RioCan Real Estate Investment Trust
TSX : REI.UN

RioCan Real Estate Investment Trust

August 05, 2011 06:00 ET

RioCan Real Estate Investment Trust Announces 12% Increase in Operating FFO for Second Quarter Ended June 30, 2011

TORONTO, ONTARIO--(Marketwire - Aug. 5, 2011) - RioCan Real Estate Investment Trust (TSX:REI.UN)

HIGHLIGHTS for Q2 2011:

All figures in Canadian dollars unless otherwise noted. RioCan's results are in accordance with International Financial Reporting Standards ("IFRS").

  • RioCan's Operating FFO ("Funds From Operations") increased by 12% for the quarter ended June 30, 2011 to $93 million compared to $83 million for the same period in 2010. On a per unit basis, Operating FFO increased 6% to $0.36 per unit from $0.34 per unit for the same period in 2010;

  • RioCan's Operating FFO increased by 14% for the first six months ended June 30, 2011 to $183 million compared to $161 million for the same period in 2010. On a per unit basis, Operating FFO increased 6% to $0.70 per unit from $0.66 per unit for the same period in 2010;

  • Improved occupancy at June 30, 2011 of 97.5% compared to 97.0% at June 30, 2010;

  • RioCan achieved a 92.1% retention rate for expiring leases at an average rent increase of 13.9% or $1.99 per square foot in the Second Quarter;

  • RioCan has acquired interests in 5 properties (2 in Canada and 3 in the US) at an aggregate purchase price of approximately $136 million with a weighted average cap rate of 7.1% during the quarter;

  • In July 2011, RioCan completed the purchase of four properties (1 in Canada and 3 in the US) at an aggregate purchase price of $84 million with a weighted average cap rate of 6.4%;

  • Year to date, RioCan has acquired interests in 18 properties (12 in Canada and 6 in the US) at an aggregate purchase price of approximately $307 million with a weighted average cap rate of 6.8%. RioCan has also acquired an interest in two development properties with a total purchase price of $36 million;

  • RioCan has $168 million (at RioCan's interest) of assets under firm contract, with a weighted average cap rate of 6.7%, two development acquisitions that total an additional $21.5 million, and $73 million (at RioCan's interest) of additional acquisitions under contract, but subject to certain conditions not yet waived;

  • RioCan has announced that Target has selected 21 of RioCan's Zellers locations in their first round of location announcements, and is expected to be the anchor tenant at RioCan's St. Clair and Weston Road development in Toronto making RioCan Target's largest Canadian landlord. Target is now RioCan's eighth largest tenant by rental revenue; and

  • Standard & Poor's Ratings Service confirmed RioCan's corporate credit rating of BBB and revised its Outlook to Stable from Negative.

RioCan Real Estate Investment Trust (TSX:REI.UN) ("RioCan" or the "Trust") today announced its financial results for the second quarter ended June 30, 2011.

"RioCan's acquisition platform remains on track to meet our objectives for the year. We continue to acquire quality properties in Canada and the United States, as well as expand our relationships in the United States," said Edward Sonshine, President & CEO. "RioCan has been able to take advantage of historically low interest rates to generate solid growth through acquisitions, development, and increased occupancy and rents."

Financial Highlights

Operating FFO

RioCan's Operating FFO represents the recurring cash flow generated through the ownership and management of income properties. Operating FFO excludes transactional gains as well as the expenditures related to development activities that are no longer capitalized under IFRS. The primary difference between net earnings and FFO is the fair value gain on investment properties.

In the Second Quarter, Operating FFO increased to $0.36 per unit from $0.34 per unit for the same period in 2010. The primary reasons for this increase were: a $14 million increase in net operating income ("NOI"), which was due to acquisitions, same store growth of 0.3% in Canada and 1% in the US, and the completion of developments, partially offset by a decrease of lease cancellation fees by $5.4 million. Operating FFO was further offset by a $5.2 million increase in interest expense during the Second Quarter.

For the six months ended June 30, 2011, Operating FFO increased to $0.70 per unit from $0.66 per unit for the same period in 2010. The primary reasons for this increase were: a $33 million increase in net operating income, which was due to acquisitions, same store growth of 0.5% for the Canadian portfolio and 4% for the US portfolio, and the completion of developments, partially offset by a decrease of lease cancellation fees by $6.9 million. Operating FFO was offset by an $8.9 million increase in interest expense during the Second Quarter. During the first quarter, RioCan incurred $27 million in prepayment penalties related to the early extinguishment of the Series L debentures, and the Series F debentures that carried an interest rate of 8.3% and 4.9%, respectively. As a result of this early extinguishment RioCan expects to recognize substantial interest savings going forward.

Net Earnings

RioCan reported net earnings for the Second Quarter of $117 million ($0.44 per unit) compared to $127 million ($0.52 per unit) for the same period in 2010, a decrease of $10 million ($0.08 on a per unit basis).

RioCan reported net earnings for the six months ended June 30, 2011 of $464 million ($1.76 per unit) compared to $187 million ($0.77 per unit), an increase of $277 million ($0.99 on a per unit basis). The positive growth in net earnings is largely attributable to a fair value gain on real estate assets of $314 million as a result of IFRS valuation changes. As at June 30, 2011 RioCan's fair value of Investment Properties was $9.1 billion based on a weighted average cap rate of 6.65%.

Same Store and Same Property NOI

Same store and same property NOI during the Second Quarter increased by 0.3% when compared to the same period in 2010. Same property and same store NOI gains were due largely to new and renewal leasing and fixed rent steps that positively impacted NOI by $2.9 million, but was partially offset by reduced NOI in the Second Quarter due to vacancies of $2 million, including vacancies as a result of lease cancellation fees received.

Same store and same property NOI during the six months ended June 30, 2011 increased by 0.5% when compared to the same period in 2010. Same property and same store NOI gains were due largely to new and renewal leasing and fixed rent steps that positively impacted NOI by $3.9 million, but was partially offset by reduced NOI due to vacancies of $3.2 million, including vacancies as a result of lease cancellation fees received.

Sequentially, same store and same property NOI increased 0.7% compared to the first quarter of 2011 for the Canadian portfolio primarily due to fixed rent steps as well as new and renewal leasing that has a positive impact of $0.9 million and reduced bad debt expenses that had a positive impact of $0.5 million. These gains were partially offset by reduced NOI from vacancies of $0.2 million.

On a US dollar basis, same store and same property NOI during the Second Quarter in the US increased by 1% when compared to the same period in 2010 and increased 4% for the six months ended June 30, 2011 when compared to the same period in 2010. Sequentially on a US dollar basis, same store and same property NOI were flat compared to the first quarter of 2011.

Portfolio Stability

As at June 30, 2011:

  • RioCan's Canadian occupancy rate was 97.5%, up from 97.0% as at June 30, 2010. RioCan's US occupancy rate was 97.4% compared to 96.2% at June 30, 2010. RioCan's overall occupancy rate was 97.5% compared to 97.0% as at June 30, 2010;
  • The portfolio economic occupancy rate represents the occupied net leaseable area for which tenants are paying rent. The portfolio economic occupancy rate was 96.3%. The annualized rental revenue impact once these tenants commence paying rent is $13 million;
  • In the Second Quarter, RioCan retained 92.1% of expiring leases compared to a renewal retention rate of 90.2% in the Second Quarter of 2010;
  • For the six months ended June 30, 2011, RioCan retained 89.3% of expiring leases compared to a renewal retention rate of 87.8% in the same period of 2010;
  • Renewed 1.0 million square feet during the Second Quarter at an average rent increase of 13.9% or $1.99 per square foot (including fixed rate renewals);
  • Renewed 2.3 million square feet during the six months ended June 30, 2011 at an average rent increase of 11.2% or $1.54 per square foot (including fixed rate renewals);
  • During the Second Quarter at RioCan's interest, vacancies were 158,000 square feet, down from 217,000 square feet of vacated space in the same period in 2010, and RioCan leased 60,000 square feet of vacant space during the quarter;
  • RioCan's Canadian portfolio is concentrated in Canada's six high growth markets (Calgary, Edmonton, Montreal, Ottawa, Toronto and Vancouver). Assets in these markets account for about 65.8% of RioCan's Canadian annualized rental revenue;
  • National and anchor tenants represented 86.7% of annualized rental revenue at June 30, 2011, compared to 85.9% at June 30, 2010;
  • RioCan's 50 largest tenants generate 59.6% of annualized rental revenue; and
  • No individual tenant comprised more than 4.5% of annualized rental revenue.

Portfolio Activity and Acquisition Pipeline

In the Second Quarter, RioCan acquired 2 properties in Canada and 3 properties in the US at an aggregate purchase price of $136 million, at RioCan's interest, with a weighted average capitalization rate of 7.1%.

During the six months ended June 30, 2011, RioCan acquired a total of 11 properties in Canada and 3 properties in the US at an aggregate purchase price of $223 million, at RioCan's interest, at a weighted average capitalization rate of 6.9%.

Details on these acquisitions are available in Management's Discussion and Analysis for the period ending June 30, 2011.

Acquisitions Completed Subsequent to June 30, 2011

RioCan has completed the purchase of one property in Canada and three properties in the US. The aggregate purchase price for these acquisitions was $84 million equating to a weighted average cap rate of 6.4%.

Canadian Properties Acquired:

Repentigny Shoppers Drug Mart

Repentigny Shoppers Drug Mart is a 17,000 single tenant Shoppers Drug Mart shopping centre in the Greater Montreal Area market of Repentigny, Quebec. The property was built in 2009 and is tenanted by Shoppers Drug Mart (lease expiry 2024). The property was acquired at a purchase price of $5.4 million, which equates to a cap rate of 7.0%. In connection with the purchase RioCan assumed $3.5 million of financing that carries a rate of 5.7% with a maturity of 2023.

US Properties Acquired:

Huntington Square

Huntington Square, located in the Long Island, New York community of East Northport, is a 116,200 square foot grocery anchored shopping centre. The property is anchored by Stop & Shop (Royal Ahold) on a land lease and a Best Buy. The property has a weighted average remaining lease of 12 years. The term for both tenants runs to 2023. RioCan has acquired a 100% interest in the property at a purchase price of US$40.2 million, which equates to a cap rate of 6.2%. Cedar Shopping Centers, Inc. ("Cedar") will manage the property on behalf of RioCan. The property was purchased free and clear of financing.

Stop & Shop Plaza

Stop & Shop Plaza is located in Richmond, Rhode Island. The property is a 60,500 square foot grocery anchored centre anchored by a 55,500 square foot Stop & Shop and gas bar (expiry 2018). The other tenant at the centre is a 5,000 square foot Anytime Fitness (expiry 2014). RioCan purchased a 100% interest in the property. Cedar will manage the property on behalf of RioCan. The property was acquired at a purchase price of approximately US$12.1 million which equates to a cap rate of 7.4%. The property was purchased free and clear of financing.

Sawyer Heights Village

RioCan has purchased Sawyer Heights Village, a 107,500 square foot new format retail centre located in a high density area of downtown Houston, Texas. The property is shadow anchored by Target. Other major tenants include Staples and PetSmart. The property has a weighted average lease term of 6.5 years. The property was purchased for US$35 million (100%) which equates to a cap rate of approximately 6.2%. Upon lease-up of the newly constructed 12,400 square feet of vacancy, it is anticipated that the yield will be approximately 7%.

Sawyer Heights Village was acquired with Inland Western Retail REIT ("Inland Western") and is owned on an 80/20 joint venture basis (80% RioCan / 20% Inland Western). Inland Western manages the property on behalf of the co-ownership on terms similar to previous joint venture acquisitions. In conjunction with the closing the joint venture secured US$18.7 million financing for a 10 year term carrying an interest rate of 5.0% on an interest only basis.

Acquisitions Under Contract (Firm)

RioCan has waived conditions pursuant to a Purchase and Sale agreement with respect to two Canadian properties for an aggregate purchase price of approximately $68.5 million at RioCan's interest: Megacentre Rive-Sud in Levis, Quebec and Southwinds Shopping Centre.

In the US RioCan has waived conditions pursuant to a Purchase and Sale agreement with respect to two US properties located in Texas (Southpark Meadows Phase II and Cinco Ranch) that if completed represents US$102.2 million of additional acquisitions at RioCan's interest.

Megacentre Rive-Sud

Megacentre Rive-Sud is a 207,200 square foot new format retail centre located in the Quebec City market of Levis, Quebec. The property, built in 2006, is anchored by a 111,930 square foot Walmart, and is shadow anchored by Canadian Tire and Home Depot. Other major tenants include Sports Experts (Forzani Group), Reitmans, and TD Bank. The property has a weighted average remaining lease term of 8.7 years. RioCan expects to acquire a 100% interest in the property at a purchase price of $48.0 million, which equates to a cap rate of 6.25%. The property will be acquired free and clear of financing.

Southwinds Shopping Centre

Southwinds Shopping Centre is a 73,000 square foot grocery anchored shopping centre located in the Okanagan Valley town of Oliver, British Columbia. The property, built in 2011, is anchored by a 23,100 square foot Canadian Tire (lease expiry 2026) and a 23,900 square foot Buy Low Foods (Pattison Group) grocery store (lease expiry 2026). Other tenants on the site include Mark's Work Wearhouse, The Source, and Tim Horton's. The weighted average remaining lease term for the property is approximately 13.7 years. RioCan expects to acquire a 100% interest in the property at a purchase price of $20.5 million, which equates to a cap rate of 6.5%. The property will be acquired free and clear of financing.

Southpark Meadows Phase II

Southpark Meadows Phase II is a 654,300 square foot new format retail centre located in Austin, Texas. The 97.6 acre site is shadow anchored by a Super Target. Major tenants at the property include JC Penney, Best Buy, Marshalls, Bed Bath & Beyond and Office Max. The property which was built in 2006 and 2008 has a weighted average remaining lease term of 9.7 years. The property would be purchased with Inland Western on an 80/20 joint venture basis (80% RioCan / 20% Inland Western) at a purchase price of US$110.3 million (at 100%) which equates to a cap rate of 6.6%. The joint venture would assume the in place financing, which has an outstanding principal balance of US$60 million (at 100%) and carries an interest rate of 4.5%. In the fourth quarter of 2010, RioCan with its partner Inland Western acquired Phase I of this property.

Cinco Ranch

Cinco Ranch is a 97,761 square foot new format retail centre located in the suburban Houston, Texas market of Katy, Texas. The property which was built in 2004 is shadow anchored by Target and is anchored by Michaels and Office Max. Other tenants include HomeGoods, Jenny Craig, and Supercuts. The weighted average remaining lease term for the property is 5.2 years. The property will be acquired on an 80/20 joint venture basis with Sterling Organization (80% RioCan / 20% Sterling) at a purchase price of US$17.5 million (at 100%) which equates to a cap rate of 7.7%. The Sterling Organization will manage the property on behalf of the joint venture. In connection with the acquisition the joint venture will assume the in place financing of US$10 million that carries an interest rate of 7.3% with a 2019 maturity.

Acquisitions Under Contract (Conditional)

In addition, RioCan currently has 4 properties (2 US, 2 Canada) that are under contract where conditions have not yet been waived that if completed total $73 million of acquisitions. It is expected that these transactions will be completed in the third quarter of 2011. These properties are in various stages of due diligence and while efforts will be made to complete these acquisitions, no assurance can be given.

Acquisition Pipeline

RioCan is currently in negotiations regarding property acquisitions in Canada and the US that, if completed, represent in excess of $250 million of additional acquisitions. These transactions are in various stages of negotiations and while efforts will be made to complete these negotiations, no assurance can be given.

Liquidity and Capital

In selecting appropriate funding choices, RioCan's objective is to manage its capital structure in such a way as to diversify its funding sources while minimizing its funding costs and risks. RioCan had cash on hand of approximately $101 million at June 30, 2011.

As at June 30, 2011, adjusted EBITDA interest coverage for RioCan was 2.4x. RioCan's indebtedness was 47.5% of total assets. As part of RioCan's capital management strategy, it is RioCan's objective to further strengthen its balance sheet as well as improve its coverage ratios over time. RioCan's Net Debt to adjusted EBITDA in the Second Quarter of 2011 was 7.1x.

During the Second Quarter, Standard & Poor's Ratings Service confirmed RioCan's corporate credit rating of BBB and revised its Outlook to Stable from Negative.

Mortgage Financing

Canada

During the Second Quarter, RioCan obtained approximately $95 million of mortgage financing at an average interest rate of 4.90% with a weighted average term to maturity of about 6.8 years. For the six months ended June 30, 2011, RioCan obtained approximately $245 million of mortgage financing at an average interest rate of 5.21% with a weighted average term to maturity of about 8.3 years.

US

During the Second Quarter, RioCan obtained approximately $58 million of mortgage financing at an average interest rate of 5.05% with a weighted average term to maturity of about 7.1 years. For the six months ended June 30, 2011, RioCan obtained approximately $75 million of mortgage financing at an average interest rate of 5.08% with a weighted average term to maturity of about 7.1 years.

Lines of Credit

RioCan has five revolving lines of credit in place with three Canadian chartered banks, having an aggregate capacity of $422 million against which approximately $33 million has been drawn as letters of credit leaving $387 million available for cash draws under the lines of credit.

Development Activity

During the Second Quarter, RioCan completed 68,000 square feet (three months ended June 30, 2010 10,000 square feet) of redevelopment and development activities.

During the six months ended June 30, 2011, RioCan completed 112,000 square feet (six months ended June 30, 2010 – 15,000 square feet) of redevelopment and development activities.

As at June 30, 2011, RioCan's pipeline of development projects that will, upon completion, comprise about 8.3 million square feet, of which RioCan's ownership interest will be 4.0 million square feet. Included in this are interests in 10 greenfield developments.

RioCan has under firm contract two development acquisitions that total $21.5 million. Herongate Mall ($13.5 million at RioCan's interest), in Ottawa, Ontario, and the remaining two parcels of a four parcel assembly in Toronto, Ontario near Bathurst Street and College Street which total $8 million.

Herongate Mall will be acquired on a 75/25 joint venture basis with its partner Trinity Development Group Inc. ("Trinity") (75% RioCan / 25% Trinity). The property is situated on a 16 acre site in a mature area of Ottawa, Ontario. This is a redevelopment project, which when completed, will be anchored by many of the existing tenants at the property including, Metro, Pharma Plus, and Scotiabank.

During the Second Quarter, RioCan purchased the first two pieces (at a purchase price of $6.6 million) of a four parcel assembly that will, upon completion, aggregate a total land area of 1.3 acres at a total cost of approximately $15 million. The site, located just west of the downtown core in Toronto near the intersection of Bathurst Street and College Street, will become part of RioCan's Urban Development portfolio. When developed, the site has the potential for 150,000 square feet of urban retail space. These first two parcels have been acquired free and clear of financing.

Subsequent to the quarter end, RioCan acquired its partners' two thirds interest in Windfield Farms, in Oshawa, Ontario, at a cost of $29.3 million, bringing RioCan's ownership interest to 100%. Windfield Farms is a 160 acre site located at Simcoe Street, in the suburban Greater Toronto Area, adjacent to the proposed Highway 407 extension. The site is designated as a regional retail site and will be able to accommodate up to 1.5 million square feet of development. Development is expected to commence in 2014.

RioCan's Consolidated Financial Statements, Management's Discussion and Analysis and a Supplemental Information Package for the three months ended June 30, 2011 and 2010 are available on RioCan's website at www.riocan.com.

Conference Call and Webcast

Interested parties are invited to participate in a conference call with management on Friday, August 5, 2011 at 9:00 a.m. eastern time. You will be required to identify yourself and the organization on whose behalf you are participating.

In order to participate, please dial 416-340-2218 or 1-866-226-1793. If you cannot participate in the live mode, a replay will be available until September 3, 2011. To access the replay, please dial 905-694-9451 or 1-800-408-3053 and enter passcode 5553057#.

Scheduled speakers include Edward Sonshine, President and Chief Executive Officer, Fred Waks, Executive Vice President and Chief Operating Officer and Rags Davloor, Senior Vice President and Chief Financial Officer. Management's presentation will be followed by a question and answer period. To ask a question, press "star 1" on a touch-tone phone. The conference call operator will be notified of all requests in the order in which they are made, and will introduce each questioner.

Alternatively, to access the simultaneous webcast, go to the following link on RioCan's website http://investor.riocan.com/Investor-Relations/Events-Webcasts/default.aspx and click on the link for the webcast. The webcast will be archived 24 hours after the end of the conference call and can be accessed for 120 days.

About RioCan

RioCan is Canada's largest real estate investment trust with a total capitalization of approximately $11.5 billion as at June 30, 2011. It owns and manages Canada's largest portfolio of shopping centres with ownership interests in a portfolio of 305 retail properties, including 10 under development, containing an aggregate of over 73 million square feet. RioCan owns an 80% interest in 35 grocery anchored and new format retail centres in the United States through various joint venture arrangements. In addition, RioCan owns a 14% equity interest in Cedar Shopping Centers, Inc., a real estate investment trust focused on supermarket-anchored shopping centres and drug store-anchored convenience centres located predominantly in the Northeastern United States. For further information, please refer to RioCan's website at www.riocan.com.

Forward-Looking Information

This News Release contains forward-looking statements within the meaning of applicable securities laws. These statements include, but are not limited to, statements made in this News Release (including the sections entitled "Financial Highlights", "Portfolio Stability", "Portfolio Activity and Acquisition Pipeline", "Liquidity and Capital" and "Development Activities"), and other statements concerning RioCan's objectives, its strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "will", "would", "expect", "intend", "estimate", "anticipate", "believe", "should", "plan", "continue", or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. All forward-looking statements in this News Release are qualified by these cautionary statements.

These forward-looking statements are not guarantees of future events or performance and, by their nature, are based on RioCan's current estimates and assumptions, which are subject to risks and uncertainties, including those described under "Risks and Uncertainties" in this News Release, which could cause actual events or results to differ materially from the forward-looking statements contained in this News Release. Those risks and uncertainties include, but are not limited to, those related to: liquidity in the global marketplace associated with current economic conditions, tenant concentrations, occupancy levels, access to debt and equity capital, interest rates, joint ventures/partnerships, the relative illiquidity of real property, unexpected costs or liabilities related to acquisitions, construction, environmental matters, legal matters, reliance on key personnel, unitholder liability, income taxes, the investment in the United States of America ("US"), US currency and RioCan's qualification as a real estate investment trust for tax purposes. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information may include, but are not limited to: a more robust retail environment compared to recent years; relatively stable interest costs; a continuing trend toward land use intensification in high growth markets; access to equity and debt capital markets to fund, at acceptable costs, the future growth program to enable the Trust to refinance debts as they mature; the availability of purchase opportunities for growth in Canada and the US; and the impact of accounting principles adopted by the Trust effective January 1, 2011 under International Financial Reporting Standards ("IFRS") which includes application to the Trust's 2010 comparative financial results. Although the forward-looking information contained in this News Release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain statements included in this News Release may be considered "financial outlook" for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this News Release.

The Income Tax Act (Canada) (the "Act") contains legislation affecting the tax treatment of publicly traded trusts (the "SIFT Legislation"). The SIFT Legislation will not impose tax on a trust which qualifies under such legislation as a real estate investment trust (the "REIT Exception"). RioCan currently qualifies for the REIT Exception and intends to continue to qualify for future years. Should this not occur, certain statements contained in this News Release may need to be modified.

Except as required by applicable law, RioCan under takes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Contact Information

  • RioCan Real Estate Investment Trust
    Rags Davloor
    Senior Vice President & CFO
    (416) 642-3554