RioCan Real Estate Investment Trust Announces 5% Growth in Operating Funds From Operations in the Third Quarter of 2015

TORONTO, ONTARIO–(Marketwired – Nov. 3, 2015) –

RioCan’s HIGHLIGHTS for the three and nine months ended September 30, 2015 were:

RioCan Real Estate Investment Trust (TSX:REI.UN) (“RioCan”) today announced its financial results for the three and nine months ended September 30, 2015.

“The Trust continues to demonstrate the resiliency of our business model in a challenging operating environment once again by generating solid growth in Operating FFO this past quarter. RioCan’s occupancy rate increased slightly during the quarter, and we are cautiously optimistic that the worst of the challenges in the retail marketplace may be behind us,” said Edward Sonshine, Chief Executive Officer of RioCan.

Financial Highlights

All figures in Canadian dollars unless otherwise noted. RioCan’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Consistent with RioCan’s management framework, management uses certain financial measures to assess RioCan’s financial performance, which are not generally accepted accounting principles (GAAP) under IFRS. For a full definition of these measures, please refer to the “Use of Non-GAAP Measures” in RioCan’s Third Quarter 2015 Management Discussion and Analysis.

Third Quarter 2015:

Net earnings attributable to Unitholders and preferred unitholders for the third quarter of 2015 was $144.5 million compared to $161.6 million for the same period in 2014, representing a decrease of $17.1 million. The decline in net earnings was largely due to a $26.5 million decline in gross fair value adjustments from a fair value gain of $21.2 million in the third quarter 2014 to a fair value loss of $5.2 million this quarter. This fair value loss was primarily due to negative valuation adjustments related to foreign exchange translation on realty tax recoveries from U.S. properties, partly offset by fair net value gains resulting from reductions in capitalization rates on certain Canadian assets located in primary markets.

Operating FFO for the third quarter of 2015 was $140.2 million or $0.44 per Unit compared to $133.6 million or $0.43 per Unit for the third quarter in 2014, representing an increase of approximately $6.6 million or 5.0%. On a per Unit basis, Operating FFO increased by $0.01 per Unit. Operating FFO increased primarily due to higher NOI of $6.1 million and lower interest expense of $1.7 million, partially offset by higher general and administrative expenses of $2.0 million.

The increase in NOI was primarily driven by higher foreign currency translation gains from U.S. operations, higher lease cancellation fees and completed developments.

Year to Date 2015

Net earnings attributable to Unitholders and preferred unitholders for the nine months ended September 30, 2015 was $319.8 million compared to $491.5 million for the same period in 2014, a decrease of $171.0 million. This decrease was primarily due to a $178.8 million decline in gross fair value adjustments from a fair value gain of $113.8 million for the nine months ended September 30, 2014 to a fair value loss of $65.0 million the current period. The fair value loss was primarily due to negative valuation adjustments related to certain tenant vacancies (primarily Target), and interior renovation costs at some of RioCan’s enclosed malls, partially offset by fair value gains resulting from reductions in capitalization rates on assets located in primary markets.

Operating FFO for the first nine months of 2015 was $414.6 million or $1.30 per Unit, compared to $387.9 million or $1.27 per Unit for the same period in 2014, representing an increase of $26.7 million or 6.9%. On a per Unit basis, Operating FFO increased by $0.03 per Unit or 2.8%. Operating FFO increased mainly due to higher NOI of $27.6 million and higher investment income of $4.8 million, partly offset by lower interest income of $2.8 million and higher general and administrative expenses of $5.6 million. The increase in general and administrative expenses is primarily due to the timing of recognition of variable compensation expenses, and in part due to costs related to RioCan’s strategic review of its U.S. business. RioCan expects to realize a partial offset in compensation costs in the fourth quarter of 2015 due to the timing of certain expenses and anticipates modest growth in full year general and administrative expense as compared to 2014.

The primary driver for the decline in RioCan’s same store and same property NOI for the three and nine months ended September 30, 2015 was higher vacancies as a result of the challenging operating environment encountered in the first nine months of 2015. Partially offsetting these declines, were increases in NOI from new leasing, rental revenue on renewals, and vacated space that has since been backfilled by new tenants.

Corporate Developments

RioCan is in the process of completing a strategic review of its U.S. operations. To assist with this strategic review, RioCan has engaged Morgan Stanley and RBC Capital Markets. RioCan received approval from its Board of Trustees during the second quarter to explore various strategic alternatives regarding its U.S. operations. These strategic alternatives include, but are not limited to, continuing to operate and invest in the U.S. portfolio, the sale of some or all of its properties in the U.S., and other strategic joint venture alternatives. RioCan’s review is currently well underway and on track with original timelines. There can be no assurance as to which strategy will be pursued.

Highlights

Lease Cancellation Fees

On a recurring basis, the Trust receives lease termination fees from tenants as they re-evaluate their operating strategies and as a result look to return unneeded space to the Trust. Considering the size of RioCan’s portfolio, these activities occur with relative frequency. These are often tenant specific events driven by a change in strategy or re-organization, and not issues that are property specific as in many cases the Trust is able to lease the space to a new tenant (or tenants), often times at higher rents than what the previous tenant was paying. Also, RioCan has the opportunity to find a replacement tenant (or tenants) that improves the overall centre and draw greater traffic to the property.

During the Third Quarter, RioCan received $4.3 million of lease cancellation fees as compared to $1.5 million in the same period of 2014. In the nine months ended September 30, 2015, lease cancellation fees of $11.1 million were recognized by RioCan as compared to $4.8 million for the same period in 2014.

The quality of RioCan’s assets and the strength of its leasing team have historically enabled the Trust to capitalize on such events and find new tenants relatively quickly. In many cases, this has resulted in increased cash flow to the Trust.

Two such examples that have occurred recently are:

Target Canada Co. (Target Canada)

As at September 30, 2015, Target Canada had disclaimed 19 leases in properties owned by RioCan. All but one of these leases are guaranteed through an indemnity agreement with Target Corp for the remaining term of each lease, under which RioCan is seeking a claim.

RioCan and Target Corporation are currently engaged in good faith negotiations and are hopeful that a settlement can be reached. These negotiations are complex as they involve a number of properties and various partners, in some cases. Given the confidential nature of the discussions, RioCan is unable to provide any additional details at this time and there can be no assurance as to the timing of, or the ability of the parties to reach an agreement.

RioCan is actively in discussion with potential retailers and is experiencing good momentum in its leasing efforts to backfill the vacant premises. For most of the disclaimed Target Canada leases, it is unlikely that a single tenant will be found to utilize the entirety of such space. Consequently, there will likely be a need to break-up the space which will require incremental capital expenditures and time to complete the related work. Management believes it will take an estimated 18 to 24 months for a new tenant to commence paying rent in these reconfigured spaces, taking into consideration lease negotiations, construction approvals, construction time and fitting out of such space. RioCan is working diligently to fill the disclaimed Target Canada lease space in the most efficient and effective manner possible. Over the long run, RioCan believes that the re-tenanting of the larger Target boxes will result in a more diversified revenue stream and a better draw for consumers.

Portfolio Activity

Acquisitions Completed During the Third Quarter

Canada

As previously disclosed, on July 9, 2015, Hudson’s Bay Company (HBC) and RioCan announced the closing of the first tranche of the joint venture focused on real estate growth opportunities in Canada. The joint venture will enable HBC and RioCan to build on the strength of existing real estate assets and identify new real estate growth opportunities.
At the first tranche closing, the joint venture entity (the RioCan-HBC JV) acquired properties at a total purchase price of approximately $1.6 billion, generating annual cash rent of $81 million. New and assumed debt at the RioCan-HBC JV totals $494 million, made up of $352 million in new debt, and assumed mortgages of $142 million. RioCan’s contribution included a 50% interest in two mall properties in Ontario (Oakville Place and Georgian Mall) representing an initial equity stake of $147 million or 13.4% in the RioCan-HBC JV.

United States

RioCan completed the acquisitions of two income properties in the U.S at an aggregate purchase price of $47 million
(US$36.5 million), representing a weighted average capitalization rate of 6.3%.

Acquisitions Completed Subsequent to Quarter End

Canada

Dissolution of Canadian Joint Venture with Kimco

On September 24, 2015, RioCan and Kimco announced that they have agreed to unwind their Canadian joint arrangement, which had amassed a portfolio of 35 properties over 15 years.

Acquisitions of Kimco’s interests in 22 properties

RioCan will acquire Kimco’s interest in a portfolio of 22 Canadian properties at a purchase price of $715 million. Under the terms of the transaction, RioCan will assume Kimco’s share of the existing in-place debt, subject to conventional closing conditions, of $231 million, which carries an average interest rate of 4.1% with a weighted average term to maturity of approximately 3.5 years.

The initial closing of RioCan’s acquisition of Kimco’s interest in 19 properties was completed on October 6, 2015, at a purchase price of $477 million. RioCan assumed Kimco’s share of the existing in-place debt of $127 million, representing a cash commitment of approximately $350 million by RioCan. RioCan funded this acquisition through a combination of internal resources and credit facilities. The remaining three properties will be acquired at a purchase price of $238 million. RioCan will assume Kimco’s share of the existing in-place debt of $104 million. This phase of the transaction is expected to be completed by January 2016.

The acquisition will be immediately accretive, and upon completion of the second phase of the transaction the portfolio is expected to generate additional annualized net operating income of approximately $45 million and will require no additional resources by management. RioCan’s cash commitment of approximately $485 million needed to complete the overall transaction will be funded from a combination of internal resources and credit facilities.

As RioCan’s management team has provided leasing, asset, and property management duties for these properties since the inception of the joint venture relationship with Kimco, the portfolio will be easily absorbed by the Trust. This acquisition improves RioCan’s Canadian portfolio by increasing the concentration of the Trust’s portfolio located in Canada’s six largest markets, most notably in the Greater Toronto Area.

Remaining 13 properties in the Joint Venture

RioCan and Kimco will seek to dispose of ten of the remaining 13 co-owned properties, which total approximately 1.1 million square feet, by the end of the first half of 2016. There is no assurance that sale transactions will be completed. The remaining three properties will be dealt with at a future date.

Pipeline Acquisitions

RioCan is currently in negotiations regarding income property acquisitions in Canada and the U.S. that, if completed, would represent approximately $74 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.

Property Dispositions Completed During the Third Quarter

During the quarter ended September 30, 2015, RioCan disposed of interests in four income properties aggregating to $328 million representing a weighted average capitalization rate of 5.3%, comprised of approximately 657,000 square feet. The Trust’s mortgage obligations related to these properties was $142 million.

Development Activities

As at September 30, 2015, RioCan had ownership interests in 16 development projects that will, upon completion, comprise about 7.1 million square feet (4.0 million square feet at RioCan’s interest). In addition to its development projects, RioCan continued its urban intensification activities, primarily in the Toronto, Ontario and Calgary, Alberta markets.

Recent events include:

• RioCan has begun demolition at its Bathurst and College Street development in Toronto, Ontario. The site will be developed into an retail and office commercial building with completion expected in 2018.
• At its 491 College Street development in Toronto, Ontario, RioCan has entered into a lease agreement to relocate the LCBO that is currently located at RioCan’s College Street and Manning Avenue development site. With existing tenant concerns resolved, RioCan and its partner Allied are now able to move forward with the redevelopment plans at College and Manning, which will be developed into a mixed use property containing approximately 6,000 square feet of retail space and 77 rental residential units.
• RioCan and its co-owner, KingSett Capital Partners (“KingSett”), have received zoning approval and expect to commence the redevelopment at RioCan Yonge Sheppard Centre, in Toronto, Ontario in early 2016.
• RioCan and its co-owner, Allied, received zoning approval for its development plans at King Street & Portland Street in Toronto, Ontario. The current development plans contemplate a 396,000 square foot mixed use property containing 267,000 square feet of commercial space and 116 residential units.
• RioCan’s retail expansion at the RioCan Yonge Eglinton Centre is nearing completion. Winners and Cineplex have taken possession of their premises, and during the quarter Winners commenced operations. Cineplex is expected to commence operations of its additional theatres before the end of the year. Sephora will take possession of space on the ground floor of the expansion in the first quarter of 2016.

Residential Development

RioCan has currently identified 46 properties that it considers to be strong possible intensification opportunities, all of which are in the six major urban markets and are typically located in the vicinity of substantive transit infrastructure. RioCan’s objective is to zone for 18,000 residential units over the course of the next ten years. Given the early stage of the evolution of this strategy, there can be no assurance that all of these developments will be undertaken, and if they are, on what terms.

RioCan has filed applications for rezoning 12 mixed use projects which, if all rezoning requests are granted as applied for, is expected to comprise a total of 6.4 million square feet, of which approximately 3.3 million square feet will be residential rental units held for long-term rental income, approximately 1.0 million square feet will be condominiums for sale, and 2.2 million square feet will be incremental commercial gross leasable area. This would permit RioCan to have an interest in approximately 3,800 residential rental units. The majority of these properties are located directly on, or in close proximity, to major transit lines such as the existing Toronto Transit Commissions’ subway lines or The Crosstown Eglinton LRT line, which is currently under construction. The ability to intensify its existing retail properties into transit-oriented mixed use developments is indicative of both the locational attributes of RioCan’s land holdings and its development capabilities.

Liquidity and Capital

Financing Highlights for the Third Quarter

Credit Facilities

At September 30, 2015, RioCan has five revolving lines of credit in place having an aggregate capacity of $731 million with $582 million available to be drawn. Subsequent to the quarter end, RioCan added $200.0 million of capacity to an existing credit facility which was used to provide short term financing for the Trust’s acquisition of Kimco’s share of certain properties that were held in the joint venture. A strategy to repay the amounts drawn on this facility will be developed pending the outcome of the Trust’s strategic review of its US business. As a result, there may be some near term deterioration in the Trust’s targeted credit metrics; however any disruption is expected to be short term.

Term Financing

In Canada, RioCan obtained approximately $157.4 million fixed-rate mortgage financing during the quarter at an average interest rate of 3.08% and an average term to maturity of 7.6 years. In the U.S., RioCan obtained approximately $135.4 million of fixed-rate mortgage financing during the quarter at an average interest rate of 3.34% and an average term to maturity of 6.8 years.

As a result of these activities in Canada and the U.S., RioCan has reduced its overall contractual interest rate on outstanding debt to 3.86% at September 30, 2015 from 4.12% at December 31, 2014.

RioCan’s Unaudited Interim Condensed Consolidated Financial Statements and Management’s Discussion and Analysis for the three and nine months ended September 30, 2015 is 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 Tuesday, November 3, 2015 at
10:00 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 416-340-2216 or 1-800-355-4959. If you cannot participate in the live mode, a replay will be available until December 1, 2015. To access the replay, please dial 905-694-9451 or 1-800-408-3053 and enter passcode 8465599#.

Scheduled speakers include Edward Sonshine, O.Ont. Q.C., Chief Executive Officer, and Rags Davloor, President and Chief Operating Officer and Cynthia Devine, Executive Vice President, Chief Financial Officer and Corporate Secretary. 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-and-presentations/events/ 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 enterprise value of approximately $15.1 billion as at September 30, 2015. It owns and manages Canada’s largest portfolio of shopping centres with ownership interests in a portfolio of 354 retail properties containing approximately 78 million square feet, including 49 retail properties containing 13 million square feet in the United States as at September 30, 2015. RioCan’s portfolio also includes 16 properties under development in Canada. For further information, please refer to RioCan’s website at www.riocan.com.

Non-GAAP Measures

RioCan’s consolidated financial statements are prepared in accordance with IFRS. Consistent with RioCan’s management framework, management uses certain financial measures to assess RioCan’s financial performance, which are not generally accepted accounting principles (GAAP) under IFRS. The following measures, RioCan’s Interest, Funds From Operations (“FFO”), Operating Funds From Operations (“Operating FFO”), Adjusted Funds From Operations (“AFFO”), and Adjusted Earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), Operating EBITDA, Interest Coverage Ratio, Debt Service Coverage Ratio, Net Debt to Operating EBITDA, Net Operating Income (“NOI”), Same Store NOI, Same Property NOI, and Total Enterprise Value as well as other measures discussed elsewhere in this 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 uses these measures to better assess the Trust’s underlying performance and provides 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 RioCan’s performance, liquidity, cash flow, and profitability. For a full definition of these measures, please refer to the “Use of Non-GAAP Measures” in RioCan’s third quarter 2015 Management Discussion and Analysis.

Forward-Looking Information

This news release contains forward-looking information within the meaning of applicable Canadian securities laws. These information includes, but is not limited to, statements made in this News Release (including the sections entitled “Highlights for the three and nine months ended September 30, 2015”, “Financial Highlights”, “Corporate Developments” “Leasing and Operational Highlights”, “Portfolio Activity and Acquisition Pipeline”, “Development Portfolio”, and “Liquidity and Capital”), 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 information 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 information reflects management’s current beliefs and are based on information currently available to management. All forward-looking information in this News Release are qualified by these cautionary statements.

Forward-looking information is not a guarantee of future events or performance and, by its nature, is based on RioCan’s current estimates and assumptions, which are subject to numerous risks and uncertainties, including those described under “Risks and Uncertainties” in RioCan’s Management’s Discussion and Analysis for the period ended September 30, 2015, which could cause actual events or results to differ materially from the forward-looking information contained in this News Release. Those risks and uncertainties include, but are not limited to, those related to: liquidity and general market conditions; tenant concentrations and related risk of bankruptcy or restructuring (and the terms of any bankruptcy or restructuring proceeding), occupancy levels and defaults, including the failure to fulfill contractual obligations by the tenant or a related party thereof; lease renewals and rental increases; the ability to re-lease and find new tenants for vacant space; retailer competition; access to debt and equity capital; interest rate and financing risk; joint ventures and partnerships; the relative illiquidity of real property; unexpected costs or liabilities related to acquisitions and dispositions; development risk associated with construction commitments, project costs and related approvals; environmental matters; litigation; reliance on key personnel; management information systems; unitholder liability; income and indirect taxes; U.S. investments, property management and foreign currency risk; and credit ratings.

RioCan currently qualifies as a real estate investment trust for tax purposes and intends to continue to qualify for future years. The Income Tax Act (Canada) contains provisions which potentially impose tax on publicly traded trusts which qualify as specified investment flow-through entities (the SIFT Provisions). However, the SIFT Provisions do not impose tax on a publicly traded trust which qualifies as a real estate investment trust (REIT). Should RioCan no longer qualify as a REIT under the SIFT Provisions, certain statements contained in RioCan’s MD&A may need to be modified. RioCan is still subject to Canadian tax in their incorporated Canadian subsidiaries.

The Trust’s U.S. subsidiary qualifies as a REIT for U.S. income tax purposes. The subsidiary expects to distribute all of its U.S. taxable income (if any) to Canada and is entitled to deduct such distributions for U.S. income tax purposes. The subsidiary’s qualification as a REIT depends on the REIT’s satisfaction of certain asset, income, organizational, distribution, unitholder ownership and other requirements on a continuing basis. The Trust anticipates that the subsidiary will continue to qualify as a U.S. REIT in the future. The Trust’s U.S. subsidiary is subject to a
30% or 35% withholding tax on distributions to Canada.

Other factors, such as general economic conditions, including interest rate and foreign exchange rate fluctuations, may also have an effect on RioCan’s 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 low and stable interest costs; a continuing trend toward land use intensification, including residential development in high growth and urban markets; access to equity and debt capital markets to fund, at acceptable costs, future capital requirements and to enable the Trust to refinance debts as they mature; and the availability of investment opportunities for growth in Canada and the U.S..

For a description of additional risks that could cause actual results to materially differ from management’s current expectations, see “Risks and Uncertainties” in RioCan’s Management’s Discussion and Analysis in its 2014 Annual Report, and for the period ended September 30, 2015, and in “Risks and Uncertainties” in RioCan’s AIF. 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. Certain statements included in this News Release may be considered “financial outlook” for purposes of applicable Canadian securities laws, and as such the financial outlook may not be appropriate for purposes other than this News Release. The forward-looking information contained in this News Release is made as of the date of this News Release, and should not be relied upon as representing RioCan’s 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.