, reflecting the overall strength of the downtown Calgary office market, which had a vacancy decline to 1% in Q1 2006 from 5% last year. The strong demand for office space in Calgary’s downtown office market has resulted in a lack of contiguous blocks of space, which is having a positive impact on market net rental rates. The favourable conditions will likely continue at least until several new development projects are completed over the next two to four years to satisfy the pent up demand for space.

There are currently several projects underway in downtown Calgary expected to add four million to five million square feet over the next two to four years (an increase of 10% to 15%), although in most instances the projects are now 75% to 90% leased. Although speculative development has been reasonably limited so far, there are several further potential projects which could add another two million to three million square feet of office space in downtown Calgary over the next few years.

PC Centre’s lease maturities are minimal through the remaining life of the bonds, ranging from 3.3% to 5.0%, and its average lease term stands at 7.2 years. DBRS expects that NOI and coverage ratios in 2006 should modestly improve, as releasing activity over the past year or so has been at higher net rents on average, based on the strength of the Calgary office market. During 2005, PC Centre achieved average increases in net rent on new leases of between 20% and 25%, while tenant inducements were lower in 2005. Given the contractual rent increases over the next several years for major tenants and modest lease maturities through 2010, the Project is expected to generate stable cash flows through the term of the Bonds.

Longer term, the major challenge relates to additional supply coming onto the market in the 2008 to 2010 time frame, which could have a negative impact, depending on market conditions at the time. The rights of the First Mortgage Bonds are protected by a Subordination Agreement and Lock Box Agreement between the First and Second Mortgage Bondholders. First Mortgage Bondholders are well-secured given a loan-to-value (LTV) estimated at under 35% based on current market values. The total debt outstanding at maturity will be Cdn$240 million comprised of Cdn$174 million of First Mortgage Bonds and Cdn$66 million of Second Mortgage Bonds. DBRS does not expect any difficulties refinancing at that time.