DBRS Morningstar Confirms Ratings on RioCan Real Estate Investment Trust at BBB (high), Stable

DBRS Limited (DBRS Morningstar) confirmed the Senior Unsecured Debentures and Senior Unsecured Debentures, Series I rating of RioCan Real Estate Investment Trust (RioCan or the Trust) at BBB (high) with Stable trends. The ratings continue to be supported by RioCan’s (1) quality urban retail assets in Canada’s six major markets; (2) solid market position as one of the largest real estate investment trusts (REIT) in Canada with 36.6 million square feet (sf) of income-producing net leasable area (NLA) at September 30, 2019; (3) strong tenant and lease maturity profile with low counterparty risk and long-term leases; (4) and an internal growth opportunity provided by its robust development pipeline and execution capabilities (27.4 million sf at September 30, 2019). The ratings continue to be constrained by (1) high leverage with total debt-to-EBITDA of 9.6 times (x) in the last 12 months ended September 30, 2019 (LTM); retail and geographic concentration risks; retail comprising 94% NLA and the Greater Toronto Area (GTA) contributing 50% of annualized gross rental revenue at September 30, 2019; and development execution risk with over $1.1 billion in estimated costs over the next several years at September 30, 2019, which may fluctuate with completed or added projects.

The Stable trend considers the following: (1) RioCan’s deteriorating key financial metrics over the LTM; (2) the Trust’s recently announced acquisition of KingSett Capital’s 50% non-managing co-ownership interest in Yonge Sheppard Centre for $372.1 million, partially funded by Kingsett Capital’s $100.0 million equity investment in RioCan’s units; (3) additional property acquisitions of $505.1 million year-to-date at September 30, 2019 (YTD), which were funded with debt in the interim; (4) partial repayment of such debt with the Trust’s $230.0 million equity offering (gross) in October 2019; (5) the Trust’s continued progress in executing its major market strategy and disposing of secondary market/non-core assets ($286.5 million YTD or $1.4 billion total since October 2017); and (6) RioCan’s recently announced sustainability initiatives, which further demonstrate its market-leading position in the Canadian REIT space.

DBRS Morningstar acknowledges that RioCan’s leverage as measured by total debt-to-EBITDA is currently elevated; however, DBRS Morningstar expects total debt-to-EBITDA to improve by year-end 2019 to the 9.0x range and remain stable or improve further through 2021 while EBITDA interest coverage remains relatively stable. The expected improvement in total debt-to-EBITDA is largely the result of the equity raise and EBITDA contribution from recent acquisitions and developments, notwithstanding continued spending on development.

DBRS Morningstar could take negative rating action in the near to medium term if key financial metrics fail to improve as expected, such that total debt-to-EBITDA remains above 9.3x or EBITDA interest coverage (including capitalized interest) falls below 3.20x on a sustained basis, all else equal. DBRS Morningstar is not contemplating a positive rating action at this time because of the above-noted constraints, including elevated leverage.

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

The principal methodology is Rating Entities in the Real Estate Industry, which can be found on dbrs.com under Methodologies & Criteria.

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 [email protected].

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

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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