DBRS Confirms RioCan REIT at BBB (high) and Pfd-3 (high), Stable Trends

DBRS has today confirmed the Senior Unsecured Debentures and Preferred Trust Units of RioCan Real Estate Investment Trust (RioCan or the Trust) at BBB (high) and Pfd-3 (high), respectively. The trends are Stable. RioCan’s BBB (high) rating incorporates the following strengths: (1) dominant retail portfolio with well-located properties; (2) diverse tenant base; and (3) reasonable balance sheet and coverage ratios. The rating also takes into consideration the following challenges: (1) high payout ratio and negative free cash flow position; (2) geographic concentration in Ontario; and (3) countervailing power of large tenants.

In 2011, RioCan achieved significant growth in operating income driven primarily by $1.1 billion of property acquisitions. These investments were slightly weighted toward the United States (focused in the Northeast and Texas). To date, RioCan has acquired approximately 6.8 million square feet (sf) (represents 14.9% of total net leasable sf) in the United States through joint ventures formed with Cedar Realty Trust, Inc. (Cedar), Inland Western Retail REIT (Inland Western), Kimco Realty Corporation (Kimco) and Sterling Organization, LLC. RioCan’s U.S. properties are predominantly grocery store-anchored and new format shopping centres. These properties complement the Trust’s existing portfolio with good occupancy levels (98.1% as at Q4 2011) and quality tenants, such as Giant Food Stores, LLC (Giant Food) and Lowes. RioCan also achieved same portfolio net operating income (NOI) growth in the Canadian and U.S. portfolio of 1.1% and 1.9%, respectively, driven by higher average rental rates on lease renewals and fixed rent step-ups on existing leases. The Trust’s portfolio also continues to achieve high occupancy levels (97.6% as at Q4 2011) and high tenant retention rates (89.4%).

From a financial standpoint, higher cash flow levels have improved the Trust’s payout ratio and negative free cash flow position. However, DBRS still believes that RioCan’s payout ratio is aggressive for the current rating. In 2011, RioCan used a higher proportion of equity than debt to fund investments and its negative free cash flow position, which resulted in the Trust’s debt levels decreasing modestly to 48.1% from 51.1% a year earlier. In addition, EBITDA interest coverage improved to 2.40 times (includes capitalized interest) benefiting from cash flow growth and lower interest costs on refinancing activity.

The stable outlook reflects RioCan’s modest lease maturities over the next two years, which should continue to provide underlying support to its cash flow and earnings profile. In addition, DBRS expects recent property acquisitions to contribute to growth in cash flow. The Trust currently has $124 million of acquisitions under contract that are scheduled to close in the first half of 2012. DBRS also expects RioCan to acquire approximately $600 million of retail properties with a slight weighting toward markets in the United States. With regards to the financing of property acquisitions, DBRS believes that RioCan has good access to the capital markets.

In terms of financial profile, continued cash flow growth expected in 2012 should help to narrow RioCan’s negative free cash flow position. Furthermore, RioCan has more than sufficient liquidity (totaling $350 million as at Q4 2011) to fund its modest development expenditures in 2012. The Trust has a laddered debt maturity profile, which limits its exposure to refinancing and interest rate risk. DBRS expects that RioCan will achieve further interest expense savings on upcoming debt maturities (debt maturities in 2012 have a weighted-average interest rate of 5.47% compared with recent financing rates done at below 4%), which should result in EBITDA interest coverage improving to the 2.4 times to 2.5 times range in the near term. As such, DBRS expects that RioCan’s credit metrics will remain sound for the Trust’s current rating category.

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

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