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

DBRS Limited (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. The confirmation reflects RioCan’s continued focus on high quality development projects in its core markets and the Trust’s steady financial metrics over the past year, while acknowledging the high distribution payout ratio for the current rating category. The confirmation also takes into account the Trust’s tenant exposure to Target Canada Corporation, which announced plans to discontinue its Canadian operations (2.1% of rental revenue and 4.6% of net leasable area as at Q3 2014). See the January 15, 2015, press release “DBRS Comments on Real Estate Implications of Target’s Exit from Canada” for more details.

DBRS expects modest growth in net rental income over the next couple of years as the Trust continues to focus on Canadian urban intensification and greenfield development projects, such as The Well project, CPA Lands and the Yonge Eglinton project, and less so on lower-yielding acquisitions related to heightened valuations in the North American real estate market. DBRS expects the majority of these projects to become income-producing in 2017. As at Q3 2014, RioCan had 4.5 million square feet under development (approximately 8% of total square feet). RioCan’s high quality asset base and long-term lease profile with contractual rent steps should continue to contribute to cash flow stability.

In terms of its 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 projects in growing urban markets. As such, DBRS expects RioCan will maintain its key financial metrics within the current rating category in the near term (i.e., EBITDA interest coverage in the 2.70 times (x) to 2.90x range).

DBRS notes that a positive rating action could occur should the Trust lower its distribution payout ratio and improve its EBITDA coverage (including capitalized interest) above 3.0x, such that it is more consistent with the A (low) rating category.

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 methodologies are Rating Entities in the Real Estate Industry (October 2013) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.