RioCan Announces Fourth Quarter and Year End Results for 2018
TORONTO, Feb. 12, 2019 (GLOBE NEWSWIRE) — RioCan Real Estate Investment Trust (“RioCan” or the “Trust”) today announced its financial results for the three months and year ended December 31, 2018.
“In 2018, RioCan accelerated its transformation into a REIT focused on Canada’s major markets and an expanding transit-oriented mixed-use residential portfolio. We are pleased with our year end results which report stronger same property NOI growth and continued FFO per unit growth even as we made significant progress on our secondary market dispositions,” said Edward Sonshine, Chief Executive Officer of RioCan. “The quality of our portfolio, income and liquidity has never been better than it is today. We are also pleased with the development completions scheduled for 2019 and 2020 and the yields we are achieving, adding to our optimism about RioCan’s next several years. As we deliver on transit-oriented mixed-use residential developments, further optimize our retail tenant mix and drive operational efficiency, the transformed portfolio will be poised to deliver higher FFO and net asset value per unit growth for our unitholders.“
|Three months ended
|(in millions except percentages, square feet and per unit values)||2018||2017||2018||2017|
|Weighted average units outstanding – diluted (in thousands)||306,295||326,155||314,024||326,929|
|FFO per unit – diluted (i)||$||0.45||$||0.44||$||1.85||$||1.79|
|Same property NOI growth – overall portfolio (i)(ii)||2.1||%||2.9||%||2.2||%||2.1||%|
|Same property NOI growth – major markets (i)(ii)||2.2||%||3.0||%||2.6||%||2.2||%|
|Six major markets – % of total annualized revenue (iv)||85.4||%||76.1||%||85.4||%||76.1||%|
|Greater Toronto Area – % of total annualized revenue (iii) (iv)||46.8||%||40.9||%||46.8||%||40.9||%|
|Occupancy – committed (iv)||97.1||%||96.6||%||97.1||%||96.6||%|
|Occupancy – committed six major markets (iv)||97.7||%||97.6||%||97.7||%||97.6||%|
|Renewal retention ratio||91.2||%||87.5||%||91.2||%||91.1||%|
|Development completions – sq ft in thousands||298.0||117.0||799.0||849.0|
|Development expenditures (v)||$||151.3||$||110.5||$||473.4||$||355.1|
|Properties held for development as a percentage of consolidated gross book value of assets (maximum permitted: 15%) (iv)||8.5||%||8.5||%|
|Balance Sheet Strength Highlights|
|Debt to Adjusted EBITDA – RioCan’s proportionate share (i)||7.88||x||7.57||x||7.88||x||7.57||x|
|Ratio of total debt to total assets – RioCan’s proportionate share (i) (iv)||42.1||%||41.4||%||42.1||%||41.4||%|
|Unencumbered assets (iv)||$||7,966||$||7,663||$||7,966||$||7,663|
|Unencumbered assets to unsecured debt (iv)||231||%||226||%||231||%||226||%|
|(i)||A Non-GAAP measurement. For definitions and basis of presentation of RioCan’s Non-GAAP measures, refer to the Presentation of Financial Information and Non-GAAP Measures section in RioCan’s Management’s Discussion and Analysis (MD&A) for the year ended December 31, 2018.|
|(ii)||Refers to same property NOI growth on a year-over-year basis. Prior periods as reported; not restated to reflect current period categories.|
|(iii)||The Greater Toronto Area (GTA) extends north to Barrie, ON; west to Hamilton, ON; and east to Oshawa, ON. The GTA definition has been extended from Burlington to Hamilton effective January 1, 2018.|
|(iv)||Information presented as at December 31.|
|(v)||Includes costs incurred for various properties under development and for residential inventory in respective reporting periods.|
FFO Per Unit Growth and Capital Recycling
- FFO per unit grew by $0.06 or 3.3% from 2017 to 2018 despite nearly $1.0 billion of secondary market assets dispositions closed and $7.5 million of severance costs incurred during the year. For the Fourth Quarter, FFO per unit increased by $0.01 or 2.2% when compared to the same period last year despite substantial dispositions completed and $2.7 million severance costs incurred in the quarter.
- Since the announcement of its strategic asset disposition program in October 2017, the Trust has completed or entered into firm, conditional or letter of intent agreements to sell $1.5 billion or 72 secondary market assets as of February 11, 2019, representing approximately 73% of our disposition target, at a weighted average capitalization rate of 6.68%, materially in line with our IFRS values, of which nearly $1.0 billion dispositions were closed in 2018 alone.
- Over the same period since October 2017, RioCan used a portion of the disposition proceeds to purchase and cancel 22.9 million RioCan units at a weighted average purchase price of $24.51 per unit for a total cost of $561.2 million. The remaining portions of the disposition proceeds were used to repay debt and fund development.
- Severance costs were incurred during the year as the Trust further streamlined its organizational structure to maximize operational efficiency and focus on the major markets, which will further drive same property NOI and FFO growth. Since September 30, 2017, there has been a net reduction of 69 employees.
- Net income changes for the three months and year ended December 31, 2018 over the comparable periods were primarily due to changes in fair value gains on investment properties and changes in fair values of marketable securities.
- Included in the FFO for the three months and year ended December 31, 2018 were $9.2 million and $59.2 million realized gains on the sale of marketable securities (comparable periods in 2017 – $10.5 million and $46.0 million), respectively.
Same Property NOI Growth
- RioCan achieved strong same property NOI growth for its major market portfolio – with 2.6% for the year and 2.2% for the Fourth Quarter. Improvements in the underlying portfolio quality as reflected in occupancy and renewal growth, contractual rent increases, and the completion of certain redevelopment projects were key contributors to this growth.
- For the overall portfolio, RioCan achieved same property NOI growth of 2.2% for the year and 2.1% for the Fourth Quarter. The lower same property NOI growth for secondary market assets (0.2% for the year and 1.3% for the Fourth Quarter) brought down the total portfolio same property NOI growth relative to the Trust’s major market portfolio, particularly on the annual basis.
- Percentage of total annualized rental revenue from six major markets and Greater Toronto Area (GTA) increased to 85.4% and 46.8% as of December 31, 2018, up 930 and 590 basis points from the same periods in 2017, respectively. Successful execution of the Trust’s strategic disposition program and strong same property NOI growth were the key driving factors. The two metrics are progressing well towards their respective >90% and >50% targets for the Trust.
- Committed occupancy improved by 50 basis points to 97.1% for the overall portfolio and by 10 basis points to 97.7% for the Trust’s major market portfolio as of December 31, 2018 when compared to December 31, 2017. Committed occupancy was up 60 basis points to 97.2% for the Trust’s retail portfolio when compared to December 31, 2017. Committed occupancy for office increased 60 basis points from September 30, 2018 to 94.4% as of December 31, 2018.
- In-place occupancy also improved by 50 basis points to 96.1% for the overall portfolio and by 20 basis points to 96.7% for the Trust’s major market portfolio as of December 31, 2018 when compared to December 31, 2017.
- Average net rent per occupied square foot for the Trust’s portfolio grew from $17.75 as of December 31, 2017 to $19.07 as of December 31, 2018, a 7.4% increase. This further demonstrates the improvements in the overall quality of the Trust’s portfolio, as it continues to progress well on its strategic disposition program and drives strong same property NOI growth.
- Average net rent at the Trust’s active urban intensification projects is $32.26 per square foot based on approximately 811,000 square feet of committed or in-place leases as of February 11, 2019, reflecting the quality of the Trust’s developments which are all major market focused and transit-oriented. This will further drive up the average rent and improve the overall quality of the Trust’s portfolio.
- Renewal retention ratio remained high at 91.2% for the year. Excluding eleven leases renewed with an anchor tenant in the second half of 2018, most of which occurred at properties in secondary markets, the blended new and renewal leasing spread was 6.8% for the year ended December 31, 2018.
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. Development expenditures were higher in 2018 than in 2017 primarily due to progress and substantial completion of several large mixed-use projects as noted below. The number of residential units and net leasable area (NLA) square footage stated here are at 100%.
- Yonge Eglinton Northeast Corner (ePlace, consisting of eCentral & eCondos) - This mixed-use project in Toronto with unparalleled access to the Yonge subway line and the new Eglinton Crosstown Light Rail Transit is near substantial completion. The 623 condominium units at eCondos were 100% pre-sold and possession commenced in the Fourth Quarter with $1.4 million of condominium gains realized during the quarter. Residential rental leasing at eCentral has commenced and is progressing well with first occupancy occurring in January 2019. ePlace’s 22,000 square feet of retail NLA is substantially leased with its flagship anchor tenant, TD Bank, taking possession of the space in the Fourth Quarter.
- King Portland Centre - The commercial component at this trendy 421,000 square feet mixed-use development in King West, Toronto was substantially completed in Q3 2018 and fully leased; possession of the 100% pre-sold 132-unit condominium, Kingly, is expected in Q3 2019.
- Bathurst College Centre – This 140,000 square feet mixed-use, grocery-anchored retail and office project was substantially complete in Q3 2018 and is fully leased with high profile tenants. All tenants have taken possession and the grocery anchor commenced operations in January 2019.
- Gloucester (Frontier) – The first phase or 228-unit of this residential rental development in Ottawa is progressing well with substantial completion expected in late Q2 2019. Residential rental leasing commenced in Q4 2018 and is progressing ahead of our expectations.
- Sage Hill – This greenfield retail project in Calgary, Alberta was completed in 2017. The Trust acquired the remaining non-managing 50% interest from its partner in February 2019 for $70.4 million. This property is performing well and its success reflects the Trust’s capability in project execution, as well as the location and quality of RioCan’s development, even as Alberta faces challenges in its economy with historically low oil prices.
- The Well – This flagship mixed-use development representing nearly 3.0M square feet of NLA in Toronto made significant leasing progress in 2018 with 71% of the office space leased to high caliber office tenants nearly three years prior to project completion. Construction is progressing as scheduled and has reached above grade for the office component. The retail component is expected to hit grade by Q2 2019. The 12-million-litre Enwave thermal energy storage tank has been installed. Retail leasing will commence in 2019.
For the five projects that are complete or near completion (ePlace, Bathurst College Centre and King Portland Centre in Toronto, Frontier in Ottawa, and Sage Hill in Calgary), the Trust estimates the average development yield to be 5.7% based on estimated stabilized NOI, which leads to an estimated $204.5 million incremental value creation for the projects’ commercial and residential rental components plus an additional $26.5 million of residential inventory gains on the sale of condominium units at two projects, bringing the total incremental value creation to $231.0 million. As of December 31, 2018, approximately $165.4 million of incremental value creation has been recognized through property fair market value, applicable interim and fee income, and applicable gains on sale of condo units.
These yield and value creation estimates take into account the Trust’s purchase of our partner’s 50% non-managing interest in Sage Hill subsequent to the year end and the expected purchase of the remaining 50% interest in the residential rental and retail portions of ePlace in 2019 based on agreements in place.
Balance Sheet Strength
RioCan continued to exercise sound capital management in 2018 and maintained a strong balance sheet. Debt to Adjusted EBITDA at RioCan’s proportionate share was at 7.88x as at December 31, 2018, below the Trust’s 8.0x target despite substantial secondary market asset dispositions completed. Debt to total assets at RioCan’s proportionate share was 42.1%, as at December 31, 2018, in line with our leverage target. The Trust continued to maintain a large unencumbered asset pool of $8.0 billion as of December 31, 2018, which provided 231% coverage over its unsecured debt, well above its 200% target.
Subsequent to the year end, the Trust extended the maturity date of its $150.0 million non-revolving unsecured credit facility from December 27, 2019 to June 27, 2024 and fixed the all-in annual interest rate at 3.43% through an interest rate swap. The Trust also fixed the annual all-in interest rate for $125.0 million of its other non-revolving unsecured credit facility maturing on January 31, 2023 at 3.38% through an interest rate swap. Further, the Trust entered into a $350.0 million five-year non-revolving unsecured credit facility with three financial institutions and has fully drawn on the credit facility to repay certain debt and for general trust purposes. This credit facility matures on February 7, 2024 and, through an interest rate swap, bears an annual all-in fixed interest rate of 3.34%. These transactions demonstrate the Trust’s credit worthiness and access to multiple sources of capital, extend the average term to maturity of the Trust’s total debt, and reduce the Trust’s floating interest rate debt exposure.
Conference Call and Webcast
Interested parties are invited to participate in a conference call with management on February 12, 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 5298637#.
For a copy of the slides to be used for the conference call or, to access the simultaneous webcast, visit RioCan’s website at http://investor.riocan.com/investor-relations/events-and-presentations/ and click on the link for the webcast.
RioCan is one of Canada’s largest real estate investment trusts with a total enterprise value of approximately $13.2 billion as at December 31, 2018. 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 233 properties, including 16 development properties, with an aggregate net leasable area of approximately 38.7 million square feet. 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. RioCan’s 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 annual audited consolidated financial statements (“2018 Annual Consolidated Financial Statements”) and MD&A for the three months and year ended December 31, 2018, which is available on RioCan’s website at www.riocan.com and on SEDAR at www.sedar.com.
Consistent with RioCan’s management framework, management uses certain financial measures to assess RioCan’s financial performance, which are not in accordance with generally accepted accounting principles (GAAP) under IFRS. The following measures Funds From Operations (“FFO”), 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 Trust’s 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 RioCan’s performance, liquidity, cash flow, and profitability. For full definitions of these measures, please refer to the “Presentation of Financial Information and Non-GAAP Measures” section in RioCan’s MD&A for the year ended December 31, 2018.
This News Release contains forward-looking information within the meaning of applicable Canadian securities laws. This information reflects RioCan’s objectives, our strategies to achieve those objectives, as well as statements with respect to management’s 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 “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 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 RioCan’s current estimates and assumptions, which are subject to numerous risks and uncertainties, including those described in the “Risks and Uncertainties” section in RioCan’s MD&A for the year ended December 31, 2018 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 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 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; and 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 subsidiary’s qualification as a REIT depends on the REIT’s 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 RioCan’s 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 year ended December 31, 2018 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 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.
RioCan Real Estate Investment Trust
Senior Vice President and Chief Financial Officer
416-866-3033 | www.riocan.com