RioCan Real Estate Investment Trust Announces Financial Results for 2017 With 5.4% Growth in Operating Income and 2.1% Same Property NOI Growth

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RioCan’s HIGHLIGHTS for 2017:

  • For the year ended December 31, 2017, IFRS Operating income increased 5.4% to $737 million. For the three months ended December 31, 2017 (“Fourth Quarter”), IFRS Operating income increased 3.9% to $188 million;
  • Funds From Operations (“FFO”) increased 6.7% or $37 million to $585 million in 2017. FFO per unit increased 6.3% or $0.11 to $1.79, despite the sale of the U.S. portfolio in May 2016;
  • FFO increased 9.1% or $12 million to $144 million in the Fourth Quarter over the comparable quarter in 2016. FFO per unit in the Fourth Quarter increased 9.3% or $0.04 to $0.44;
  • Same property NOI for the year ended December 31, 2017 increased 2.1% or $14 million compared to 2016. This is the Trust’s strongest annual same property performance since 2010. Same property NOI for RioCan’s properties in Canada’s six major markets increased 2.2% from 2017 to 2016 as compared to same property NOI growth of 1.7% in the secondary markets;
  • Same property NOI increased by 2.9%, or $4.9 million in the Fourth Quarter as compared to the same quarter in 2016. This is the strongest quarterly same property NOI growth since the fourth quarter of 2010. Same property NOI for RioCan’s properties in Canada’s six major markets increased 3.0% over the comparable fourth quarter as compared to same property NOI growth of 2.6% in the secondary markets;
  • Committed occupancy improved by 100 basis points to 96.6% at December 31, 2017 as compared to December 31, 2016. In addition, committed occupancy for RioCan’s properties in Canada’s six major markets increased by 110 basis points to 97.6% at December 31, 2017 as compared to December 31, 2016. In-place occupancy increased 200 basis points from 93.6% at December 31, 2016 to 95.6% at December 31, 2017;
  • Lease renewal retention rate increased 530 basis points to 91.1% in 2017 from 85.8% in 2016 with a 5.8% renewal spread in 2017;
  • The Trust is making good progress on the execution of its strategy to accelerate its portfolio focus in Canada’s six major markets. In the four months since the strategy’s announcement in October 2017, the Trust has either completed or entered into firm agreements to sell $512 million of properties in secondary markets at a weighted average capitalization rate of 6.07% based on in-place NOI, representing approximately 25% of the announced disposition target; the Trust currently also has conditional transactions under contracts totalling $58 million. The aggregate sales proceeds from these assets are in line with the Trust’s IFRS valuations;
  • The percentage of rental revenue generated from RioCan’s properties in Canada’s six major markets increased by 0.9% to 76.1% in the Fourth Quarter versus the third quarter, with the Greater Toronto Area (“GTA”) generating 40.9% of RioCan’s annualized rental revenue as at December 31, 2017;
  • The Trust obtained 4.5 million square feet of zoning approvals in 2017 and completed 849,000 square feet of development projects with $224 million costs transferred to income producing properties;
  • RioCan is making significant progress on the re-leasing of the former Sears space, which accounted for 0.8% of the Trust’s total NLA as of September 31, 2017. The Trust has completed or is in the final stages of lease negotiations for 320,000 square feet or 84% of the vacated Sears space (at RioCan’s interest). These leases will replace approximately 130% of the lost annual rental revenue from all of the former Sears space.
  • The Trust continued to maintain a strong balance sheet with a debt to total assets ratio of 41.4% on proportionate share basis as of December 31, 2017 , and further improved its debt to adjusted EBITDA ratio to 7.57x for the year. The Trust continued to grow its unencumbered assets pool to $7.7 billion, which generates 56.7% of RioCan’s annualized NOI as of December 31, 2017; and
  • Effective January 1, 2018, RioCan increased its annual distribution by $0.03 or 2.1% to $1.44 per unit.

TORONTO, Feb. 13, 2018 (GLOBE NEWSWIRE) — RioCan Real Estate Investment Trust (“RioCan”) (TSX:REI) today announced its financial results for the three months and year ended December 31, 2017.

“I am very pleased with our results this year, as 2017 marked the strongest year of same property performance for RioCan in seven years. The performance of our operations excelled in the past year, driving our FFO per unit, to its highest level in the Trust’s history, excluding 2015 when we received a substantial Target settlement, and grew FFO per unit by 6.3% over 2016. Our occupancy levels returned to their historical average of near 97% in the second half of the year and our same property portfolio posted the best results that RioCan has delivered since 2010. We are anticipating that 2018 will continue the momentum that began in the second half of 2016, with another year of solid same property performance. By the end of this year, we should begin to realize some of the benefits of our development program with a number of completions that will propel our growth into 2019,” said Edward Sonshine, Chief Executive Officer of RioCan. “We are pleased with the progress that we have already made in executing our strategic vision for RioCan, and we are very confident in our ability to build on our early successes. Our strong balance sheet and the capital provided through the sale of secondary markets properties will enable RioCan to focus on the ongoing value creation in our major market portfolio that will greatly enhance the quality, resilience and growth profile of our portfolio and deliver strong FFO and net asset value growth to our unitholders during this very exciting time for RioCan.”

Financial Highlights
All figures are expressed in Canadian dollars unless otherwise noted. For further information about RioCan’s results for the year ended December 31, 2017, this earnings release should be read in conjunction with our audited annual consolidated financial statements (“Consolidated Financial Statements”), as well as Management’s Discussion and Analysis (“MD&A”) for the year ended December 31, 2017.

RioCan’s Consolidated 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 full definitions of these measures, please refer to “Non-GAAP Measures” in RioCan’s December 31, 2017 Management’s Discussion and Analysis. As a result of the sale of the U.S. operations, we have reported our former U.S. geographic segment performance as “discontinued operations” with comparative income statement amounts adjusted to reflect this change, unless otherwise noted.

Net income from continuing operations attributable to unitholders

  Three months ended December 31, Year ended December 31,
(in millions except percentages and per unit values)   2017   2016 % Change   2017   2016 % Change
Net income from continuing operations $   209.7 $   178.5 17.5 % $   708.3 $   683.1 3.7 %
Net income per unit from continuing operations attributable to unitholders – diluted $   0.64 $   0.54 18.5 % $   2.16 $   2.06 4.9 %


2017
Net income from continuing operations attributable to unitholders for the year ended December 31, 2017 is $708.3 million, representing an increase of $25.2 million compared to the same period in 2016. Excluding $45.9 million lower fair value gains over the comparable period, net income from continuing operations attributable to unitholders for the year ended December 31, 2017 increased by $71.2 million or 14.2% from the prior year.

The increase of $71.2 million is largely the net effect of the following:

  • $36.4 million higher income primarily due to property acquisitions (net of dispositions), strong same property performance, completed developments, and higher lease cancellation fees;
  • $31.9 million increase in gains from the sale of available-for-sale marketable securities;
  • $8.1 million in interest savings due mainly to lower average debt and debt refinancing at lower interest rates;
  • $5.7 million in higher income from our equity accounted investments; partly offset by
  • $6.1 million in lower transaction gains; and
  • $4.6 million less dividend income from available-for-sale marketable securities given such sales since Q3 2016.

Q4 2017
Net income from continuing operations attributable to unitholders for the three months ended December 31, 2017 is $209.7 million, representing an increase of $31.3 million to the same period in 2016. Excluding $26.6 million higher fair value gains over the comparable period, net income from continuing operations attributable to unitholders for the fourth quarter of 2017 increased $4.6 million or 3.4% from the same period in 2016 .

The increase of $4.6 million is largely the net effect of the following:

  • $5.0 million increase is primarily due to strong same property performance; and
  • $6.8 million increase in gains from the sale of available-for-sale marketable securities; partially offset by
  • $4.1 million in higher general and administrative expenses primarily due to accelerated depreciation of certain management information systems: and
  • $2.6 million higher other costs as a result of a one-time fair market value adjustment to a loan receivable. Funds From Operations (“FFO”)

Funds From Operations (“FFO”)

  Three months ended December 31, Year ended December 31,
(in millions except percentages and per unit values)   2017   2016   % Change   2017   2016 % Change
FFO from continuing operations $   144.1 $   132.5   8.8 % $   582.6 $   497.3 17.2 %
FFO from discontinued operations $   0.1 $   (0.3 ) N/A   $   2.0 $   50.6 N/A  
FFO (i) $   144.2 $   132.2   9.1 % $   584.6 $   547.9 6.7 %
FFO per Unit – diluted $   0.44 $   0.40   9.3 % $   1.79 $   1.68 6.3 %

(i) A non-GAAP measurement. A reconciliation to net income can be found under “Results of Operations” in RioCan’s Management’s Discussion and Analysis for the period ending December 31, 2017. 

2017
FFO for the year ended 2017 is $584.6 million, an increase of $36.7 million or 6.7%. On diluted per unit basis, FFO is $1.79 compared to $1.68 in 2016, an increase of 6.3%, despite the sale of the U.S. portfolio in May 2016. 

Continuing Operations
FFO from continuing operations increased $85.3 million or 17.2% to $582.6 million in 2017. The $85.3 million increase in FFO from continuing operations for the period was primarily due to the following: 

  • $36.2 million higher NOI (at RioCan’s proportionate share) mainly as a result of acquisitions (net of dispositions), strong growth in same property NOI, development completions and higher lease cancellation fees;
  • $31.9 million increase in gains related to the sale of available-for-sale marketable securities;
  • $7.7 million lower interest costs (at RioCan’s proportionate share);
  • $9.5 million less preferred unit distributions and redemption costs;
  • $5.8 million in higher income from our equity accounted investments; partially offset by
  • $4.6 million lower dividend income from the sale of available-for-sale marketable securities.

Q4 2017
FFO for the fourth quarter of 2017 is $144.2 million, an increase of $12.0 million or 9.1%. On a diluted per unit basis, FFO is $0.44 compared to $0.40 in Q4 2016, representing an increase of 9.3%.

Continuing Operations
FFO from continuing operations increased $11.6 million or 8.8% to $144.1 million in Q4 2017. The $11.6 million increase in FFO from continuing operations for the quarter was primarily due to the net effect of the following:

  • $4.8 million higher NOI (at RioCan’s proportionate share) mainly as a result of strong same property NOI growth;
  • $6.8 million increase in gains related to the sale of available-for-sale marketable securities;
  • $3.7 million in higher income from equity accounted investments; partly offset by
  • $4.1 million higher general and administrative expenses mainly due to accelerated depreciation as noted above.

Acceleration of Major Market Focus
On October 2, 2017 the Trust announced its plan to accelerate its portfolio focus in Canada’s six major markets through the sale of approximately 100 properties located primarily in secondary markets across Canada over the next two to three years.

As of February 13, 2018, four months since the strategy’s announcement, the Trust has either completed or entered into firm agreements to sell $511.9 million of properties in secondary markets at a weighted average capitalization rate of 6.07% based on in-place net operating income (NOI), representing approximately 25% of the announced disposition target. The deals consist of the following:

  • An firm agreement to sell seven properties to CT REIT in Hamilton, Orillia, Sudbury, Collingwood and St. Catharines in Ontario, Oliver, British Columbia and Yorkton, Saskatchewan at an aggregate sale price of $200.0 million and a weighted average capitalization rate of 6.12% based on in-place NOI. The sale of five properties were closed in December 2017 at a sales price of $135.2 million, with $21.7 million of mortgages repaid on closing. The sales of the remaining two properties are expected to be completed during the first quarter of 2018.
  • The sale of a 50% non-managing interest of a property in Fredericton, New Brunswick in December 2017 to the property’s co-owner for a sale price of $10.0 million at a capitalization rate of 10.20% based on in-place NOI. RioCan provided a vendor take-back mortgage of $2.5 million.
  • A firm agreement to sell two properties in Kelowna and Vernon in British Columbia at a sale price of $85.0 million at a weighted average capitalization rate of 5.45% based on in-place NOI, subject to customary closing conditions. On the expected closing date in the first quarter of 2018, the buyer will assume the mortgage payable of $32.7 million and RioCan will provide a vendor take-back mortgage of $7.5 million.
  • A firm agreement to sell four properties in Flamborough, Guelph and Orangeville in Ontario and Duncan in British Columbia at a sale price of $216.9 million at a weighted average capitalization rate of 6.06% based on in-place NOI, with $67.5 million mortgages payable to be repaid upon expected deal closing in April 2018.

In addition to the above $511.9 million closed and firm deals, the Trust has also entered into three conditional agreements as of February 13, 2018 to sell five properties in Ontario and Quebec for aggregate sale proceeds of $58.0 million at a weighted average capitalization rate of 6.66%. Should these firm and conditional transactions close by the end of the second quarter in 2018, as currently contemplated, the Trust would have completed the sale of 19 properties for aggregate sale proceeds of $569.9 million or approximately 28% of our disposition target by sales proceeds, at a weighted average capitalization rate of 6.13%. The aggregate proceeds from the sale of these properties are in line with the Trust’s IFRS valuations.

The net proceeds from the dispositions have been and will be used to pay down debt, fund unit repurchases through RioCan’s Normal Course Issuer Bid (NCIB) program and fund the Trust’s development activities. Since the renewal of the NCIB program on October 20, 2017 and as of December 31, 2017, RioCan has purchased and cancelled 3.9 million Trust units at an average purchase price of $25.30 per unit.

Operational Performance

Same Property NOI Growth

  Three months ended
December 31, 2017
Year ended
December 31, 2017
Same Property Growth 2.9% 2.1%

Refers to same property NOI growth on a year over year basis. 

2017
Same property NOI for the year ended December 31, 2017 increased 2.1% or $13.6 million compared to the same period in 2016. This is the strongest annual same property growth that the Trust has generated since 2010. Approximately $8.8 million of the increase related to higher occupancy, renewal rate growth and contractual rent increases and $4.8 million is due to the timing of Target backfills and other expansion and redevelopment projects completed in 2017 and 2016.

As a component of total same property NOI growth, same property NOI from RioCan’s properties in Canada’s six major markets increased 2.2% for the year ended December 31, 2017, while same property NOI over the same comparable period for the Trust’s secondary markets grew 1.7%.

Q4 2017
Same property NOI for the three months ended December 31, 2017 increased 2.9% or $4.9 million compared to the same period in 2016. Approximately $3.8 million of the increase related to higher occupancy, renewal rate growth and contractual rent increases and $1.1 million is due to an increase in NOI from Target backfills and other expansion and re-development projects completed. This is the strongest quarterly same property NOI growth since the fourth quarter of 2010.

As a component of total same property NOI growth, same property NOI from RioCan’s properties in Canada’s six major markets increased 3.0% for the three months ended December 31, 2017 over the same period in 2016 while same property NOI from the Trust’s secondary markets properties grew 2.6% over the same comparable period.

Operating Statistics
The key performance indicators related to operating and leasing for the Canadian portfolio over the last eight quarters are as follows:

 

  2017 2016
Full Year  Q4  Q3  Q2  Q1 Full Year  Q4  Q3  Q2  Q1
Committed occupancy 96.6 % 96.6 % 96.8 % 96.7 % 96.2 % 95.6 % 95.6 % 95.3 % 95.1 % 94.8 %
In-place occupancy 95.6 % 95.6 % 96.0 % 95.2 % 94.4 % 93.6 % 93.6 % 93.6 % 92.9 % 92.8 %
Retention rate 91.1 % 87.5 % 93.6 % 93.9 % 88.6 % 85.8 % 84.0 % 83.1 % 91.6 % 84.4 %
% increase in average net rent per sq ft 5.8 % 4.5 % 5.2 % 4.7 % 8.2 % 6.0 % 8.1 % 6.6 % 3.3 % 6.2 %
  • Despite Sears closures in the Fourth Quarter, which accounted for 0.8% of the Trust’s GLA as of September 30, 2017, in-place and committed occupancies remain near the Trust’s historical highs as of December 31, 2017,
  • Committed occupancy improved by 100 basis points to 96.6% at December 31, 2017 as compared to 95.6% at December 31, 2016;
  • In-place occupancy as of December 31, 2017 increased 200 basis points from 93.6% at December 31, 2016 to 95.6% at December 31, 2017,
  • The Trust expects to generate $9.0 million of annualized net incremental IFRS rent once all tenants that have committed leases as of …

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