TORONTO, Aug. 02, 2019 (GLOBE NEWSWIRE) — RioCan Real Estate Investment Trust (âRioCan” or the “Trustâ) today announced its financial results for the three and six months ended June 30, 2019 (“Second Quarter”).
âRioCan continued to deliver strong unitholder value in the second quarter of 2019 as a result of the successful execution of our major market strategy. The quality of our income has never been higher with 87.8% of our revenue derived from Canadaâs major markets and almost three quarters of our rental revenue generated from necessity-based and service-oriented tenants,â said Edward Sonshine, Chief Executive Officer of RioCan. âThe results of our strategy are beginning to be evident in all key operational metrics, including our highest quarterly FFO per unit in our history excluding Q4 2015 when we received a one-time substantial settlement income. This quarter’s performance is a direct result of the strength of RioCanâs leadership team and positioning as a major market and urban mixed-use focused REIT.â
|Three months ended
|Six months ended
|(in millions except percentages, square feet and per unit values)||2019||2018||2019||2018|
|Weighted average units outstanding – diluted (in thousands)||304,636||316,329||304,829||319,143|
|FFO per unit â diluted (i)||$||0.48||$||0.46||$||0.94||$||0.92|
|Same property NOI growth – six major markets (i) (ii)||2.9||%||2.5||%||2.4||%||2.8||%|
|Same property NOI growth – overall portfolio (i) (ii)||2.2||%||2.1||%||1.9||%||2.3||%|
|Six major markets – % of total annualized revenue (iii)||87.8||%||81.4||%||87.8||%||81.4||%|
|Greater Toronto Area – % of total annualized revenue (iii)||48.6||%||43.5||%||48.6||%||43.5||%|
|Occupancy – committed six major markets (iii)||97.8||%||98.0||%||97.8||%||98.0||%|
|Occupancy – committed (iii)||97.1||%||96.8||%||97.1||%||96.8||%|
|Blended leasing spread||11.3||%||4.0||%||11.0||%||5.8||%|
|Renewal leasing spread||10.9||%||4.2||%||9.4||%||4.2||%|
|Development completions – sq ft in thousands||269.0||119.0||361.0||237.0|
|Development expenditures (iv)||$||102.5||$||117.2||$||195.0||$||219.3|
|Properties under development and residential inventory as a percentage of consolidated gross book value of assets (maximum permitted: 15%) (iii) (iv)||8.0||%||10.1||%||8.0||%||10.1||%|
|Balance Sheet Strength Highlights|
|Debt to Adjusted EBITDA (i) (v)||7.92||x||7.74x||7.92||x||7.74x|
|Ratio of total debt to total assets (i) (iii) (v)||42.9||%||42.4||%||42.9||%||42.4||%|
|Unencumbered assets (i) (iii) (v)||$||8,104||$||8,036||$||8,104||$||8,036|
|Unencumbered assets to unsecured debt (i) (iii) (v)||225||%||222||%||225||%||222||%|
|(i)||A Non-GAAP measurement. For definitions and basis of presentation of RioCan’s Non-GAAP measures, refer to the Non-GAAP Measures section in RioCan’s Management’s Discussion and Analysis (MD&A) for the three and six months ended June 30, 2019.|
|(ii)||Refers to same property NOI (SPNOI) growth on a year-over-year basis. Prior periods as reported; not restated to reflect current period categories. For the three months ended June 30, 2019, excluding the impact of disclaimed Bombay/Bowring and Payless Shoe leases, same property NOI grew by 3.9% for the Trust’s six major market portfolio and by 3.1% for its overall commercial portfolio, and by 3.3% and 2.7%, respectively, for the six months ended June 30, 2019. When completed properties under development are further included in same property NOI and the impact of disclaimed Bombay/Bowring and Payless Shoe leases are excluded, same property NOI grew by 5.4% for the Trust’s six major market portfolio and by 4.5% for its overall commercial portfolio for the three months ended June 30, 2019 and by 4.3% and 3.6%, respectively, for the six months ended June 30, 2019. Such completed developments have been owned by the RioCan in the comparative periods and are generating cash rent.|
|(iii)||Information presented as at June 30.|
|(iv)||Includes costs incurred for various properties under development and for residential inventory in respective reporting periods.|
|(v)||At RioCan’s proportionate share.|
FFO Per Unit Growth and Capital Recycling
- The Trust produced FFO per unit of $0.48 in the Second Quarter, representing a $0.02 per unit or 3.4% increase over the same period last year. Strong same property NOI growth, residential inventory gains, an increase in net operating income from strategic acquisitions, increased fee income and lower G&A costs, as well as substantial unit buybacks, offset the impact of $0.7 billion of secondary market asset dispositions since Q2 2018, lower realized gains on the sale of marketable securities, and lower capitalized interest due to development completions.
- For similar reasons, FFO per unit increased by $0.02 or 2.0% over the same period last year to $0.94 per unit for the six months ended June 30, 2019.
- The Trust continued to make good progress on its strategic asset disposition program, having completed or entered into firm, conditional or letter of intent agreements to sell $1.6 billion or 82 secondary market assets as of August 1, 2019, at a weighted average capitalization rate of 6.82%, materially in line with our IFRS values.
- Net income increased by 127.1% and 80.0% for the three and six months ended June 30, 2019, respectively over the comparable periods primarily due to higher fair value gains on investment properties as the Trust continues to drive operational growth, improve its portfolio quality and tenant base, and unlock the intrinsic values of its portfolio.
Major Market Focus
- The percentage of total annualized rental revenue from the six major markets and Greater Toronto Area (GTA) increased to 87.8% and 48.6% as of June 30, 2019, up 30 and 100 basis points, respectively from the previous quarter. These two key strategic metrics steadily progressed towards the respective >90% and >50% targets, having increased 640 and 510 basis points, respectively when compared to June 30, 2018 as a result of same property NOI growth, substantial secondary market asset dispositions, strategic acquisitions, and 923,000 square feet of development completions over the trailing twelve months.
Same Property NOI Growth
- Same property NOI increased by 2.9% for RioCan’s six major market commercial properties while same property NOI for its secondary market commercial properties decreased by 2.7%, resulting in overall same property NOI growth of 2.2% for the Second Quarter. Excluding the impact of disclaimed Bombay/Bowring and Payless Shoe leases, same property NOI grew by 3.9% for the Trust’s six major market portfolio and by 3.1% for its overall commercial portfolio. When completed properties under development are further included in same property NOI and the impact of disclaimed Bombay/Bowring and Payless Shoe leases are excluded, same property NOI grew by 5.4% for the six major market portfolio and by 4.5% for the Trust’s overall commercial portfolio. The Trust expects to re-lease the disclaimed premises to high quality tenants in the normal course during 2019.
- For the six months ended June 30, 2019, same property NOI for RioCan’s six major market commercial properties grew by 2.4% while same property NOI for its secondary market commercial properties decreased by 1.8% compared to the same period in 2018, resulting in overall same property NOI growth of 1.9%. Excluding the impact of disclaimed Bombay/Bowring and Payless Shoe leases, same property NOI grew by 3.3% for the Trust’s six major market portfolio and by 2.7% for its overall commercial portfolio. When completed properties under development are further included in same property NOI and the impact of disclaimed Bombay/Bowring and Payless leases are excluded, same property NOI grew by 4.3% for the Trust’s six major market portfolio and by 3.6% for its overall commercial portfolio.
Commercial Operation Highlights
- Committed and in-place occupancy increased by 30 basis points and 40 basis points to 97.1% and 96.1%, respectively, when compared to the previous quarter. The quarter to quarter committed occupancy improvement was driven by a 40 basis points increase in office occupancy and a 30 basis points increase in retail occupancy, while the in-place occupancy improvement was driven by a 130 basis points increase in office occupancy and a 40 basis points increase in retail occupancy.
- Committed and in-place occupancy improved by 30 basis points and 50 basis points, respectively, when compared to June 30, 2018. Over the same comparable period, retail committed and in-place occupancy increased by 20 basis points and 40 basis points, respectively, while office committed and in-place occupancy increased by 250 basis points and 360 basis points, respectively.
- Blended leasing spread increased to 11.3% for new and renewal leasing in the quarter, bolstered by a 10.9% renewal leasing spread, our highest renewal leasing spread since the fourth quarter of 2014, while achieving a retention ratio of 94.2% in the quarter. This reflects the benefits of the Trust’s strategy of focusing on the six major markets.
- Average net rent per occupied square foot grew by 5.8% over Q2 2018 to $19.26 as of June 30, 2019, driven by strong new and renewal leasing and the Trust’s increasing presence in the six major markets including the GTA.
- Average net rent at the Trust’s active urban intensification project is $33.06 per square foot based on 674,000 square feet of committed or in-place leases as of August 1, 2019, reflecting the quality of the Trust’s developments which are major market focused and transit-oriented, and are expected to further propel increases in average rent and the quality of the Trust’s portfolio.
- The Trust continues to strengthen its tenant mix, with 74.0% of its annualized net rent revenues coming from necessity-based and service-oriented tenants, an increase of 40 basis points from the previous quarter.
Residential Operation Highlights
- Residential inventory gains of $7.8 million and $12.9 million were recognized for the three and six months ended June 30, 2019, respectively from condominium units at Yonge Eglinton Northeast Corner (eCondos) in Toronto, Ontario and townhomes at Phase One of Windfield Farms in Oshawa, Ontario where purchasers began taking possession of the completed townhomes in the Second Quarter.
- Residential rental leasing is progressing at a strong velocity at the 466-unit Yonge Eglinton Northeast Corner (eCentral), the Trust’s first purpose-built RioCan Livingâ¢ property in Toronto, Ontario. As at August 1, 2019, 277 units (59.4% of all units) have been leased, averaging $3.88 rent per square foot for market rent units with stabilization expected in mid-2020. Construction of the 228-unit, first phase of the Gloucester residential development (Frontier) in Ottawa, Ontario, was substantially completed during the second quarter of 2019. As of August 1, 2019, 164 units (72.2% of all units) have been leased at an average rent per square foot of $2.50, ahead of expectations with stabilization expected by the end of 2019.
- In less than six months after the start of the phased lease up with upper floor, higher rent units just recently released for leasing, the two residential rental buildings have generated net operating income of $0.2 million during the quarter.
Strategic Acquisitions and Partnerships
- During the six months ended June 30, 2019, the Trust completed acquisitions of interests in a total of seven income properties for an aggregate purchase price of $320.4 million at a weighted average capitalization rate of 6.32%, comprised of approximately 1.1 million square feet. In connection with these acquisitions, RioCan assumed mortgage financing of $126.7 million at a weighted average interest rate of 3.5%. The majority of the acquisitions were for remaining non-managing interests in major market assets thereby accelerating RioCan’s major market presence.
- On June 6, 2019, the Trust announced that it had entered into a firm agreement to acquire KingSett Capitalâs (KingSett) non-managing, 50% co-ownership interest in Yonge Sheppard Centre for an estimated purchase price of $331.0 million, net of certain working capital adjustments. As part of the consideration for this transaction, RioCan will assume KingSettâs share of the existing property debt (approximately $128.0 million) and KingSett will invest $100 million in RioCan at the 5-day volume weighted average trading price of $26.25 as of June 5, 2019, the date the firm agreement was entered into. The estimated purchase price is based on capital costs incurred as of April 30, 2019 and will be further adjusted based on KingSettâs share of capital costs incurred up to the closing date. KingSett’s equity investment is subject to a one year lock-up agreement. The deal is subject to customary closing conditions and is expected to close by August 30, 2019. Upon closing, it will result in the Trust owning 100% of two flagship assets at two of the three intersections along the Yonge Street corridor in Toronto with intersecting subway lines, namely, Yonge and Sheppard and Yonge and Eglinton. RioCan recognizes that Yonge Sheppard Centre has significant income and value growth potential over the longer term similar to its Yonge Eglinton Centre in Toronto.
- Subsequent to quarter end, RioCan closed on a transaction to sell a 50% interest in just over two acres of a discreet portion of our Sandalwood Square property in Mississauga, Ontario to an existing partner with residential management expertise. The total sales price is $80 per square foot for excess density, or $14.9 million in aggregate which is above the IFRS value. RioCan has submitted a re-zoning application to construct a 25-storey mixed-use building on the transit-oriented site, which will include 470 residential rental units (at 100%). Zoning approvals are anticipated in early 2020.
RioCan’s development program is a significant component of its growth strategy to unlock the intrinsic value of its existing properties and deliver strong Net Asset Value (NAV) growth to its unitholders. The head start that RioCan has in its development program in terms of the extent of zoning approvals achieved and zoning applications submitted, recent completion or near substantial completion of a number of large mixed-use projects, and the experience and scale of our development team, gives the Trust distinct competitive advantages.
- As of June 30, 2019, the Trust has identified an estimated 27.2 million square feet of development pipeline (at RioCan’s interest), of which 13.1 million square feet or 48.2% have zoning approvals and an additional 7.3 million square feet or 26.9% have zoning applications submitted.
- The Trust’s zoned density increased by 1.9 million square feet in the quarter, including zoning approvals for the luxury mixed-use Yorkville project in Toronto, Ontario and two other GTA projects, as well as an increase in zoned density due to the acquisition of the remaining non-managing interest in Mill Woods Town Centre in Edmonton, Alberta. The Yorkville project zoning approval is subject to an appeal period expiring mid-August 2019.
- A zoning application for 0.8 million square feet of mixed-use development in the Vancouver suburb of Surrey, British Columbia was submitted during the quarter.
- All of the Trust’s mixed-use residential projects are in Canada’s six major markets. Residential components represent 19.4 million square feet (at RioCan’s interest) or 71.3% of the Trust’s current estimated development pipeline.
- As of June 30, 2019, the Trust has recognized cumulative $246.7 million of fair value gains for its 3.6 million square feet of active projects with detailed cost estimates, which are substantially completed, near completion, or under construction. No significant fair value gains have been recognized for its remaining identified excess density even though another 9.2 million square feet of excess density already have zoning approvals and 7.3 million square feet of excess density already have zoning applications submitted.
- For the three and six months ended June 30, 2019, the Trust completed 269,000 and 361,000 square feet of developments, respectively, including floors 14 to 36 of eCentral and the substantial completion of the first residential building at Frontier in Ottawa, Ontario. Given the strong leasing performance of Frontier Phase One to date, the construction start of the 209 unit residential rental building at Frontier Phase Two, was accelerated and commenced in Q2 2019.
- Sales for the first phase of the high rise condominium component at Windfield Farms are progressing well with 273 of the 503 units pre-sold as of August 1, 2019. RioCan is also developing the first phase of the retail development at Windfield Farms and has secured a number of firm and conditional leases with strong national tenants at good rates.
- Construction of the office and retail components at The Well is proceeding on schedule. The project continues to generate a significant amount of interest from potential office tenants who are looking for urban workspace in downtown Toronto west. The office component of the project is now 76% pre-leased. Retail leasing is progressing well with active discussions underway with several high calibre retail tenants. Developers of the condominium buildings at The Well, to whom the Trust and its partners sold the related air rights with closing estimated in 2020/2021, launched sales for two of the three condominium buildings during the quarter.
- As of June 30, 2019, properties under development and residential inventory account for 8.0% of the Trust’s consolidated gross book value of assets, well under the 15% limit permitted under the Trust’s revolving line of credit agreement and decreased from the prior quarter end.
Balance Sheet Strength
RioCan continued to exercise sound capital management in the first half of 2019 and maintained a strong balance sheet. Debt to Adjusted EBITDA at RioCan’s proportionate share was at 7.92x as at June 30, 2019, a modest improvement from 7.94x at the end of the first quarter of 2019, and below the Trust’s 8.0x target despite the completion of substantial secondary market asset dispositions and a development balance of $1.2 billion as of June 30, 2019. Debt to total assets at RioCan’s proportionate share was 42.9%, as at June 30, 2019 due to the timing of acquisitions and dispositions. The Trust remains committed to a strong balance sheet. On a proportionate share basis, the Trust continued to maintain a large unencumbered asset pool of $8.1 billion as of June 30, 2019, which provided 225% coverage over its unsecured debt, well above its 200% target.
During the Second Quarter, the Trust exercised its option to extend the maturity date on its operating line of credit to May 31, 2024. All other terms and conditions remained the same. On June 28, 2019, RioCan redeemed, in full, its $350 million 3.85% Series Q senior unsecured debentures in accordance with its terms.
Conference Call and Webcast
Interested parties are invited to participate in a conference call with management on Friday, August 2, 2019 at 10:00 a.m. (ET). You will be required to identify yourself and the organization on whose behalf you are participating.
In order to participate, please dial 647-427-3230 or 1-877-486-4304. If you cannot participate in the live mode, a replay will be available. To access the replay, please dial 1-855-859-2056 and enter passcode 2493324#.
For a copy of the slides to be used for the conference call or, to access the simultaneous webcast, visit RioCanâs website at http://investor.riocan.com/investor-relations/events-and-presentations/ and click on the link for the webcast.
RioCan is one of Canadaâs largest real estate investment trusts with a total enterprise value of approximately $14.3 billion as at June 30, 2019. RioCan owns, manages and develops retail-focused, increasingly mixed-use properties located in prime, high-density transit-oriented areas where Canadians want to shop, live and work. Our portfolio is comprised of 230 properties, including 13 development properties, with an aggregate net leasable area of approximately 39.1 million square feet including residential rental properties. To learn more about us, please visit www.riocan.com.
Basis of Presentation and Non-GAAP measures
All figures included in this News Release are expressed in Canadian dollars unless otherwise noted. RioCanâs Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (IFRS). Financial information included within this News Release does not contain all disclosures required by IFRS, and accordingly should be read in conjunction with the Trust’s unaudited interim condensed consolidated financial statements (“Consolidated Financial Statements”) and MD&A for the three and six months ended June 30, 2019, which is available on RioCan’s website at www.riocan.com and on SEDAR at www.sedar.com.
Consistent with RioCanâs management framework, management uses certain financial measures to assess RioCanâs financial performance, which are not in accordance with generally accepted accounting principles (GAAP) under IFRS. Funds From Operations (âFFOâ), Same Property NOI, Debt to Adjusted EBITDA, RioCan’s Proportionate Share, Unencumbered Assets to Unsecured Debt and Total Enterprise Value, as well as other measures that may be discussed elsewhere in this News Release, do not have a standardized definition prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers. RioCan supplements its IFRS measures with these Non-GAAP measures to aid in assessing the Trustâs underlying performance and reports these additional measures so that investors may do the same. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCanâs performance, liquidity, cash flow, and profitability. For full definitions of these measures, please refer to the “Non-GAAP Measuresâ section in RioCanâs MD&A for the three and six months ended June 30, 2019.
This News Release contains forward-looking information within the meaning of applicable Canadian securities laws. This information reflects RioCanâs objectives, our strategies to achieve those objectives, as well as statements with respect to managementâs beliefs, estimates and intentions concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking information generally can be identified by the use of forward-looking terminology such as âoutlookâ, âobjectiveâ, âmayâ, âwillâ, âwouldâ, âexpectâ, âintendâ, âestimateâ, âanticipateâ, âbelieveâ, âshouldâ, âplanâ, âcontinueâ, or similar expressions suggesting future outcomes or events. Such forward-looking information reflects managementâs current beliefs and is based on information currently available to management. All forward-looking information in this News Release is qualified by these cautionary statements.
Forward-looking information is not a guarantee of future events or performance and, by its nature, is based on RioCanâs current estimates and assumptions, which are subject to numerous risks and uncertainties, including those described in the âRisks and Uncertaintiesâ section in RioCan’s MD&A for the period ended June 30, 2019 and in our most recent Annual Information Form, which could cause actual events or results to differ materially from the forward-looking information contained in this News Release. General economic conditions, including interest rate fluctuations, may also have an effect on RioCanâs results of operations. 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 stable retail environment; relatively historically low interest costs; a continuing trend toward land use intensification, including residential development in urban markets; access to equity and debt capital markets to fund, at acceptable costs, future capital requirements and to enable our refinancing of debts as they mature; the availability of investment opportunities for growth in Canada; the timing and ability for RioCan to sell certain properties; the valuations to be realized on property sales relative to current IFRS values; and the Trust’s ability to utilize the capital gain refund mechanism. 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 this forward-looking information.
Our U.S. subsidiary qualified as a REIT for U.S. income tax purposes up to May 25, 2016, subsequent to the closing date of the sale of our U.S. property portfolio. For U.S. income tax purposes, the subsidiary distributed all of its U.S. taxable income and is entitled to deduct such distributions against its taxable income. The subsidiaryâs qualification as a REIT depends on the REITâs satisfaction of certain asset, income, organizational, distribution, unitholder ownership and other requirements up until May 25, 2016. Our U.S. subsidiary was subject to a 30% or 35% withholding tax on distributions of its U.S. taxable income to Canada. We did not distribute any withholding taxes paid or payable to our unitholders related to the disposition. Should RioCanâs U.S. subsidiary no longer qualify as a U.S. REIT for U.S. tax purposes prior to May 25, 2016, certain statements contained in this News Release or the MD&A for the period ending June 30, 2019 may need to be modified.
The forward-looking statements contained in this News Release are made as of the date hereof, and should not be relied upon as representing RioCanâs views as of any date subsequent to the date of this News Release. Management undertakes no obligation, except as required by applicable law, to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
RioCan Real Estate Investment Trust
Senior Vice President and Chief Financial Officer
416-866-3033 | www.riocan.com