DBRS Confirms Southcentre Mall at A (low)

DBRS has today confirmed the ratings of the 6.48% First Mortgage Bonds, Series A of Southcentre Mall (Southcentre or the Shopping Centre) at A (low). The credit profile remains stable, with support from solid credit metrics, improving sales performance and favourable economic conditions in Alberta.

The current rating category is based on the performance of the Shopping Centre and reflects the following:

(1) The Shopping Centre continues to benefit from strong retail conditions in Alberta, with increased consumer-spending levels driven by the province’s robust oil- and gas-based economy. As a result, Southcentre’s sales performance continues to strengthen, with commercial retail unit (CRU) sales per square foot increasing significantly (+10.6%) to $697 for F2007 from $630 for the comparable period in 2006. Although growth in consumer spending levels will likely moderate in Alberta over the medium term, DBRS expects Southcentre’s sales performance to continue to improve throughout 2008 and to compare favorably to other shopping centres similarly rated by DBRS.

(2) Southcentre’s improved sales performance continues to drive higher average CRU net rental rates. This improvement is highlighted by the moderate increase in net operating income (NOI) levels and coverage ratios for the Shopping Centre. For F2007, the interest coverage and debt service coverage ratios were 3.67 times and 2.37 times, up from 3.05 times and 2.04 times, respectively. Although these coverage metrics remain strong for the rating category and partially reflect the very conservative amount of debt outstanding against the Shopping Centre, Southcentre’s NOI levels are at the lower end of the range compared with higher DBRS-rated shopping centres, which generate over $30 million in NOI. Going forward, DBRS expects Southcentre to continue to exhibit NOI growth throughout 2008 and to likely achieve higher rental rates on the moderate amount of CRU space (21.1%) set to expire in 2008.

(3) Southcentre has a very conservative loan-to-value ratio, with only $94.5 million in debt outstanding as at December 31, 2007.

(4) Bondholders have full recourse to Ivanhoe Cambridge I Inc. and Ivanhoe Cambridge II Inc. (collectively, Ivanhoe Cambridge), which DBRS views as a solid, investment-grade credit.

The rating is limited by the following constraints. First, Southcentre’s anchor tenants (The Bay and Sears) continue to face significant competition from discount-type retailers and those that demonstrate changing trends in retail formats, such as the new power-centre layouts. DBRS believes this could potentially result in at least one of the noted tenants undertaking strategic changes, including possible store closures. DBRS notes, however, that any potential disruption would likely be short in nature given the overall quality and location of the Shopping Centre. Overall, DBRS views this risk as manageable considering the Shopping Centre’s noted credit strengths, and has reflected this in the current rating category.

Second, despite experiencing moderate growth over the past the year, the level of Southcentre’s NOI remains below higher DBRS-rated shopping centres. And third, Calgary remains one of the most competitive retail cities in Canada, having a high proportion of well-performing regional shopping centres. Specifically, Chinook Centre remains a significant competitor for Southcentre in its primary trade area.

Overall, DBRS expects Southcentre’s credit profile to remain stable in 2008, with underlying support from a strong local economy. DBRS notes that Southcentre will undergo a $100 million renovation project (the Project) expected to be completed in fall 2009. The project is expected to consolidate existing CRU space to accommodate a tenant (Crate & Barrel) with larger space requirements. While the additional rent from this space will likely be minimal, the Project is expected to further enhance Southcentre’s competitive position within its market and improve overall customer appeal. In addition, the Project will be funded entirely by an equity injection and provides bondholders with additional security.

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