DBRS Confirms RioCan REIT at BBB (high), 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 confirmation of the ratings consider RioCan’s recently announced U.S. portfolio sale (the Transaction; see DBRS press release dated December 21, 2015) and plan to use proceeds from the Transaction to temporarily reduce debt.

The stable outlook incorporates moderately lower earnings for RioCan following the closing of the Transaction expected on April 30, 2016, due to the associated loss of income. However, DBRS notes this loss will be partially offset by income from RioCan’s recent acquisitions and expected development completions during the year. DBRS also acknowledges RioCan has made significant progress re-leasing its vacant Target locations with 54% of the space committed, 8% holding conditional agreements and 38% in advanced discussions on a square foot (sf) basis at 100%, collectively representing approximately 1.0 million sf of leased area. DBRS estimates these leases should contribute approximately $8 million of stabilized net rental income in 2016 to 2018. Despite the economic challenges associated with low oil prices in Alberta, RioCan’s leasing performance in the province was above average relative to the rest of the Trust’s portfolio in 2015. While DBRS expects weaker demand for retail space and consumer spending in Alberta for the foreseeable future, reasonable retail property fundamentals across RioCan’s remaining markets should continue to result in moderate rental rate growth in 2016.

Proceeds from the Transaction are expected to mainly pay down debt, which should temporarily improve key financial metrics to levels that are better placed within the BBB (high) rating category.

DBRS, however, expects the Trust will use this additional financial capacity to fund its substantial development pipeline with a higher proportion of debt than equity. As at Q4 2015, RioCan’s active development pipeline totalled approximately $1.6 billion in projected construction costs, including near-term leased projects of approximately $184 million before the end of 2016 (at RioCan’s share). DBRS believes the Trust will primarily use debt financing to fund these developments in the near to medium term, which should bring key financial metrics to lower levels, albeit still commensurate with the BBB (high) rating category.

DBRS believes a positive rating action could occur if RioCan increases the size of its portfolio, reduces its geographic concentration and improves EBITDA interest coverage (including capitalized interest) above 3.0 times (x), bringing the Trust to levels more consistent with the A (low) rating category. A negative rating action could occur if RioCan experiences any development mishaps, lower rents and/or tenant departures causing EBITDA interest coverage to fall below 2.3x on a sustained basis.

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.

The applicable methodology is Rating Entities in the Real Estate Industry (May 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link or by contacting us at info@dbrs.com.