RioCan Real Estate Investment Trust Announces Settlement With Target Corporation

TORONTO, ONTARIO–(Marketwired – Nov. 23, 2015) – RioCan Real Estate Investment Trust (“RioCan”) (TSX:REI.UN) is pleased to announce that, on its behalf and on behalf of its co-owners, it has entered into a binding agreement (“Settlement Agreement”) with Target Corp., the US parent of Target Canada Co. (“Target Canada”), concluding terms of settlement relating to the eighteen leases that were disclaimed pursuant to the Companies’ Creditors Arrangement Act (“CCAA”).

Target Corp. had entered into indemnity agreements (the “Indemnities”) with certain RioCan entities (including co-owned entities) and whereby Target Corp. indemnified those entities for, among other matters, the obligations of Target Canada Co. pursuant to the various leases.

In consideration of a net payment of $132 million to RioCan, of which approximately $92 million belongs to RioCan with the remainder to be distributed to its various co-owners, the relevant RioCan entities and their partners have agreed to release Target Corp. from the Indemnities relating to the Subject Leases. The relevant RioCan entities have also directed that any distributions from Target Canada to be made to such entities, insofar as they relate to the Subject Leases, will be paid to Target Corp.

RioCan has received payment in full of the settlement amount.

The proceeds of the settlement will be utilized by RioCan and its co-owners to mitigate losses caused by Target Canada’s departure and disclaimer of the Subject Leases.

Leasing Update:

At the time of Target Canada’s announcement that it would close all of its Canadian stores, RioCan had 26 locations that were under lease to Target Canada. Through the CCAA, leases at seven locations were assigned to other tenants (six locations to Lowe’s and one to Canadian Tire). RioCan’s leasing team continues to work diligently negotiating with potential tenants to backfill the premises at the remaining nineteen properties with the objective to utilize the space optimally so as to improve the overall shopping centre and increase revenues in the most efficient, expedient, and effective manner possible.

To date, RioCan has made great progress, and there is strong momentum behind the Trust’s leasing efforts. It is anticipated that the backfilled units will begin to come on line in mid-2016, and that most of the work that has currently been identified will be completed by the end of 2017.

Once complete, the centres will benefit from increased cashflow, in part due to higher rental revenue, and from higher recoveries as the new leases are more market based, providing for a full pro-rata share of operating cost recoveries, utilities, and realty taxes, which were capped under the former Target Canada leases. Traffic to the centres is expected to be higher, which should result in greater sales, and stronger tenants. Furthermore, the new cashflow stream will be more diverse, have longer remaining terms, and will have a stronger growth profile than the previous Target Canada leases, which were assumed from Zellers and had little, if any, rent growth through the remaining lease terms and renewal options. As a result, management is very confident that overall RioCan will end up with a stronger portfolio that will generate a more secure, diverse, and faster growing cashflow stream.

To date, RioCan has completed 14 leases totalling approximately 448,000 square feet (“sf.”) at 100% (344,000 sf. at RioCan’s interest). These 14 leases will, at RioCan’s interest, generate $5.2 million of base rental revenue per year.

RioCan has two conditional offers to lease space totalling 50,000 sf. at RioCan’s interest and at 100%. These conditional leases are expected to generate $0.6 million at RioCan’s interest of base rental revenue per year.

In addition, RioCan is in advanced stages of negotiation for another 16 leases totalling approximately 670,000 sf. at 100% (538,000 sf. at RioCan’s interest) that are expected to be finalized by the end of the first quarter of 2016. These 16 leases are expected to generate $4.5 million at RioCan’s interest of base rental revenue per year.

Collectively, these 32 leases represent approximately $10.3 million at RioCan’s interest, or 94% of the total rental revenue lost through Target’s departure. The expected cost to complete the redevelopment work related to the 32 leases is currently estimated to be approximately $110 million (approximately $75 million at RioCan’s interest). The overall redevelopment costs will evolve as additional tenants are secured, development plans are completed and construction costs finalized.

There is 568,600 sf. at 100% (406,000 sf. at RioCan’s interest) that is currently being marketed, but is not presently the subject of active lease negotiations where redevelopment plans are being prepared.

The area that will be converted for landlord purposes including common area, loading docks and other uses represents 186,000 sf. at 100% (156,000 sf. at RioCan’s interest). The remaining 195,500 sf. at 100% and RioCan’s interest represents space for potential redevelopment, where plans have not yet been finalized.

The lease agreements are in various stages of negotiations and there can be no assurance as to how many of the leases agreement will be completed or their timelines.

Leasing Summary

Property Level Highlights:

RioCan’s progress backfilling the spaces previously occupied by Target Canada varies from property to property. The following summaries highlight the progress that has been made to date in 13 of RioCan’s shopping centres. Where not otherwise stated, all tenant spaces described below are at 100% interest.

Single Tenant Solutions:

At RioCan’s Stockyards property in Toronto, Ontario, RioCan has entered into a lease agreement with Nations Fresh Foods to occupy the entire 153,450 sf. (76,725 sf. at RioCan’s interest) that was previously occupied by Target Canada generating roughly the same base rental revenue that was generated by Target Canada. Nations Fresh Foods is part of an Ontario based full service grocery chain focused on providing a multi-ethnic fresh food shopping experience through its Oceans Fresh Food Market and Nations Fresh Foods banners.

Currently, RioCan is in advanced stages of lease negotiations involving various single tenant solutions totalling 455,663 sf. at 100% (397,880 sf. at RioCan’s interest), which we expect will be completed over the next several months at Millcroft Shopping Centre, Orillia Square Mall, RioCan Niagara Falls, and RioCan Scarborough Centre.

Burlington Mall (RioCan ownership – 50%)

At RioCan’s Burlington Mall property in Burlington, Ontario, Target Canada previously occupied approximately 121,500 sf. paying $4.17/sf. in base rent (approximately $0.5 million at 100%, $0.3 million at RioCan’s interest). The former Target box will be reconfigured to accommodate four large format tenants of approximately 22,000 sf. each, and additional small shop space aggregating approximately 10,000 sf. RioCan currently has a commitment from Denninger’s Fresh Foods of the World, a specialty food retailer (23,000 sf.), and negotiations are substantially complete with three national tenants for the remaining large format premises. As a result of the redevelopment, approximately 23,000 sf. of the former Target Canada premises will be converted to a new interior corridor, including a new mall entrance, landlord storage or will be demolished.

The Trust expects to file for site plan approvals in late 2015 and commence construction on the redevelopment in 2016 with tenants taking possession of the space in 2017. Upon completion, the redeveloped space is expected to generate base rental revenue of $20.72/sf. on the reconfigured space generating approximately $2.0 million annually at 100% ($1.0 million at RioCan’s interest).

Charlottetown Mall (RioCan ownership – 50%)

At RioCan’s Charlottetown Mall in Charlottetown, Prince Edward Island, Target Canada previously occupied approximately 107,800 sf. paying $4.20/sf. in base rent (approximately $0.5 million at 100%, $0.2 million at RioCan’s interest). The former Target box will be reconfigured to accommodate four large format tenants ranging in size from approximately 20,000 sf. to 30,000 sf. each, as well as two small shop tenants totalling approximately 5,000 sf. each. Negotiations with three national tenants are at an advanced stage.

Approximately 7,000 sf. of the former Target Canada premises will be converted to landlord storage or demolished. Construction is expected to begin in the fourth quarter of 2015, with tenants taking possession and opening in the second half of 2016. Upon completion, the redeveloped space is expected to generate base rental revenue of $12.46/sf. generating approximately $1.3 million annually at 100% ($0.6 million at RioCan’s interest).

Lawrence Square (RioCan ownership – 100%)

At its Lawrence Square property in Toronto, Ontario, RioCan has successfully backfilled most of the 89,430 sf. that was leased to Target Canada. Target Canada was paying $7.50/sf. (approximately $0.7 million). The space will be reconfigured to accommodate four large format tenants ranging in size from 12,000 sf. to 28,000 sf. RioCan has successfully leased 63,000 sf. to HomeSense (23,000 sf.), Marshalls (28,000 sf.), and PetSmart (12,000 sf.). Work began at the site in the third quarter of 2015 and RioCan expects to complete the redevelopment and expects the new tenants will take possession of the spaces in the first half of 2016. The remaining unit of approximately 15,000 sf. is being marketed. Upon completion, approximately 12,000 sf. will be used for common area uses.

Upon completion, the redeveloped space is expected to generate base rental revenue of $19.56/sf. generating approximately $1.5 million annually.

Trinity Common Brampton (RioCan ownership – 100%)

At Trinity Common Brampton, in Brampton, Ontario, Target Canada previously occupied 118,200 sf. paying $7.50/sf. in base rent (approximately $0.9 million). The former Target box will be reconfigured to accommodate three new large format tenants. RioCan currently has commitments from DSW (20,000 sf.) and Michaels (23,000 sf.) and negotiations are substantially complete with one national tenant for the remaining unit (25,000 sf.).

RioCan expects to file for site plan approvals in the fourth quarter of 2015, and commence construction in mid-2016, with tenants taking possession in early 2017. As a result of the redevelopment, approximately 50,000 sf. will be removed or reconfigured to create the new tenant facades and loading areas. Upon completion, the redeveloped space is expected to generate base rental revenue of $20.15/sf. generating approximately $1.4 million annually.

Shoppers World Brampton (RioCan ownership – 100%)

At Shoppers World Brampton, in Brampton, Ontario, Target Canada previously occupied 121,490 sf. paying $4.18/sf. in base rent (approximately $0.5 million). The former Target box (121,490 sf.) will be reconfigured to accommodate four large format tenants ranging in size from 15,000 sf. to 38,000 sf. and additional small shop space aggregating approximately 6,000 sf. RioCan currently has a commitment from GoodLife Fitness (38,000 sf.) and negotiations are in various stages with three national tenants for the balance of the large format premises.

Construction is anticipated to start in mid-2016 with tenants taking possession a year later. As a result of the redevelopment, approximately 13,000 sf. of the former Target Canada premises will be converted to common area. Upon completion, the redeveloped space is expected to generate base rental revenue of $9.77/sf. or approximately $1.1 annually.

RioCan Durham Centre (RioCan ownership – 100%)

At RioCan’s Durham Centre in the Greater Toronto Area market of Ajax, Ontario, Target Canada previously occupied 121,280 sf. paying $8.11/sf. of base rent (approximately $1.0 million). The former Target box (121,280 sf.) will be reconfigured to accommodate three new large format tenants ranging in size from 20,000 sf. to 23,000 sf. and additional small shop space aggregating approximately 5,000 sf. RioCan currently has commitments from Michaels (23,000 sf.) and DSW (20,000 sf.) with negotiations in the final stages for another 23,000 sf. with a national retailer.

Construction is expected to commence in the second quarter of 2016, with tenants taking possession in the early 2017. As a result of the redevelopment, approximately 50,000 sf. of the former Target Canada premises will be demolished. Upon completion the redeveloped space is expected to generate base rental revenue of $18.68/sf. generating approximately $1.3 million annually.

Gates of Fergus (RioCan ownership – 50%)

At RioCan’s Gates of Fergus shopping centre in Fergus, Ontario, Target Canada previously occupied 95,978 sf. paying $7.00/sf. of base rent ($0.7 million at 100%, $0.4 million at RioCan’s interest). The former Target box will be reconfigured to accommodate three large format tenants ranging from approximately 9,000 sf. to 24,000 sf. per unit. RioCan currently has commitments from Dollarama (12,700 sf.) and Giant Tiger (20,000 sf.) and negotiations are at an advanced stage for the remaining unit.

Construction has commenced on demising the space and we anticipate tenants will take possession in the second quarter of 2016. As a result of the redevelopment, approximately 30,000 sf. of the former Target Canada premises will be converted to landlord storage or demolished. Upon completion, the redeveloped space is expected to generate base rental revenue of $10.92/sf. generating approximately $0.7 million annually ($0.4 million at RioCan’s interest).

South Hamilton Square (RioCan ownership – 100%)

At RioCan’s South Hamilton Square, in Hamilton, Ontario, Target Canada previously occupied 93,125 sf. paying $7.51/sf. of base rent (approximately $0.7 million). The former Target box will be reconfigured to accommodate three large format tenants ranging in size from 15,000 sf. to approximately 40,000 sf. RioCan currently has commitments from Fabricland (15,500 sf.) and Hamilton Trampoline Club (36,500 sf.).

Construction is anticipated to start in the second quarter of 2016 with tenants taking possession in late 2016. Upon completion the redeveloped space is expected to generate base rental revenue of $12.46/sf. generating approximately $1.2 million annually.

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.

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: “Leasing Update” and “Property Level Highlights”) regarding the settlement reached with Target Corporation and the Trust’s ability to lease space previously vacated by Target Canada together with 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 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 statements 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.