RioCan Real Estate Investment Trust (TSX: REI.UN) has agreed to sell its portfolio of 49 retail properties in the Northeastern United States and Texas for $2.7 billion (US$1.9 billion). The deal, which is expected to close in April 2016, will see the properties go to a real estate private equity fund affiliated with the Blackstone Group. RioCan, a Canadian real estate investment trust, acquired the U.S. properties between 2009 and 2015 for about $1.7 billion. It said their sale was the result of a strategic review and will enable the business to focus on its domestic growth strategy and development pipeline.
RioCan Real Estate Investment Trust Announces Results of its Strategic Review of the Trust’s U.S. Operations
TORONTO, ONTARIO–(Marketwired – Dec. 18, 2015) –
RioCan has agreed to sell its U.S. portfolio of 49 retail properties located in the Northeastern U.S. and Texas at a total sale price of US$1.9 billion or C$2.7 billion (based on the noon exchange rate of $1.397 USD/CAD on December 17, 2015 (“current exchange rates”));
RioCan will take advantage of an opportunity to repatriate capital estimated to be approximately C$1.2 billion, as its investment in the U.S. has increased in value by approximately C$930 million over its historical cost (based on current exchange rates);
The sale will ensure ample capital to fund its recently announced acquisition from Kimco and to significantly deleverage the Trust’s balance sheet;
The sale will enhance corporate liquidity to fund its Canadian growth strategy and development pipeline; and
RioCan will simplify its business structure and improve its strategic advantage in Canada by allowing management to focus exclusively on the Trust’s Canadian operations.
RioCan Real Estate Investment Trust (“RioCan”) (TSX:REI.UN) is pleased to announce that it has entered into an agreement with Blackstone Real Estate Partners VIII (“Blackstone”) and has received approval from its Board of Trustees to sell its U.S. portfolio of 49 retail properties located in the Northeastern U.S. and Texas at a total sale price of US$1.9 billion (C$2.7 billion, based on current exchange rates). The sale is expected to be completed on April 30, 2016 subject to customary closing conditions.
“We are very pleased to complete our strategic review, which has culminated in the decision to sell our U.S. portfolio at an opportune time, and to realize a sizeable gain on our investment relative to RioCan’s historical cost. The sale will enable management to focus exclusively on RioCan’s operations in Canada, including its significant development pipeline, a key driver of the Trust’s future growth strategy. Our development pipeline is beginning to pick up speed, and we have a number of projects that have received final approvals where construction will commence within the next year,” said Edward Sonshine, CEO of RioCan. “The sale provides the Trust with sufficient capital to fortify our balance sheet. Through our previously announced acquisition from Kimco Realty Corporation we have already replaced a good portion of the cash flow generated by the U.S. portfolio. Our initiative in the U.S. has been an economic success while also allowing us to forge deeper relationships with many of our U.S.-based tenants. I would like to thank all that have been involved in our U.S. operations, and for the contributions that they have made to the success of RioCan over these past six years.”
RioCan acquired the 49 properties over a period beginning in November 2009 through September 2015 representing a total historical purchase price of approximately C$1.7 billion. The sale price of approximately of US$1.9 billion or C$2.7 billion, based on current exchange rates is below the reported IFRS fair value of C$2.9 billion as at September 30, 2015, but represents an increase in value of approximately C$930 million over the historical cost, or an estimated internal rate of return of approximately 16% on an unlevered basis, in Canadian dollars. Management believes that the agreement to sell its U.S. assets provides the Trust with the opportunity to capitalize on the current strength of the U.S. dollar versus the Canadian dollar, fortify the Trust’s balance sheet, and reinvest the proceeds into its Canadian operations for future growth.
The U.S. portfolio contributed approximately US$97 million (C$123 million) to RioCan’s Net Operating Income (“NOI”) and approximately US$65 million (C$83 million) of Operating Funds From Operations (“OFFO”) for the first nine months of 2015. Based on the nine month results in 2015, the U.S. portfolio’s annualized NOI and OFFO, would be US$129 million and US$87 million, respectively. RioCan will continue to benefit from the ownership of the U.S. portfolio until the sale is completed, which is currently anticipated to be April 30, 2016. In addition, RioCan has established and put in place a strategy that will both reduce the dilutive effects of the sale and allow RioCan to fortify its balance sheet in 2016. Blackstone will assume or repay the debt on the portfolio of approximately US$0.9 billion which carries a weighted average contractual interest rate of approximately 4.3% and has a weighted average term to maturity of approximately 5.5 years. Taxes and transaction costs to be incurred by the Trust are expected to be approximately US$130 million.
Based on current exchange rates, RioCan will receive approximately C$1.2 billion of net proceeds. From these proceeds, approximately C$510 million will be used to repay operating lines that were used to complete RioCan’s acquisition of Kimco’s interest in 23 properties in Canada. The Kimco acquisition is expected to contribute, approximately C$40 million of OFFO in 2016, net of interest carrying costs on the operating lines for the first four months of 2016, thus replacing a significant portion of OFFO that was contributed by the U.S. portfolio.
The remaining portion of net proceeds of approximately C$725 million will be used to reduce debt, which is expected to lower RioCan’s ratio of debt-to-total assets to approximately 39% in 2016, on a proforma basis as compared to 43.6% at September 30, 2015. Anticipated interest savings of approximately C$18 million annualized (approximately C$12 million in 2016 based on the anticipated closing date), will further reduce the dilutive effects of the sale of the U.S. portfolio. With a strong balance sheet, RioCan will have the additional financial capacity and flexibility to internally fund much of the projected capital needs of the Trust’s foreseeable development and acquisition opportunities.
The sale will simplify RioCan’s business structure and will improve its strategic advantage in Canada by allowing management to focus exclusively on the Trust’s Canadian operations, and will solidify RioCan’s position as the leading pure play Canadian-based real estate investment trust. With a superior balance sheet and financial profile, RioCan’s cost of capital is expected to improve, which will provide enhanced flexibility should additional opportunities become available.
RioCan’s current development strategy to intensify a significant number of its urban properties will require a sizable amount of capital. With the funds provided through the sale of the U.S. portfolio, RioCan will be better able to manage the future development risk to the Trust and will be able to generate greater growth for the Trust than what would have been achievable from the U.S. portfolio, which had limited growth opportunities for RioCan. Furthermore, the additional value that is created through the development process is expected to further assist in reducing the Trust’s leverage both on a debt-to-assets basis, as well as on a debt-to-EBITDA basis as the cash flow profile of RioCan’s development projects will be stronger than the assets they will replace.
Morgan Stanley and RBC Capital Markets are acting as financial advisors and Goodmans LLP is acting as legal advisor to 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.
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 regarding RioCan’s agreement to sell its U.S. portfolio, the ability of Blackstone to complete the transaction and the timing of such, 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, leverage ratios, circumstances, performance or expectations that are not historical facts, including but without limitation to the intended use of proceeds from the sale. 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: the completion of the sale of the U.S. portfolio on the terms agreed upon, or at all, liquidity and general market conditions; foreign currency risk; 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; unitholder liability; income and indirect taxes; U.S. investments until such time the sale if completed, property management; 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 this news release 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 until the completion of the transaction and distribution of the proceeds of sale. 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 herein may include, but are not limited to: the satisfaction of the closing conditions to the transactions and the transaction closing in accordance with its terms, 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.
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.
RioCan Real Estate Investment Trust
Edward Sonshine, O. Ont., Q.C.
Chief Executive Officer
RioCan Real Estate Investment Trust
Cynthia Devine, FCPA, FCA
Executive Vice President, Chief Financial Officer
and Corporate Secretary
Photo courtesy of RioCan Real Estate Investment Trust