DBRS Confirms First Capital Realty at BBB with a Stable Trend

DBRS has today confirmed the rating of First Capital Realty Inc. (First Capital or the Company) at BBB with a Stable trend. First Capital continues to maintain a sound credit profile, with support from a large portfolio of neighbourhood and community shopping centres that are well located in densely populated urban residential areas across Canada, reasonable credit metrics and ample liquidity to meet its near-term capital obligations.

The rating confirmation incorporates the defensive features of First Capital’s portfolio, including a stable core of supermarket- and drugstore-anchored neighbourhood and community shopping centres and a large and diversified tenant base with a focus on non-discretionary type retailers, such as national/regional grocery and drugstore chains. These types of tenants are generally less sensitive to recessionary periods than are fashion-oriented tenants. In addition, First Capital has well-located properties within high barrier-to-entry and densely populated markets across Canada, which is reflected in the Company’s consistently high occupancy levels (96.3% as at Q1 2010) and increasing average in-place rental rates. First Capital continues to generate cash flow growth with support from completed development/redevelopment projects, positive releasing activity (+7.2% uplift on average rental rates on 259,000 square foot (sq. ft.) lease renewal space) and, to a lesser extent, property acquisitions.

Going forward, First Capital has modest lease maturities, with current in-place rents below average market rents, which should provide stability to cash flow. Nevertheless, DBRS expects that the challenging economic climate could put pressure on the Company’s smaller and/or lower-quality tenants and limit upside improvement on market rental rates. DBRS believes, however, that these concerns are manageable given the quality and stability of First Capital’s portfolio.

In terms of financial profile, First Capital continues to demonstrate ample financial flexibility and liquidity to fund its upcoming capital requirements and development costs. First Capital has approximately $245 million of available liquidity, including un-drawn amounts totalling $242.7 million on its secured revolving credit facilities and $2.4 million in cash balances as at Q1 2010. Recently, liquidity has been enhanced with the $125 million of Series I senior unsecured debentures, $50 million of Series J senior unsecured debentures and $50 million of common shares issued subsequent to Q1 2010. DBRS believes that this is more than enough to fund contractual obligations, including $99.4 million to complete current development projects and debt maturities for the remainder of 2010.

Financial flexibility is also enhanced by the Company’s positive free cash flow position and low payout ratio of 78.9% (DBRS-adjusted for maintenance capex and leasing costs) for the 12-month period ended Q1 2010. DBRS also notes that protection measures for the senior unsecured debenture holders are further enhanced by the Company’s large unencumbered asset pool ($1.3 billion as at Q1 2010, excludes properties under development), which continues to positively differentiate First Capital from other DBRS-rated real estate entities.

Going forward, DBRS expects First Capital to use a higher proportion of debt to fund portfolio growth and expects debt levels to increase slightly to the 55% to 60% range on a gross book value basis. This range of debt is reflected in the current rating category. Overall, DBRS expects First Capital’s credit profile to remain stable into 2011 and believes that the Company has appropriately managed its balance sheet with a prudent level of financial strength, which should position it well for growth opportunities when economic conditions show further signs of improvement.

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

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate (Real Estate) rating.