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

DBRS has today confirmed the ratings of RioCan Real Estate Investment Trust’s (RioCan or the Trust) Senior Unsecured Debentures and Senior Unsecured Debentures, Series 1, at BBB (high) and Preferred Trust Units at Pfd-3 (high), all with Stable trends. While the confirmation acknowledges RioCan’s steady growth in operating income and improvement in financial metrics over the past several years, the ratings continue to be constrained by the Trust’s high distribution payout ratio. DBRS notes that a positive rating action could occur, should the Trust continue to improve its EBITDA coverage (including capitalized interest) above 3.0 times (x) and lower its distribution payout ratio such that it is more consistent with the A (low) rating category.

Net rental income increased by 7.6% to $744.9 million in 2013, as a result of net property acquisitions, modest same-property net operating income (NOI) growth and the completion of development projects. RioCan’s growth strategy involves increasing exposure to high-growth urban areas in Canada while divesting assets in secondary markets. In terms of financial profile, distributions continued to exceed internally generated cash flow, although to a lesser degree than previous years. RioCan funded this marginal deficit and its developments and acquisitions (totalling $723 million) primarily with proceeds from divestitures ($440 million), modest amount of debt ($102 million) and an active dividend reinvestment plan (DRIP) program. RioCan’s key financial metrics improved within the current rating category (i.e., debt-to-EBITDA of 8.2x in 2013 versus 8.5x a year earlier, and EBITDA interest coverage of 2.76x in 2013 versus 2.56x in 2012), primarily as a result of growth in operating income.

DBRS expects RioCan will continue to achieve high-single-digit growth in net rental income, driven by its recent acquisitions and completion of several development projects (i.e., the Stockyards mall project in Toronto, Tanger Outlets and East Hills projects) in 2014. Going forward, growth should be underpinned by the Trust’s long-term lease profile and modest level of maturities in the near term. However, the rate of growth should moderate in the near term as the Trust focuses more on development/redevelopment projects, the returns of which generally takes longer to realize, and less so on acquisitions due to heightened valuations in the real estate market. DBRS notes that as at the end of 2013, RioCan had approximately 4.9 million square feet (sf) (RioCan’s net interest) of property under development (approximately 10% of the current portfolio).

In terms of financial profile, RioCan is expected to continue to pay out essentially all of its internally generated cash flow in the form of distributions. DBRS anticipates RioCan will continue to fund investments with proceeds from asset dispositions and debt as the Trust recycles its asset base toward high-quality properties in growing urban markets. As such, DBRS expects RioCan’s key financial metrics will improve modestly within the current rating category in the near term (EBITDA interest coverage in the 2.70x to 2.90x range), based on continued growth in operating income and lower weighted-average interest rate.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Entities in the Real Estate Industry (October 2013), which can be found on our website under Methodologies.

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