DBRS Confirms St. Laurent Shopping Centre at A (low) with a Stable Trend

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of St. Laurent Shopping Centre (“St. Laurent” or the “Shopping Centre”) as indicated above at A (low) with a Stable trend.

St. Laurent’s credit profile remains stable, despite the potential near-term exposure to strategic changes for Hudson’s Bay Company and Sears Canada Inc. (rated BB with an “Under Review with Developing Implications” rating action by DBRS), including possible store closures across Canada. Under DBRS’s extreme scenario, where all anchor tenants would vacate the Shopping Centre and stop paying rent, interest coverage would drop from 2.18 times to the 1.90 times range.

DBRS, however, believes the occurrence of such an event would likely be less dramatic and takes comfort in the fact that:

(1) Given that St. Laurent has a dominant position within its market, the Shopping Centre would be able to attract replacement tenants in a timely fashion and would likely achieve higher net effective rents than under the current anchor leases.

(2) Bondholders’ obligations are still adequately covered by cash flows if all anchor tenants were to vacate the Shopping Centre.

(3) The Shopping Centre’s loan-to-value ratio is conservative with Cdn$135 million in debt outstanding as at December 31, 2005.

(4) Bondholders have full recourse to Morguard Real Estate Investment Trust (rated BB (high) with a Stable trend by DBRS).

Notwithstanding the above concerns, the rating continues to be based on the performance of the Shopping Centre and takes into consideration the following:

(1) Commercial retail unit (CRU) sales per square foot continued its positive trend with support from a sound Ottawa, Ontario, economy and robust consumer spending levels over the past few years. As at FYE2005, CRU sales per square foot were Cdn$598, a level that compares well with similar shopping centres rated by DBRS.

(2) As a result of the improving sales performance, St. Laurent has achieved higher average CRU rental rates, which has contributed to a steady increase in its interest coverage ratio over the past several years. Although acceptable for the rating category, DBRS notes that St. Laurent’s interest coverage remains at a level below other shopping centres rated by DBRS.
(3) St. Laurent has a significant amount of CRU space (34.6%) maturing in 2007 that presents a potential for re-leasing risk. However, DBRS believes this provides an opportunity to achieve a further uplift in rental rates given the strong performance of the CRU tenants and the Shopping Centre as a whole.

Overall, DBRS expects St. Laurent’s credit profile to remain stable in 2006, with support from a stable Ottawa economy with steady employment growth forecasted in 2006. DBRS notes that the Cdn$55 million 6.76% Series D First Mortgage Bonds were refinanced with Cdn$55 million Series E First Mortgage Bonds on March 28, 2006. These Bonds rank pari passu with the existing First Mortgage Bonds and have been assigned a rating of A (low). In addition, DBRS does not anticipate any refinancing difficulties with respect to the Series B and Series E First Mortgage Bonds that mature in March 2007.