RioCan Real Estate Investment Trust

RioCan Real Estate Investment Trust

September 23, 2010 16:16 ET

RioCan Real Estate Investment Trust Announces Accounting Impact on Book Value of Investment Properties on Adoption of International Financial Reporting Standards

TORONTO, ONTARIO--(Marketwire - Sept. 23, 2010) - RioCan Real Estate Investment Trust ("RioCan") (TSX:REI.UN) today announced the valuation of its investment properties to be adopted in 2011 as of January 1, 2010 in accordance with its transition to International Financial Reporting Standards ("IFRS"). The carrying value of RioCan's income properties and properties under development is expected to increase by approximately $1.6 billion, to $6.9 billion. This $6.9 billion value compares to the historical cost amount under current Canadian GAAP ("GAAP") of $5.3 billion as at January 1, 2010. IFRS will become effective on January 1, 2011 and RioCan's financial statements will include comparative results for the periods commencing January 1, 2010. RioCan's first reporting period under IFRS will commence with its interim financial statements for the three months ended March 31, 2011.

Summary of Impact of Adoption of IFRS – Investment Property

  • RioCan has chosen to adopt the cost model and, as provided under IFRS, has elected to use "fair value as deemed cost" at January 1, 2010 for accounting for income properties and properties under development (collectively "Investment Property").
  • RioCan primarily used the Direct Capitalization Income Approach method to value its income properties. Individual properties were valued using capitalization rates in the range of 6.0% to 9.0% applied to stabilized net operating income ("NOI"), resulting in an overall weighted average capitalization rate for the portfolio of approximately 7.1%.
  • RioCan's carrying value of Investment Properties is expected to increase from $5.3 billion to $6.9 billion, an increase of approximately $1.6 billion, or 30%, as of January 1, 2010. Total assets are expected to increase from $5.9 billion under GAAP to approximately $7.5 billion under IFRS. The corresponding adjustment will be recognized in opening retained earnings.
  • RioCan's leverage ratio (debt to gross book value of assets) is expected to decrease to approximately 49% as of January 1, 2010 based on IFRS carrying values compared to RioCan's stated leverage of 55.6% based on GAAP on January 1, 2010.

"The undertaking to value RioCan's portfolio has been a long, intensive process, and as the transition to IFRS continues, we feel it will provide a more even basis for comparison of leverage against our peers," said Edward Sonshine, Q.C., President and CEO of RioCan. "We expect that interest coverage metrics rather than a leverage calculation as a measure of creditworthiness will become increasingly important going forward."

Impact of Adoption of IFRS – Investment Property

In connection with the implementation of IFRS, RioCan has elected to use the cost model and has also elected to use fair value as deemed cost at January 1, 2010 to report the asset values of Investment Properties as part of the first time adoption of IFRS. As a result, RioCan will initially measure an item of Investment Property upon transition to IFRS at its fair value, which will become the new deemed cost amount for qualifying assets at transition.

The Trust's opening balance sheet will reflect a one-time revaluation of substantially all of RioCan's income properties and properties under development to fair value as at January 1, 2010. This will result in a carrying value of approximately $6.9 billion, which is approximately $1.6 billion greater than the depreciated cost of $5.3 billion reported under GAAP. The IFRS and GAAP carrying amounts are each inclusive of straight-line rent and incentive balances and the GAAP carrying amount also includes corresponding intangible assets. Under this valuation metric gross assets are expected to increase to $7.5 billion from $5.9 billion. The Trust determined the fair value of each income property based upon the Direct Capitalization Income Approach method of valuation. The fair value was determined by applying a capitalization rate to stabilized NOI, which incorporates allowances for vacancy, management fees and structural reserves for capital expenditures for the property. The resulting capitalized value was further adjusted, where appropriate, for extraordinary costs to stabilize the income and non recoverable capital expenditures. RioCan valued properties under development on a land value per acre basis. Where a site was partially developed, the Direct Capitalization method was used to capitalize the pro forma income, from which the costs to complete the development were deducted.

As a result of the expected $1.6 billion increase to the carrying value of RioCan's Investment Properties, the leverage calculation as of January 1, 2010, for the purposes of the borrowing restriction under its Declaration of Trust, is expected to decrease to approximately 49% based on IFRS carrying values as compared to RioCan's stated leverage ratio of 55.6% based on GAAP historical cost as at January 1, 2010.

Valuation Process

RioCan's management has conducted an internal valuation of its investment property assets to determine the fair value of its property portfolio. RioCan included a sample of external appraisals, which were used as a data source. Individual properties were valued using capitalization rates in the range of 6.0% to 9.0% applied based on property type and market characteristics, which resulted in an overall weighted average capitalization rate for the portfolio of approximately 7.1%. RioCan's properties were grouped by retail class (Enclosed Shopping Centre, Mixed Use, Grocery Anchored Centre, Non-Grocery Anchored Centre, New Format Retail, and Urban Retail) as well as by geographic location (Primary and Secondary markets). RioCan's primary markets were defined as Canada's six major markets (Toronto, ON, Ottawa, ON, Montreal, QC, Calgary, AB, Edmonton, AB and Vancouver, BC) those being markets with a population base in excess of 1 million people and those in which RioCan's portfolio is concentrated.

The table below provides further details of the average capitalization rates, (weighted based on stabilized NOI), and ranges for each retail class and market category as at January 1, 2010:

As at January 1, 2010 Overall Portfolio Primary Market Secondary Market
Retail Class Weighted Average Cap Rate* Range Weighted Average Cap Rate* Range Weighted Average Cap Rate* Range
Enclosed Shopping Centre 8.0% 7.0% - 9.0% 7.8% 7.5% - 8.8% 8.1% 7.0% - 9.0%
Mixed Use 7.2% 6.0% - 8.8% 7.0% 6.0% - 7.9% 8.3% 7.8% - 8.8%
Grocery Anchored Shopping Centre 7.3% 6.5% - 9.0% 7.2% 6.5% - 8.5% 7.5% 6.8% - 9.0%
Non-Grocery Anchored Centre 7.3% 6.0% - 9.0% 6.9% 6.0% - 7.5% 7.7% 7.0% - 9.0%
New Format Retail 6.8% 6.3% - 8.5% 6.7% 6.3% - 7.3% 7.2% 6.4% - 8.5%
Urban Retail 6.7% 6.0% - 7.3% 6.7% 6.0% - 7.3% n/a n/a
Total Weighted Average 7.1% 6.0% - 9.0% 6.9% 6.0% - 8.8% 7.5% 6.4% - 9.0%
* at RioCan's interest

IFRS Conversion Plan

RioCan has established a formal project governance structure with oversight by its IFRS Steering Committee, consisting of senior management from investment, accounting and finance, information technology, and business operations. Several sub-committees support the IFRS Steering Committee and include: (i) Real Estate Valuations; (ii) Financial Reporting and Information Technology Implementation; and (iii) Business Change and Risk Management Review. Issue-specific working groups, including communications, report into the sub-committees. The IFRS Steering Committee provides periodic updates of the status and effectiveness of the IFRS conversion plan to the Trust's senior executives, Audit Committee and Board of Trustees. RioCan's IFRS conversion plan addresses changes in financial statement presentation, the impact on RioCan's business groups and functions, various training and education sessions for staff, senior executives, and trustees, information technology and data system requirements, as well as required changes to internal controls over financial reporting and disclosure controls and procedures.

About RioCan

RioCan is Canada's largest real estate investment trust with a total capitalization of approximately $8.6 billion as at June 30, 2010. It owns and manages Canada's largest portfolio of shopping centres with ownership interests in a portfolio of 269 retail properties, including 11 under development, containing an aggregate of over 60 million square feet. RioCan owns an 80% interest in nine grocery anchored shopping centres and 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

Forward Looking Advisory

This news release contains forward-looking statements and information within the meaning of applicable securities legislation. These statements include, but are not limited to, statements made in this news release (including the sections entitled "Summary of Impact of Adoption of IFRS – Investment Property", "IFRS Conversion Plan", "Impact of Adoption of IFRS – Investment Property" and "Valuation Process"). This information is being provided to allow investors and others to obtain a better understanding of our IFRS conversion plan and the resulting possible effects on our financial statements. Readers are cautioned, however, that it may not be appropriate to use such information for any other purpose. Although RioCan believes that the anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information because they involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements and information. Accordingly, the Trust cannot give any assurance that its expectations will in fact occur and cautions that actual results may differ materially from those in the forward-looking statements. 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 statements are not guarantees of future events or performance and, by their nature, are based on RioCan's estimates and assumptions, which are subject to risks and uncertainties, including those described under "Risks and Uncertainties" in the Trust's MD&A filed in respect of the period ending June 30, 2010 complemented by those contained in RioCan's current Annual Information Form dated March 21, 2010, 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, and income taxes. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information may include: a less robust retail environment than has been seen for the last several years; relatively stable interest costs; an increase in acquisition capitalization rates; a decrease in land costs for Greenfield Development; a continuing trend towards land use intensification in high growth markets; and more limited but available access to equity and debt capital markets to fund, at acceptable costs, the future growth program and to enable the Trust to refinance debts as they mature and the availability of purchase opportunities for the joint venture with Cedar. Furthermore, the valuations referred to herein reflect an assessment of value based on the facts and circumstances as at the date the valuation was made. Such valuation may not have relied on all relevant facts or may have relied on incorrect assumptions which may have been either too optimistic or not sufficiently optimistic. Furthermore, valuations conducted at one point in time may not be reflective of a value at another point in time, nor may the valuation be reflective of the value that can be obtained on a sale or other transaction. The Trust does not undertake to update the valuations set out herein. The valuations were conducted for the purposes of the conversion to IFRS in connection with the IFRS conversion process and may be unsuitable for any other purpose. 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.

Contact Information

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