Press Release

DBRS Confirms RioCan REIT’s Senior Unsecured Debentures at BBB (high), Stable

Real Estate
September 25, 2018

DBRS Limited (DBRS) 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). All trends are Stable. The rating confirmations reflect RioCan’s asset quality, large retail portfolio and improving asset diversification, but are constrained by high leverage (i.e., total debt-to-EBITDA).

The stable outlook considers RioCan’s continued improving asset quality and stable EBITDA at around $670 million in F2019 ($674 million for the last 12 months (LTM) ended June 30, 2018) as EBITDA loss from dispositions is expected to be offset by higher gains from the sale of residential inventory property and asset management fees and same property net rental income growth. At the same time, DBRS anticipates the Trust’s leverage to continue to be high for the rating category at 9.0 times (x) in 2019 (8.9x for the LTM ended June 30, 2018), as measured by debt-to-EBITDA.

Since October 2017, RioCan has accelerated its execution to focus its portfolio on six major Canadian markets: Greater Toronto Area, Ottawa, Calgary, Montréal, Vancouver and Edmonton with a view to generate over 90% of its annual rental revenue from these six major markets (81% as at June 30, 2018). Historically, the Trust’s strategy was more geographically diversified across primary and secondary markets in Canada and the United States. This acceleration entails disposing $2.0 billion of secondary-market assets by the end of 2019 as well as developing residential and mixed-use projects along transit corridors. As of August 7, 2018, RioCan completed or entered into firm agreements to sell $876 million of properties and conditionally sold an additional $279 million of properties. Despite geographic concentration increasing, RioCan is better positioned to benefit from the continuing trend toward urbanization.

Development is critical to RioCan’s major-market strategy. At Q2 2018, there was 26.2 million square feet in the development pipeline with 69.3% in residential properties (i.e., rentals, air rights as well as condominiums and townhouses). The Trust has expertise in developing residential and mixed-use properties and a fair number of zoning approvals in place; however, development risks are heightened, given that projects are sig¬nificantly larger, more complex and they involve numerous part¬ners amid a more challenging development environment. Proceeds from dispositions, including the sale of condominiums, and free cash flow from operations are expected to adequately fund developments.

A negative rating action could occur if RioCan’s total debt-to-EBITDA ratio exhibits a deteriorating trend, all else equal. The trend could be revised to Positive in the medium term if asset quality meaningfully improves, asset-class diversification improves such that multi-residential is a material part of the portfolio, interest coverage rises above 3.5x and total debt-to-EBITDA decreases to below 8.0x on a sustained basis, all else equal.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 2018) and DBRS Criteria: Preferred Shares and Hybrid Securities for Corporate Issuers (December 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

Ratings

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  • CA = Lead Analyst based in Canada
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  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
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