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

DBRS Limited (DBRS) has today confirmed RioCan Real Estate Investment Trust’s (RioCan or the Trust) Senior Unsecured Debentures rating and Senior Unsecured Debentures, Series I rating at BBB (high) and its Preferred Trust Units rating at Pfd-3 (high), all with Stable trends. The confirmations reflect RioCan’s near-term enhanced financial flexibility to fund its development pipeline and DBRS’s expectation that financial metrics will return to BBB (high) levels. The confirmations follow RioCan’s announcement to sell its U.S. portfolio of 49 retail properties located in the Northeastern United States and Texas for a total sale price of USD 1.9 billion or $2.7 billion to Blackstone Real Estate Partners VIII (Blackstone; the Transaction).

DBRS’s view of the Transaction’s near-term impact on RioCan’s credit risk profile is neutral. This view is based on the Transaction’s slightly positive impact from a financial profile perspective as DBRS expects key financial metrics to improve to levels that are more consistent with the A (low) category. DBRS estimates pro forma EBITDA interest coverage (including capitalized interest) to increase to 3.25 times from 2.97 times (annualized Q3 2015), pro forma total debt-to-EBITDA to decrease to 7.6 times from 8.6 times (annualized Q3 2015) and pro forma total debt-to-capital to decrease to 37.6% from 45% from Q3 2015.

DBRS, however, believes RioCan will operate at these levels temporarily and will likely use its enhanced financial flexibility to fund its substantial development pipeline with a higher proportion of debt than equity, causing metrics to fall back to levels more in line with the BBB (high) category. DBRS notes that RioCan also has the potential for additional proceeds to come from the sale of 12 remaining properties co-owned with Kimco. As at Q3 2015, RioCan’s development pipeline (including greenfield development, urban intensification and expansion and redevelopment) totalled approximately $1.6 billion, including near-term leased projects totalling approximately $621 million before the end of 2017 (at RioCan’s share).

RioCan acquired its portfolio of U.S. properties over a period beginning in November 2009 through to September 2015 for a total historical price of $1.7 billion. The sale price results in a significant gain of $930 million over the historical cost (an estimated 16% internal rate of return). Based on current exchange rates, RioCan will receive approximately $1.2 billion of net proceeds after transaction costs/taxes of approximately $181 million and approximately $1.25 billion of debt assumed by Blackstone.

From the $1.2 billion net proceeds, approximately $510 million will be used to repay operating lines that were used to complete RioCan's previously announced acquisition of Kimco's interest in 23 properties in Canada. The remaining portion of net proceeds of approximately $725 million will be used to reduce existing secured debt. DBRS notes that the Trust will continue to benefit from the ownership of the U.S. portfolio until the sale is complete, which is expected to occur on April 30, 2016.

From a business risk perspective, the Transaction moderately reduces the size of RioCan’s portfolio as pro forma income-producing gross leasable area, including properties acquired from Kimco, decreases to 42.1 million square feet (sf) from 49.3 million sf as at Q3 2015. In addition, the Trust’s pro forma EBITDA will decrease to $643.9 million from $773.8 million annualized Q3 2015, which is at the lower end of the current rating category’s parameters. While the U.S. portfolio sale will allow RioCan to place greater focus on its Canadian assets, including higher-return development properties, the Trust’s geographic concentration in Ontario (pro forma Ontario GLA 64.8% of total GLA), will become more pronounced following the Transaction and continue to be a limiting rating factor. Notwithstanding this, DBRS believes RioCan’s development projects will be the main growth driver, further enhance the Trust’s asset quality and contribute greater cash flow stability than the U.S. portfolio.

DBRS notes that a positive rating action could occur should RioCan increase the size of its portfolio and reduce its geographic concentration while maintaining EBITDA interest coverage (including capitalized interest) above 3.0 times, 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 (May 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015) which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.