RioCan Real Estate Investment Trust Q2 2017 results: IFRS Operating income reached $185 million; up by 8.5% from same period last year

RioCan’s HIGHLIGHTS for the three and six months ended June 30, 2017:

  • For the quarter ended June 30, 2017 (“Second Quarter”), IFRS Operating income increased to $185 million from $171 million or 8.5% in the quarter from the prior year;
  • Revenue increased 3.6% for the Second Quarter to $286 million as compared to $276 million for the second quarter of 2016;
  • Funds From Operations (“FFO”) in the Second Quarter increased 10.1% to $147 million as compared to $133 million during the second quarter of 2016, despite the sale of our discontinued U.S. operations in May 2016. On a continuing operations basis, FFO increased 25.5% to $146 million for the Second Quarter, as compared to $116 million in the second quarter of 2016;
  • Same property NOI grew by 1.9%, or $3.0 million in the Second Quarter as compared to the same period in 2016;
  • Committed occupancy continued to improve, up 160 basis points to 96.7% at June 30, 2017 as compared to 95.1% at June 30, 2016;
  • Retention rate further improved to 93.9% in the Second Quarter as compared to a retention rate of 91.6% in the same period in 2016;
  • Renewal rent increases were 4.7% in the Second Quarter as compared to renewal rent increases of 3.3% with in the same period in 2016;
  • As part of RioCan’s ongoing capital recycling program, RioCan completed the sale of its Cambie Street property in Vancouver, B.C. for $94.2 million at a 3.29% capitalization rate. RioCan also sold a portion of its marketable securities and recognized a gain of $10.3 million in the Second Quarter;
  • During the quarter, RioCan entered into two strategic residential joint ventures. One with Killam Apartment REIT for the Gloucester residential development, and the other with Concert Real Estate Corporation for the Sunnybrook Plazaredevelopment project; and
  • RioCan completed the offering of $300 million Series Z senior unsecured debentures that mature in April 2021 with a 2.194% coupon rate. RioCan also redeemed $149.5 million of the Trust’s cumulative rate reset preferred trust units Series C on June 30, 2017.

TORONTO, 2017-Aug-07 — /EPR Retail News/ — RioCan Real Estate Investment Trust (“RioCan”) (TSX:REI.UN) today (08/03/2017) announced its financial results for the three and six months ended June 30, 2017.

“I am very pleased with what we have been able to accomplish in the first half of 2017. Our Canadian operations have generated very strong growth in Funds From Operations and our portfolio is performing well with occupancy levels returning to near our best of around 97%,” said Edward Sonshine Chief Executive Officer of RioCan. “We are creating substantial value in our development program, as evidenced by the quality of partners that we have been able to attract to projects such as Gloucester City Centre and Sunnybrook Plaza. Our development with Allied Properties at King and Portland is progressing very well and the office component is 93% pre-leased. These and other projects currently well underway will be solid contributors to the continued growth in Funds From Operations for RioCan.”

Financial Highlights
All figures are expressed in Canadian dollars unless otherwise noted. For further information about RioCan’s results for the three and six months ended June 30, 2017, this earnings release should be read in conjunction with our unaudited interim consolidated financial statements (“Consolidated Financial Statements”), as well as Management’s Discussion and Analysis (“MD&A”) for the three and six months ended June 30, 2017.

RioCan’s Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Consistent with RioCan’s management framework, management uses certain financial measures to assess RioCan’s financial performance, which are not generally accepted accounting principles (GAAP) under IFRS. For full definitions of these measures, please refer to “Non-GAAP Measures” in RioCan’s June 30, 2017 Management’s Discussion and Analysis. As a result of the sale of the U.S. operations, we have reported our former U.S. geographic segment performance as “discontinued operations” with comparative income statement amounts adjusted to reflect this change, unless otherwise noted.

Continuing Operations
FFO from continuing operations increased from $116.1 million in the second quarter of 2016 to $145.7 million in the second quarter of 2017, an increase of $29.6 million or 25.5%. The $29.6 million increase in FFO from continuing operations for the quarter was primarily due to higher NOI of $13.7 million (at RioCan’s proportionate share) mainly as a result of acquisitions net of dispositions and growth in same property NOI, $10.3 million gains related to the sale of available-for-sale marketable securities, $3.5 million lower interest costs (at RioCan’s proportionate share), $2.6 million lower general and administrative expenses mainly resulting from mark to market adjustments for certain cash-settled unit-based compensation, and $1.7 million higher fee income and other income, partially offset by $1.1 million in lower dividend income on available-for-sale marketable securities $1.2 million in other costs associated with transactions that the Trust decided not to pursue further, and $0.6 million lower inventory sales net of costs.

FFO for the first half of 2017 is $289.4 million compared to $275.8 million representing an increase of approximately $13.6 million or 4.9%. On a basic per unit basis, FFO is $0.89 compared to $0.85, representing an increase of 4.2%, despite the sale of the U.S. portfolio in May 2016.

Continuing Operations
FFO from continuing operations increased from $224.8 million in the first half of 2016 to $288.7 million in the comparable period in 2017, an increase of $63.8 million or 28.4%. The $63.8 million increase in FFO from continuing operations for the period was primarily due to higher NOI of $23.1 million (at RioCan’s proportionate share) mainly as a result of acquisitions net of dispositions and growth in same property NOI, $21.8 million gains related to the sale of available-for-sale marketable securities, $7.0 million lower interest costs (at RioCan’s proportionate share), $4.8 million lower general and administrative expenses, $4.3 million Series A preferred unit redemption costs in Q1 2016, $1.6 million less Series A preferred unit distributions, $1.3 million higher interest income and $1.0 million higher property management and asset management fee income, partially offset by $1.8 million lower dividend income from the sale of available-for-sale marketable securities and $1.2 million in other costs associated with transactions that the Trust decided not to pursue further.

Other Operating Statistics

  • Renewal rents increased on average 4.7% and RioCan’s retention rate increased from 91.6% in Q2 2016 to 93.9% this quarter. The lower renewal average net rent increase in Q2 2017 in comparison to Q1 2017 is primarily due to a higher proportion of renewals with fixed rates many of which were completed with anchor tenants in secondary markets compared to renewals at market rental rates.
  • We expect to generate  $13.0 million of annualized net incremental IFRS rent once all tenants that have signed leases as of June 30, 2017 take possession of their space. Approximately 40.3% of the incremental IFRS rent relates to the leasing of former Targetspace and leasing of other tenant space in development projects expected to be completed in the second half of 2017; and
  • Consistent with RioCan’s stated strategy, its portfolio is concentrated in Canada’s six major markets (consisting of Toronto, Ottawa, Calgary, Edmonton, Montreal and Vancouver). Assets in these markets contribute approximately 75.2% of RioCan’s annualized rental revenue as at June 30, 2017 (75.5% at December 31, 2016).

Acquisitions and Dispositions

Income Producing Property Acquisitions and Dispositions
During the quarter, we completed the acquisition of one income property for $16.5 million.  During the quarter, we disposed of one income property (Cambie Street property in Vancouver, British Columbia) for sale proceeds of $94.2 million at a capitalization rate of 3.29%.

As at August 3, 2017, RioCan expects to complete the sale of a portfolio of six chartered bank branches located in British Columbia at a sale price of $30.3 million, at a capitalization rate of 3.72%, subject to customary closing conditions. There is no debt associated with these properties.

Development Property Acquisitions and Dispositions
We did not acquire any development properties during the second quarter of 2017. During the quarter, we disposed of 50% interests in the following two development properties for gross sale proceeds of $35.2 million.

  • Gloucester Residential – On April 21, 2017, RioCan and Killam Apartment REIT announced the creation of a 50/50 Joint Venture to develop a residential community at Gloucester City Centre in Ottawa, Ontario. The site has zoning approval for a total of four residential towers containing up to an aggregate of 840 units. The first phase of the development will be a 23-storey tower containing approximately 222 units. This leading edge development will maximize efficiency with the incorporation of a geothermal energy system for the building’s heating and cooling. Construction has commenced and occupancy is anticipated in mid-2019.
  • Sunnybrook Plaza – On June 14, 2017, RioCan completed the sale of a 50% interest in Sunnybrook Plaza to Concert Properties(“Concert”). RioCan and Concert plan to construct a 16-storey and 11-storey mixed use residential project. Currently, RioCan and Concert are contemplating that the residential component will be developed as rental suites.

Development Pipeline

RioCan’s development program is an important component of its long-term growth strategy and is focused on well- located urban and suburban properties in the six major markets in Canada. Often, these are properties that RioCan already owns and are located directly on, or in proximity, to major transit lines. RioCan’s development program continues to be a significant value creation driver and will secure diversification and growth for our future cash flows.

Pipeline Summary
RioCan’s overall estimated development pipeline as at June 30, 2017, represents approximately 24.1 million square feet of density (at RioCan’s interest). These projects include commercial space (office and retail), residential rental held for long-term rental income, condominiums and townhouses for sale, and density associated with air rights sales. Approximately 3.5 million square feet of net leaseable area (“NLA”) in the estimated development pipeline is existing NLA which is currently income producing, therefore the net incremental density included in the total development pipeline is estimated at 20.6 million square feet (at RioCan’s interest) as of June 30, 2017. Approximately 94.1% or 22.7 million square feet of our overall estimated development pipeline is residential or mixed-use projects.

A key milestone of the development process and in creating value for the Trust is the the zoning approval process. Of the Trust’s estimated 24.1 million square feet of development pipeline (at RioCan’s interest) 10.7 million square feet have zoning approvals, representing approximately 44.6% of total estimated NLA in the Trust’s current estimated development pipeline. In addition, the Trust has 7.1 million square feet with zoning applications submitted, representing an additional 29.4% of the Trust’s current development pipeline as of June 30, 2017.

RioCan has categorized its development pipeline into three primary components: active projects with detailed cost estimates, active projects with cost estimates in progress, and future estimated density. As of June 30, 2017, RioCan has active projects with detailed cost estimates that when complete over the next six years represent 4.4 million square feet (4.6 million square feet including Residential Inventory) with total estimated project costs of $2.2 billion, after projected proceeds from land and air rights dispositions, of which $1.1 billion of costs have been incurred to date.

The Trust will continue to fund its development pipeline through its capital recycling program and strategic development partnerships.

Completed Developments in 2017
During the Second Quarter, RioCan transferred $41.8 million in costs to income producing properties pertaining to 232,000  square feet of completed greenfield development and expansion and redevelopment projects.

Liquidity and Capital
RioCan’s debt and leverage metrics are disclosed below to help facilitate an understanding of RioCan’s leverage and its ability to service such leverage. The definitions that management uses, as well as the calculation methodology for the ratios included in the table below are described in RioCan’s Management’s Discussion and Analysis for the six months ended June 30, 2017.

The interest and debt service coverage ratios calculated at RioCan’s proportionate share for the twelve months ended June 30, 2017 improved compared to December 31, 2016 mainly due to lower interest and debt service costs as a result of the repayment of debt using the net proceeds from the U.S. sale and interest savings from mortgage refinancing, partially offset by a decrease in adjusted EBITDA mainly in connection with our U.S. property portfolio disposition.

The fixed charge coverage ratio calculated at RioCan’s proportionate share for the twelve months ended June 30, 2017 improved compared to December 31, 2016 mainly due to lower total fixed charges (interest cost plus unitholder distributions) partially offset by the same changes in adjusted EBITDA as described above.

Debt to adjusted EBITDA at RioCan’s proportionate share has decreased to 7.51x for the twelve months ended June 30, 2017 mainly as a result of lower average debt balances outstanding, partially offset by a decrease in adjusted EBITDA mainly in connection with our U.S. property portfolio disposition in the second quarter of 2016.

Our leverage ratio at RioCan’s proportionate share increased from 40.0% at December 31, 2016 to 41.5% at June 30, 2017 primarily due to the payment of U.S. taxes that have been accrued in 2016, relating to the sale of our U.S. portfolio in 2016, as well as redemption of the Trust’s Series C preferred trust units on June 30, 2017. We expect our total debt to total asset ratio to fluctuate between 38% to approximately 42%. Over the next 12 to 18 months, we expect this ratio to rise toward the higher end of this range.

The percentage NOI generated from unencumbered assets has improved from 49.5% to 52.6% as we continued to unencumber assets during the first half of 2017. The unencumbered assets to unsecured debt ratio, however, decreased from 240% to 231% this period as the increase in our unsecured debt of $333 million, partially driven by tax payments relating to the U.S. portfolio sale and redemption of the Trust’s Series C preferred units, outpaced the $503 million increase in unencumbered assets on a relative basis.  Overall, we are still well over our 200% target.

Selected Financial Information
The following includes financial information prepared by management in accordance with IFRS and based on the Trust’s Consolidated Financial Statements for the period ended June 30, 2017. This financial information does not contain all disclosures required by IFRS, and accordingly should be read in conjunction with the Trust’s Consolidated Financial Statements and MD&A for the period ended June 30, 2017, which is available on RioCan’s website and on SEDAR.

Conference Call and Webcast
Interested parties are invited to participate in a conference call with management on Friday, August 4, 2017 at 8:30 a.m. Eastern time. You will be required to identify yourself and the organization on whose behalf you are participating.

In order to participate, please dial 647-427-3230 or 1-877-486-4304. If you cannot participate in the live mode, a replay will be available. To access the replay, please dial 1-855-859-2056 and enter passcode 47045117#.

Alternatively, to access the simultaneous webcast, go to the following link on RioCan’s website http://investor.riocan.com/investor-relations/events-and-presentations/events/ and click on the link for the webcast. The webcast will be archived 24 hours after the end of the conference call and can be accessed for 120 days.

About RioCan
RioCan is Canada’s largest real estate investment trust with a total enterprise value of approximately $13.9 billion as at June 30, 2017. RioCan owns and manages Canada’s largest retail focused portfolio with ownership interests in 299 retail and mixed-use properties, including 15 properties under development, containing an aggregate net leasable area of 45 million square feet. For the past 25 years, we have shaped the future, sensibly cultivated growth, and taken our stakeholders and partners wherever they needed to go. Currently, we have more than 6,350 retail tenants and approximately 660 employees with a presence from coast to coast. We know that there is a home for every retailer. Whether we find it today or build it for tomorrow, we deliver real vision, solid ground. For more information, visit www.riocan.com.

Non-GAAP Measures
RioCan’s consolidated financial statements are prepared in accordance with IFRS. Consistent with RioCan’s management framework, management uses certain financial measures to assess RioCan’s financial performance, which are not generally accepted accounting principles (GAAP) under IFRS. The following measures, RioCan’s Interest, RioCan’s Proportionate Share, Funds From Operations (“FFO”), Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”), Interest Coverage Ratio, Debt Service Coverage Ratio, Debt to Adjusted EBITDA, Net Operating Income (“NOI”), Same Property NOI, Fixed Charge Coverage, Percentage of NOI Generated from Unencumbered Assets, Unencumbered Assets to Unsecured Debt, and Total Enterprise Value, as well as other measures discussed elsewhere in this release, do not have a standardized definition prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers. RioCan supplements its IFRS measures with these non-GAAP measures to aid in assessing the Trust’s underlying performance and reports these additional measures so that investors may do the same. Non- GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan’s performance, liquidity, cash flow, and profitability. For a full definition of these measures, please refer to the “Non-GAAP Measures” in RioCan’s Management Discussion and Analysis for the period ending June 30, 2017.

Forward-Looking Information

This news release contains forward-looking information within the meaning of applicable Canadian securities laws. This information includes, but is not limited to, statements made in “Financial Highlights”, “Operational Performance”, “Acquisitions and Dispositions”, “Development Pipeline Summary”, Liquidity and Capital” and other statements concerning RioCan’s objectives, its strategies to achieve those objectives, as well as statements with respect to management’s beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking information generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”, “would”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plan”, “continue”, or similar expressions suggesting future outcomes or events. Such forward-looking information reflects management’s current beliefs and is based on information currently available to management. All forward-looking information in this News Release is qualified by these cautionary statements.

Forward-looking information is not a guarantee of future events or performance and, by its nature, is based on RioCan’s current estimates and assumptions, which are subject to numerous risks and uncertainties, including those described under “Risks and Uncertainties” in RioCan’s Management’s Discussion and Analysis for the period ended June 30, 2017 (“MD&A”), which could cause actual events or results to differ materially from the forward-looking information contained in this News Release. Those risks and uncertainties include, but are not limited to, those related to: liquidity and general market conditions; tenant concentrations and related risk of bankruptcy or restructuring (and the terms of any bankruptcy or restructuring proceeding), occupancy levels and defaults, including the failure to fulfill contractual obligations by the tenant or a related party thereof; lease renewals and rental increases; the ability to re-lease and find new tenants for vacant space; retailer competition; changes in Ontario’s rent control legislation; access to debt and equity capital; interest rate and financing risk; joint ventures and partnerships; the relative illiquidity of real property; unexpected costs or liabilities related to acquisitions and dispositions; development risk associated with construction commitments, project costs and related approvals; environmental matters; litigation; reliance on key personnel; unitholder liability; income, sales and land transfer taxes; and credit ratings.

RioCan currently qualifies as a real estate investment trust for Canadian tax purposes and intends to qualify for future years. The Income Tax Act (Canada) contains provisions which potentially impose tax on publicly traded trusts that qualify as specified investment flow-through entities (the SIFT Provisions). However, the SIFT Provisions do not impose tax on a publicly traded trust which qualifies as a REIT. Should RioCan no longer qualify as a Canadian REIT under the SIFT Provisions, certain statements contained in this News Release may need to be modified. RioCan is still subject to Canadian tax in its incorporated Canadian subsidiaries.

Our U.S. subsidiary qualified as a REIT for U.S. income tax purposes up to May 25, 2016, subsequent to the closing date of the sale of our U.S. property portfolio. For U.S. income tax purposes, the subsidiary distributed all of its U.S. taxable income and is entitled to deduct such distributions against its taxable income. The subsidiary’s qualification as a REIT depends on the REIT’s satisfaction of certain asset, income, organizational, distribution, unitholder ownership and other requirements up until May 25, 2016. Our U.S. subsidiary was subject to a 30% or 35% withholding tax on distributions of its U.S. taxable income to Canada. We do not intend to distribute any withholding taxes paid or payable to our unitholders related to the disposition. Should RioCan’s U.S. subsidiary no longer qualify as a U.S. REIT for U.S. tax purposes prior to May 25th, 2016, certain statements contained in this MD&A may need to be modified.

Other factors, such as general economic conditions, including interest rate fluctuations, may also have an effect on RioCan’s results of operations. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information may include, but are not limited to: a stable retail environment; relatively low and stable interest costs; a continuing trend toward land use intensification, including residential development in urban markets; access to equity and debt capital markets to fund, at acceptable costs, future capital requirements and to enable our refinancing of debts as they mature; and the availability of investment opportunities for growth in Canada. For a description of additional risks that could cause actual results to materially differ from management’s current expectations, see “Risks and Uncertainties” in RioCan’s MD&A for the period ended June 30, 2017, and in “Risks and Uncertainties” in RioCan’s most recent Annual Information Form. Although the forward- looking information contained in this News Release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with this forward-looking information. Certain statements included in this News Release may be considered “financial outlook” for purposes of applicable Canadian securities laws, and as such the financial outlook may not be appropriate for purposes other than this News Release. The forward-looking information contained in this News Release is made as of the date of this News Release , and should not be relied upon as representing RioCan’s views as of any date subsequent to the date of this News Release.

Management undertakes no obligation, except as required by applicable law, to publicly update or revise any forward- looking information, whether as a result of new information, future events or otherwise.

Contact Information:
RioCan Real Estate Investment Trust
Qi Tang
Senior Vice President and Chief Financial Officer
416-866-3033

Source: RioCan Real Estate Investment Trust