THE MAJOR MARKETS
CANADIAN POPULATION: 36,708,083
POPULATION GROWTH SINCE 2006: 8.1%
POPULATION FOR THE 6 MAJOR MARKETS: 17,790,810
POPULATION GROWTH FOR THE
6 MAJOR MARKETS SINCE 2006: 26.1%
CORPORATE PROFILE
RioCan is Canada's largest real estate investment trust with a total enterprise value
of approximately $13.9 billion as at December 31, 2017. RioCan is a fully integrated
REIT that owns, manages and develops high quality retail-focused, increasingly
mixed-use properties in Canada with ownership interests in a portfolio of 289 retail
and mixed-use properties, including 17 properties under development, containing an
aggregate net leasable area of 44 million square feet. 76.1% of RioCan's annual
rental revenue is comprised from a portfolio that is powerfully rooted in Canada's six
largest markets.
TABLE OF CONTENTS
IFC CORPORATE PROFILE
1 THE MAJOR MARKETS
2 CEO’S LETTER TO UNITHOLDERS
6 GLOUCESTER
8 EPLACE
10 KING PORTLAND CENTRE
12 YONGE SHEPPARD CENTRE
14 BRENTWOOD VILLAGE
16 MANAGEMENT TEAM
17 PROPERTY PORTFOLIO
27 MANAGEMENT’S DISCUSSION AND ANALYSIS
101 FINANCIALS
147 CORPORATE INFORMATION
IFC_1
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
TORONTO
Metropolitan area: 6,654,682
Population growth since 2006: 30.2%
% of Income Producing NLA: 34.9%
% of annualized rental revenue: 40.9%
MONTREAL
Metropolitan area: 4,138,300
Population growth since 2006: 13.8%
% of Income Producing NLA: 7.7%
% of annualized rental revenue: 5.6%
OTTAWA
Metropolitan area: 1,377,016
Population growth since 2006: 21.8%
% of Income Producing NLA: 11.7%
% of annualized rental revenue: 11.8%
VANCOUVER
Metropolitan area: 2,571,262
Population growth since 2006: 21.5%
% of Income Producing NLA: 4.3%
% of annualized rental revenue: 4.7%
EDMONTON
Metropolitan area: 1,451,849
Population growth since 2006: 40.3%
% of Income Producing NLA: 4.1%
% of annualized rental revenue: 4.9%
CALGARY
Metropolitan area: 1,597,701
Population growth since 2006: 48.0%
% of Income Producing NLA: 7.6%
% of annualized rental revenue: 8.2%
*Source: Statistics Canada
SURFACING
VALUE
IN CANADA’S
MAJOR
MARKETS
To ensure its premiere position in the
Canadian marketplace, RioCan is
transforming properties in high-
density, transit-orientated locations.
RioCan’s growth flourishes in
Canada’s six major markets: Toronto,
Ottawa, Calgary, Edmonton,
Vancouver and Montréal, cities with
compelling demographics and strong
population growth. RioCan
properties greatly appeal to tenants,
resulting in stable tenancies and
strong income growth.
2_3
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
EDWARD SONSHINE, O.ONT., Q.C.
CHIEF EXECUTIVE OFFICER
Growth Driven By Insight
As evidenced by a number of key
indicators, 2017 was a strong year for the
Trust. These results were bolstered by
strong organic growth and committed
occupancy that is returning to a level
consistent with our historical average at
96.6% as at December 31, 2017. During
2017, we retained over 90% of our expiring
leases and attained, on average,
approximately 6% increase in renewal rent.
These accomplishments translated into a
6.3% increase in FFO per unit in 2017 as
compared to 2016.
Based on the growth over this past year,
and the Trust’s confidence in our ability to
maintain our growth profile, the Board of
Trustees approved a three cent or 2.1%
increase to RioCan’s 2018 distribution to
an annualized distribution of $1.44 per
unit per year.
Canada’s Six Major Markets:
A Foundation For The Present – And
The Future
RioCan has the entrepreneurial vision to
identify opportunities and the resources to
realize them. At the onset of our REIT, our
business primarily consisted of acquiring
and managing shopping centres. More
than a decade ago, RioCan anticipated a
demographic shift away from Canada’s
secondary markets to Canada’s six major
markets with compelling demographics
and rapid population growth: Toronto,
Ottawa, Calgary, Edmonton, Vancouver
and Montréal. This population growth has
driven investment in new infrastructure,
specifically significant investment in transit
expansion. Population density and
accessibility make these markets
compelling for tenants, resulting in a
resilient portfolio with stable tenancies and
strong income growth. We planned for this
seismic demographic shift into the nation’s
six major markets, and for more than a
decade RioCan has focused its growth in
these markets.
At its core, RioCan represents a portfolio of
retail-focused, increasingly mixed-use
properties situated in high-density, transit-
oriented locations. Due to its intrinsic
value, RioCan’s major market portfolio is
central to its ongoing success. Currently,
approximately 76% of our revenue is
generated from these markets. Upon the
completion of our announced secondary
market property dispositions over the next
two to three years, more than 90% of our
rental revenue will be produced in
Canada’s six largest markets. Of note, we
expect that more than 50% of our
revenue will be generated from Canada’s
largest market: the Greater Toronto Area
(“GTA”). The anticipated outcome will be a
resilient portfolio that generates stronger
same property NOI growth per year and
every property in that portfolio will
eventually be an opportunity to surface
increased value.
In addition to evolving the geographic mix
of our portfolio, we are also evolving our
tenant mix. RioCan recognizes that our
success is deeply intertwined with the
success of our tenants. By anticipating,
planning for the future and continuously
evolving, RioCan attracts tenants best
suited for future success. Over the past
decade, RioCan has increased our tenant
concentration into the strongest retail
sectors, such as grocery, pharmacy,
restaurants, personal services,
and value retailers.
Maximizing Value By Disposing Of
Secondary Market Assets
To accelerate the progress of our major
market initiatives, we have embarked on
the sale of approximately 100 properties
largely in Canada’s secondary markets
with a value surpassing $2.0 billion. These
properties generate stable income;
however, their growth profile lags that of
RioCan’s major market portfolio. Over the
next two to three years, we anticipate
realizing approximately $1.5 billion of net
proceeds from these sales. These funds
will be allocated to maintaining our
current leverage and capital structure, the
development program, and the
repurchase of units through our normal
course issuer bid.
We have made significant progress on the
disposition of these properties. As of
February 13, 2018 there is a total of
approximately $512 million in either
closed, firm or conditional transactions,
representing approximately 25% of the
$2.0 billion disposition target at sale prices
in-line with IFRS values.
CEO’S LETTER
TO UNITHOLDERS
Dear Unitholders,
RioCan – We Are Where You Want To Be
2017 was a year of much change and saw a
strong progression of RioCan’s strategic
vision. While the Trust made significant
progress on its development program and
accelerating its major market strategy, it
delivered at the same time the highest
same property net operating income
(“NOI”) growth since 2010 and 6.3%
year‑over‑year funds from operations
(“FFO”) growth.
With a total enterprise value of $13.9
billion, RioCan’s portfolio of retail and
increasingly mixed-use properties is
powerfully rooted in Canada’s six major
markets. Twenty five years of experience,
acumen and insight have resulted in an
incomparable major-market portfolio, with
a diversified, strong national tenant base,
significant upside on rent growth and
tremendous intrinsic value that will drive
Net Asset Value (“NAV”) and FFO growth in
the near and long term. This portfolio is
managed and optimized by the strong
executive bench who use their collective
wealth of experience and expertise to drive
organic growth, strategically surface the
intrinsic value within the portfolio;
maintain a strong balance sheet and
make selective acquisitions.
Canadian consumers’ shopping habits are
changing, as are Canada’s major markets,
which are becoming more populous and
urbanized. Increasingly there is a need for
mixed-use communities in Canada’s major
markets as more Canadians shop, live and
work in urban settings. RioCan’s portfolio of
major market assets is perfectly positioned
to capitalize on these trends and drive value
growth for our unitholders.
Exciting New
Community, 15
Minutes From
Downtown Ottawa
Phase I, 23 Storey,
222 Residential
Units
Approval For A
Total Of 4 Towers
And Up To 820
Units
RioCan crafts a site-specific approach for
every project, based on demographics, retail
trends, the competitive environment, and
current and future transit infrastructure.
RioCan’s mixed-use projects feature leading
retailers, a rental residential and/or a
condominium component and in some cases
an office component. Canadians living in
the six major markets enjoy the convenience
of shopping, living, and working in RioCan’s
signature properties.
4_5
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
Surfacing Value With An Exceptional
Balance Sheet
RioCan’s financial strength is derived from a
conservative balance sheet, and sound
fiscal discipline, which provides the
flexibility to carry out its large-scale,
capital-intensive projects. To mitigate risk
RioCan employs a principle we call
“laddering” in our development program,
similar to our approach with staggering our
debt maturities. The “debt ladder” is an
effective tool in both a declining interest
rate environment as well as in a slowly
rising interest rate economy, as is the case
presently. In a similar manner, RioCan
“staggers” the development of our
properties so as to spread out risk,
allowing us to best allocate our financial,
and human capital resources to achieve
our strategic goals.
Our ability to find strategic acquisitions and
develop key strategic relationships is
another of RioCan’s competitive
advantages that is based on a 25 year
proven track record and deep respect
within the industry. In certain instances,
RioCan forms strategic partnerships for
large-scale projects, allowing us to disperse
our financial risk, crystalize value of zoned
density, leverage our partners’ local
expertise, and at the same time drive
revenue through property and development
management fees.
RioCan’s development program will
continue to expand as we identify and
realize new intensification opportunities
within our portfolio in Canada’s growing six
major markets.
Building Success In The 21st Century
What will RioCan look like moving forward?
Upon completion of the disposition of our
secondary market assets, RioCan expects
that more than 90% of its rental revenue
will be generated from Canada’s six major
markets, with more than 50% of these
revenues derived from the Greater Toronto
Area’s thriving marketplace.
Although RioCan will always feature a
significant retail component, retail has
changed in terms of client mix and goods
and services offered. To maintain our
leadership in the marketplace, our
development strategy reflects a popular
saying: “People shop where they live, and,
increasingly live where they shop.”
Consumers will easily find, enjoy and shop
in RioCan’s properties in high‑density,
transit oriented locations in Canada’s
major markets.
RioCan is a dynamic entity whose growth is
driven by insight. We constantly evaluate
our portfolio of properties for opportunities
to surface value and increase FFO, cash
flow, and NAV growth. We see our
communities in which we operate for what
they are, what they could be, and what they
need to get there. Our seasoned
management team has the entrepreneurial
spirit to imagine – and seize opportunities.
RioCan capitalizes on its resources,
financial strength, and discipline to form
long-lasting strategic relationships with
tenants and joint venture partners to
ensure every RioCan property is optimized
to deliver its highest and best use.
The execution of our strategy is designed to
ensure success today, and to secure
RioCan’s growth and market leadership
tomorrow. We are proud of our results to
date and eagerly anticipate and plan for
further success.
Thank you for your continued support and
confidence in RioCan.
Ed Sonshine O.Ont., Q.C.
Chief Executive Officer
RioCan Real Estate
Investment Trust
Surfacing Value Through Intensification
And Redevelopment
RioCan’s major market portfolio today
presents significant redevelopment
opportunities to unlock the intrinsic value
of our assets, or “surface value” that is
inherent in our property portfolio.
Unlocking this value will generate
tangible benefits to Unitholders: stronger
FFO and cash flow growth and increased
net asset value.
How Will RioCan Surface Value?
As a mini case study, consider a shopping
centre that was built in Toronto decades
ago. Over time, the surrounding
neighbourhood has grown in density and
major new transit infrastructure is being
added to the community. Accordingly, the
value of our land, of which more than half is
a parking lot, has increased by a multiple of
its original value. To unlock its full value,
RioCan will “intensify” this property with a
retail component, and the addition of
residential uses, often vertically.
Currently, RioCan has identified 74 projects
in our portfolio for potential intensification
and redevelopment, some of which we will
develop with strategic partners. In the initial
planning stages, additional value for these
properties is surfaced by obtaining the
necessary zoning approvals to proceed with
future development and RioCan has
already obtained such approvals for 52 of
these projects in our six major markets.
Transformative and much talked-about
development completions coming in future
months include Yonge Eglinton Northeast
Corner (ePlace), King Portland Centre, in
Toronto and the first phase at our
Gloucester rental residential development
in Ottawa, to name but a few.
OTTAWA_
MAJOR MARKET
RioCan leads the way in innovative
mixed-use properties that include leading
retailers and smart residential living,
located in close proximity to existing or
proposed transit infrastructure.
Gloucester (Frontier)
Frontier, in Gloucester is a striking, modern 23 storey tower featuring 222 residential
units. Frontier offers a contemporary lifestyle adjacent to RioCan's Silver City Gloucester,
a 150,600 square foot retail centre with a GoodLife gym, a Cineplex theatre, Indigo, and a
variety of exciting new restaurants and amenities. The site, located right on the LRT line,
is complemented with top retailers and other conveniences right at the doorstep.
6_7
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
Gloucester
Just 15 minutes east of downtown Ottawa, buzz is building for Frontier,
coming on board in 2019. With approval for three additional residential
towers in this new conception of Gloucester.
GLOUCESTER
TORONTO_
MAJOR MARKET
Located among many transit options including subway and a new light rapid
transit line in Toronto’s midtown “downtown” with almost 500,000 people in a 5
km radius, the area boasts an average household income of more than $156,000.
Yonge Eglinton Northeast Corner (ePLACE)
The first residential rental property to be completed in the RioCan
Living portfolio, the 466 unit eCentral at ePlace is beside three
storeys of retail in ePLACE, and is across the street from RioCan's
newly renovated Yonge Eglinton Centre, one of Toronto’s most
popular midtown shopping destinations.
8_9
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
ePLACE
Situated at Yonge and Eglinton, the intersections of two of Toronto’s
busiest streets, RioCan’s dynamic new mixed-use project will satisfy
many shopping and living needs.
ePLACE
TORONTO_
MAJOR MARKET
Nearing completion, the dynamic King Portland Centre is a complete success: all
of the 134 condominium units are sold. As well, the new office space is fully
leased to Indigo and to Shopify. Finally, the property includes exciting boutique
retail space fronting King Street West.
King Portland Centre (Kingly)
The King Portland location has it all: leading
retailers, modern living and working, with
convenient transit access, in a prime location
in Toronto’s vibrant “downtown west.”
10_11
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
King Portland Centre
King Portland showcases RioCan in action in Toronto’s trendy King West:
complete with condominium units, office working spaces, and RioCan’s
signature retail component.
KING PORTLAND CENTRE
TORONTO_
MAJOR MARKET
Yonge Sheppard Centre is the "go-to" destination for the 340,000 people living
within 5 kms of the site.
Yonge Sheppard Centre (Pivot)
A reimagined retail presence that features leading retailers such as Longo's, Winners,
Shoppers Drug Mart, and three major banks. Yonge Sheppard Centre, at the intersection
of two of Canada's busiest streets, and two major subway lines, with retail, two office
towers and Pivot, a 36 storey, 361 unit rental residential tower is the perfect lifestyle
destination rich in shopping and dining experiences.
12_13
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
Yonge Sheppard Centre
With an array of retailers, services, fitness and restaurants, Yonge
Sheppard Centre is the first choice for thousands of people who shop at
and frequent this site each day.
YONGE SHEPPARD CENTRE
The demographics in a 5 km
radius say it all for Brentwood
Village: average household
income is in excess of $140,000.
The 163 unit Brio is perfectly
situated in northwestern Calgary
near the Crowchild Parkway, and
with easy access to McMahon
Stadium, the Foothills Hospital,
and the University of Calgary.
CALGARY_
MAJOR MARKET
Brentwood Village (Brio)
This exciting mixed-use project features Brio, with
approximately 10,000 sq. feet of retail and 163
rental units in a 12 storey building. The site is
adjacent to RioCan's Brentwood Village, a 286,000
square foot shopping centre anchored by Safeway,
located near the University of Calgary on the
Northwest LRT line. The anticipated completion
date is 2020.
14_15
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
Brentwood Village
Brio – RioCan’s leading retail and this state-of-the-art
rental residential complex, will draw people to shop and
live in this fast-growing area of Calgary.
BRENTWOOD VILLAGE
Management Team
A seasoned management team is growing RioCan
based on decades of combined experience and
insight. By design, RioCan is transforming
Canada’s retail, living and office landscapes.
16_17
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2017
1 Edward Sonshine, O.Ont., Q.C.
Chief Executive Officer
2 Raghunath Davloor
President and Chief Operating Officer
3 Qi Tang
Senior Vice President and CFO
4 Jeff Ross
7 John Ballantyne
Senior Vice President, Leasing
& Tenant Coordination
Senior Vice President, Asset
Management
5 Danny Kissoon
8 Jennifer Suess
Senior Vice President,
Operations
Senior Vice President, General
Counsel and Corporate Secretary
6 Andrew Duncan
9 Jonathan Gitlin
Senior Vice President,
Developments
Senior Vice President, Investments
& Residential
PROPERTY PORTFOLIO
CANADA
ALBERTA
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
17004 & 17008 107th Avenue NW
Edmonton, AB
100%
11,963
11,963
5008 5020 97th Street NW, Edmonton, AB
Brentwood Village, Calgary, AB
100%
100%
11,943
11,943
286,594
286,594 Bed Bath & Beyond, London Drugs, Safeway,
Ashley Home Furniture
East Hills, Calgary, AB
40%
140,229
510,573 Walmart, Sport Chek, Bed Bath & Beyond,
Edmonton Walmart Centre, Edmonton, AB
Glenmore Landing, Calgary, AB
Jasper Gates Shopping Centre
Edmonton, AB
Lethbridge Towne Square, Lethbridge, AB
Lethbridge Walmart Centre
Lethbridge, AB
Lowe’s Sunridge Centre, Calgary, AB
Market at Citadel Village, Edmonton, AB
Mayfield Common, Edmonton, AB
Mill Woods Town Centre, Edmonton, AB
North Edmonton Cineplex Centre
Edmonton, AB
Northgate Village Shopping Centre
Calgary, AB
127,516
370,400 Walmart, Golf Town, Totem Building Supplies*
Michaels, Marshalls, Costco*
73,031
146,061 Safeway
91,063
146,063 London Drugs, Safeway*
76,651
76,651 Fit For Less
284,765
284,765 Walmart, Shoppers Drug Mart
213,100
213,100 Lowe’s, GoodLife Fitness, Golf Town
50,678
207,487
184,616
50,678 Shoppers Drug Mart
414,973 Winners, Save-On-Foods, JYSK
457,649 Safeway (Co-op), Canadian Tire, GoodLife Fitness
75,836
75,836 Cineplex
40%
50%
100%
100%
100%
100%
100%
50%
40%
100%
100%
268,900
395,990 Safeway, Gold's Gym, JYSK, Staples, Home
Depot*
RioCan Beacon Hill, Calgary, AB
100%
527,835
787,206 Canadian Tire, Winners, The Brick, Best Buy,
GoodLife Fitness, Home Depot*, Costco*
RioCan Centre Grande Prairie
Grande Prairie, AB
100%
279,983
379,983 Rona, Cineplex Odeon, London Drugs, Staples,
Michaels, Walmart*
RioCan Meadows, Edmonton, AB
100%
309,184
409,184 Home Depot, Staples, Winners, Best Buy,
RioCan Shawnessy, Calgary, AB
100%
470,460
Loblaws*
841,105 Lowe’s, Sport Chek, Winners, Home Depot*,
Walmart*, Co-op*, Canadian Tire*
RioCan Signal Hill Centre, Calgary, AB
100%
477,173
592,173 Lowe’s, Winners, Indigo, Michaels, Staples,
Riverbend Square Shopping Centre
Edmonton, AB
Sage Hill, Calgary, AB
Southbank Centre, Calgary, AB
100%
138,654
138,654 Safeway
Loblaws*
50%
75%
186,022
108,910
372,043 Walmart, Loblaws City Market, London Drugs
421,227 Winners, Michaels, Save-On-Foods*, Home
Depot*, Costco*
South Edmonton Common, Edmonton, AB
100%
430,418
981,488 London Drugs, The Brick, Home Outfitters,
Michaels, Old Navy, Home Depot*, Walmart*,
Loblaws*, Cineplex*, Staples*, Best Buy*
17
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
PROPERTY PORTFOLIO
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
South Trail Crossing, Calgary, AB
100%
311,684
311,684 Winners, HomeSense, Marshalls, Staples,
Sport Chek
Southland Crossing Shopping Centre
Calgary, AB
100%
132,063
132,063 Safeway
Summerwood Shopping Centre, Edmonton, AB
100%
83,980
83,980 Save-On-Foods, Shoppers Drug Mart
Timberlea Landing, Fort McMurray, AB
100%
104,307
104,307 Regional Municipality of Wood Buffalo
BRITISH COLUMBIA
Abbotsford Power Centre, Abbotsford, BC
Chahko Mika Mall, Nelson, BC
Clearbrook Town Square, Abbotsford, BC
Cowichan Commons, Duncan, BC
Dilworth Shopping Centre, Kelowna, BC
Grandview Corners, Surrey, BC
Impact Plaza, Surrey, BC
Parkwood Place, Prince George, BC
100%
100%
100%
100%
100%
100%
100%
100%
219,892
459,892 Lowe’s, Winners, PetSmart, Costco*, Rona*
173,107
173,107 Walmart, Save-On-Foods
189,552
189,552 Safeway, GoodLife Fitness, Staples
186,629
186,629 Walmart
197,405
197,405 Safeway, Staples, JYSK, World Gym
529,319
614,319 Walmart, Future Shop, The Brick, Home Depot*
133,657
133,657 T&T Supermarket
370,260
370,260 Save-On–Foods, The Bay, London Drugs,
Cineplex, Staples
RioCan Langley Centre, Langley, BC
100%
380,088
380,088 Leon’s, Winners, HomeSense, Chapters,
Michaels, Marshalls
Strawberry Hill Shopping Centre, Surrey, BC
100%
337,846
337,846 Home Depot, Cineplex, Winners, PetSmart, Sport
Chek
Tillicum Centre, Victoria, BC
100%
466,356
466,356 Lowe’s, Cineplex, London Drugs, Winners,
Save-On–Foods
Vernon Square, Vernon, BC
100%
96,706
149,706 London Drugs, Safeway*
MANITOBA
Garden City, Winnipeg, MB
Kildonan Crossing Shopping Centre
Winnipeg, MB
30%
100%
113,904
379,681 Canadian Tire, Winners, Seafood City
179,027
179,027 Safeway, PetSmart
NEW BRUNSWICK
Corbett Centre, Fredericton, NB
100%
237,457
457,457 Winners, Michaels, Bed Bath Beyond, Home
Depot*, Costco*
Northumberland Square, Miramichi, NB
Quispamsis Town Centre, Quispamsis, NB
50%
100%
51,664
88,114
103,328 Winners, Giant Tiger, PetSmart
88,114 Shoppers Drug Mart, GoodLife Fitness
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
18
*Non-owned anchor
PROPERTY PORTFOLIO
NEWFOUNDLAND
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
Shoppers on Topsail, St. John’s, NFLD
100%
29,690
29,690 Shoppers Drug Mart
Trinity Conception Square, Carbonear, NFLD
100%
182,155
182,155 Walmart, Dominion, Rossy
ONTARIO
85 Bloor Street West, Toronto, ON
1650-1660 Carling Avenue, Ottawa, ON
1860 Bayview Avenue, Toronto, ON
1910 Bank Street, Ottawa, ON
1946 Robertson Road, Nepean, ON
2422 Fairview Street, Burlington, ON
2950 Carling Avenue, Ottawa, ON
2955 Bloor Street West, Toronto, ON
2990 Eglinton Avenue East, Toronto, ON
404 Town Centre, Newmarket, ON
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
4055-4065 Carlingview Avenue, Ottawa, ON
100%
410 King Street North, Waterloo, ON
549-555 College Street, Toronto, ON
506 & 510 Hespeler Road, Cambridge, ON
649 Queen Street West, Toronto, ON
6666 Lundy’s Lane, Niagara Falls, ON
735 Queenston Road, Hamilton, ON
Adelaide Centre, London, ON
Ajax Marketplace, Ajax, ON
Albion Centre, Etobicoke, ON
Belleville Stream Centre, Belleville, ON
Belleville Walmart Centre, Belleville, ON
Bellfront Shopping Centre, Belleville, ON
BMO-1293 Bloor Street West, Toronto, ON
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
BMO-145 Woodbridge Avenue, Vaughan, ON
100%
BMO-1556 Bank Street, Ottawa, ON
BMO-2 King Street West, Bowmanville, ON
BMO-200 Ouelette Avenue, Windsor, ON
BMO-270 Dundas Street, London, ON
BMO-297 King Street East, Kingston, ON
BMO-519 Brant Street, Burlington, ON
BMO-79 Durham Street, Sudbury, ON
BMO-81 King Street West, Hamilton, ON
BMO-945 Smyth Road, Ottawa, ON
100%
100%
100%
100%
100%
100%
100%
100%
100%
13,810
13,810 COS
142,188
142,188 Canadian Tire
70,318
70,318 Whole Foods, Shoppers Drug Mart
6,425
2,938
6,221
6,425
2,938
6,221
10,442
10,442 Pharma Plus
9,748
6,200
9,748
6,200
267,954
267,954 Walmart, Metro
22,496
2,067
28,823
12,515
14,200
8,434
8,818
81,004
70,724
22,496
2,067
57,646
12,515
14,200 CB2
8,434
8,818
81,004 Metro
70,724 Metro, Pharma Plus
376,579
376,579 Canadian Tire, No Frills
89,237
89,237 Stream International
275,410
275,410 Walmart
109,995
159,995 Bed Bath & Beyond, Canadian Tire*
5,683
4,973
4,835
5,584
17,047
20,269
8,856
5,190
5,683
4,973
4,835
5,584
17,047
20,269
8,856
5,190
24,075
24,075
5,550
8,532
5,550
8,532
19
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
PROPERTY PORTFOLIO
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
Burlington Mall, Burlington, ON
50%
299,848
712,848 Canadian Tire, Winners, HomeSense, Indigo,
Denninger’s, Sport Chek, GoodLife Fitness,
The Bay*
Cambrian Mall, Sault Ste. Marie, ON
Campus Estates, Guelph, ON
Chapman Mills Marketplace, Ottawa, ON
Cherry Hill Centre, Fergus, ON
Churchill Plaza, Sault Ste. Marie, ON
City View Plaza, Nepean, ON
Clarkson Crossing, Mississauga, ON
Clarkson Village Shopping Centre
Mississauga, ON
Colborne Place, Brantford, ON
Coliseum Ottawa, Ottawa, ON
Collingwood Centre, Collingwood, ON
Commissioners Court Plaza, London, ON
Dufferin Plaza, Toronto, ON
Dundas 427 Marketplace, Mississauga, ON
Eagle’s Landing, Vaughan, ON
Eastcourt Mall, Cornwall, ON
Elmvale Acres, Ottawa, ON
Empress Walk, Toronto, ON
Fairlawn Plaza, Ottawa, ON
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
Fallingbrook Shopping Centre, Orleans, ON
100%
Five Points Shopping Centre, Oshawa, ON
Flamborough Walmart Centre
Flamborough, ON
Flamborough Power Centre,
Flamborough, ON
100%
100%
134,807
316,638 Winners, Canadian Tire*, Loblaws*
72,859
72,859 No Frills
451,673
566,673 Walmart, Winners, Staples, Indigo, Cineplex,
Loblaws*
73,886
73,886 Zehrs
143,203
143,203 Metro
60,090
60,090 Giant Tiger, PartSource
213,077
213,077 Metro, Canadian Tire, Shoppers Drug Mart
63,835
63,835 HomeSense
70,406
70,406 No Frills
109,260
109,260 Cineplex, Shoppers Drug Mart
203,290
203,290 Fresh Co., Canadian Tire, Sport Chek, Bed,
Bath & Beyond, Winners
94,140
70,100
97,885
94,140 Food Basics
70,100 Staples
97,885 Staples
175,672
175,672 Yummy Market
81,487
162,974 No Frills, Urban Planet
146,699
146,699 Loblaws, Pharma Plus
180,829
238,829 Cineplex, Best Buy, Loblaws*
8,322
97,145
191,034
300,292
8,322
97,145 Metro, Shoppers Drug Mart
191,034 Metro, LA Fitness, JYSK
300,292 Walmart, Rona, Staples
100%
194,724
194,724 Treasure Hunt, Value Village
Frontenac Mall, Kingston, ON
30%
84,057
280,191 Food Basics, Value Village, Boys and Girls Club
Galaxy Centre, Owen Sound, ON
Garrard & Taunton, Whitby, ON
Gates of Fergus, Fergus, ON
Glendale Marketplace, Pickering, ON
Goderich Walmart Centre, Goderich, ON
GoodLife Plaza, St. Catharines, ON
Grant Crossing, Ottawa, ON
100%
100%
100%
100%
100%
100%
100%
of Kingston
91,563
91,563 No Frills, Cineplex
146,835
146,835 Lowe's
71,737
53,963
94,283
144,983
237,405
71,737 Giant Tiger, Habitat for Humanity
53,963 Your Independent Grocer, Pharma Plus
202,859 Walmart, Canadian Tire*, Zehrs*
144,983 GoodLife Fitness, Canadian Tire (Call centre)
365,345 Winners, HomeSense, Michaels, Bed Bath &
Beyond, Lowe's*
Green Lane Centre, Newmarket, ON
67%
106,817
417,668 Bed Bath & Beyond, Michaels, PetSmart,
Halton Hills Shopping Plaza
Georgetown, ON
100%
73,030
73,030 Food Basics
Costco*, Loblaws*
20
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
PROPERTY PORTFOLIO
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
Hamilton Highbury Plaza, London, ON
Hamilton Walmart Centre, Hamilton, ON
Hartsland Market Square, Guelph, ON
Hawkesbury Centre, Hawkesbury, ON
Heart Lake Town Centre, Brampton, ON
Herongate Mall, Ottawa, ON
Highbury Shopping Plaza, London, ON
Hunt Club Centre, Ottawa, ON
Hunt Club Centre II, Ottawa, ON
Huron & Highbury, London, ON
Innes Road Centre, Gloucester, ON
Kanata Centrum Shopping Centre
Kanata, ON
Kendalwood Park Plaza, Whitby, ON
Kennedy Commons, Scarborough, ON
Keswick Walmart, Keswick, ON
King & Portland, Toronto, ON
King George Square, Belleville, ON
King Plaza, Oshawa, ON
Lawrence Square, Toronto, ON
100%
100%
100%
100%
100%
75%
100%
100%
100%
100%
100%
100%
100%
50%
75%
50%
100%
100%
100%
5,269
5,269
312,914
312,914 Walmart, Winners, Staples
108,722
108,722 Zehrs
72,466
123,572
104,129
70,981
67,186
72,466
123,572 Metro
138,838 Metro, GoodLife Fitness, PetSmart
70,981 LA Fitness
67,186 Metro
143,815
143,815 Lowe’s
87,969
47,512
87,969 Shoppers Drug Mart
167,512 PetSmart, Costco*
286,336
386,336 Walmart, Chapters, Loblaws
158,688
186,618
158,688 Fresh Co., Value Village, Shoppers Drug Mart
454,235 Metro, The Brick, LA Fitness, Chapters,
Michaels, Ashley Furniture
120,363
160,484 Walmart
39,308
71,985
34,202
656,521
78,615 Shopify (office), Indigo (office)
71,985 Metro
34,202 Shoppers Drug Mart
656,521 Fortino’s, Canadian Tire, Marshalls, HomeSense,
PetSmart, Hudson’s Bay Company (office)
Lincoln Fields Shopping Centre, Ottawa, ON
100%
284,947
284,947 Metro
London Plaza, London, ON
Markington Square, Scarborough, ON
Meadow Ridge Plaza, Ajax, ON
Meadowlands Power Centre, Ancaster, ON
Merivale Market, Ottawa, ON
Millcroft Shopping Centre, Burlington, ON
Mississauga Plaza, Mississauga, ON
New Liskeard Walmart Centre
New Liskeard, ON
Niagara Falls Plaza, Niagara Falls, ON
Niagara Square, Niagara Falls, ON
Norwest Plaza, Kingston, ON
Oakridge Centre, London, ON
Pine Plaza, Sault Ste. Marie, ON
Queensway Cineplex, Toronto, ON
RioCan Centre Barrie, Barrie, ON
RioCan Centre Belcourt, Orleans, ON
100%
100%
100%
100%
75%
50%
100%
100%
100%
30%
100%
100%
100%
50%
100%
60%
122,183
122,183 Gold's Gym, Value Village
173,029
173,029 Metro, GoodLife Fitness
111,762
145,605
59,136
152,564
175,672
111,762 Sobeys, GoodLife Fitness
589,209 Best Buy, Sport Chek, Michaels, PetSmart,
Costco*, Home Depot*, Sobeys*, Staples*
78,848 Food Basics, Shoppers Drug Mart
357,360 Metro, Movati, Value Village, Canadian Tire*
175,672 Fresh Co., Talize, LA Fitness
110,522
155,278 Walmart, Canadian Tire*
79,562
72,893
39,924
34,066
42,455
61,488
79,562 LA Fitness
242,976 Cineplex, Winners, JYSK, World Gym, The Brick
39,924 GoodLife Fitness
139,566 Pharma Plus, Loblaws*
42,455 Food Basics
122,976 Cineplex
244,589
244,589 Loblaws, Lowe’s, Mountain Equipment Co-op
156,369
402,989 Food Basics, The Athletic Club, Landmark
Cinemas, Toys R Us, Lowe’s*
RioCan Centre Burloak, Oakville, ON
100%
454,623
552,623 Cineplex, Home Outfitters, Longo's, Home Depot*
21
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
PROPERTY PORTFOLIO
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
RioCan Centre Kingston, Kingston, ON
100%
635,048
756,093 Cineplex, Staples, Winners, HomeSense,
RioCan Centre London North, London, ON
RioCan Centre London South, London, ON
RioCan Centre Merivale, Nepean, ON
RioCan Centre Milton, Milton, ON
100%
100%
100%
100%
Michaels, Best Buy, Home Depot*
105,040
165,040
Indigo, PetSmart, Loblaws*
139,622
139,622 Metro
200,177
200,177 Your Independent Grocer, Winners, Value Village
171,465
291,465 Cineplex, LA Fitness, Home Depot*, Longo’s*
RioCan Centre Newmarket, Newmarket, ON
40%
26,688
66,721 Staples, Mark's Work Wearhouse
RioCan Centre Sudbury, Sudbury, ON
100%
403,797
669,193 Cineplex, Staples, Chapters, Michaels, Winners,
RioCan Centre Vaughan, Vaughan, ON
RioCan Centre Windsor, Windsor, ON
RioCan Colossus Centre, Vaughan, ON
100%
100%
100%
262,336
262,336 Walmart
Costco*, Home Depot*
239,420
572,228
349,420 Cineplex, The Brick, PetSmart, Staples, Costco*
702,228 Cineplex, Marshalls, Bed Bath & Beyond,
HomeSense, Buy Buy Baby, Staples, Golf Town,
Costco*
RioCan Durham Centre, Ajax, ON
100%
891,888
1,272,888 Walmart, Canadian Tire, Cineplex, Marshalls,
Winners, HomeSense, Sport Chek, Chapters,
Michaels, Home Depot*, Loblaws*, Costco*
RioCan Elgin Mills Crossing
Richmond Hill, ON
100%
320,325
441,325 Costco, Michaels, Staples, Home Depot*
RioCan Fairgrounds, Orangeville, ON
100%
366,437
510,512 Walmart, Leon’s, Cineplex, Winners, Canadian
Tire*, Home Depot*
RioCan Georgian Mall, Barrie, ON
50%
242,620
601,755 The Bay, Sport Chek, Home Sense, H&M,
RioCan Grand Park, Mississauga, ON
RioCan Gravenhurst, Gravenhurst, ON
RioCan Hall, Toronto, ON
RioCan Leamington, Leamington, ON
RioCan Leaside Centre, Toronto, ON
RioCan Marketplace Toronto, Toronto, ON
RioCan Niagara Falls, Niagara Falls, ON
RioCan Oakville Place, Oakville, ON
RioCan Orleans, Cumberland, ON
RioCan Renfrew Centre, Renfrew, ON
100%
100%
100%
100%
100%
67%
100%
50%
100%
100%
F21 Red
118,681
118,681 Winners, Shoppers Drug Mart, Staples
149,548
149,548 Canadian Tire, Sobeys
227,326
227,326 Cineplex, Marshalls, Michaels, GoodLife Fitness
192,851
192,851 Walmart, Metro
133,035
133,035 Canadian Tire, PetSmart
114,298
447,438 Winners, Loblaws*, Home Depot*
295,164
231,018
393,739 Staples, Zehrs, Home Depot*
462,035 The Bay, H&M, Sport Chek, Pusateri’s,
Shoppers Drug Mart
182,251
297,251 Metro, JYSK, Staples, Home Depot*
53,099
127,099 Giant Tiger, No Frills*
RioCan Scarborough Centre, Scarborough, ON 100%
326,823
326,823 Costco, PetSmart, Staples, LA Fitness, Al’s
RioCan St. Laurent, Ottawa, ON
RioCan Thickson Ridge, Whitby, ON
100%
100%
308,031
362,031
Premium Food Market
308,031 Lowe’s, Adonis, Food Basics, Winners
492,031 Winners, Ikea, JYSK, Bed Bath & Beyond, Home
Sense, PetSmart, Home Depot*
RioCan Thickson Ridge –
Bed Bath & Beyond, Whitby, ON
RioCan Victoria, Whitby, ON
RioCan Warden, Scarborough, ON
RioCan West Ridge Place, Orillia, ON
RioCan Yonge Eglinton Centre, Toronto, ON
31%
8,749
28,222 Bed Bath & Beyond
50%
100%
100%
100%
49,290
98,579 Flying Squirrel, Reptilia
230,967
206,519
230,967 Lowe’s, Marshalls, Michaels
336,519 Food Basics, Cineplex, Home Depot*
1,059,136
1,059,136 Cineplex, Indigo, Metro, Toys R Us, Winners
22
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
PROPERTY PORTFOLIO
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
RioCentre Brampton, Brampton, ON
RioCentre Kanata, Ottawa, ON
RioCentre Newmarket, Newmarket, ON
RioCentre Oakville, Oakville, ON
RioCentre Thornhill, Thornhill, ON
Sandalwood Square Shopping Centre
Mississauga, ON
100%
100%
100%
100%
100%
100%
103,607
103,607 Food Basics
108,562
108,562 Sobeys, Pharma Plus
92,688
92,688 Metro, Shoppers Drug Mart
106,884
106,884 Food Basics, Shoppers Drug Mart
140,370
140,370 No Frills, Winners, HomeSense
96,571
96,571 Value Village
Sheppard Centre, Toronto, ON
50%
236,659
473,318 Winners, Shoppers Drug Mart, Longo’s,
LA Fitness
Sherwood Forest Mall, London, ON
100%
218,758
218,758 Food Basics, Goodwill, Shoppers Drug Mart,
Shoppers City East, Ottawa, ON
Shoppers Drug Mart Pembroke
Pembroke, ON
Shoppers on Argyle, Caledonia, ON
Shoppers World Brampton, Brampton, ON
Shoppers World Danforth, Toronto, ON
Shoppes on Avenue, Toronto, ON
Shoppes on Queen West, Toronto, ON
Silver City Gloucester, Gloucester, ON
South Cambridge Shopping Centre
Cambridge, ON
South Hamilton Square, Hamilton, ON
Southgate Shopping Centre, Ottawa, ON
Spring Farm Marketplace, Vaughn, ON
Stratford Centre, Stratford, ON
Sunnybrook Plaza, Toronto, ON
Tanger Outlets Cookstown, Cookstown, ON
62.8%
100%
26,066
17,020
41,507 Shoppers Drug Mart
17,020 Shoppers Drug Mart
GoodLife Fitness
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
50%
50%
17,024
17,024 Shoppers Drug Mart
691,926
691,926 Canadian Tire, Winners, Staples, Oceans, JYSK,
Giant Tiger, GoodLife Fitness
326,303
326,303 Lowe’s, Metro, LA Fitness, Staples
20,884
89,419
118,944
189,739
20,884 Pharma Plus
89,419 Loblaws, Winners
150,608 Cineplex, Chapters
189,739 Zehrs, Home Hardware
298,527
298,527 Fortino’s, Flying Squirrel, JYSK, GoodLife Fitness
72,627
72,896
72,627 Metro, Shoppers Drug Mart
72,896 Sobeys, Shoppers Drug Mart
132,224
132,224 Metro, Michaels, World Gym, Value Village
25,507
51,013 Pharma Plus
155,301
310,602 Under Armour, Coach, Tommy Hilfiger, Nike,
Polo Ralph Lauren, H&M
Tanger Outlets Ottawa, Ottawa, ON
50%
170,269
340,537 Polo Ralph Lauren, Old Navy, Nike, Saks off Fifth,
Under Armour, Coach, Marshalls
The Stockyards, Toronto, ON
50%
252,227
504,454 Nations, Winners, Best Buy, Sport Chek,
The Shops of Summerhill, Toronto, ON
Timiskaming Square, New Liskeard, ON
Timmins Square, Timmins, ON
Trafalgar Ridge Shopping Centre
Oakville, ON
Trenton Walmart Centre, Trenton, ON
Trinity Common Brampton, Brampton, ON
75%
50%
30%
100%
100%
100%
23,115
42,853
117,140
131,250
147,441
613,901
HomeSense, Michaels
30,820
85,705 Food Basics
390,468 No Frills, Winners, Sport Chek, Urban Planet
131,250 Winners/HomeSense, GoodLife Fitness
147,441 Walmart
828,901 Cineplex, Metro, Winners, Marshalls,
HomeSense, Staples, Sport Chek, Michaels,
Canadian Tire*, Home Depot*
Trinity Crossing, Ottawa, ON
100%
191,465
371,465 Winners/HomeSense, Michaels, Value Village,
Loblaws*
23
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
PROPERTY PORTFOLIO
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
University Plaza, Dundas, ON
Victoria Crossing, Scarborough, ON
Viewmount Centre, Ottawa, ON
Walker Place, Burlington, ON
Walker Towne Centre, Windsor, ON
West Side Place, Port Colborne, ON
Westgate Shopping Centre, Ottawa, ON
Wharncliffe Centre, London, ON
White Shield Plaza, Toronto, ON
Woodview Place, Burlington, ON
Yonge & Erskine Avenue, Toronto, ON
Yorkville, Toronto, ON
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
50%
185,779
185,779 Metro, Shoppers Drug Mart
76,515
76,515 Fresh Co.
127,270
127,270 Metro, Best Buy, HomeSense
69,857
39,768
93,123
69,857 Fresh Co.
39,768
93,123 No Frills
165,660
165,660 Shoppers Drug Mart
60,744
148,770
145,401
6,862
8,473
60,744 No Frills
148,770 Lone Thai Grocery
145,401 Metro
13,723
16,945
PRINCE EDWARD ISLAND
Charlottetown Mall, Charlottetown, PEI
100%
355,318
355,318 Cineplex, Loblaws, Sport Chek, Winners, West
Royalty Fitness, Urban Planet, H&M
QUEBEC
2335 Lapiniere Boulevard, Brossard, PQ
541 Saint-Joseph Boulevard
Gatineau, PQ
BMO-279 Rue St Charles Ouest
Longueuil, PQ
Centre Carnaval LaSalle, LaSalle, PQ
Centre Carnaval Montreal, Montreal, PQ
Centre Carnaval Pierrefonds
Pierrefonds, PQ
Centre Carnaval Trois Rivieres
Trois Rivieres, PQ
Centre Concorde, Laval, PQ
Centre Rene A. Robert Centre
Ste. Therese, PQ
Centre RioCan Kirkland, Kirkland, PQ
Centre Sicard, Ste. Therese, PQ
Centre St. Jean
St. Jean Sur Richelieu, PQ
Centre St. Julie, Ste. Julie, PQ
Centre St. Martin, Laval, PQ
Desserte Ouest, Laval, PQ
Galeries Laurentides, St. Antoine, PQ
Galeries Mille-Iles, Rosemere, PQ
100%
100%
2,259
2,584
2,259
2,584
100%
5,015
5,015
100%
100%
100%
208,563
208,563 Super C, L’Aubainerie
67,815
67,815 Super C
129,589
129,589 Super C
100%
112,955
112,955 Super C
50%
50%
100%
100%
100%
50%
100%
100%
100%
100%
31,649
37,513
319,445
106,329
104,280
63,298 IGA
75,025 IGA
319,445 Cineplex, Winners
106,329 IGA
104,280 IGA
30,389
60,778 IGA
248,974
248,974 Provigo, Giant Tiger, World Gym
87,970
452,363
252,450
87,970 Staples, JYSK, Gold’s Gym
452,363 Maxi, World Gym, Urban Planet
252,450 Maxi, World Gym, Leon’s, Staples
24
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
PROPERTY PORTFOLIO
As at December 31, 2017
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.) Major or Anchor Tenants
Granby, Granby, PQ
Lachute Walmart Centre, Lachute, PQ
Les Factories Tanger Bromont
Bromont, PQ
Les Factories Tanger St. Sauveur
Prevost, PQ
Les Galeries Lachine, Montreal, PQ
Levis, Levis, PQ
Mega Centre Notre Dame
Sainte Dorothée, PQ
Mega Centre Rive-Sud, Levis, PQ
Place Carnaval Laval, Laval, PQ
Place Newman, LaSalle, PQ
RioCan Gatineau, Gatineau, PQ
RioCan Greenfield, Greenfield Park, PQ
Place La Prairie, La Prairie, PQ
RioCan La Gappe, Gatineau, PQ
Shoppers Drug Mart Repentigny
Repentigny, PQ
100%
100%
50%
48,870
78,761
81,187
48,870 L’Aubainerie
78,761 Walmart
162,373 Atmosphere, Urban Planet, Reebok
50%
56,996
113,992 Tommy Hilfiger, Atmosphere
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
167,383
167,383 Maxi, Shoppers Drug Mart, Rossy
19,003
19,003
421,617
483,515 Winners/HomeSense, L’Aubainerie,
Shoppers Drug Mart, Sports Experts, Super C*
204,759
108,214
181,463
300,007
352,516
393,628 Walmart, Canadian Tire*, Home Depot*
108,214 Adonis
181,463 Maxi, Winners, Rossy
300,007 Walmart, Canadian Tire, Super C
352,516 Maxi, Winners, Staples, Guzzo Cinemas, JYSK,
Giant Tiger
35,467
70,934 IGA
372,883
372,883 Walmart, Winners, Michaels
17,050
17,050 Shoppers Drug Mart
Silver City Hull, Hull, PQ
100%
84,590
499,775 Cineplex, Rona*, Walmart*, Maxi*,
St. Hyacinthe Walmart Centre
Ste. Hyacinthe, PQ
Vaudreuil Shopping Centre
Vaudreuil-Dorion, PQ
100%
166,930
254,430 Walmart, Staples, Canadian Tire*
Super C*, Winners*
100%
117,773
228,273 Staples, Canadian Tire*, Super C*
25
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
*Non-owned anchor
REAL ESTATE PORTFOLIO KEY FACTS as at December 31, 2017 (all metrics stated at RioCan's interest)
Net Leasable Area (NLA) (thousands of sq.ft.):
Income Producing Properties
Properties Under Development (i)
Total
Number of Tenancies
Retail
39,870
833
40,703
Office
1,937
741
2,678
Residential
—
718
718
(i)
Includes the NLA for only active projects with detailed costs estimates, but excludes NLA for air rights sales and residential inventory.
Committed Occupancy
Retail
Office
Total
Geographic Diversification
Ontario
Alberta
Quebec
British Columbia
Eastern Canada
Manitoba
Percentage of
annualized rental
revenue
Income producing
properties
Properties under
development (i)
Number of properties
66.0%
14.8%
8.8%
7.7%
2.0%
0.7%
100.0%
186
30
35
13
6
2
272
13
4
—
—
—
—
17
Total
41,807
2,292
44,099
6,309
96.6%
96.0%
96.6%
Total
199
34
35
13
6
2
289
(i) Given the multi-phase nature of certain development projects, a single investment property could have more than one project, as discussed in the Properties Under Development
section of this MD&A. Therefore, the number of projects should not be viewed as equivalent to number of properties under development.
Anchor and National Tenants
Percentage of:
Annualized rental revenue
Total NLA
Top Ten Sources of Revenue by Property Tenant
Rank
Tenant
1
2
3
4
5
6
7
8
9
Loblaws/Shoppers Drug Mart (i)
Canadian Tire Corporation (ii)
Walmart
Cineplex/Galaxy Cinemas
Winners/HomeSense/Marshalls
Metro/Super C/Loeb/Food Basics
Cara/Prime Restaurants/St-Hubert
Lowe's
Dollarama
10
Sobeys/Safeway
84.8%
84.6%
Percentage of
annualized rental revenue
Weighted average
remaining lease term (yrs)
4.8%
4.3%
4.2%
3.9%
3.9%
3.4%
1.8%
1.8%
1.6%
1.6%
31.3%
7.5
4.8
9.3
7.4
6.8
6.7
7.0
10.4
6.3
8.4
7.3
(i)
(ii)
Loblaws/Shoppers Drug Mart includes No Frills, Fortinos, Zehrs Markets, Joe Fresh and Maxi.
Canadian Tire Corporation includes Canadian Tire, PartSource, Mark’s, Sport Chek, Sports Experts, National Sports and Atmosphere.
Property Lease Expiries
NLA (thousands of sq. ft)
Average expiring rent per square foot
Total
41,807
$17.75
2018
3,424
$19.23
2019
5,325
$18.44
2020
4,935
$17.51
2021
4,911
$18.48
2022
4,071
$20.23
RioCan
FINANCIAL REVIEW
MANAGEMENT’S DISCUSSION
AND ANALYSIS
TABLE OF CONTENTS
Management’s Discussion and Analysis
28 ABOUT THIS MANAGEMENT’S
DISCUSSION AND ANALYSIS
28 FORWARD-LOOKING INFORMATION
29
BUSINESS OVERVIEW, OUTLOOK AND
STRATEGY
36 SUSTAINABILITY
36
PRESENTATION OF FINANCIAL
INFORMATION AND NON-GAAP
MEASURES
Selected Annual Information
2017 Financial Highlights
Operating Income
41 RESULTS OF OPERATIONS
41
42
43
44 Net Operating Income (NOI)
45
46
47
49
Other Income
Other Expenses
Funds from Operations (FFO)
Adjusted Cashflow from Operations
(ACFO)
51 OPERATIONS
52
Occupancy and Leasing
60 ASSET PROFILE
Investment Property
60
Income Property Acquisitions During 2017
60
Income Property Dispositions During 2017
60
Co-ownership Arrangements
61
Capital Expenditures on Income Properties
64
Properties Under Development
65
Residential Inventory
75
76
Mortgages and Loans Receivable
77 CAPITAL RESOURCES AND LIQUIDITY
Liquidity and Cash Management
77
Capital Management Framework
77
Debt Metrics
77
Credit Ratings
79
Capital Structure
80
Debentures Payable
80
Mortgages Payable
81
Lines of Credit and Other Bank Loans
83
Total Debt Profile
83
Liquidity
84
Guarantees
86
86
87
88
88
90
93
94
95
Hedging Activities
Trust Units
Preferred Units
Distributions to Unitholders
QUARTERLY RESULTS AND TREND
ANALYSIS
SIGNIFICANT ACCOUNTING POLICIES
AND ESTIMATES
FUTURE CHANGES IN ACCOUNTING
POLCIES
DISCLOSURE CONTROLS AND
PROCEDURES AND INTERNAL
CONTROLS OVER FINANCIAL
REPORTING
96 RELATED PARTY TRANSACTIONS
96 RISKS AND UNCERTAINTIES
27
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
ABOUT THIS MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (MD&A) is provided to enable a reader to assess our results of operations and
financial condition for the three months and year ended December 31, 2017 (Q4 2017 and 2017, respectively). This MD&A is
dated February 13, 2018 and should be read in conjunction with our annual audited consolidated financial statements and related
notes for the year ended December 31, 2017 (2017 Annual Consolidated Financial Statements). Unless the context indicates
otherwise, references to “RioCan”, "the Trust”, "we", "us" and "our" in this MD&A refer to RioCan Real Estate Investment Trust
and its consolidated operations. Unless otherwise specified, all amounts are based on financial statements prepared in
accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board
(IASB). These documents, as well as additional information relating to RioCan, including our most recently filed Annual
Information Form (AIF), have been filed electronically with Canadian securities regulators through the System for Electronic
Document Analysis and Retrieval (SEDAR) and may be accessed through the SEDAR website at www.sedar.com or RioCan's
website at www.riocan.com.
Unless otherwise specified, all information in this MD&A refers to the results of our continuing operations only, amounts are in
thousands of Canadian dollars and percentage changes are calculated using whole numbers.
FORWARD-LOOKING INFORMATION
Certain information included in this MD&A contains forward-looking information within the meaning of applicable Canadian
securities laws. This information includes, but is not limited to, statements made in the 2017 Financial Highlights, Business
Overview, Outlook and Strategy, Asset Profile and Capital Resources and Liquidity sections, 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 is based on information currently available to management. All forward-looking information in
this MD&A is qualified by the following 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 the Risks
and Uncertainties section in this MD&A which could cause actual events or results to differ materially from the forward-looking
information contained in this MD&A. 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; potential changes in Ontario's rent control legislation; access to debt and equity capital; interest rate and financing
risk; joint ventures and partnerships; the relative illiquidity of real property, the timing and ability of 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; 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, sales and land transfer taxes; and credit ratings.
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 depended 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
MD&A may need to be modified.
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 low and stable 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. For a description of additional risks that could cause actual results to materially differ from management’s current
expectations, refer to Risks and Uncertainties in this MD&A and Risks and Uncertainties in RioCan’s AIF. Although the forward-
looking information contained in this MD&A 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 MD&A
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 MD&A. The forward-looking information contained in this MD&A is made as of the
date of this MD&A, and should not be relied upon as representing RioCan’s views as of any date subsequent to the date of this
MD&A. 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.
28
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS OVERVIEW, OUTLOOK AND STRATEGY
Business Overview
RioCan is an unincorporated “closed-end” real estate investment trust listed on the Toronto Stock Exchange (TSX) under the
symbol REI.UN. We are Canada’s largest real estate investment trust based on market capitalization with a total enterprise value
of approximately $13.9 billion at December 31, 2017. RioCan is a fully integrated REIT that owns, manages and develops high
quality retail-focused, increasingly mixed-use properties in Canada’s largest retail focused portfolio with ownership interests in
289 retail and mixed-use properties, including 17 properties under development, containing an aggregate net leasable area (NLA)
of 44,099,000 square feet.
RioCan's property portfolio includes grocery anchored, new format retail, urban retail, mixed-use and non-grocery anchored
centres, of which 236 properties are 100% owned (233 income properties and 3 properties under development) and 53 are co-
owned and governed by co-ownership agreements (including 14 properties under development). RioCan’s primary co-ownership
arrangements are with Allied Properties REIT (Allied); Canada Pension Plan Investment Board (CPPIB); KingSett Capital
(KingSett); Tanger Factory Outlet Centres, Inc. (Tanger); and Trinity Development Group (Trinity). In addition, the Trust also owns
partial interests in 13 properties through joint ventures with Hudson's Bay Company (HBC) and Marketvest Corporation/Dale-Vest
Corporation which are included in our equity accounted investments in the 2017 Annual Consolidated Financial Statements.
Operating results
For the year ended December 31, 2017, RioCan reported net income per unit of $2.18 and FFO per unit of $1.79, with FFO per
unit growth of 6.3% from 2016. Operationally, the Trust reported same property NOI growth of 2.1%, its highest annual same
property NOI growth since 2010, and 849,000 square feet of completed developments, all at RioCan's interest. Same property
NOI for RioCan's properties in Canada's six major markets increased by 2.2% as compared to same property NOI growth of 1.7%
by its secondary markets properties. Committed occupancy and in-place occupancy remained high at 96.6% and 95.6%,
respectively, despite Sears store closures which accounted for 0.8% of the Trust's NLA as of September 30, 2017. The Trust's
major markets properties' committed occupancy was 97.6% as of December 31, 2017,1.1% higher than as of December 31,
2016.
RioCan continues to report strong results in Q4 2017 with net income per unit of $0.64 and FFO per unit of $0.44, with FFO per
unit growth of 9.3% from Q4 2016. With respect to operating performance, the Trust reported same property NOI growth of 2.9%,
its highest quarterly same property NOI growth since Q4 2010. Same property NOI for RioCan's properties in Canada's six major
markets increased by 3.0% as compared to same property NOI growth of 2.6% by its secondary markets properties. In addition
117,000 square feet of developments were completed during the quarter, all at RioCan's interest.
Based on annualized rental revenues as of December 31, 2017, 76.1% of the Trust's annualized rent revenue is generated from
Canada's six major markets, including 40.9% from the Greater Toronto Area (GTA), each increased by 0.9% from the same
measures as of September 30, 2017. On a NLA basis, 70.3% of the Trust’s income producing properties NLA is in Canada's six
major markets, an increase of 1.6% as compared to 68.7% as of September 30, 2017. NLA from the GTA accounts for 34.9% of
the Trust's NLA as of December 31, 2017, an increase of 0.7% from 34.2% as of September 30, 2017. All of our development
properties are located in the six Canadian major markets.
RioCan is making significant progress on the re-leasing of the former Sears premises, with leases completed or in the final stages
of negotiation, which will generate approximately 130% of the lost annual rental revenue while representing 320,000 square feet (at
RioCan’s interest) or 84% of the vacated Sears space.
Progress on Acceleration of Canadian Major Markets 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. Refer to
the Strategy section of this MD&A for further details.
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:
•
•
•
A 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.
29
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
•
A firm agreement to sell four properties in Flamborough, Guelph and Orangeville in Ontario and in Duncan, British
Columbia for 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 of 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 are expected to 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 for a total cost of $99.6 million.
To maximize the effectiveness of the Trust's NCIB program, the Trust suspended its DRIP program effective November 1, 2017,
as announced on October 2, 2017.
Additional Capital Recycling
As part of RioCan's ongoing capital recycling program, RioCan completed additional income producing property dispositions
totalling $149.6 million in 2017, consisting of:
•
•
•
Sale of its Cambie Street property in Vancouver, British Columbia on June 29, 2017, for a sale price of $94.2 million at a
capitalization rate of 3.29%. There was no debt relating to the disposition.
Sale of a portfolio of six chartered bank branches located in British Columbia on August 3, 2017, at a sales price
of $30.3 million and a capitalization rate of 3.72%. There was no debt relating to the disposition.
Sale of a partnership interest for sale proceeds of $25.1 million in Q1 2017.
Also, RioCan sold a portion of its available-for-sale marketable securities and recognized gains of $10.5 million in Q4 2017 and
$46.0 million for the year ended December 31, 2017.
Development Progress and Strategic Alliances
RioCan's development program is a significant component of its growth strategy to unlock the intrinsic value of its existing
properties through redevelopment and intensification and deliver strong net asset value ("NAV" ) growth to its unitholders. During
2017, RioCan continued to make significant progress in advancing its development program, notably:
•
•
Project completions - completed 0.8 million square feet of projects with $224.3 million costs transferred to income
producing properties. Notably, the Trust substantially completed the Sage Hill development, a 380,000 square foot new
format centre located in a growing residential suburb in northwest Calgary. This project is co-owned with KingSett
Capital on a 50/50 basis. The 32 acre development site is anchored by Walmart and Calgary’s first Loblaws City Market
banner, with an excellent mix of strong national (London Drugs, Dollarama, Scotiabank, McDonalds, Royal Bank of
Canada) and high quality regional retailers.
Zoning approvals and development pipeline - obtained 4.5 million square feet (at RioCan's interest) of zoning
approvals in 2017 including the zoning approvals for The Well in Toronto, Westgate and Elmvale in Ottawa, Millwoods
in Edmonton and Southland in Calgary. The Trust continues to identify new intensification opportunities and expand its
development pipeline, while maintaining prudent capital management. As of December 31, 2017, the Trust has
identified approximately 26.3 million square feet of development pipeline (at RioCan's interests), of which 46.7% is
already zoned and another 20.1% with zoning applications submitted.
•
Project and leasing progress - Several large projects are progressing as planned and are scheduled to be completed
by the end of 2018 or early 2019, including but not limited to:
Yonge Eglinton Northeast Corner Condominium - the 623 unit fully pre-sold landmark condominium project
located at the intersection of the Yonge-Bloor subway and the new Eglinton Crosstown light rail transit line
("Eglinton LRT") in Toronto; 50/50 co-owned by RioCan and Metropia/Bazis;
Yonge Eglinton Northeast Corner Residential Rental - a 466 residential rental unit project, including 65
residential rental replacement units and retail and office space with underground access to the Yonge-Bloor
subway and the new Eglinton LRT in Toronto; 50/50 co-owned by RioCan and Metropia/Bazis; and
King & Portland - a mixed-use project in the trendy Toronto King West neighbourhood. In September 2017,
RioCan and its 50% partner Allied Properties Real Estate Investment Trust ("Allied") seized the market trend
and changed the originally contemplated residential rental component to condominium units, 100% of which
were subsequently sold with profitability well ahead of initial estimate. The project's office component is 100%
leased and the retail component is currently 44% leased with the remaining 7,000 square feet expected to be
leased upon completion.
The Trust continues to make good progress on other developments such as Sheppard Centre, 491 College Street and Bathurst
College Centre, all located in urban Toronto and scheduled for full or phased completion in 2018.
30
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
• New strategic alliances - Part of the strength in RioCan's development program is its ability to attract well-established
partners with proven track records and residential development expertise. During 2017, RioCan entered into strategic
alliances with select new partners through the sale of partial interests in several development projects. Such strategic
alliances not only reduce the Trust's development risks but also crystallize the value of zoned density and generate NAV
growth for unitholders.
Gloucester Residential - a new 50/50 joint venture with Killam Apartment Real Estate Investment Trust
("Killam") formed on April 21, 2017 to redevelop an income producing property on the new Confederation LRT
Line in Ottawa into a residential community with four residential towers containing up to 840 units (at 100%);
Sunnybrook Plaza - a new 50/50 joint venture with Concert Real Estate Corporation ("Concert") formed on
June 14, 2017 to redevelop an income producing property located on the new Eglinton LRT route in Toronto
into a 16-storey and an 11-storey mixed-use project; and
Yorkville - a new partner Capital Developments ("CD") acquired a 25% interest in the project on October 12,
2017, resulting in a 50/25/25 joint venture among RioCan, Metropia and CD. The project is located in the
prestigious Toronto Yorkville neighborhood with the potential for approximately half a million square feet of
luxury condominiums, retail uses and up to 82 residential rental replacement units. As of February 13, 2018,
the partners have completed acquisitions of adjacent properties substantially required for the intensification
project. RioCan has agreed to purchase the partners' interest in the retail portion upon project completion at a
6% capitalization rate and has the right of first opportunity to acquire the residential rental replacement units.
This will provide further NAV growth to the Trust's unitholders.
Brentwood Village - On November 23, 2017, RioCan completed the sale of a 50% interest in a discrete portion
of its Brentwood Village property in Calgary, Alberta to Boardwalk Real Estate Investment Trust ("Boardwalk")
for total proceeds, including certain cost recoveries, of $4.8 million (50% interest). The co-owners plan to
develop this discrete portion of the property into a mixed-use project with 163 residential rental units plus retail
space. RioCan continues to own 100% of the main portion of the property including existing retail and future
density.
• Building on existing strategic alliances - RioCan continues to build on and re-align our existing strategic alliances
with our partners when opportunities arise for similar reasons as noted earlier for new strategic alliances.
Yonge Eglinton Northeast Corner - On July 5, 2017, RioCan entered into an agreement with its partner to
purchase the remaining 50% interest in the rental residential tower of the landmark, mixed-use, transit oriented
project. The purchase price is based on costs plus $10.0 million upon closing (which is estimated in the first
quarter of 2019), subject to final costs amount.
RioCan also has an agreement to acquire the remaining 50% interest in the retail component of the project at a
purchase price based on a 7% capitalization rate and the stabilized net operating income upon completion in
2019.
Both deals will provide RioCan further NAV growth potential upon deal closings.
The Well - On October 5, 2017, RioCan and its partner Allied acquired Whitecastle New Urban Fund 2's
("WNUF 2") undivided 20% interest in the commercial component of The Well, the large-scale landmark mixed-
use development in downtown Toronto. As a result of this transaction, both Allied and RioCan each own an
undivided 50% interest in the commercial component of the project.
Windfield Townhouse Development - On October 27, 2017, RioCan formed a 50/50 joint venture with Tribute
Communities ("Tribute") to develop 551 townhouses in several phases on approximately 31 acres at RioCan's
Windfields Farm development property in Oshawa, Ontario. 166 of the 170 units released in phase one and 14
of the 94 units in phase two have been sold.
740 Dupont - On December 15, 2017, RioCan completed the sale of a 50% interest in its 740 Dupont Avenue
mixed-use development project in Toronto, Ontario to Woodbourne Canada Partners ("Woodbourne") for total
proceeds, including certain cost recoveries, of $9.4 million (50% interest). The mixed-use project will consist of
210 residential rental units plus retail space. Woodbourne is also the Trust's 50% partner in the Trust's largest
584-unit residential rental development - residential Building 6 at The Well in downtown Toronto.
E2 Condos at Yonge & Eglinton - On December 11, 2017, RioCan acquired a 10% interest in E2 Condos, a
development adjacent to the Trust's residential rental project at the northeast corner of Yonge and Eglinton.
RioCan will invest a total of $3.0 million and will participate in project profits and earn fees for easement rights.
During Q4 2017, RioCan contributed $1.4 million to the project.
Capital Management and Distribution Increase
During 2017, the Trust continued to exercise sound capital management. As of December 31, 2017, RioCan's debt to total
assets remained low at 41.4% on a proportionate share basis. All debt metrics as discussed in the Debt Metrics section of this
MD&A outperformed the Trust's targets. Notably, the Trust's Debt to Adjusted EBITDA ratio further improved to 7.57x for the year
from 8.10x as of December 31, 2016. The Trust has a significant unencumbered asset pool of $7.7 billion as of December 31,
2017 that generates 56.7% of RioCan's annualized NOI as of December 31, 2017. In addition, RioCan's unencumbered assets to
unencumbered debt ratio stood at 226%, well above our 200% target.
During 2017, RioCan continued to expand and access multiple sources of capital at competitive rates.
31
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Debenture
RioCan issued $300 million of 5.75-year Series Y senior unsecured debentures on January 16, 2017, at a price of $999.97 per
$1,000 principal amount with an effective yield of 2.831% if held to maturity, and $300 million of 4-year Series Z senior unsecured
debentures on April 10, 2017 at 2.194%. RioCan also redeemed, in full, its $150 million 3.80% Series P senior unsecured
debentures on March 1, 2017 in accordance with its terms.
On January 31, 2018, the Trust issued $300 million of Series AA senior unsecured debentures, which mature on September 29,
2023 and carry a coupon rate of 3.209%. The interest on these debentures is payable semi-annually commencing September 29,
2018. The debentures were sold at a price of $999.95 per $1,000 principal amount with an effective yield of 3.209% if held to
maturity. The net proceeds were used to fund development activities, property acquisitions, repayment of certain indebtedness
and other general trust purposes. The Series AA debentures can be redeemed in whole or in part at par on or after August 29,
2023 prior to maturity.
Unsecured Credit Facilities
On April 25, 2017, the Trust exercised its option to extend the maturity date on its $1 billion revolving unsecured operating credit
facility to May 31, 2022. All other terms and conditions remained the same.
On October 31, 2017, the Trust entered into a $200 million non-revolving unsecured credit facility with two financial institutions
(consisting of a Schedule I and a Schedule III bank), maturing January 31, 2023 bearing interest at a rate of Bankers'
Acceptances plus 110 basis points per annum. In addition, the Trust entered into a $100 million non-revolving unsecured credit
facility on December 27, 2017 with a Schedule I bank, maturing December 27, 2019 bearing interest at a rate of Bankers'
Acceptances plus 100 basis points per annum. The second facility provided the Trust with an option to increase the facility by up
to $50 million with the addition of a lender. As of December 31, 2017, the Trust has drawn $300 million on the two non-revolving
unsecured credit facilities. Subsequent to year end, the Trust exercised its option and borrowed an additional $50 million from a
Schedule III bank under the second facility.
The $300 million in total draws on the non-revolving unsecured credit facilities as of December 31, 2017 were used to pay down
the Trust's revolving unsecured operating line of credit and mortgages payable. The agreements governing these non-revolving
unsecured credit facilities require the Trust to maintain certain financial covenants similar to those of RioCan's $1 billion revolving
unsecured operating line of credit.
Preferred units
On June 30, 2017, the Trust exercised its option to redeem all 5.98 million outstanding Series C preferred trust units for total
redemption proceeds of $149.5 million.
Distribution Increase
As announced on December 1, 2017, the Trust increased its annual distribution to unitholders by $0.03 per unit or 2.1% to $1.44
per unit effective January 1, 2018.
Outlook
Canada's economy demonstrated stronger than anticipated growth in 2017. This growth, together with a positive outlook resulted
in the Bank of Canada easing on its accommodative stance and increasing the overnight interest rate by 50 basis points in 2017
to 1.0%. In its January 2018 meeting, the Bank of Canada increased the overnight rate by an additional 25 basis points to 1.25%.
It is generally expected that the Bank of Canada will continue with its stance on monetary tightening with further hike(s) to interest
rates in 2018, even though there are general economic concerns and uncertainties regarding the potential outcome of the North
American Free Trade Agreement (NAFTA) negotiations between Canada, the U.S. and Mexico. We are well-positioned to
withstand an increasing interest rate environment through our low leverage and staggered portfolio of debt maturities, with no
more than 18% of our overall debt maturing in any one year over the next five years.
Energy prices have largely appeared to have stabilized, however there remains some uncertainty about the strength of the recent
recovery. The U.S. economy has also posted positive indicators for economic growth and employment levels have improved. It is
generally believed that the U.S. Federal Reserve will gradually raise interest rates over the next twelve to eighteen months if the
economy continues to grow.
Overall, our large size and dominant position in Canada's six major markets from which 76.1% of our portfolio rental revenues are
derived, leave us well-positioned to withstand the current retail environment. The announced acceleration of our major market
strategy, which is further discussed in the Strategy section below, will increase our focus in these markets and is expected to
further improve the quality, growth profile and resilience of our portfolio in the ever changing retail environment. In addition to the
competitive advantage provided by RioCan's significant scale and six major markets presence, our resiliency is aided by the
depth of our management team, our well diversified and stable portfolio, the portfolio's value creation potential through its
development program, solid tenant base, flexible capital structure (evidenced by our ability to raise debt from a variety of sources
and a large pool of unencumbered assets) and conservative borrowing practices.
We expect continued organic growth over the long term including continued development deliveries from our development
program. As the properties that were impacted by Target's departure are largely stabilized, we anticipate positive effects to same
property net operating income (NOI) in 2018. However, this will be partially offset by increased interest expense as costs that
were previously capitalized while such properties were classified as under redevelopment, will be expensed after completion of
the redevelopment.
For 2018, we expect to achieve same property NOI growth in the 2.0% to 3.0% target range assuming current market conditions
prevail, although quarter to quarter results may vary.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
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Macro Economic and Market Trends
Canadian dollar
The improvement in the economic environment and potential for further interest rates increases in Canada has resulted in an
improvement for the Canadian dollar in 2017 relative to 2016. The Canadian dollar has recently weakened versus the U.S. dollar
given the heightened expectation of rising interest rates in the U.S. However, the prolonged weakness in the Canadian dollar,
relative to that of the U.S. over the last few years, has negatively impacted retailers that import goods from the U.S. On the other
hand, there may be some positive growth in retail sales resulting from fewer Canadians shopping in the U.S. Also, if the Canadian
dollar remains relatively attractive, it may attract more tourists and foreign capital to Canada, and more specifically to Canada's
major markets where we have a significant presence.
Alberta economy
Low energy prices in 2017 caused a sharp economic contraction in Alberta. Despite Alberta's attempts to diversify into non-
energy dependent sectors, the province is dependent on the energy resource sectors. Oil prices have recovered to an extent in
recent months and we would anticipate a continued economic improvement in Alberta should oil prices continue to recover.
Recent economic forecasts suggest that the economic recovery in Alberta will continue to progress with signs of renewed
investment in the province's energy sectors and improving employment results. Furthermore, recent retail sales data as
measured on a per capita basis has been solid, and consumer confidence is growing, as the economy in Alberta adjusts to the
current environment. Occupancy rates in our Alberta portfolio remain amongst the highest in our portfolio at approximately 98%
and valuations for RioCan's high quality, well-located assets in Alberta also remain strong. Notwithstanding, the regional economy
is sensitive to energy prices and if weakness returns to oil prices, the headwinds will likely persist with potential to further impact
retail and residential markets.
Interest rates
The Bank of Canada increased the overnight interest rate in aggregate by 50 basis points to 1.0% in 2017 and, in their January
2018 meeting, raised the overnight interest rate by another 25 basis points to 1.25%. The Bank of Canada report noted that it
expects inflation to remain close to its 2% target for the coming period. It is generally viewed that the Government of Canada
bond yield curve has built in one or two more interest rate hikes in 2018.
Despite the recent interest rate hikes and expectations for further modest rate increases, the interest rate environment remains
relatively favorable in Canada in comparison to longer term historical levels. We will monitor the economy and real estate
markets with a view to ensure that we continue to have adequate access to capital, either by way of debt, strategic asset
dispositions or equity to meet our business requirements and to maximize financing opportunities as they become available.
E-commerce
We believe that the depth and breadth of our retail portfolio, especially in Canada's six major markets, makes us well positioned
to withstand the effects of e-commerce on the overall retail market.
There is no question that we see evidence today of the disruptive effects of e-commerce on the traditional brick-and-mortar
powerhouses, as giants like Walmart begin redirecting significant portions of their capital spending toward on-line sales
capabilities. At the same time, urban population growth is generally out-pacing the overall population growth with higher barriers
for e-commerce players to establish distribution centres in urban settings for the "last-mile" deliveries. Canada's geographic
dispersion remains another challenge for e-commerce as it makes shipping and delivery costs more expensive. As a result, the
penetration of e-commerce, while growing, has been more limited in Canada in comparison to that in the U.S. or Europe.
Despite the negative impact of e-commerce on the traditional brick-and-mortar retailers, we believe that shopping centres will
always have a place for consumers as they remain the most cost-effective way for a retailer to distribute goods, and the most
successful retailers in the future will be the ones that effectively execute a combined on-line and brick-and-mortar strategy. These
retailers will employ models that have been adapted to integrate sales in their storefronts as well as catering to on-line sales,
commonly referred to as 'omni channeling' to provide today's consumer with the choice of how they want to shop. In the changing
face of retail, national tenants are increasingly realizing that they must provide this flexibility to their customers in order to remain
relevant.
Grocery stores have historically been more resistant to on-line consumer spending, and in Canada, most on-line grocery orders
are filled at the store level rather than through a distribution warehouse. The Amazon acquisition of Whole Foods in August 2017
validates the need for a physical retail presence, particularly in the grocery segment of the retail market. RioCan continues to
pro-actively bolster its portfolio through a greater focus on national and grocery anchor tenants and an improved overall shopping
experience.
While e-commerce may have an impact on the size, mix and possibly even the location of physical stores, we expect that
shopping centres are going to be a very important part of how retailers remain connected to their customers. For example, the
two largest demographic groups are the Baby Boomers in their retirement years and the Millennials, each having very different
spending habits than previous generations. The spending patterns of these two groups compound the effects of e-commerce by
changing the focus of retail to more service-oriented providers, such as food and beverage, entertainment, personal services and
fitness - or what we sometimes refer to as 'experiential retail'. We have been evolving our tenant mix to increase our tenants in
these sectors which tend to be less impacted by e-commerce. Refer to Tenant Profile section of this MD&A for an overview of our
tenant mix. Our residential strategy further addresses these trends, in part, as it not only re-purposes the existing retail, but also
focuses on the service component on today’s changing retail landscape.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
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Canadian retail environment
We expect fundamentals in Canadian retail real estate to remain steady in 2018, particularly necessity-based retail, value retail,
and service and experience oriented retail such as restaurants and entertainment. As the retail landscape continues to evolve,
innovative responses to reorienting retail spaces in order to create value are evident in today’s marketplace. For locations which
are centrally located in high demand areas, the integration or change in use can, in fact, maximize the value of the real estate
and enhance the productivity of the space. A good example of this is Hudson Bay’s announcement in 2017 to re-purpose its
excess retail space to office space for lease in certain of its prime locations.
The Target departure, Sears and other announced store closures that have occurred over the past two to three years have
contributed to the overall negative market sentiment towards retail real estate and created a more cautious environment for
retailers. However, relative to the U.S retail markets, the fundamentally lower retail space per capita in Canada, tighter controlled
municipal zoning bylaws, and higher distribution costs in Canada given its geographic diversity, as well as sound retail tenant
base with solid financial strength, will benefit the retail real estate market in Canada over the long run as tenants and landlords
adapt to the changing retail environment.
The recent store closures by Sears Canada are not expected to have a material impact on RioCan operations, but they are
expected to dampen overall market sentiment towards retail real estate and put further pressure on leasing and rent growth in
secondary market assets, which further supports the Trust's strategy to accelerate its major markets focus.
In Q4 2017, RioCan and its partner Hudson Bay Company secured a surrender agreement with Sears Canada Inc. for its location
at RioCan Oakville Place, in Oakville, Ontario. By terminating the long-term lease with Sears, the co-owners gained the ability to
re-tenant the premises with dynamic retailers at current market rents. The lease surrender agreement also removes development
restrictions held by Sears which will allow the co-owners to pursue potential intensification at the site given its close proximity to
the Queen Elizabeth Highway and a Go Transit Station. In addition, at Garden City Shopping Centre in Winnipeg, Manitoba,
RioCan and its partner (Bayfield Realty Advisors) acquired the freehold interest in the Sears location. The acquisition of the
Sears premises provides the co-owners the opportunity to replace the defunct anchor with dynamic retailers that will enhance the
performance of the recently renovated Centre, and unlocks existing density on the site that will permit further commercial
development.
Strategy
Acceleration of Canadian major markets focus
On October 2, 2017, RioCan announced its plan to accelerate its portfolio focus in Canada’s six major markets through the sale
of approximately 100 of its properties located primarily in secondary markets across Canada over the next two to three years. On
completion, RioCan expects to generate in excess of 90% of its annualized rental revenue from Canada’s six major markets
(currently 76.1%). This strategy will further enhance the quality, growth profile and resilience of the Trust’s portfolio of retail
focused, increasingly mixed-use properties located in prime, high density, transit oriented areas where Canadians want to shop,
live and work.
With the recent announcement, our Canadian growth strategy has evolved to now entail the following:
•
The sale of over $2.0 billion of income properties primarily located in Canada’s secondary markets, including certain non-
core assets in major markets, representing approximately 100 of RioCan’s properties to be sold in phases over the next two
to three years. The sales are expected to generate total net proceeds of approximately $1.5 billion;
• Repurchase and cancellation of the Trust’s units through the Trust’s Normal Course Issuer Bid (NCIB) program while
maintaining its strong credit fundamentals. It is estimated that approximately half of the net proceeds from the sales of
properties will be used for its NCIB program;
•
Suspension of its Distribution Reinvestment Plan (DRIP) effective November 1, 2017, in order to maximize the effectiveness
of the NCIB;
• Continued investment of approximately $300 million to $400 million per year into RioCan’s robust development program,
which is focused exclusively in Canada’s six major markets and focused on commercial and mixed-use projects, including a
residential intensification program that includes purpose-built, transit-oriented projects seeking to capitalize on our
development capabilities and unlock the intrinsic values of our existing properties that are located in high growth and high
population hubs of Canadian major markets;
•
•
Achievement of strong organic growth by leveraging our existing strengths, such as our strong relationships with high quality
tenants and partners, our economies of scale, diversity and experience; and
Financial strength through prudent capital management ensuring continued access to cost effective and diversified capital in
support of our investment and development strategies, such as our $1 billion revolving unsecured operating line of credit.
RioCan intends to complete the aforementioned sales in a targeted and phased approach over the next two to three years, which
will help mitigate the risks associated with the sale of a portfolio of this size. Given the preliminary nature of these planned dispositions
and the flexibility that the Trust intends to maintain over the disposition process, there can be no assurance regarding the timing or
expected proceeds of the planned asset sales.
In the four months since the October 2017 announcement, RioCan has successfully completed or entered into firm agreements to
sell approximately $511.9 million of properties in secondary markets representing approximately 25% of the announced
disposition target. In addition, the Trust has entered into three conditional agreements as of February 13, 2018 to sell five
properties in Ontario and Quebec for total sale proceeds of $58.0 million. The expected $569.9 million aggregate proceeds from
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
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the sale of these assets are in line with the Trust's IFRS valuations. Refer to Business Overview section of this MD&A for details
on the closed, firm or conditional transactions.
RioCan has also since purchased and cancelled 3.9 million units at an average purchase price of $25.30 per unit at a total cost of
$99.6 million.
Mixed-Use Residential Development and NAV Growth
Over the past 24 years, we have accumulated a robust portfolio of income producing properties with significant redevelopment
potential that are strategically situated on or near existing or government approved transit lines. We are focused on optimizing the
value of our existing properties through our development program, diversifying our portfolio into residential real estate, and
advancing our development pipeline to deliver FFO and NAV growth to our unitholders and value to our tenants and meet the
evolving needs of the communities we serve.
RioCan is committed to ensuring that individual properties in our portfolio are utilized to their highest and best use over the long
term. While there are numerous ways to utilize the existing properties beyond their current use of conventional retail centres,
RioCan has focused on mixed-use projects containing predominantly multi-residential (both rentals and condominiums), retail
and, to a lesser extent, office rental buildings.
In addition to opportunities being identified within the existing portfolio, certain properties owned as part of our real estate joint
venture with HBC have the strong potential for intensification as urban mixed-use properties.
The Trust will continue to pursue a disciplined approach to our development program with a focus on major urban markets. The
markets of Toronto, Calgary, and Ottawa are the principal focus of the Trust's development program. We will continue to use a
staggered approach in our development program to avoid unnecessary concentration of development projects in a single period
of time. This will allow us to balance our development risk exposure and effectively manage our capital and personnel resources.
Furthermore, RioCan will continue to build our team to carry forward the residential development initiative as it evolves, drawing
from its existing areas of expertise. The current team is comprised of existing RioCan executives as well as third-party
consultants. As the initiative continues to grow, additional resources may be added to the platform to facilitate such growth,
including bringing either new or existing partners that have residential development and management expertise on a property-by-
property basis.
Acquisitions
There is greater competition for acquisitions of income producing properties because of a significant number of well-capitalized
high net worth investors and institutions seeking quality investments, especially due to the current low interest rate environment in
Canada. Given the competitive nature of the acquisition market and limited supply of acquisitions that meet RioCan's criteria in
selected markets, it is not currently expected that acquisitions of income producing properties will be a significant growth driver in
the near term. On occasion, management may be approached by a partner interested in disposing of its interest in a co-owned
property. Our ability to acquire our co-owners' interests in property where we already have an efficient management structure in
place represents a competitive advantage because we can acquire managing interests in highly desirable assets that are
unavailable on the open market. Consistent with our income producing property acquisition strategy noted above, we will
continue to maintain a disciplined approach in evaluating these acquisition opportunities to ensure that they meet our investment
criteria.
In addition, the Trust will evaluate and seize opportunities to acquire selective sites suitable for development, such as our recent
acquisitions of properties in the prestigious Yorkville neighbourhood of Toronto to potentially develop into 0.5 million square feet of
luxury condominiums, retail uses and 71 residential rental replacement units. Such acquisitions for development purpose will be
very selective and will have to meet our investment criteria and fit into our overall development program.
Capital Management
RioCan is committed to prudent management of its balance sheet. Management believes that the quality of RioCan’s assets and
strong balance sheet are attractive to both lenders and equity investors, and should enable RioCan to continue to access multiple
sources of capital at competitive rates.
To support growth, RioCan employs a three-fold capital strategy: to provide the capital necessary to fund growth; to maintain
sufficient flexibility to access capital in many forms, both public and private; and to manage the overall financial structure in a
fashion that preserves investment grade credit ratings. RioCan strives for an optimal financial structure to drive appropriate risk-
adjusted total returns. The principal objectives of the capital strategy are to:
•
•
optimize the risk-adjusted cost of capital through an appropriate mix of debt and equity;
raise debt from a variety of sources and maintain a well-staggered maturity schedule and a large pool of unencumbered
assets;
• maintain and expand as necessary significant committed undrawn loan facilities to support current and future business
requirements;
•
•
actively manage financial risks, including interest rate, foreign exchange, liquidity and counterparty risks; and
selectively sell assets as part of actively managing the portfolio and to increase the portfolio weighting to the six urban
markets in Canada as a means to strategically recycle capital.
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Sustainability
Embedding Sustainability
Sustainability is another key component of RioCan's strategy. The Trust's objective for sustainability is to be among the leaders
in embedding sustainability practices in its business model. To the Trust, embedding sustainability means that it enhances its
business model and management approaches and incorporates sustainability in developments, operations, investment activities
and corporate functions.
RioCan's platform for sustainability focuses on three areas. To achieve the sustainability vision, RioCan has centered on people,
community and environmental leadership. 2017 was the Trust's first year of implementing its sustainability policy and it has made
significant progress on its sustainability plan, achieving its milestones. Key accomplishments this year include:
•
•
•
•
Formalization of a sustainability policy;
Participation in the Global Real Estate Sustainability Benchmark ("GRESB") Survey for the first time;
Inclusion of a new performance indicator for Management within our performance evaluation and goals. The specific
indicator is to improve year over year sustainability performance of our portfolio;
Implementation of sustainability guidelines for development projects and existing properties;
• Collection of employee feedback on sustainability drivers via an engagement survey;
•
•
•
•
Establishment of a baseline for sustainability: energy intensity, water intensity and Greenhouse Gas ("GHG") emissions.
RioCan's GHG emissions and energy consumptions both decreased from 2015 to 2016 (i);
Establishment of sustainability standards in our development projects; the Trust is planning for Toronto Green Standard
(TGS) Tier II for its The Well and Sunnybrook Plaza projects and is pursuing LEED Gold & TGS Tier II for its Yonge
Sheppard Centre project.
Teaming with Enwave Energy Corporation (“Enwave”) and our partner Allied to extend Enwave’s existing deep lake water
cooling and hot water distribution networks by building a new energy storage facility housed at The Well in downtown
Toronto. The thermal energy storage facility will store 12 million-litres of temperature-controlled water fed by Enwave’s
existing deep lake water cooling system and a newly developed hot water loop. It will provide the first low-carbon, resilient
cooling and heating option for energy within the property and to the surrounding communities; and
Incorporation of a geothermal energy system for heating and cooling at Gloucester Residential development in Ottawa with
Killam, which is under construction and estimated to be completed in 2019.
(i) Energy consumption data was compiled using the recoverable utility account invoices. GHG emissions were calculated based on the direct energy
(e.g., natural gas) and indirect energy (e.g., electricity) consumed at RioCan properties. Properties where RioCan owned less than a 25% share
were not included in calculating the energy consumption and GHG emissions.
RioCan's sustainability focus in 2018 will be sustainability performance measurement and further engaging the various
stakeholder groups such as employees, tenants, partners, investors and communities. As an owner, operator and developer of a
large real estate portfolio, RioCan has the responsibility to consider the sustainability impacts of our activities and find
opportunities to improve.
Sustainability Governance
RioCan's Sustainability Steering Committee is comprised of cross functional executive and leadership team members that
oversee the sustainability strategy implementation and drive performance improvements. Steering Committee members sponsor
and provide guidance on sustainability initiatives within the organization and enable performance measurement. In addition,
RioCan has a dedicated environmental and sustainability team to manage day-to-day sustainability strategy implementation.
For RioCan's sustainability policy and additional information about its sustainability strategy and plan, visit RioCan's web site
under Social Responsibility.
PRESENTATION OF FINANCIAL INFORMATION AND NON-GAAP MEASURES
Presentation of Financial Information
Unless otherwise specified herein, financial results, including related historical comparatives, contained in this MD&A are based
on RioCan’s 2017 Annual Consolidated Financial Statements. In connection with the sale of our U.S. assets in 2016, the net
income associated with our former U.S. geographic segment is presented as a single line in the consolidated statements of
income as discontinued operations.
Non-GAAP Measures
In addition to reported IFRS measures, industry practice is to evaluate real estate entities giving consideration, in part, to certain
non-IFRS performance measures described below, such as funds from operations, net operating income and same property net
operating income growth. Management believes that these measures are helpful to investors because they are widely
recognized measures of a REIT's performance and provide a relevant basis for comparison among real estate entities. In
addition to the IFRS results, we also use these measures internally to measure the operating performance of our investment
property portfolio. These measures are not in accordance with IFRS generally accepted accounting principles (GAAP) and have
no standardized definition prescribed by IFRS and, as such, our computation of these non-GAAP performance measures might
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
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not be comparable to similar measures reported by other issuers. Non-GAAP measures should not be considered as alternatives
to net income or comparable metrics determined in accordance with IFRS as indicators of RioCan’s performance, liquidity, cash
flows and profitability. We supplement our IFRS measures with these non-GAAP measures to aid in assessing our core
performance and we report these additional measures so that investors may do the same. Management believes that the
supplementary non-GAAP measures described below provide readers with a more comprehensive understanding of
management's perspective on its operating performance.
The Real Property Association of Canada (REALpac) issued a whitepaper in February 2017 prescribing revised definitions for
certain non-GAAP financial measures of cash flow and operating performance commonly used by the Canadian real estate
industry. RioCan has reviewed these guidelines and has adopted certain measures, where appropriate, commencing with our
first quarter 2017 reporting. Further details are included below under the headings Funds From Operations (FFO) and Adjusted
Cash Flow From Operations (ACFO).
The following discussion describes the non-GAAP measures RioCan management currently uses in evaluating its operating
results. For greater clarity, each measure defined below includes the results from both continuing and discontinued operations on
a combined basis.
Funds From Operations (FFO)
FFO is a non-GAAP financial measure of operating performance widely used by the Canadian real estate industry based on the
definition set forth by REALpac, which published a whitepaper describing the intended use of FFO last revised in April 2014 and
restated in February 2017. It is RioCan's view that IFRS net income does not necessarily provide a complete measure of
RioCan's recurring operating performance. This is primarily because IFRS net income includes items such as fair value changes
of investment property that are subject to market conditions and capitalization rate fluctuations and gains and losses on the
disposal of investment properties, including associated transaction costs and taxes, which are not representative of a company's
recurring operating performance. For these reasons, RioCan has adopted REALpac's definition of FFO, which was created by
the real estate industry as a supplemental measure of recurring operating performance.
FFO is computed as IFRS consolidated net income attributable to RioCan unitholders adjusted for items such as, but not limited
to, unrealized changes in the fair value of investment properties and transaction gains and losses on the acquisition or disposal of
investment properties (including related transactions costs and income taxes) calculated on a basis consistent with IFRS.
FFO should not be construed as an alternative to net income or cash flows provided by or used in operating activities determined
in accordance with IFRS. RioCan’s method of calculating FFO is in accordance with REALpac’s recommendations, but may differ
from other issuers' methods and, accordingly, may not be comparable to FFO reported by other issuers. A reconciliation of FFO to
IFRS net income can be found under Results of Operations section in this MD&A.
RioCan regards FFO as a key measure of operating performance and as a key measure for determining the level of employee
incentive based compensation. RioCan also uses FFO in assessing its distribution paying capacity.
Effective January 1, 2017, we are no longer reporting Operating Funds From Operations (OFFO) as discussed in our 2016
Annual Report.
As noted in the Future Changes in Accounting Policies section of this MD&A, the Trust intends to adopt the new standard IFRS 9
- Financial Instruments (“IFRS 9”) on the required effective date of January 1, 2018. One impact of adopting this new standard is
that the unrealized gains or losses on available-for-sale marketable securities will be included in IFRS net income, whereas they
are recorded in other comprehensive income in 2017 and prior years consolidated financial statements. Based on FFO definition
currently set forth by REALpac, which was revised in April 2014 and restated in February 2017 before the effective date of this
new accounting standard, the unrealized gains or losses on available-for-sale marketable securities would be included in FFO, as
a result of adopting IFRS 9. However, the Trust believes that including such unrealized gains or losses on available-for-sale
marketable securities in FFO does not represent the recurring operating performance of the Trust. As a result, effective January
1, 2018 when the Trust adopts the IFRS 9, RioCan’s method of calculating FFO starting in 2018 will be in compliance with
REALpac’s definition of FFO except that RioCan will exclude these unrealized gains or losses on available-for-sale marketable
securities in its calculation of FFO. For further clarity, RioCan will continue to include realized gains or losses on available-for-
sale marketable securities in its calculation of FFO as it has been based on the REALpac’s definition of FFO.
Adjusted Cash Flows From Operations (ACFO)
In February 2017, REALpac issued a whitepaper, introducing a new non-GAAP measure called Adjusted Cash Flow from
Operations (ACFO), which is intended as a measure for sustainable economic cash flow available for distributions. RioCan has
reviewed the whitepaper guideline and adopted ACFO as a supplementary non-GAAP measure of sustainable cash flow and has
no longer reported the previously reported adjusted funds from operations (AFFO), effective January 1, 2017. ACFO is used by
management as an input, together with FFO, in assessing RioCan's distribution payout ratios.
ACFO is computed as cash provided by (used in) operating activities per the IFRS consolidated statement of cash flows plus, but
not limited to, the following adjustments:
•
•
•
includes adjustments for certain working capital items that are not considered indicative of sustainable economic cash flow
available for distribution. Examples include, but are not limited to, working capital changes relating to the following:
residential inventory and developments, prepaid realty taxes and insurance, interest payable and receivable, sales and other
indirect taxes payable to or receivable from applicable governments, income taxes payable and receivable and transaction
cost accruals relating to acquisitions and dispositions;
includes cash distributions from equity accounted for investments;
adds back transaction-related income statement expenses associated with dispositions and acquisitions;
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
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•
•
•
includes realized gains or losses on available-for-sale marketable securities;
adds back taxes relating to non-operating activities, such as taxes relating to sale of our U.S. portfolio in 2016;
deducts normalized capital expenditures, which include both third-party leasing commissions and capital spending related to
maintaining the physical condition and the existing earnings capacity of the Trust's income property portfolio (see below for a
further description of normalized capital expenditures); and
•
adds back internal leasing costs relating to development projects.
The REALpac ACFO definition effectively includes working capital fluctuations relating to recurring operating activities in ACFO,
such as working capital changes relating to trade accounts receivable and trade accounts payable and accrued liabilities. This, in
management's view, introduces greater fluctuations in quarterly and twelve-month trailing ACFO. As a result, RioCan uses
ACFO, together with FFO, in assessing its distribution payout ratios.
ACFO should not be construed as an alternative to cash flows provided by or used in operating activities determined in
accordance with IFRS. RioCan’s method of calculating ACFO is in accordance with REALpac’s recommendations, but may differ
from other issuers' methods and, accordingly, may not be comparable to ACFO reported by other issuers. A reconciliation of
ACFO to IFRS cash flow from operating activities is found under the Results of Operations section in this MD&A.
The adoption of the IFRS 9 effective January 1, 2018, is not expected to have an impact on ACFO with respect to unrealized
gains and losses on available-for-sale marketable securities. As a result, The Trust’s calculation of ACFO will continue to be in
accordance with REALpac’s ACFO recommendations after the adoption of IFRS 9 effective January 1, 2018.
RioCan does not report on the new earnings metric, adjusted funds from operations (New AFFO), as introduced by REALpac in
February 2017. RioCan management does not use the New AFFO as a measure of its recurring operating performance and
believes that the disclosures in the subsections "FFO", "ACFO" and "Net Operating Income (NOI)" included in the Results of
Operations section in this MD&A provide sufficient information for readers to compute the New AFFO. Management has,
therefore, opted not to report the New AFFO in order to reduce the number of non-GAAP measures reported in our MD&A.
Normalized capital expenditures
Normalized capital expenditures are an estimate made by management of the amount of ongoing capital investment required to
maintain the condition of the physical property and current rental revenues. Management considers a number of items in
estimating normalized capital expenditures relative to the growth in the age and size of the Trust's property portfolio. Such factors
include, but are not limited to, review and analysis of seven to ten years of historical capital spending, comparison of each
quarter's annualized actual spending activity to the annual budgeted capital expenditures as approved by our Board of Trustees
at the beginning of each year and management's expectations and/or plans for the properties.
RioCan does not obtain support from independent sources for its normalized capital expenditures but relies on internal diligence
and expertise in arriving at this management estimate. RioCan’s long tenured management team has extensive experience in
commercial real estate and in-depth knowledge of the property portfolio. As a result, RioCan believes that management is best
suited to make the assessment of normalized capital expenditures without independent third party sources.
Since actual capital expenditures can vary widely from quarter to quarter depending on a number of factors, management
believes that normalized capital expenditures are a more relevant input than actual capital expenditures in assessing a REIT's
distribution payout ratio and for determining an appropriate level of sustainable distributions over the long run. The number of
factors affecting the quarterly variations in actual capital expenditures include, but are not limited to, lease expiry profile, tenant
vacancies, age and location of the properties, general economic and market conditions, which impact the level of tenant
bankruptcies and acquisitions and dispositions.
As part of formulating its estimate of normalized capital expenditures, the Trust reviews its actual capital spending levels based
on property performance and type of spend (e.g. HVAC, elevator, roof, parking lot, electrical, etc.) to determine the amount of
ongoing capital investment required to maintain the condition of the physical property and current rental revenues. This review is
done with representation and input from RioCan's cross-functional teams. Short-term fluctuations in actual capital expenditures
are analyzed to remove any expenditures that are determined to not represent the level of ongoing maintenance capital
investment. For example, during periods of adverse market conditions where RioCan experiences a period of higher tenant
turnover, short-term spikes in leasing, re-tenanting costs and landlord work would not necessarily result in a material increase to
the level of ongoing capital investment over the life cycle of a property, and accordingly, are removed from the actual costs for the
purpose of determining normalized capital expenditures. Property capital expenditures that are generally expected to add to the
overall earnings capacity of the property are considered revenue enhancing capital expenditures by management and are also
excluded in determining the normalized capital expenditures.
In determining the Trust’s 2017 normalized capital expenditures, the Trust used the above process and analyzed its historical
seven to ten year actual maintenance capital expenditures for its Canadian income-producing properties. It determined the ten-
year and seven-year average maintenance capital expenditures per square foot (PSF) were $1.16 PSF and $1.22 PSF,
respectively. The analysis excluded revenue enhancing capital expenditures for reasons noted above. After giving consideration
to a number of factors impacting these historical data points as discussed earlier in this section of the MD&A, management
estimated $1.22 PSF as more representative of normalized maintenance capital expenditures on a going-forward basis which
was within the historical seven to ten year average range. This rate was applied to the estimated 2017 Canadian income-
producing NLA of 43.2 million square feet, resulting in the $52.5 million normalized capital expenditure estimate for 2017.
For the year ended December 31, 2017, the Trust's maintenance capital expenditures amounted to $51.0 million, $1.5 million
lower than the $52.5 million normalized capital expenditure estimate for the year. IFRS capital expenditures are further discussed
and analyzed under the section Capital Expenditures on Income Properties in this MD&A.
38
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Given the Trust's announcement on October 2, 2017 to sell over $2.0 billion of income properties over the next two to three years
with its acceleration of its major markets focus strategy, normalized capital expenditures are expected to decrease over the next
two to three years as the Trust sells most of its secondary market properties. The Trusts' remaining properties located in
Canada's six major markets tend to have higher tenant retention and lower average age, resulting in lower average maintenance
capital expenditures on per square foot basis relative to the Trust's secondary markets properties. The Trust's income producing
NLA is also expected to decrease as it sells secondary markets properties, as evidenced by the approximately 1.1 million square
feet decrease in income producing NLA from September 30, 2017 to December 31, 2017 primarily as a result of sales of six
secondary markets properties subsequent to the October 2017 announcement. As a result, the Trust determines that it is no
longer reasonable to use its historical average approach in estimating its 2018 normalized capital expenditures. Instead, it uses
its 2018 maintenance capital expenditure budget as its normalized capital expenditures for 2018, which amounts to $45.0 million,
representing an average of $1.16 per square foot on a projected average income-producing NLA of 38.8 million square feet for
the year.
FFO and ACFO Payout Ratios
FFO and ACFO payout ratios are supplementary non-GAAP measures of a REIT's distribution paying capacity. FFO and ACFO
payout ratios are computed on a rolling twelve month basis by dividing total common unitholder distributions paid (including
distributions paid under RioCan's distribution reinvestment program) by FFO and ACFO, respectively, over the same period.
RioCan’s method of calculating FFO and ACFO payout ratios may differ from other issuers’ methods and, accordingly, may not be
comparable to payout ratios reported by other issuers.
As previously discussed, the REALpac ACFO definition includes net working capital increases and decreases relating to
operating activities, which tend to fluctuate period over period in the normal course of business. In management's view, this
tends to introduce greater fluctuations in three and twelve-month trailing ACFO calculations. As a result, RioCan management
uses the FFO payout ratio in addition to the ACFO payout ratio in assessing its distribution paying capacity, as FFO is not subject
to such working capital fluctuations.
Net Operating Income (NOI)
NOI is a non-GAAP measure and is defined by RioCan as rental revenue from income properties less property operating costs
adjusted to normalize the impact of the application of the requirements of International Financial Reporting Interpretation
Committee Issue 21, Levies (IFRIC 21) by matching the pro-rata expense over the period of property ownership with the actual
timing of tenant cost recoveries. The provisions of IFRIC 21 mainly relate to the timing of the liability recognition of certain U.S.
property taxes. IFRIC 21 is, therefore, no longer applicable since the sale of our U.S. property portfolio in May 2016.
For the calculation of NOI, rental revenue includes all amounts earned from tenants related to lease agreements, including
property tax and operating cost recoveries, to the extent recoverable under tenant leases. Amounts payable by tenants to
terminate their lease prior to the contractual expiry date (lease cancellation fees) are included in rental revenue for the calculation
of NOI. The amount of property taxes and operating costs that can be recovered from tenants is impacted by property vacancy
and fixed cost recovery tenancies.
Management believes that NOI is a meaningful supplementary measure of operating performance of the Trust's income
producing properties in addition to the most comparable IFRS measure, which we believe is operating income. The IFRS
measure of operating income also includes residential inventory gains and losses as well as property and asset management
fees earned from co-owners. While management considers its residential inventory and portfolio management activities part of
its business operations, and thus operating income, such revenues are not part of how we evaluate the operating performance of
our income producing properties. As such, we report NOI as a useful supplementary non-GAAP measure to report the operating
performance of our income producing properties.
NOI is an important measure of the income generated from the income producing properties and is used by the Trust in
evaluating the performance of the portfolio, as well as a key input in determining the value of the income producing portfolio.
RioCan’s method of calculating NOI may differ from other issuers’ methods and, accordingly, may not be comparable to NOI
reported by other issuers.
Same Property NOI
Same property NOI is a non-GAAP financial measure used by RioCan to assess the period over period performance of those
properties owned and operated by RioCan in both periods. In calculating same property NOI growth, NOI for the period is
adjusted to remove the impact of lease cancellation fees and straight-line rent revenue in order to highlight the 'cash impact' of
contractual rent increases embedded in the underlying lease agreements. Same property performance is a meaningful measure
of operating performance because it allows management to assess rent growth and leasing activity of its portfolio on a same
property basis and the impact of capital investments.
RioCan uses same property NOI growth as its primary measure of portfolio performance and we are no longer reporting same
store NOI growth, effective January 1, 2017. Refer to our 2016 MD&A for further additional details.
Enterprise Value
Enterprise value is a non-GAAP measure calculated at the reporting period date as the sum of RioCan's total debt measured on a
proportionate basis, common unit market capitalization and preferred unit market capitalization. This non-GAAP measure is used
by RioCan management and the industry as a measure of total value of the REIT based on the market price of debt and equity
instead of IFRS GAAP total assets.
39
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
RioCan’s Proportionate Share
Debt metrics, such as those described below, are shown on both an IFRS and a RioCan proportionate basis (as defined below).
Unless otherwise indicated, comparative financial information has been updated to reflect the current year's presentation.
All references to “RioCan’s proportionate share” refer to a non-GAAP financial measure representing RioCan’s proportionate
interest in the financial position and results of operations of its entire portfolio, taking into account the difference in accounting for
joint ventures using proportionate consolidation versus equity accounting. Management considers certain results presented on a
proportionate basis to be a meaningful measure because it is consistent with how RioCan and its partners manage the net assets
and assess operating performance of each of its co-owned properties. The Trust currently accounts for its investments in joint
ventures and associates using the equity method of accounting.
The remaining definitions outlined below pertain to measures and/or inputs to our financial leverage, coverage ratios and other
key metrics that we use to manage capital and to assess our liquidity, borrowing capacity and cost of capital. All of these
measures include the results of both continuing and discontinued operations. In our opinion, the following ratios calculated on the
basis of the combined continuing and discontinued operations provide a more meaningful measure of financial performance with
respect to the periods reported.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
Adjusted EBITDA is a non-GAAP measure that is used by management as an input in several of our debt metrics, providing
information with respect to certain financial ratios that we use in measuring our debt profile and assessing our ability to satisfy
obligations, including servicing our debt. Adjusted EBITDA is used as an alternative to IFRS net income because it excludes
major non-cash items (including, but not limited to, depreciation and amortization expense, unit-based compensation costs, fair
value gains and losses on investment properties, and unrealized gains or losses on available-for-sale marketable securities upon
adoption of IFRS 9 effective January 1, 2018), interest costs, current and deferred tax expenses (recoveries), transaction gains
and losses on the disposition of investment properties and equity accounted investments, transaction costs and other items that
management considers either non-operating in nature or related to the capital cost of our investment properties. For greater
clarity, realized gains and losses on the disposition of available-for-sale marketable securities have been and will continue to be
included in Adjusted EBITDA for purposes of management assessing the Trust's ongoing ability to satisfy its obligations and
service its debt after the adoption of IFRS 9 effective January 1, 2018.
A reconciliation of Adjusted EBITDA to IFRS net income and the debt metrics that utilize Adjusted EBITDA are presented under
Capital Resources and Liquidity - Debt Metrics section of this MD&A.
Debt to Adjusted EBITDA
Debt to adjusted EBITDA is a non-GAAP measure of our financial leverage calculated on a trailing twelve month basis and is
defined as our quarterly average total debt (net of cash and cash equivalents) divided by Adjusted EBITDA. Debt to Adjusted
EBITDA is calculated and presented in the Debt Metrics section of this MD&A on both a RioCan's proportionate share basis and
using IFRS reported amounts.
Debt Service Coverage
Debt service coverage is a non-GAAP measure calculated on a trailing twelve month basis and is defined as Adjusted EBITDA
divided by the sum of total interest costs (including interest that has been capitalized) and scheduled mortgage principal
amortization. It measures our ability to meet our debt service obligations on a trailing twelve month basis. Debt service coverage
is calculated and presented in the Debt Metrics section of this MD&A on both a RioCan's proportionate share basis and using
IFRS reported amounts.
Interest Coverage
Interest coverage is a non-GAAP measure calculated on a trailing twelve month basis and is defined as Adjusted EBITDA divided
by total interest costs (including interest that has been capitalized). It measures our ability to meet our interest cost obligations on
a trailing twelve month basis. Interest coverage is calculated and presented in the Debt Metrics section of this MD&A on both a
RioCan's proportionate share basis and using IFRS reported amounts.
Fixed Charge Coverage
Fixed charge coverage is a non-GAAP measure calculated on a trailing twelve month basis and is defined as Adjusted EBITDA
divided by total interest costs (including interest that has been capitalized) and distributions declared and/or paid to common and
preferred unitholders. It measures our ability to meet our interest and unitholder distribution obligations on a trailing twelve month
basis. Fixed charge coverage is calculated and presented in the Debt Metrics section of this MD&A on both a RioCan's
proportionate share basis and using IFRS reported amounts.
Percentage of NOI generated from unencumbered assets
Percentage of NOI generated from unencumbered assets is a non-GAAP measure defined as the annualized in-place NOI from
unencumbered assets as of the end of a reporting period divided by total annualized NOI as of the end of the same reporting
period. Unencumbered assets are investment properties that have not been pledged as security for debt.
Unencumbered assets to unsecured debt
The unencumbered asset to unsecured indebtedness ratio is a non-GAAP measure calculated as the carrying value of all
investment properties that have not been pledged as security for debt divided by total unsecured indebtedness.
40
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Selected Annual Information
(thousands of dollars, except where otherwise noted)
Revenue
Net income from continuing operations
Net income
FFO (i)
ACFO (i)
Weighted average common units outstanding – diluted (in thousands)
Per unit basis (diluted)
Net income from continuing operations
Net income
FFO (i)
Common unitholder distributions
Key Ratios
Same property NOI growth (decline) % (i)
Payout ratios for the twelve months ended December 31:
FFO (i) (iv)
ACFO (i) (iv)
As at
Total assets
Total debt (ii)
Debt to total assets (i) (iii)
Debt to total assets (RioCan's proportionate share) (i) (iii)
Interest coverage (RioCan's proportionate share) (i) (v)
Debt to adjusted EBITDA (RioCan's proportionate share) (i) (v)
Weighted average contractual interest rate
Unencumbered assets to unsecured debt (i)
% NOI generated from unencumbered assets (i)
2017
2016
2015
1,155,219
1,133,332
1,087,736
708,265
715,286
584,597
588,462
326,929
683,151
830,838
547,879
484,185
325,665
417,566
142,437
622,364
603,209
319,983
$
$
$
$
2.16
2.18
1.79
1.41
$
$
$
$
2.06
2.51
1.68
1.41
$
$
$
$
1.26
0.40
1.94
1.41
2.1%
0.5%
(1.8)%
78.8%
78.3%
83.6%
94.6%
72.7%
75.0%
December 31,
2017
December 31,
2016
December 31,
2015
14,376,578
14,173,760
15,996,491
5,931,965
5,653,592
7,413,370
41.0%
41.4%
3.84
7.57
3.37%
226%
56.7%
39.7%
40.0%
3.36
8.10
3.54%
240%
49.5%
46.1%
46.3%
3.07
8.34
3.65%
166%
25.1%
(i) Represents a non-GAAP measure. RioCan's method of calculating non-GAAP measures may differ from other reporting issuers' methods and
accordingly may not be comparable. For definitions and basis of presentation of RioCan's non-GAAP measures, refer to the section Presentation of
Financial Information and Non-GAAP Measures section in this MD&A.
(ii) Total debt is defined as the sum of mortgages payable, lines of credit and other bank loans, mortgages on properties held for sale and debentures
payable.
(iii) Debt to total assets is a non-GAAP measure and is calculated as total debt less cash and cash equivalents, divided by total assets, excluding cash
and cash equivalents.
(iv) Calculated on a trailing twelve month basis. For further discussion of the Trust's FFO and ACFO payout ratios, refer to the sections FFO and ACFO in
this MD&A.
(v) Calculated on a trailing twelve month basis. Refer to the Debt Metrics section of this MD&A for further details.
41
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
2017 Financial Highlights
Due to the sale of our U.S. property portfolio in the second quarter of 2016, our results are presented on both a continuing and
discontinued operations basis below.
Net income attributable to unitholders
(thousands of dollars, except per unit amounts)
Net income (loss) attributable to unitholders:
Continuing operations
Discontinued operations
Three months ended
December 31,
Year ended
December 31,
2017
2016
2017
2016
$
209,735
$
178,472
$
708,265
(62)
(14,013)
7,021
Net income attributable to unitholders
$
209,673 $
164,459 $
715,286
Net income (loss) per unit attributable to unitholders (basic):
Continuing operations
Discontinued operations
$
0.64
$
—
Net income per unit attributable to unitholders (basic)
$
0.64 $
Net income (loss) per unit attributable to unitholders (diluted):
Continuing operations
Discontinued operations
$
0.64
$
—
Net income per unit attributable to unitholders (diluted)
$
0.64 $
0.54
(0.04)
0.50
0.54
(0.04)
0.50
$
$
$
$
2.16
0.02
2.18
2.16
0.02
2.18
$
$
$
$
$
$
683,060
147,687
830,747
2.06
0.45
2.51
2.06
0.45
2.51
Continuing Operations
2017
Net income from continuing operations attributable to unitholders for the year ended December 31, 2017 is $708.3 million
compared to $683.1 million during the same period in 2016, representing an increase of $25.2 million. 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 is $571.3 million compared to $500.2 million in 2016, representing an increase of $71.2 million or
14.2%.
The increase of $71.2 million is largely the net effect of the following:
•
•
•
•
•
•
$36.4 million of 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 related to the sale of available-for-sale marketable securities;
$8.1 million in interest savings due mainly to lower average debt balances outstanding as a result of debt repayments using
proceeds from the sale of the U.S. portfolio in 2016, and the refinancing of debt 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 due to a higher gain on the sale of an investment property during the third quarter of
2016; and
$4.6 million less dividend income from available-for-sale marketable securities due to such sales since Q3 2016.
For a discussion of fair value adjustments during the year ended December 31, 2017, refer to the Other income section of this
MD&A.
Q4 2017
Net income from continuing operations attributable to unitholders for the three months ended December 31, 2017 is $209.7
million compared to $178.5 million during the same period in 2016, representing an increase of $31.3 million. 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 is $138.7 million compared to $134.1 million in 2016, representing an increase of $4.6 million or 3.4%.
The increase of $4.6 million is largely the net effect of the following:
•
•
•
•
•
•
•
$5.0 million of income primarily due to strong same property performance;
$6.8 million increase in gains related to the sale of available-for-sale marketable securities; and
$1.1 million in interest savings due to the same reasons as noted above for annual interest savings; partially offset by
$4.1 million in higher general and administrative expenses primarily due to accelerated depreciation of certain management
information systems;
$2.6 million higher other costs as a result of a one-time fair market value adjustment to a loan receivable;
$1.5 million less dividend income from available-for-sale marketable securities due to such sales since Q3 2016; and
$0.7 million in lower income from equity accounted investments.
For a discussion of fair value adjustments during the quarter, refer to the Other income section of this MD&A.
42
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Discontinued Operations
2017
Net income from discontinued operations attributable to unitholders for the year ended December 31, 2017 is $7.0 million
compared to net income of $147.7 million in the same period in 2016, representing a decrease of $140.7 million. During May
2016, the Trust sold its U.S. property portfolio and discontinued its operations in the U.S. The net income of $7.0 million during
2017 includes the impact of a reversal of an accrual as a result of a lower settlement of a dispute with a former tenant located in
the U.S., partial reversal of bad debt provisions based on receivable collections, positive post-closing working capital
adjustments, general and administrative recoveries (state tax refunds) and current income tax recoveries as a result of foreign
exchange translation and accrual adjustments.
Q4 2017
Net loss from discontinued operations attributable to unitholders for the three months ended December 31, 2017 is $0.1 million
this quarter compared to net loss of $14.0 million in the same period in 2016, representing an improvement in net income of
$14.0 million from the prior period. The net loss in the comparable quarter in 2016 was the result of transaction costs accrual in
connection with additional professional fees in connection with the disposition of the U.S. portfolio and current tax accrual
including the impact of foreign exchange translation on accrued taxes payable.
Operating Income
The IFRS operating income for the three months and year ended December 31, 2017 and 2016 are as follows:
(thousands of dollars)
Revenue
Rental revenue
Property and asset management fees
Residential inventory sales
Operating costs
Rental operating costs
Recoverable under tenant leases
Non-recoverable costs
Residential inventory cost of sales
Three months ended December 31,
Year ended December 31,
2017
2016
2017
2016
$
$
$
289,403
$
285,257 $
1,140,665
$
1,103,884
3,823
—
2,968
3,353
14,554
—
13,186
16,262
293,226
$
291,578 $
1,155,219
$
1,133,332
100,110
$
101,058 $
399,580
$
397,776
5,353
—
105,463
5,233
4,550
110,841
18,270
—
417,850
19,684
16,188
433,648
699,684
Operating income
$
187,763
$
180,737 $
737,369
$
2017
Operating income from continuing operations for the year ended December 31, 2017 is $737.4 million compared to $699.7 million
during the same period in 2016, representing an increase of $37.7 million or 5.4%. The increase of $37.7 million is largely the net
effect of the following:
•
•
•
•
•
•
$16.3 million higher operating income mainly due to property acquisitions (net of dispositions);
$13.6 million in same property operating income growth;
$3.2 million higher lease cancellation fees;
$2.8 million higher NOI from development projects completed that are not same property during the comparable periods;
$1.4 million higher property and management fee revenue; and
$0.5 million in higher straight-line rent.
Q4 2017
Operating income from continuing operations for the three months ended December 31, 2017 is $187.8 million compared to
$180.7 million during the same period in 2016, representing an increase of $7.0 million or 3.9%. The increase of $7.0 million is
largely the net effect of the following:
•
•
•
•
•
•
•
$4.9 million of same property operating income growth;
$3.2 million higher lease cancellation fees;
$1.2 million higher income due to inventory losses recognized in Q4 2016 due to timing of the cost of sales;
$0.9 million higher property and management fee revenue; partly offset by
$2.4 million in lower straight-line rent;
$0.4 million lower operating income mainly due to property dispositions (net of acquisition); and
$0.4 million lower NOI from development projects completed that are not same property during the comparable periods.
43
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the fourth quarter 2017 and 2016 consolidated statements of income refer to Quarterly Results and Trend Analysis section of
this MD&A. For a discussion of fair value adjustments during the quarter, refer to the Other Income section of this MD&A.
Net Operating Income (NOI)
This NOI section is a sub-section of the MD&A related to IFRS operating income. The NOI for the three months and year ended
December 31, 2017 and 2016 is as follows:
(thousands of dollars)
Operating income (i)
Adjusted for the following:
Three months ended December 31,
Year ended December 31,
2017
2016
2017
2016
$
187,763
$
180,737
$
737,369
$
699,684
Property and asset management fees
(3,823)
(2,968)
(14,554)
(13,186)
Residential inventory
Sales
Cost of sales
NOI
NOI as a percentage of rental revenue (excluding
the impact of lease cancellation fees)
Add: NOI of proportionate share of equity accounted
investments
RioCan-HBC JV:
Rental income (excluding straight-line rent)
Straight-line rent
Property operating costs
Other (ii)
—
—
(3,353)
4,550
—
—
$
183,940
$
178,966
$
722,815
$
(16,262)
16,188
686,424
63.1%
62.7%
63.2%
62.1%
3,195
3,160
412
(377)
(26)
3,191
2,969
490
(268)
176
12,903
12,336
1,893
(1,326)
132
12,271
8,379
1,500
2,392
933
NOI - RioCan's proportionate share
$
187,109
$
182,333
$
735,850
$
699,628
(i)
(ii)
In accordance with IFRS.
Includes NOI from RioCan's equity accounted investments in Dawson Yonge LP, WhiteCastle New Urban Fund, LP, WhiteCastle New Urban Fund
2, LP, WhiteCastle New Urban Fund 3, LP and WhiteCastle New Urban Fund 4, LP.
The increase in NOI as a percentage of rental revenue (excluding lease cancellation fees) for the three months and year ended
December 31, 2017 over the comparable periods is due to occupancy growth and timing of cost recoveries. Refer to the next
section of this MD&A for more detailed breakdown and analysis of NOI.
Same property NOI
Same property NOI for the three months and year ended December 31, 2017 and 2016 is as follows:
Three months ended December 31,
Year ended December 31,
(thousands of dollars)
Same property (i)
NOI from income producing properties:
Acquired (ii)
Disposed (ii)
NOI from completed properties under development
Lease cancellation fees
Straight-line rent adjustment
NOI
2017
2016
2017
$
174,125 $
169,232 $
651,149 $
594
3,171
3,765
1,984
3,330
736
180
3,942
4,122
2,370
145
3,097
36,636
13,587
50,223
7,412
6,225
7,806
2016
637,584
15,959
17,940
33,899
4,626
3,052
7,263
$
183,940 $
178,966 $
722,815 $
686,424
Add: NOI of proportionate share of equity accounted
investments
RioCan-HBC JV:
Rental income (excluding straight-line rent)
Straight-line rent
Property operating costs
Other (iii)
NOI - RioCan's proportionate share
Total straight-line rent - RioCan's proportionate
share
$
$
3,195
3,160
412
(377)
(26)
3,191
2,969
490
(268)
176
12,336
1,893
(1,326)
132
8,379
1,500
2,392
933
187,109 $
182,333 $
735,850 $
699,628
1,148 $
3,587 $
9,699 $
8,763
(i) Refer to the same property NOI in the Non-GAAP Measures section of this MD&A.
44
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
(ii)
(iii)
Includes properties acquired or disposed during the periods being compared.
Includes NOI from RioCan's Canadian equity accounted investments in Dawson Yonge LP, WhiteCastle New Urban Fund, LP, WhiteCastle New
Urban Fund 2, LP, WhiteCastle New Urban Fund 3, LP and WhiteCastle New Urban Fund 4, LP.
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. 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% and same property NOI from its secondary markets properties increased 1.7% when compared to the same
period in 2016 for the year ended December 31, 2017. The Trust has started to disclose this information given its announced
strategy to accelerate its portfolio focus in Canada's six major markets.
Total NOI for the year increased by $36.4 million over the prior year. In addition to the above same property NOI growth, total
NOI also benefited from a $16.3 million increase from property acquisitions (net of dispositions) primarily due to property
acquisitions completed in 2016 from Kimco and CPPIB, $3.2 million in higher lease cancellation fees, $0.5 million in higher
straight-line rent and $2.8 million in increased NOI from completed developments that are not same property during the
comparable periods.
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.
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% and same property NOI from its secondary markets properties increased 2.6% compared to the same period in
2016 for the three months ended December 31, 2017. The Trust has started to disclose this information given its announced
strategy to accelerate its portfolio focus in Canada's six major markets.
Total NOI during the quarter increased by $5.0 million primarily due to the increase in same property NOI as the remaining factors
largely offset each other. The $3.2 million increase in lease cancellation fees over the comparable period was largely offset by
$2.4 million lower straight-line rent, $0.4 million decrease due to property dispositions (net of acquisitions), and $0.4 million
decrease due to completed developments that are not same property during the comparable periods.
Other Income
The components of other income are as follows:
Three months ended December 31,
Year ended December 31,
(thousands of dollars)
Interest income
Income from equity accounted investments
Fair value gains on investment properties, net
Investment and other income
Other income
$
$
2017
1,950 $
3,782
71,013
11,979
2016
1,657 $
4,521
44,371
6,762
2017
7,586 $
15,719
136,942
57,014
88,724 $
57,311 $
217,261 $
2016
5,744
9,972
182,888
33,268
231,872
Interest income for the three months and year ended December 31, 2017 was higher than comparable periods in 2016 primarily
due to higher contractual interest rates on new mortgages and loans receivables and interest proceeds in Q2 2017 relating to the
expropriation of certain land at one of our property locations.
Income from equity accounted investments includes our share of the income from the RioCan-HBC joint venture and gains from
inventory sales from our other equity accounted investments. For further details on the 100% results of operations of the RioCan-
HBC joint venture, refer to the Co-ownerships Arrangements section of this MD&A.
During the three months ended December 31, 2017, we recognized fair value gains that were $26.6 million higher than the
comparative period in 2016, primarily driven by capitalization rate reductions and higher stabilized net operating income on
certain income properties, and updated valuation estimates on specific development properties.
During the year ended December 31, 2017, we recognized fair value gains that were $45.9 million lower than the same period in
2016. This was due to fair value gains in the comparable period in 2016 driven by the revaluation of interests acquired in
previously co-owned properties, in addition to the aforementioned reasons.
Investment and other income primarily includes gains on the sale of available-for-sale marketable securities as well as related
dividend income, and transaction gains or losses on the sale of investment properties. During the three months ended
December 31, 2017, the increase in investment and other income of $5.2 million over the comparable period in 2016 is primarily
the result of higher gains on the sale of available-for-sale marketable securities partially offset by lower dividends from available-
for-sale marketable securities. Excluding a $6.1 million transaction gain on the sale of investment property recognized in the prior
year, investment and other income for the year ended December 31, 2017 increased by $29.8 million primarily due to higher
transaction gains from the sale of available-for-sale marketable securities in 2017.
45
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Other Expenses
Interest costs
The components of interest costs are as follows:
(thousands of dollars)
Total interest
Interest costs capitalized to investment property
Net interest
Percentage capitalized to investment properties
Three months ended December 31,
Year ended December 31,
$
$
2017
50,385
(7,996)
42,389
15.9%
$
$
2016
49,787
(6,323)
43,464
12.7%
$
$
2017
199,817
(28,399)
171,418
$
$
14.2%
2016
206,989
(27,462)
179,527
13.3%
Net interest costs have decreased by $1.1 million and $8.1 million, respectively, for the three months and the year ended
December 31, 2017 compared to the same periods in 2016. Interest costs have decreased primarily due to interest savings on
the refinancing of fixed rate debt and lower average debt outstanding as a result of debt repayment using net proceeds from the
sale of the U.S. portfolio in 2016. As at December 31, 2017, the weighted average effective interest rate of our total debt is
3.35% (December 31, 2016 - 3.50%).
Interest capitalized to property under development for the three months ended December 31, 2017 increased by $1.7 million
compared to the same period in 2016, due to higher development activity partly offset by lower portfolio weighted average
interest rate. Interest capitalized for the year ended December 31, 2017 increased $0.9 million compared to 2016 due to similar
reasons. Interest was capitalized to properties under development at weighted average effective interest rates of 3.49% and
3.54% for the three months and year ended December 31, 2017, respectively (three months and year ended December 31, 2016
– 3.66% and 3.94%, respectively).
General and Administrative
The components of general and administrative expenses are as follows:
Three months ended December 31,
Year ended December 31,
(thousands of dollars)
2017
2016
2017
Non-recoverable salaries and benefits
$
11,023
$
9,915
$
41,095
$
Capitalized to investment properties (i)
Internal leasing salaries and benefits
Non-recoverable salaries and benefits, net
Unit-based compensation expense
Depreciation and amortization
Other general and administrative (ii)
(2,206)
(2,839)
5,978
1,562
5,712
4,871
(1,666)
(2,538)
5,711
2,286
1,078
4,925
(8,538)
(9,290)
23,267
3,911
9,865
15,517
Total general and administrative expense
$
18,123
$
14,000
$
52,560
$
2016
41,169
(7,883)
(9,718)
23,568
6,745
4,386
17,521
52,220
Total general and administrative expense as a
percentage of rental revenue
6.3%
4.9%
4.6%
4.7%
(i) Amounts capitalized to investment properties are comprised of salaries and benefits related to development and landlord work.
(ii) Other general and administrative primarily includes information technology costs, public company costs, travel, marketing, legal and professional
fees, as well as trustee costs.
2017
For the year ended December 31, 2017, general and administrative expenses increased $0.3 million or 0.7% primarily due to:
•
•
•
•
$5.5 million increase in depreciation and amortization costs, of which $0.8 million was due to depreciation and amortization
of costs of RioCan's additional management information systems and $4.7 million was due to accelerated depreciation of
certain management information systems; partly offset by
$2.8 million decrease in unit-based compensation expense primarily as a result of a mark to market adjustment in 2017
related to employee/executive cash-settled compensation costs;
$2.0 million lower other general and administrative expenses mainly as a result of a mark to market adjustment in 2017
related to trustee cash-settled unit-based compensation costs and prior period office rent adjustment; and
$0.3 million decrease in non-recoverable salaries and benefits.
Q4 2017
For the three months ended December 31, 2017, general and administrative expenses increased $4.1 million or 29.5% primarily
due to accelerated depreciation of certain management information systems as noted above.
46
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Internal Leasing Costs
Internal leasing costs are comprised of the payroll costs of our internal leasing department and related administration costs. For
the three months and year ended December 31, 2017, leasing costs were relatively flat when compared to the prior comparative
periods.
Transaction and Other Costs
Transaction and other costs increased $1.8 million and $2.2 million for the three months and year ended December 31, 2017,
respectively. The increase for the year was the net effect of $2.6 million of costs associated with transactions the Trust decided
not to pursue further and $2.6 million fair market value adjustment to a loan receivable, partially offset by $3.0 million lower
property acquisition and disposition costs when compared to the same period in the prior year.
For the fourth quarter 2017 and 2016 consolidated statements of income refer to the Quarterly Results and Trend Analysis
section of this MD&A.
Funds from Operations (FFO)
The following table presents a reconciliation of IFRS net income attributable to unitholders to FFO on both a continuing and
discontinued operations basis:
(thousands of dollars, except per unit amounts)
Three months ended
December 31,
Year ended
December 31,
2017
2016
2017
2016
Net income from continuing operations attributable to unitholders
$
209,735 $
178,472 $ 708,265 $ 683,060
Add back/(Deduct):
Fair value gains, net
Non-controlling interest relating to fair value losses
Fair value (gains) losses included in equity accounted investments
Deferred income tax recovery
Internal leasing costs
Transaction (gains) losses on investment properties, net (i)
Transaction costs on sale of investment properties
Preferred unit redemption (ii)
Preferred unit distributions
FFO from continuing operations
Net income (loss) from discontinued operations attributable to unitholders
Add back/(Deduct):
Transaction costs (recoveries) on sale of U.S. investment properties (iii)
Current tax expense (recovery) on U.S. income properties sold
Fair value (gains) losses, net
Deferred income tax recovery
Internal leasing costs
Accrued property tax expense under IFRIC 21
Transaction (gains) losses on sale of U.S. investment properties, net (iii)
FFO from discontinued operations
FFO
FFO per unit - basic
FFO per unit - diluted
Weighted average number of units - basic (in thousands)
Weighted average number of units - diluted (in thousands)
FFO payout ratio (iv)
(71,013)
(44,371)
(136,942)
(182,888)
—
2,472
(1,320)
3,265
—
993
—
—
—
(1,476)
(3,000)
2,663
—
1,978
—
—
408
(320)
10,882
(1,275)
5,136
—
(1,757)
(3,514)
91
846
(3,850)
10,931
(6,075)
8,165
(4,304)
(8,667)
144,132 $
132,509 $ 582,640 $ 497,309
(62) $
(14,013) $
7,021 $ 147,687
73
75
—
—
—
—
—
2,511
11,167
(549)
53,562
(2,871)
136,160
—
—
—
—
—
—
(16,899)
— (230,675)
—
—
706
25,145
(1,644)
(65,116)
86 $
(335) $
1,957 $
50,570
144,218 $
132,174 $ 584,597 $ 547,879
0.44 $
0.44 $
0.40 $
0.40 $
1.79 $
1.79 $
1.68
1.68
326,040
326,155
326,466
326,639
326,805
326,929
78.8%
325,386
325,665
83.6%
$
$
$
$
$
$
(i) Represents net transaction gains connected to certain investment properties during the period.
(ii) Represents the excess of par redemption value over the carrying value of our Series A preferred trust units redeemed on March 31, 2016.
(iii)
(iv) Calculated on a twelve month trailing basis. For a definition of the Trust's common unitholder distributions as a percentage of FFO, refer to the
Includes transaction costs (recoveries) associated with the disposal of U.S. investment properties.
Non-GAAP Measures section of this MD&A.
47
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
FFO Highlights
2017
FFO for the year ended 2017 is $584.6 million compared to $547.9 million representing an increase of approximately $36.7
million or 6.7%. On diluted per unit basis, FFO is $1.79 compared to $1.68, representing an increase of 6.3%, despite the sale of
the U.S. portfolio in May 2016.
Continuing Operations
FFO from continuing operations increased from $497.3 million during 2016 to $582.6 million in 2017, representing an increase of
$85.3 million or 17.2%. 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);
$4.3 million Series A preferred unit redemption costs in Q1 2016;
$5.2 million less Series A and C preferred unit distributions;
$5.8 million in higher income from our equity accounted investments; and
$1.4 million higher property and management fee revenue; partially offset by
$4.6 million lower dividend income from the sale of available-for-sale marketable securities; and
$2.6 million in other costs associated with transactions the Trust decided not to pursue further.
Discontinued Operations
The $48.6 million decrease in FFO from discontinued operations in 2017 was due to the sale of the U.S. portfolio in May 2016,
which primarily consisted of lower NOI of $68.7 million (adding back accrued property tax expense under IFRIC 21) partially
offset by $18.9 million of lower interest expense and $2.5 million in less general and administrative expenses.
Q4 2017
FFO for the fourth quarter of 2017 is $144.2 million compared to $132.2 million representing an increase of approximately $12.0
million or 9.1%. On a diluted per unit basis, FFO is $0.44 compared to $0.40, representing an increase of 9.3%.
Continuing Operations
FFO from continuing operations increased from $132.5 million in the fourth quarter of 2016 to $144.1 million in the fourth quarter
of 2017, representing an increase of $11.6 million or 8.8%. 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 growth in same property NOI;
$6.8 million increase in gains related to the sale of available-for-sale marketable securities;
$3.7 million in higher income from our equity accounted investments;
$1.8 million less Series C preferred unit distributions;
$1.2 million higher income due to inventory losses recognized in Q4 2016 due to timing of the cost of sales;
$1.1 million in lower interest expenses, partly offset by
$4.1 million higher general and administrative expenses mainly due to accelerated depreciation of certain management
information systems;
$2.6 million higher other costs as a result of a one-time fair market value adjustment to a loan receivable; and
$1.5 million in lower dividend income on available-for-sale marketable securities.
Discontinued Operations
FFO from discontinued operations of $0.4 million during the fourth quarter of 2017 was minor and flat when compared to the
same period in 2016, due to immaterial adjustments subsequent to the sale of the U.S. portfolio.
FFO Payout Ratio
The FFO payout ratio of 78.8% for the twelve months ended December 31, 2017 is 4.8% lower than the comparable period FFO
payout ratio of 83.6%. This decrease is mainly due to the Trust having replaced the FFO from discontinued operations following
the sale of the U.S. portfolio with growth in FFO from continuing operations, as discussed earlier.
For the twelve months ended December 31, 2017, RioCan achieved its FFO payout ratio target of less than 80%.
48
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Adjusted Cashflow from Operations (ACFO)
RioCan’s method of calculating ACFO is in accordance with the REALpac whitepaper issued in February 2017. The following
table presents a reconciliation of cash provided by (used in) operating activities to ACFO:
(thousands of dollars)
Three months ended
December 31,
Year ended
December 31,
2017
2016
2017
2016
Cash provided by operating activities
$
159,155 $
142,277 $
354,028 $
425,096
Adjustments to working capital changes for ACFO (i)
Distributions received from equity accounted investments
Transaction costs on sale of investment properties
Normalized capital expenditures (ii):
Leasing commissions and tenant improvements
Maintenance capital expenditures recoverable from tenants
Maintenance capital expenditures not recoverable from tenants
Gain on disposition of available-for-sale marketable securities
Internal leasing costs related to development properties
Taxes related to non-operating activities (iii)
Non-controlling interests
ACFO (iv)
(6,898)
34,883
1,066
(6,875)
(3,750)
(2,500)
10,504
602
75
—
(29,544)
192,813
(139,802)
2,291
4,488
(6,250)
(3,750)
(2,500)
3,681
400
11,166
—
44,415
4,587
(27,500)
(15,000)
(10,000)
45,981
2,009
(2,871)
—
11,196
61,727
(25,000)
(15,000)
(10,000)
14,040
1,746
160,273
(91)
$
186,262 $
122,259 $
588,462 $
484,185
(i)
Includes working capital changes that, in management’s view and based on the REALpac February 2017 whitepaper, are not indicative of
sustainable cash flow available for distribution. Examples include, but are not limited to, working capital changes relating to residential inventory
and developments, prepaid realty taxes and insurance, interest payable and interest receivable, sales and other indirect taxes payable to or
receivable from applicable governments, income taxes and transaction cost accruals relating to acquisitions and dispositions of investment
properties.
(ii) Normalized capital expenditures are management's estimate of ongoing capital investment required to maintain the condition of the physical
property and current rental revenues. Refer to the Presentation of Financial Information and Non-GAAP Measures section of this MD&A for further
discussion.
(iii) Includes IFRIC 21 tax expenses and income tax expenses (recoveries) associated with the sale of our U.S. portfolio, which have been deducted in
determining cash provided by (used in) operating activities from continuing and discontinued operations. This adjustment effectively excludes this
item's impact in ACFO based on the REALpac February 2017 whitepaper.
(iv) The ACFO definition per REALpac's February 2017 whitepaper does not prescribe for the deduction of preferred unit distributions in the ACFO
calculation. Based on the REALpac whitepaper, the ACFO reported for the year ended December 31, 2017, therefore, did not deduct preferred
unitholder distributions of $3.5 million (for the three months and year ended December 31, 2016 - $1.8 million and $8.7 million, respectively).
The following table represents a breakdown of adjustments for working capital changes used in the calculation of ACFO. These
are working capital changes that, in management’s view and based on the REALpac February 2017 whitepaper, are not
indicative of sustainable cash flow available for distribution:
(thousands of dollars)
Working capital changes related to:
Taxes relating to the U.S. portfolio (i)
Transaction related costs (ii)
Realty taxes and insurance
Residential inventory
Other (iii)
Three months ended
December 31,
Year ended
December 31,
2017
2016
2017
2016
$
(75) $
(11,166) $
121,773 $
(133,940)
13,617
(34,084)
1,713
11,931
3,515
(31,294)
2,341
7,060
19,196
5,615
37,519
8,710
(39,153)
22,794
(8,640)
19,137
Adjustments to working capital changes for ACFO
$
(6,898) $
(29,544) $
192,813 $
(139,802)
Includes income tax payment (accrual) relating to the sale of our U.S. portfolio in May 2016 and accrued property taxes under IFRIC 21.
(i)
(ii) Represents costs associated with dispositions and acquisitions.
(iii)
Includes working capital changes related to interest payable and interest receivable, sales and other indirect taxes payable to or receivable from
applicable governments.
49
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
As ACFO starts with cash provided by (used in) operating activities, the adjustments outlined neutralize the above working capital
changes to ACFO. The net impact to ACFO of working capital changes is determined as follows:
(thousands of dollars)
Three months ended
December 31,
Year ended
December 31,
2017
2016
2017
2016
Adjustments for other changes in working capital items as reported
on the consolidated statements of cash flows
Add: Adjustments to working capital changes for ACFO
Net working capital increase (decrease) included in ACFO
$
$
29,763 $
35,574 $
(168,141) $
125,741
(6,898)
(29,544)
192,813
(139,802)
22,865 $
6,030 $
24,672 $
(14,061)
ACFO Highlights
2017
ACFO for the year ended December 31, 2017 is $588.5 million compared to $484.2 million in the same period in 2016
representing an increase of $104.3 million or approximately 21.5%. Excluding a one-time $29.2 million special distributions from
equity accounted investments, ACFO increased by $75.1 million for the year or approximately 15.5%, primarily due to the net
effect of the following:
•
•
$36.2 million in higher NOI (at RioCan's proportionate share) from continuing operations mainly as a result of acquisitions
(net of dispositions), strong same property growth, development completions and higher lease cancellation fees;
$26.6 million in interest savings (at RioCan's proportionate share) comprising of $7.7 million and $18.9 million, respectively,
from continuing and discontinued operations mainly due to lower average debt balances outstanding as a result of debt
repayments using proceeds from the sale of the U.S. portfolio in 2016, and the refinancing of debt at lower interest rates;
•
$31.9 million increase in gains related to the sale of available-for-sale marketable securities;
$38.7 million in net working capital increases from continuing and discontinued operations;
•
•
•
•
$10.8 million in lower general and administrative expenses excluding non-cash depreciation and amortization and equity
settled unit-based compensation expense; and
$4.0 million increase in distributions received from equity accounted investments; partly offset by
$68.7 million in lower NOI from discontinued operations due to the sale of our U.S. property portfolio; and
$2.5 million higher normalized capital expenditures.
Q4 2017
ACFO for the three months ended December 31, 2017 is $186.3 million compared to $122.3 million in the same period in 2016,
representing an increase of $64.0 million or approximately 52.4%. Excluding a one-time $29.2 million special distributions from
equity accounted investments, the ACFO increased by $34.8 million for the quarter or approximately 28.5%, primarily due to the
net effect of the following:
•
•
•
•
•
•
•
•
$4.8 million in higher NOI from continuing operations mainly as a result of strong same property growth;
$16.8 million in higher net working capital increase from continuing and discontinued operations relating to property
operations;
$6.8 million increase in gains related to the sale of available-for-sale marketable securities;
$3.4 million increase in distributions received from equity accounted investments;
$1.2 million higher income due to inventory losses recognized in Q4 2016 due to timing of the cost of sales;
$1.1 million lower interest costs; and
$1.6 million in lower general and administrative expenses from continuing and discontinued operations excluding non-cash
depreciation and amortization and equity settled unit-based compensation expense; partly offset by
$0.6 million higher normalized capital expenditures.
50
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following tables present RioCan's ACFO payout ratio for the twelve months ended December 31, 2017 and 2016:
(thousands of dollars,
except where otherwise noted)
ACFO (i)
Distributions paid
ACFO payout ratio
Net working capital increase (decrease)
included in ACFO
$
$
Twelve months ended
December 31, 2017
Q4 2017
Q3 2017
Q2 2017
Q1 2017
588,460 $
186,262 $ 149,405
$ 135,210
$ 117,583
460,944
78.3%
115,154
115,363
115,264
115,163
24,671 $
22,865 $
13,941
$
(858) $
(11,277)
(i) The ACFO definition per REALpac's February 2017 whitepaper does not prescribe for the deduction of preferred unitholder distributions in the ACFO
calculation. Based on the REALpac whitepaper, the ACFO for the twelve months ended December 31, 2017, therefore, did not deduct preferred
unitholder distributions of $3.5 million.
(thousands of dollars,
except where otherwise noted)
ACFO (i)
Distributions paid
ACFO payout ratio
Net working capital increase (decrease)
included in ACFO
$
$
Twelve months ended
December 31, 2016
Q4 2016
Q3 2016
Q2 2016
Q1 2016
484,185 $ 122,259
$ 130,329
$ 109,334
$ 122,263
457,925
115,050
114,926
114,618
113,331
94.6%
(14,061) $
6,030
$
4,122
$
(11,197) $
(13,016)
(i) The ACFO definition per REALpac's February 2017 whitepaper does not prescribe for the deduction of preferred unit distributions in the ACFO
calculation. Based on the REALpac whitepaper, the ACFO for the twelve months ended December 31, 2016, therefore, did not deduct preferred
unitholder distributions of $8.7 million.
The ACFO payout ratio for the twelve month period ended December 31, 2017 is 78.3%, which is 16.3% lower than the ACFO
payout ratio for the comparable period as at December 31, 2016. Excluding a one-time special distribution of $29.2 million, the
ACFO payout ratio for the twelve month period ended December 31, 2017 would be 82.4%, which is 12.2% lower than the ACFO
payout ratio for the comparable period in 2016. This decrease was primarily due to the increase in ACFO as noted in the
previous section.
As previously discussed, the REALpac ACFO definition includes net working capital fluctuations relating to recurring operating
activities. In RioCan management's view, this tends to introduce greater volatility in the ACFO payout ratio. Management,
therefore, also uses the FFO payout ratio in addition to the ACFO payout ratio in assessing its distribution paying capacity
because FFO is not subject to such working capital fluctuations.
OPERATIONS
RioCan has remained focused on its core portfolio and continues to execute its growth strategy through organic growth,
development and selective acquisitions. In addition, RioCan has been selectively pruning its portfolio in order to increase its focus
on the six Canadian major markets over the last ten years. In October 2017, it announced its strategy to accelerate its major
markets focus and has since been working on execution of the strategy. As discussed in the Six Canadian Major Markets
section of this MD&A, as at December 31, 2017, RioCan's share of income producing properties NLA in the six Canadian major
markets has increased to 70.3% of total income producing properties NLA, including 34.9% in the Greater Toronto Area on NLA
basis. As at December 31, 2017, 100% of the Trust's PUD NLA are in the six Canadian major markets.
The following is our percentage of portfolio net rental revenue derived from the six Canadian major markets:
2017
2016
At RioCan's interest
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Percentage of rental revenue (i)
76.1 %
75.2 %
75.2 %
75.4 %
75.5 %
75.6 %
75.7 %
75.0 %
(i) The six Canadian major markets include the following: Calgary, AB; Edmonton, AB; Montreal, QC; Ottawa, ON (includes Gatineau region); Toronto
(includes the Greater Toronto Area), ON; and Vancouver, BC.
The percentage of portfolio rental revenue from the six Canadian major markets increased by 0.9% to 76.1% from Q3 2017 to Q4
2017. Approximately 40.9% of RioCan's portfolio annualized rental revenue was from the Greater Toronto Area as of
December 31, 2017, which also increased by 0.9% from Q3 2017. The increase was related to the sale of six properties in the
secondary markets in Q4 2017 as part of the execution of the Trust's acceleration of its major markets focus strategy.
51
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net Leasable Area (NLA)
(thousands of square feet)
At 100% (i)
Income properties
Properties under development (ii)
At RioCan's interest
Income properties
Properties under development (ii)
Q4
55,524
4,288
59,812
41,807
2,292
44,099
2017
Q3
Q2
Q1
Q4
2016
Q3
Q2
Q1
56,824
4,363
61,187
42,890
2,259
45,149
56,996
4,545
61,541
42,994
2,359
45,353
57,079
5,166
62,245
43,064
2,789
45,853
57,085
6,440
63,525
43,212
3,761
46,973
57,248
5,862
63,110
43,299
3,283
46,582
57,416
5,851
63,267
41,987
3,240
45,227
57,648
6,755
64,403
42,019
3,715
45,734
(i)
(ii)
Includes non-owned anchors.
Includes the NLA for only active projects with detailed costs estimates, but excludes these projects' NLA for air rights sales and residential
inventory NLA as well as vacant former Target space and completed NLA that has been transferred to IPP.
Income Properties NLA
As at December 31, 2017, NLA at RioCan's interest was 41,807,000 square feet compared to 43,212,000 square feet as at
December 31, 2016. This decrease of 1,405,000 square feet of NLA in 2017 was due primarily to the disposition of six properties
completed in Q4 2017 pursuant to the strategic initiative to accelerate the major markets focus, other dispositions including the
sale of a portfolio of six chartered bank branches in British Columbia in August 2017 and the sale of the Cambie Street property in
British Columbia in June 2017, and decommissioning of property space that is being redeveloped, partially offset by the NLA
created by completed developments with new tenants commencing operations. Refer to the Income Property Dispositions During
2017 and Completed Developments in 2017 sections of this MD&A for further discussion.
Properties under Development NLA (PUD NLA)
During the year ended December 31, 2017, NLA decreased 1,469,000 square feet primarily due to completed developments with
new tenants commencing operations, and the formation of a number of strategic 50/50 joint ventures through the sale of
RioCan's interests in a number of development projects such as Sunnybrook Plaza in Toronto, Gloucester Residential in Ottawa,
and 740 Dupont Avenue in Toronto.
Occupancy and Leasing
The following table shows the difference between our committed occupancy (tenants that have signed leases) and in-place
occupancy (tenants that are in possession of their space and have straight-line rents included in revenue under IFRS). As at
December 31, 2017, the gap between committed and in-place occupancy narrowed to 1.0%, down from 2.0% as at December
31, 2016, as a number of Target backfill tenants took possession during the year. Please refer to the Target Leasing Update
section of this MD&A for further details.
The historical portfolio committed and in-place occupancy rates for our Canadian property operations are as follows:
(in percentages)
Committed
In-place
Committed Occupancy
Q4
96.6
95.6
2017
Q3
96.8
96.0
Q2
96.7
95.2
Q1
96.2
94.4
Q4
95.6
93.6
2016
Q3
95.3
93.6
Q2
95.1
92.9
Q1
94.8
92.8
RioCan’s overall portfolio committed occupancy rate is calculated as leased NLA divided by total income properties NLA. As of
December 31, 2017, the committed occupancy rate increased by 1.0% when compared to December 31, 2016 primarily due to
leasing former Target space. The committed occupancy rate for the three months ended December 31, 2017 remained high at
96.6%, representing only a 0.2% decline from the three months ended September 30, 2017 despite Sears store closings in Q4
2017 given that Sears accounted for 0.8% of the Trust's NLA as of September 30, 2017.
In-Place Occupancy
RioCan's in-place occupancy rate of 95.6% represents the occupied NLA for which tenants are in possession of their space
divided by total income properties NLA as of December 31, 2017. As of December 31, 2017, the in-place occupancy increased
by 2.0% when compared to December 31, 2016 mainly due to tenants taking possession of the former Target units. Despite
Sears store closures in Q4 2017, which accounted for 0.8% of the Trust's NLA as of September 30, 2017, the in-place occupancy
rate for the three months ended December 31, 2017 remained high at 95.6%, down modestly by 0.4% mainly due to occupancy
growth from tenants taking possession in former Target premises .
Subsequent to Q4 2017, we expect to generate approximately $9.0 million of annualized net incremental rent under IFRS from
tenants that have signed leases but have not taken possession of the space as of December 31, 2017. This includes base rent,
operating cost recoveries and straight-line rent, but excludes operating costs capitalized while a property is under redevelopment.
52
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
An IFRS rent commencement timeline for the NLA on our properties that have been leased but are not currently in possession as
at December 31, 2017 is as follows:
19
408
4.7%
100.0%
19
754
2.5%
100.0%
(in thousands, except percentage amounts)
At RioCan's interest
Square feet:
NLA commencing (i)
Cumulative NLA commencing (i)
% of NLA commencing
Cumulative % total
Average net incremental IFRS rent:
Annualized
Total
Q1 2018
Q2 2018
Q3 2018
Q4 2018+
408
408
265
265
65.0%
65.0%
49
314
12.0%
77.0%
75
389
18.3%
95.3%
Monthly net incremental IFRS rent commencing (ii)
$
9,048 $
Cumulative monthly net incremental IFRS rent commencing $
9,048 $
754 $
754 $
535
535
$
$
79
614
$
$
121
735
$
$
% of net incremental IFRS rent for NLA commencing
Cumulative % total net incremental IFRS rent commencing
71.0%
71.0%
10.5%
81.5%
16.0%
97.5%
Includes NLA expected to be completed from expansion and redevelopment projects.
(i)
(ii) Based on monthly IFRS rental revenue.
Of the 408,000 square feet of NLA commencing and $9.0 million of annualized IFRS rent commencing, 51.1% of the NLA and
39.6% of the incremental IFRS rent relates to the leasing of former Target space and leasing of other tenant space in
development projects, that are included in the Project Phasing and NLA Completion section of this MD&A.
Average Net Rent
The portfolio weighted average net rent per occupied square foot for our total property portfolio is as follows:
Average net rent per occupied square foot (i)
$ 17.75
$ 17.66
$ 17.66
$ 17.62
$ 17.59
$ 17.44
$ 17.28
$ 17.23
Q4
2017
Q3
Q2
Q1
Q4
2016
Q3
Q2
Q1
(i) Net rent is primarily contractual base rent pursuant to tenant leases.
New Leasing Activity
RioCan’s new leasing activity for the most recent eight quarters is as follows:
(in thousands, except per sqft
amounts)
NLA at 100%
Full
Year
1,996
Q4
527
Q3
376
Q2
456
Q1
637
Full
Year
2,048
Q4
440
Q3
439
Q2
581
Q1
588
Average net rent per square foot (i)
$ 19.61 $ 19.16 $ 22.20 $ 17.64 $ 19.88 $ 19.22 $ 20.01 $ 19.19 $ 21.86 $ 16.05
2017
2016
(i) Net rent is primarily contractual base rent pursuant to tenant leases.
On a full year basis, average net rent per square foot on new leasing activity increased by $0.39 or 2.0%. The average net rent
on new leasing completed in Q4 2017 is lower than Q3 2017 due to the execution of a higher proportion of leases completed in
larger units in Q4 2017 compared to Q3 2017. On average, leases completed on larger units typically have lower per square foot
rates as compared to smaller units.
Renewal Leasing
A summary of our 2017 and 2016 renewal leasing activity for the Canadian property portfolios is as follows:
2017
2016
(in thousands, except percentage
and per sqft amounts)
Square feet renewed (at 100%)
Full
Year
4,508
Q4
728
Q3
Q2
Q1
1,120
1,327
1,333
Full
Year
4,255
Q4
1,309
Q3
857
Q2
1,120
Q1
969
Average net rent per square foot (i)
$18.99
$20.91
$18.21
$18.45
$19.13
$19.14
$18.69
$19.76
$20.06
$18.12
Increase in average net rent per
square foot
Percentage increase in average net
rent per square foot
$ 1.04
$ 0.89
$ 0.90
$ 0.83
$ 1.44
$ 1.08
$ 1.39
$ 1.22
$ 0.64
$ 1.05
5.8%
4.5%
5.2%
4.7%
8.2%
6.0%
8.1%
6.6%
3.3%
6.2%
Retention rate
91.1% 87.5% 93.6% 93.9% 88.6% 85.8% 84.0% 83.1% 91.6% 84.4%
(i) Net rent is primarily contractual base rent pursuant to tenant leases.
The increase in average net rent per square foot for Q4 2017 was $0.89 or 4.5% and the retention rate for Q4 2017 remained
high at 87.5%. On a full year basis, the Trust achieved a higher retention rate in 2017 relative to 2016, albeit with a slightly lower
percentage increase in average net rent per square foot. This was due to a higher percentage of fixed rate renewals completed
in 2017 (41% in 2017 versus 38% in 2016). In addition, the fixed rate renewals completed in 2017 were at a lower average
53
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
growth rates than the fixed rate renewals completed in 2016 (4.3% in 2017 versus 6.4% in 2016). This lower growth on fixed rate
renewals partially offset the strong growth in market rate renewals that were completed in 2017 (6.4% in 2017 versus 5.9% in
2016), resulting in an overall renewal rent increase of 5.8% for 2017, slightly down from 2016.
Including anchor tenants, the components of renewal activity are as follows:
(in thousands, except per sqft
amounts)
Renewals at market rental rates:
Full
Year
2017
2016
Q4
Q3
Q2
Q1
Full
Year
Q4
Q3
Q2
Q1
Square feet renewed (at 100%)
2,656
500
605
714
837
2,659
760
591
813
494
Average net rent per square foot (i) $23.34
$23.78
$22.73
$ 23.66 $23.25
$22.61
$23.08
$ 21.33 $22.43
$23.71
Renewals at fixed rental rates:
Square feet renewed
1,853
228
516
613
496
1,596
549
265
307
475
Average net rent per square foot (i) $12.75
$14.62
$12.90
$ 12.38 $12.18
$13.35
$12.61
$ 16.25 $13.78
$12.31
(i) Net rent is primarily contractual base rent pursuant to tenant leases.
Tenant Vacancies
We strive to diversify our tenant base by location, property type and anchor type and by minimizing the degree of reliance on any
single tenant. In the regular course of business, we will, however, encounter tenants that are subject to restructuring, insolvency
or bankruptcy activities. In most cases, rental revenue continues to be paid by, or on behalf of, RioCan's tenants. We actively
monitor such situations, and in those cases where vacancies occur, RioCan endeavours to replace tenants as quickly as possible
at economically similar or better lease terms. In certain instances, such vacancies will give rise to rights in favour of other tenants
in the property that is the subject of the vacancy. This is commonly referred to as a co-tenancy right and entitles co-tenants to
certain rent reductions or lease terminations.
RioCan’s vacancy activity for the most recent eight quarters is as follows:
(in thousands of square feet)
Total vacancies (i)
At 100%
At RioCan's interest
Vacated space re-leased
At 100%
At RioCan's interest
(i) Excluding lease buyouts.
2017
2016
Full
Year
1,676
1,365
462
415
Q4
Q3
Q2
Q1
735
639
201
186
330
226
84
74
231
179
59
43
380
321
118
112
Full
Year
1,652
1,376
762
691
Q4
Q3
Q2
Q1
477
399
143
138
377
309
163
139
353
314
208
195
445
354
248
219
During Q4 2017, RioCan experienced vacancies of approximately 735,000 square feet, of which RioCan’s interest was 639,000
square feet. The average net rent on RioCan’s ownership interest was $16.93 per square foot. Approximately 201,000 square
feet of space vacated in Q4 2017 has been leased to new tenants, of which RioCan’s interest was 186,000 square feet, at an
average net rent of $21.24 per square foot.
During the year ended December 31, 2017, RioCan experienced vacancies of approximately 1,676,000 square feet, of which
RioCan's interest was 1,365,000 square feet, which were relatively consistent when compared to the same period in the prior
year. The average net rent on RioCan’s ownership interest was $17.31 per square foot for the vacated space. Approximately
462,000 square feet of space vacated during the year ended December 31, 2017 has been leased to new tenants, of which
RioCan’s interest was 415,000 square feet at an average net rent of $22.16 per square foot. The relatively lower percentage of
vacated space re-leased to total vacancies for both Q4 2017 and the year ended December 31, 2017 was mainly due to
vacancies caused by the closing of Sears locations in Q4 2017. Redevelopment of the premises formerly occupied by Sears are
underway.
Target Leasing Update
To date, leases included in our Target backfill progress will, if all are completed, produce net rental revenue of $14.0 million
versus $10.6 million of the total base rental revenue lost through Target’s departure (at RioCan's proportionate share) which
represents a 32.1% increase. The incremental net rent revenue impact of the committed Target backfill has been included in the
$9.0 million annualized net incremental revenue IFRS rent under the In-place Occupancy section of this MD&A.
The expected total cost of the redevelopment work pertaining to the deals currently included in our backfill progress, including the
costs that have been incurred to date, is estimated to be approximately $154.0 million (approximately $131.0 million at RioCan’s
proportionate share, which is being funded, in part, by our $88.3 million in net settlement proceeds received from Target in 2015).
The overall redevelopment costs will evolve as additional tenants are secured, development plans are completed and
construction costs finalized. Consistent with properties under development, interest costs are capitalized during the Target backfill
process prior to tenants taking possession of a space using the same weighted average interest of 3.49% and 3.54%,
respectively, for the three months and year ended December 31, 2017 (December 31, 2016 - 3.66% and 3.94%, respectively).
Once the tenants take possession, these interest costs will be expensed.
54
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Sears Space Leasing Update
In June 2017, Sears Canada Inc. filed for protection under the Companies' Creditors Arrangement Act ("CCAA") and
subsequently announced the liquidation of all of its stores. RioCan had nine locations under lease (one department store, an
outlet centre and seven Home stores). The nine locations totaled 381,000 square feet of NLA at RioCan’s interest and paid an
average net rent of $8.84 per square foot with an average remaining lease term of 2.98 years. The nine locations accounted for
approximately 0.6% of the annual rental revenue of the Trust and 0.8% of NLA as of September 30, 2017. One of these locations
(Timmins Square) ceased operations in August 2017 and the remaining eight locations closed during Q4 2017.
RioCan and its partner Hudson Bay Company secured a surrender agreement with Sears Canada Inc. for its 104,000 square foot
location at RioCan Oakville Place, in Oakville, Ontario for a fee of $2.0 million at RioCan’s interest ($4.0 million at 100%). By
terminating the 36 year-old lease with Sears, the co-owners gained the ability to re-tenant the premises with dynamic retailers at
current market rents. The lease surrender agreement also removes development restrictions held by Sears which will allow the
co-owners to pursue potential intensification at the site given its close proximity to the Queen Elizabeth Highway and Go Transit
Station.
In addition, at Garden City Shopping Centre in Winnipeg, Manitoba, RioCan and its partner (Bayfield Realty Advisors) acquired
the freehold interest in the Sears location for a purchase price of $2.4 million at RioCan’s interest ($8.0 million at 100%). The
acquisition of the 92,500 square foot Sears premises provides the co-owners the opportunity to replace the poor performing
anchor with dynamic retailers that will enhance the performance of the recently renovated Garden City Shopping Centre, and
unlocks existing density on the site that will permit further commercial development. RioCan has completed a deal with Seafood
City to lease approximately 40,000 square feet of the premises and is in the latter stages of negotiation with two national box
tenants for the remainder of the NLA.
RioCan is making significant progress on releasing the former Sears premises, with leases completed or in the final stages of
negotiation on 320,000 square feet, or 84% of the NLA at RioCan’s interest. These leases will replace 130% of the revenue from
all of the former Sears space. Replacement rent on the entire space is expected to exceed previous rent from Sears by
approximately $5.00 per square foot (60% increase), with estimated cost of tenanting work considerably lower than the average
Target releasing. Unlike our previous experience with the Target premises, we will not be required to undergo the time-consuming
process of obtaining site plan approval to convert the majority of the Sears premises to multi-tenant units. As such, we anticipate
that replacement tenants will be in possession of their spaces by the end of 2018 and will be open and paying rent in Q1/Q2 of
2019.
Other Store Closures
During January 2017, Grafton Fraser, the company that owns Tip Top Tailors, was granted court protection under the Companies
Creditors Arrangement Act (CCAA). At the time of the tenant's filing, RioCan had 20 locations under lease representing
approximately 92,000 square feet of total NLA with an average remaining lease term of 3.3 years. We received notice from
Grafton Fraser that three of our locations totaling 8,000 square feet will be disclaimed. We have reached an agreement for 17 of
the 20 locations for Grafton Fraser to remain as a tenant.
In April 2017, Payless Shoesource Inc. (Payless) filed for Chapter 11 in the U.S and in August announced that it had emerged
from restructuring. Currently, RioCan has 21 locations under lease representing approximately 62,000 square feet of total NLA
with an average remaining lease term of 5.1 years. Payless is up to date on its rent payments and the Trust will monitor the
situation.
In August 2017, Toys R Us filed for protection under the CCAA. In January 2018 the company announced the closures of
approximately 180 stores in the US, however, Canadian stores are to remain open for business as usual. Currently, RioCan has
two locations under lease representing approximately 49,000 square feet of total NLA with an average remaining lease term of
6.1 years, representing 0.1% of annual rent revenue of the Trust. Toys R Us is up to date on its rent payments and the Trust is
monitoring the situation.
Overall, store closures in 2017 are not expected to have a material impact on the Trust's operations.
Lease Expiries
Lease expiries for the next five years are as follows:
(in thousands, except per sqft and percentage amounts)
Lease expiries for the years ending
At RioCan's interest
Square feet
Square feet expiring/Portfolio NLA
Average net rent per occupied square foot
NLA
41,807
2018
3,424
2019
5,325
2020
4,935
2021
4,911
8.2%
12.7%
11.8% 11.7%
2022
4,071
9.7%
$ 19.23
$ 18.44
$ 17.51
$ 18.48
$ 20.23
55
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
The components of our lease expiries for 2018 are as follows:
(in thousands, except per sqft amounts)
At RioCan's interest
2018 expiries at market rental rates:
Square feet expiring
Average net rent per sqft
2018 expiries with fixed rental rate options:
Square feet expiring
Average in-place net rent per sqft
Average renewal net rent per sqft
Increase in average net rent per sqft
Total:
Square feet expiring
Average net rent per sqft
Contractual Rent Increases
Total
2,539
21.19
885
13.59
14.35
0.76
3,424
19.23
$
$
$
$
$
Certain of our leases allow for periodic increases in rates during the lease term which contributes to growth in same property NOI.
Contractual rent increases (including rent increases at the time of renewal) in each year for the next five years for our properties
are as follows:
(in thousands of dollars)
For the years ending
Contractual rent increases
Property Ownership by Geographic Area
2018
2019
2020
2021
$
8,441 $
6,892 $
4,772 $
4,114 $
2022
3,821
(in thousands of square feet)
As at December 31, 2017
Ontario
Alberta
Quebec
British Columbia
Eastern Canada
Manitoba
Income producing properties
Properties under development
Investment properties
Six Canadian Major Markets
(in thousands of square feet)
As at December 31, 2017
Calgary
Edmonton
Montreal
Ottawa (i)
Greater Toronto Area (ii)
Vancouver (iii)
Income producing properties
Properties under development
Total
NLA at
RioCan's
Interest
26,608
NLA at
Partners'
Interest
3,334
5,665
5,016
3,281
944
293
41,807
2,292
44,099
1,177
273
—
52
266
5,102
1,996
7,098
Retailer
Owned
Anchors
4,987
2,166
864
378
220
—
8,615
—
8,615
Total NLA
34,929
Percentage of
annualized gross
rental revenue
66.0%
Committed
occupancy
percentage
96.4%
9,008
6,153
3,659
1,216
559
55,524
4,288
59,812
14.8%
8.8%
7.7%
2.0%
0.7%
100.0%
—%
100.0%
98.1%
95.7%
96.6%
95.9%
97.4%
96.6%
—%
96.6%
NLA at
RioCan's
Interest
3,196
NLA at
Partners'
Interest
506
Retailer
Owned
Anchors
1,308
1,723
3,201
4,889
14,597
1,790
29,396
2,292
31,688
672
135
376
2,194
—
3,883
1,996
5,879
758
260
1,315
2,293
325
6,259
—
6,259
Total Site
NLA
5,010
3,153
3,596
6,580
19,084
2,115
39,538
4,288
43,826
(i) Area extends from Nepean and Vanier to Gatineau, Quebec.
(ii) Area extends north to Barrie, Ontario; west to Burlington, Ontario; and east to Oshawa, Ontario.
(iii) Area extends east to Abbotsford, British Columbia.
56
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at December 31, 2017, the committed occupancy for our six major markets is 97.6%, down by 0.4% compared to 98.0% at
September 30, 2017 mainly due to Sears stores closures, but increased by 1.1% from 96.5% at December 31, 2016 primarily due
to leasing of former Target space.
As at December 31, 2017, RioCan's share of income producing properties NLA in the six Canadian major markets account for
70.3% of total income producing properties NLA, including 34.9% in the Greater Toronto Area on NLA basis. As at December 31,
2017, 100% of the Trust's PUD NLA is in the six Canadian major markets. As discussed earlier in this MD&A, 76.1% of the Trust’s
annual rent revenue is generated from the six Canadian major markets as of December 31, 2017, including 40.9% from the GTA.
57
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Tenant Profile
As discussed under the Outlook section of this MD&A, RioCan is well aware that the Canadian retail environment has been
changing, although fundamentals remain solid. The key is how the Trust adapts itself to the ever changing retail landscape with a
vision for future trends and growth patterns. The Trust has been increasing its major markets focus while evolving its tenant mix
to better suit communities' needs, make its tenant mix more resilient to the impact of e-commerce, and increase the growth profile
of its portfolio. It has been reducing its tenant mix in department stores and apparel and in electronics and books, and increasing
its tenant mix in groceries, pharmacies, restaurants, personal services, specialty retailers and value retailers.
As of December 31, 2017, RioCan's tenant profile is as follows based on annualized net rent revenues:
(i) All trademarks and registered trademarks in the chart above are the property of their respective owners.
58
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Top 50 Tenants
We strive to reduce our exposure to rental revenue risk in our portfolio through geographical diversification, staggered lease
maturities, investment in residential developments, diversification of revenue sources resulting from a large tenant base, avoiding
dependence on any single tenant by ensuring no individual tenant contributes a significant percentage of our gross revenue and
ensuring a considerable portion of rental revenue is earned from national and anchor tenants.
At December 31, 2017, RioCan’s 50 largest tenants measured by annualized gross rental revenue have the following profile:
Annualized
percentage of
total rental
revenue
Number
of
locations
NLA
(in thousands of
square feet)
Percentage
of total NLA
Weighted
average
remaining lease
term (years) (i)
Rank
Tenant name
1
2
3
4
5
6
7
8
9
10
11
12
13
Loblaws/Shoppers Drug Mart (ii)
Canadian Tire Corporation (iii)
Walmart
Cineplex/Galaxy Cinemas
Winners/HomeSense/Marshalls
Metro/Super C/Loeb/Food Basics
Cara/Prime Restaurants/St-Hubert
Lowe's
Dollarama
Sobeys/Safeway
Staples/Business Depot
GoodLife Fitness
Petsmart
14 Michaels
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
Reitmans/Penningtons/Smart Set/Addition-Elle/Thyme Maternity
Bank Of Montreal
TD Bank
Chapters/Indigo
Best Buy
Leon's/The Brick
Hudson's Bay Company
Liquor Control Board Of Ontario (LCBO)
Value Village
LA Fitness
Tim Hortons/Burger King/Popeyes
DSW/Town Shoes/The Shoe Company
The Bank Of Nova Scotia
Jysk Linen
Rexall Pharma Plus
Bluenotes/Stitches/Suzy Shier/Urban Planet
Ardene
Bed Bath & Beyond
Canadian Imperial Bank of Commerce
Old Navy/The Gap/Banana Republic
London Drugs
Genuine Canadian Corp.
Sleep Country Canada
Overwaitea Foods
Bell/The Source
Subway
Golf Town
Royal Bank of Canada
Easyhome Ltd.
La Vie en Rose
Bouclair
Dollar Tree Stores
Benix & Co Inc.
Brewers Retail
49 Moores
50 MTY Food Group
4.8%
4.3%
4.2%
3.9%
3.9%
3.4%
1.8%
1.8%
1.6%
1.6%
1.5%
1.3%
1.2%
1.2%
1.2%
1.1%
1.1%
0.8%
0.8%
0.8%
0.7%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.3%
0.3%
0.3%
0.3%
0.3%
0.3%
80
82
29
27
72
49
104
13
83
25
33
29
30
25
73
43
52
20
14
13
9
21
16
8
64
32
29
15
13
53
37
12
26
20
8
33
26
5
66
80
9
18
49
21
15
18
23
21
17
64
2,067
2,050
3,607
1,443
1,942
1,999
504
1,517
760
898
740
624
484
502
372
333
258
284
291
347
472
192
350
306
168
204
140
353
133
375
181
256
121
184
225
143
121
200
85
90
155
87
124
103
126
149
117
115
102
68
4.9%
4.9%
8.6%
3.5%
4.6%
4.8%
1.2%
3.6%
1.8%
2.1%
1.8%
1.5%
1.2%
1.2%
0.9%
0.8%
0.6%
0.7%
0.7%
0.8%
1.1%
0.5%
0.8%
0.7%
0.4%
0.5%
0.3%
0.8%
0.3%
0.9%
0.4%
0.6%
0.3%
0.4%
0.5%
0.3%
0.3%
0.5%
0.2%
0.2%
0.4%
0.2%
0.3%
0.2%
0.3%
0.4%
0.3%
0.3%
0.2%
0.2%
7.5
4.8
9.3
7.4
6.8
6.7
7.0
10.4
6.3
8.4
6.2
11.1
6.2
7.6
4.4
6.5
6.0
8.1
4.2
4.7
10.8
10.5
6.3
9.8
7.0
4.9
4.3
8.8
8.8
4.7
4.9
7.5
4.1
3.8
10.2
6.5
4.7
8.1
4.6
5.1
3.1
4.6
3.4
6.6
3.4
5.0
7.5
6.3
3.9
4.1
7.0
(i) Weighted average remaining lease term based on annualized gross rental revenue.
59
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
56.4%
1,724
26,467
63.0%
MANAGEMENT’S DISCUSSION AND ANALYSIS
(ii)
Loblaws/Shoppers Drug Mart includes No Frills, Fortinos, Zehrs Markets, Joe Fresh and Maxi.
(iii) Canadian Tire Corporation includes Canadian Tire, PartSource, Mark’s, Sport Chek, Sports Experts, National Sports and Atmosphere.
ASSET PROFILE
Investment Property
Refer to note 5 of the 2017 Annual Consolidated Financial Statements for the change in consolidated IFRS carrying values of our
income properties.
Fair Valuation of Investment Properties
The net fair value increase for the Trust's investment properties for the year ended December 31, 2017 was $136.9 million based
on the weighted average capitalization rate of the Trust's investment portfolio at 5.56%, which compressed by 8 basis points from
5.64% at December 31, 2016. Fair value gains of $71.0 million for the three months ended December 31, 2017 were based on a
weighted average capitalization rate of 5.56%, which compressed by 5 basis points from 5.61% as of September 30, 2017. The
fair value gains for Q4 2017 and for the year were primarily driven by capitalization rate reductions in certain urban markets and
higher stabilized net operating income on certain income properties and updated valuation estimates on specific development
properties.
Valuation processes
Internal valuations
RioCan measures the vast majority of its investment properties, including co-owned properties, using valuations prepared by its
internal valuation team. This team consists of individuals who are knowledgeable and have specialized industry experience in
real estate valuations and report directly to a senior member of the Trust's management. The internal valuation team's processes
and results are reviewed and approved by the Valuations Committee on a quarterly basis.
The Trust's Valuations Committee is responsible for approving any fair value changes to the investment properties and consists of
senior management of the Trust including the President & Chief Operating Officer, Chief Financial Officer, and other executive
members.
External valuations
Depending on the property asset type and location, management may opt to obtain independent third party valuations from firms
that employ experienced valuation professionals having the required qualifications in property appraisals for purposes of adopting
such appraised values in the case of land parcels or assessing the reasonableness of its internal investment property valuations.
During 2017,the Trust obtained a total of 35 external property appraisals (including 11 vacant land parcels), which supported an
IFRS fair value of approximately $3.0 billion or 22% of the Trust's investment property portfolio as at December 31, 2017.
On a go-forward basis, the Trust will continue to select approximately six investment properties for external appraisal on a
quarterly basis or 24 investment properties a year.
Capitalization Rates
The capitalization rate is based on the location and quality of the properties and takes into account market data at the valuation
date. The table below provides details of the average capitalization rate (weighted on stabilized NOI) by market category:
As at
Major markets (i)
Secondary markets
Total average portfolio capitalization rate
Weighted average capitalization rate
December 31, 2017
December 31, 2016
5.28%
6.32%
5.56%
5.36%
6.33%
5.64%
(i)
Includes properties located in the six major Canadian markets of Calgary, Edmonton, Montreal, Ottawa, Vancouver and the Greater Toronto Area.
Income Property Acquisitions During 2017
During the year ended December 31, 2017, we completed the acquisition of one income property for $16.5 million. In connection
with this acquisition, we assumed debt of $8.6 million.
Subsequent to December 31, 2017, the Trust acquired Thickson Centre in Whitby, Ontario for a purchase price of $31.1 million at
a capitalization rate of 6.16% with no assumption of debt. The Trust also acquired the remaining one third interest in an existing
income property in Newmarket, Ontario for a purchase price of $18.5 million at a capitalization rate of 5.65% and assumed a
mortgage payable with a fair value of $9.4 million.
Income Property Dispositions During 2017
During the year ended December 31, 2017, we disposed of interests in 14 properties for sales proceeds aggregating $294.8
million. Details are provided in the table below.
60
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Property name and location
Five properties in ON, BC and SK
(sold to CT REIT) (i)
Brookside Mall, Fredericton, NB
BMO West Coast Portfolio, BC
Cambie Street, Vancouver, BC
A partnership interest
Total 2017 Dispositions
Quarter
disposed
Capitalization
rate
RioCan’s
sales price
(thousands
of dollars)
Debt
associated
with property
(thousands)
GLA disposed of
at RioCan’s
interest
(thousands of sqft)
Ownership
interest
disposed of
by RioCan
Q4
Q4
Q3
Q2
Q1
6.25% $ 135,197
$
21,700
10.20%
3.72%
3.29%
n.a.
10,000
30,309
94,200
25,114
—
—
—
—
978
140
50
148
—
100%
50%
100%
100%
24.9%
$ 294,820
$
21,700
1,316
(i) The weighted average capitalization rate for the seven properties under the total portfolio deal with CT REIT is 6.12%. The remaining two
properties are expected to close in Q1 2018.
Refer to Business Overview section of this MD&A for information on firm and conditional dispositions under contract as of
February 13, 2018.
Co-ownership Arrangements
Co-ownership activities represent real estate investments in which RioCan has joint control and either owns an undivided interest
in the assets and liabilities with its co-owners (joint operations) or ownership rights to the residual equity of the co-ownership (joint
ventures).
The Trust’s co-ownership arrangements are governed by co-ownership agreements with its various co-owners. RioCan’s
standard co-ownership agreement provides exit and transfer provisions, including, but not limited to, buy/sell and/or right of first
offers or refusals that allow for the unwinding of these co-ownership arrangements should the circumstances necessitate.
Generally, the Trust is only liable for its proportionate share of the obligations of the co-ownerships in which it participates, except
in limited circumstances. Credit risk arises in the event that co-owners default on the payment of their proportionate share of such
obligations. Co-ownership agreements will typically provide RioCan with an option to remedy any non-performance by a
defaulting co-owner. These credit risks are mitigated as the Trust has recourse against the asset under its co-ownership
agreements in the event of default by its co-owners, in which case the Trust’s claim would be against both the underlying real
estate investments and the co-owners that are in default. In addition to the matter noted above, RioCan has provided guarantees
on debt totalling $348.9 million as at December 31, 2017 on behalf of co-owners (December 31, 2016 - $340.9 million).
Selected Financial Information of Joint Operations (Proportionate Share)
(thousands of dollars)
As at December 31, 2017
Allied
Allied/Diamond (The Well)
Bayfield
CMHC Pension Fund
CPPIB
First Gulf
KingSett
Metropia/CD
Metropia/Bazis
Sun Life
Tanger
Trinity
Other
RioCan's
ownership
interest
Number of
investment
properties (i)
Assets (ii)
Liabilities (ii)
50%
50%
30% - 40%
50%
40% - 50%
50%
50%
50%
50%
40% - 50%
50%
50% - 81.25%
50% - 75%
4 $
138,488 $
14,933 $
1
5
1
3
1
3
1
1
2
4
9
18
193,261
105,736
48,874
240,574
82,335
415,864
46,701
209,103
97,735
164,510
322,133
270,471
16,499
46,342
29,678
18,387
46,163
203,101
1,944
129,985
14,237
11,908
147,483
74,726
Three months ended
December 31, 2017
Year ended
December 31, 2017
NOI (iii)
333 $
34
2,129
608
2,050
1,036
3,034
85
—
1,326
2,387
3,911
3,071
NOI (iii)
1,341
194
7,042
2,190
6,473
4,147
11,426
230
—
5,223
9,524
16,309
11,491
75,590
Total joint operations
53 $ 2,335,785 $
755,386 $
20,004 $
Includes properties under development and is based on the number of proportionately owned properties as at December 31, 2017.
(i)
(ii) Assets and liabilities are stated at RioCan's proportionate share.
(iii) Represents the proportionate share of NOI related to all properties for which we owned a proportionate interest during the reporting period.
61
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Selected Financial Information of Joint Operations and Joint Ventures
Total Assets
(thousands of dollars)
As at December 31, 2017
Proportionately consolidated joint operations
Income
properties
PUD (i)
Residential
development
inventory (iii) Other (ii) Total assets
December 31,
2016
Allied
$
31,875 $
84,644 $
16,099 $
5,870 $
138,488 $
Allied/Diamond (The Well) (v)
—
187,249
Bayfield
CMHC Pension Fund
CPPIB
First Gulf
KingSett
Metropia/CD
Metropia/Bazis
Sun Life
Tanger
Trinity
Other
99,443
48,486
147,532
76,261
4,237
—
87,280
5,315
280,333
130,405
—
6,717
2,510
113,085
97,400
150,310
285,977
175,345
—
10,303
31,041
72,189
—
—
—
—
—
—
38,094
72,561
—
—
—
6,012
2,056
388
5,762
759
5,126
1,890
20,947
335
3,897
5,115
5,250
17,687
193,261
105,736
48,874
240,574
82,335
415,864
46,701
209,103
97,735
164,510
322,133
270,471
86,780
131,881
103,967
41,841
239,060
80,210
347,013
—
169,174
97,065
179,314
397,984
179,524
Total assets of proportionately consolidated
joint operations
Equity accounted joint ventures (iv):
$ 1,395,472 $ 732,465 $
132,004 $ 75,844 $ 2,335,785 $
2,053,813
HBC (RioCan-HBC JV)
$
242,500 $
— $
— $
1,209 $
243,709 $
232,256
Marketvest Corporation/Dale-Vest
Corporation (Dawson-Yonge LP)
9,012
Total assets of equity accounted joint ventures
251,512
—
—
—
—
56
9,068
8,938
1,265
252,777
241,194
$ 1,646,984 $ 732,465 $
132,004 $ 77,109 $ 2,588,562 $
2,295,007
(i)
The value of properties under development includes active development projects as well as the value of development lands where development is
currently non-active.
(ii) Primarily includes cash and cash equivalents, rents receivable and other operating expenditures recoverable from tenants.
(iii) Residential development inventory represents the Yonge Eglinton Northeast Corner ePlace in Toronto with Metropia and Bazis Inc., development
at the prestigious Yorkville area of Toronto with Metropia and CD, the condominium component of the King Portland Centre in Toronto with Allied,
and the Windfields Farm townhomes in Oshawa, Ontario with Tribute.
(iv) Includes the Trust's equity accounted joint arrangements only and excludes our equity accounted investment in the WhiteCastle Funds.
(v) The Trust has a 50% interest in the commercial component and a 40% interest in the residential component of The Well project.
62
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total NOI
(thousands of dollars)
Proportionately consolidated joint operations (i)
Allied
Allied/Diamond (The Well)
Bayfield
CMHC Pension Fund
CPPIB
First Gulf Corporation
Kimco
KingSett
Metropia/CD
Sun Life
Tanger
Trinity
Other
Year ended December 31,
2017
$
1,341 $
2016
1,271
347
6,462
1,995
15,341
4,406
5,361
10,348
—
5,102
9,315
20,363
8,534
88,845
12,271
495
12,766
101,611
194
7,042
2,190
6,473
4,147
—
11,426
230
5,223
9,524
16,309
11,491
75,590 $
12,903 $
497
13,400
88,990 $
Total NOI of proportionately consolidated joint operations
Equity accounted joint ventures (ii):
HBC (RioCan-HBC JV)
Marketvest Corporation/Dale-Vest Corporation (Dawson-Yonge LP)
Total NOI of equity accounted joint ventures
Total joint arrangements
$
$
$
(i) Represents the proportionate share of NOI related to all properties for which we owned a proportionate interest during the year.
(ii) Includes the Trust's equity accounted joint arrangements only and excludes our equity accounted investment in the WhiteCastle Funds.
RioCan-HBC JV
As at December 31, 2017, the Trust's ownership interest in RioCan-HBC JV was 12.0% (December 31, 2016 - 11.6%). The
following tables present the financial results of RioCan-HBC JV on a 100% basis:
Condensed Statements of Financial Position
(thousands of dollars)
As at
Current assets
Non-current assets
Current liabilities
Non-current liabilities (i)
Net assets
RioCan's share of net assets in RioCan-HBC JV (ii)
(i)
Includes mortgages payable and lines of credit with maturities beyond twelve months.
(ii) Represents RioCan's proportionate share of net assets and other acquisition-related costs.
Condensed Statements of Income
(thousands of dollars)
Rental revenue
Operating expenses
Fair value gains (losses)
Interest expense
Net income
RioCan's share of net income in RioCan-HBC JV
December 31, 2017
December 31, 2016
10,045 $
2,003,865
12,747
782,892
1,218,271 $
147,897 $
9,067
1,980,330
10,675
546,114
1,432,608
167,581
Year ended December 31,
2017
129,766 $
11,387
(3,722)
18,386
96,271 $
11,347 $
2016
131,653
10,643
(11,825)
15,999
93,186
10,391
$
$
$
$
$
$
63
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Capital Expenditures on Income Properties
Maintenance capital expenditures
Maintenance capital expenditures refer to investments that are necessary to maintain the existing earnings capacity of our
property portfolio and are dependent upon many factors, including, but not limited to, lease expiry profile, tenant vacancies, the
age and location of the income properties and general economic and market conditions, which impact the level of tenant
bankruptcies. As at December 31, 2017, the estimated weighted average age of our income property portfolio is approximately 24
years (December 31, 2016 - approximately 23 years). Maintenance capital expenditures consist primarily of third party leasing
commissions, tenant improvements and certain recoverable and non-recoverable capital expenditures. Actual maintenance
capital expenditures can vary widely from period to period depending on a number of factors as noted above, as well as the level
of acquisition and disposition activity particularly given our targeted over $2.0 billion asset sales over the next two to three years
with our acceleration of major markets focus strategy announced in October 2017.
As a result, management believes that for the purpose of determining ACFO which, as discussed in the Non-GAAP Measures
section of this MD&A, is used as an input in assessing a REIT's distribution payout ratio, normalized capital expenditures are
more relevant than using actual capital expenditures. Refer to the Non-GAAP Measures section of this MD&A for details on how
management estimates its normalized capital expenditures used in the determination of ACFO.
Tenant improvements and external leasing commissions
Our portfolio requires ongoing investments of capital for costs related to tenant improvements, broker commissions on new and
renewal tenant leases and other third-party leasing costs. The amount and timing of capital outlays to fund tenant improvements
on our income property portfolio depend on several factors, which may include the lease maturity profile, unforeseen tenant
bankruptcies and the location of the income property.
Recoverable and non-recoverable capital expenditures
We also invest capital on a regular basis to physically maintain our income properties. Typical costs incurred are for expenditures
such as roof replacement programs and the resurfacing of parking lots. Tenant leases generally provide for the ability to recover a
significant portion of such costs from tenants over time as property operating costs. We expense or capitalize these amounts to
income properties, as appropriate.
The majority of such activities occur when weather conditions are favourable. As a result, these expenditures are generally not
consistent throughout the year.
Revenue enhancing capital expenditures
Capital spending for new or existing income properties that is expected to create, improve and/or add to the overall earnings
capacity of the property portfolio are considered revenue enhancing. RioCan considers such amounts to be investing activities.
As a result, we do not expect such expenditures to be funded from cash flows from operating activities and do not consider such
amounts as a key determinant in setting the amount that is distributed to our unitholders. Revenue enhancing capital
expenditures are not included in the determination of ACFO.
Summary of capital expenditures
Expenditures for third-party leasing commissions and tenant improvements, recoverable and non-recoverable, and revenue
enhancing capital expenditures pertaining to our income properties are as follows:
(thousands of dollars)
Maintenance capital expenditures:
Tenant improvements and external leasing
commissions
Recoverable from tenants
Non-recoverable
Revenue enhancing capital expenditures
Three months ended
December 31,
Year ended
December 31,
Normalized capital
expenditures (i)
2017
2016
2017
2016
2017
2018
$
$
$
4,917 $
13,853 $
29,089 $
33,677 $
27,500 $
24,000
5,122
6,372
9,287
1,504
9,424
12,440
18,920
11,746
15,000
10,000
13,000
8,000
16,411 $
24,644 $
50,953 $
64,343 $
52,500 $
45,000
3,475
2,313
18,230
11,706
19,886 $
26,957 $
69,183 $
76,049
(i) Refer to the Non-GAAP Measures section in this MD&A for details on how management estimates its normalized capital expenditures.
For the three months ended December 31, 2017, our total capital expenditures on income properties were $19.9 million
compared to $27.0 million for the same period in 2016. The $7.1 million decrease was primarily due to accelerated maintenance
spending in 2016 on some facilities that lost the Target anchor in order to increase occupancy back to historic levels, partially
offset by higher revenue enhancing capital expenditures in Q4 2017.
For the year ended December 31, 2017, our total capital expenditures on income properties were $69.2 million compared to
$76.0 million for the same period in 2016. The $6.9 million decrease was primarily due to the net effect of the following:
•
•
$4.6 million in lower payments for tenant improvements; and
$8.8 million in lower recoverable and non-recoverable capital expenditures; partly offset by
64
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
•
$6.5 million in higher revenue enhancing expenditures related to RioCan Yonge Eglinton Centre and major interior upgrades
underway at some of the Trust's enclosed mall properties.
RioCan's total maintenance capital expenditures for the year ended December 31, 2017 is $51.0 million, $1.5 million lower than
our normalized capital expenditures of $52.5 million for the year due to lower spending and timing of maintenance capital
expenditures. Refer to the Non-GAAP Measures section of this MD&A for details on how estimates of normalized capital
expenditures are determined for 2017 and 2018.
Properties Under Development
RioCan’s development program is an important component of its long-term growth strategy and is focused on well-located
properties in the six major markets in Canada. Often, these are properties that RioCan already owns and are located directly on,
or in proximity to, major transit lines such as the existing Toronto Transit Commission's subway lines or the Eglinton LRT line,
which is currently under construction. Development properties that the Trust has completed either independently or with co-
owners have contributed significantly to our existing growth. The Trust's development program will continue to be a significant
value creation driver and will secure diversification and growth of its future cash flows.
Population growth in these six major markets is significant and retailers want locations that are easily accessible to this
population. RioCan’s properties within its development program will serve that demand and returns on these properties are
expected to contribute significantly to our growth strategy over time. To support the aforementioned population growth, cities are
building infrastructure and this, in turn, supports RioCan’s development growth strategy in the six major markets in Canada.
Development opportunities arise from the fact that retail centres are generally built with lot coverages of approximately 25% of the
underlying lands and municipalities are supporting additional density particularly near major infrastructure investments.
Considering that RioCan already owns the land for its portfolio of mixed-use redevelopment opportunities, these projects are
expected to generate strong returns and increase the Trust's net asset value.
The Trust strategically manages its development risks. It undertakes developments selectively based on opportunities in its
portfolio and within the markets it focuses on. Development projects must be able to generate appropriate risk-adjusted returns,
and the Trust will not commence construction until it has secured the requisite leasing commitments pertaining to the commercial
portion of the mixed-use development. In the case of mixed-use projects with a significant residential component, construction of
the rental residential component will commence without pre-leasing, as residential rental units are typically not pre-leased before
construction start. Construction will only commence with appropriate risk-adjusted returns based on a strong understanding of the
rental market in the area which is based on third party studies relating to comparable properties in the area. RioCan will also
seek to undertake major developments with established developers. Furthermore, RioCan uses a staggered approach in its
development program to avoid unnecessary concentration of development projects in a single period of time to allocate risk
exposure and manage the Trust's capital and personnel resources. The Trust's mixed-use residential development will also allow
the Trust to access Canadian Mortgage and Housing Corporation (CMHC) insured mortgages, which will further diversify the
Trust's funding sources and offer an attractive cost of debt.
The Trust categorizes the projects within its development program as follows:
Category
Description
Greenfield Development
Projects on vacant land typically located in suburban markets that are being constructed or developed
from the ground-up for future use as income producing properties (IPP or IPPs).
Urban Intensification
Projects at existing IPPs located in urban markets, which typically involve increasing the density or
square footage of the properties and are often mixed-use projects.
Expansion and
Redevelopment
Existing IPPs, or components thereof, that are being repositioned through redevelopment, which
typically increases NOI by adding to the rentable area of the properties.
In addition to the above development categories, the Trust also owns vacant lands and other properties that could be used for
future developments. Such vacant land and other properties are reported as “Development Lands and Other” under properties
under development (PUD) in the Estimated Project Costs and Development Yield section of this MD&A.
RioCan’s estimated NLA , estimated future development costs and estimated proceeds from disposition as discussed throughout
this Properties Under Development section of this MD&A are subject to change. Such changes may be material to the Trust, as
assumptions are updated regularly based on revised site plans, the cost tendering process and continuing tenant negotiations.
These assumptions, among other items, include the following: anchor tenants, estimated NLA and mix among rental, air rights
sale, and condominiums/townhouses, the likelihood, timing and amount of future sales of air rights and land dispositions, tenant
rents, building sizes, project completion timelines, availability and cost of construction financing and zoning approvals. Although
the estimated development expenditures are based upon what management believes are reasonable assumptions, there can be
no assurance that actual results will be consistent with these projections and may, therefore, materially differ from management's
current estimates.
Management's current estimates and assumptions may change over time depending on market conditions and many other
factors. There is no assurance that all of these developments will be undertaken, and if they are, there is no assurance as to the
mix of commercial and residential developments, or the costs, or the phasing of the projects.
65
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Declaration of Trust and Financial Covenants
The provisions of the Trust’s Declaration have the effect of limiting direct and indirect investments in greenfield developments and
development properties held for resale (each net of related mortgage debt and mezzanine financing to fund co-owners’ share of
such developments) to no more than 15% of total consolidated unitholders’ equity of the Trust, as determined under IFRS. As at
December 31, 2017, RioCan's investments in greenfield development and residential inventory as a percentage of consolidated
unitholders' equity is 3.3% and, therefore, the Trust is in compliance with this restriction.
In addition, RioCan's revolving unsecured operating line of credit and non-revolving unsecured credit facilities agreements require
the Trust to maintain certain financial covenants, one of which includes a more restrictive covenant as it pertains to the Trust's
development activities. As of December 31, 2017, the Trust is in compliance with all financial covenants pursuant to the credit
facility agreements including the one relating to the Trust's development activities. Refer to note 26 of the 2017 Annual
Consolidated Financial Statements for further details.
Development Pipeline
RioCan's development pipeline as at December 31, 2017 is estimated as follows:
(thousands of square feet)
A. Active projects with detailed cost estimates
Greenfield Development
Urban Intensification (v)
Expansion & Redevelopment (vi)
Subtotal
B. Active projects with cost estimates in progress (vii)
Total Active Projects
C. Future estimated density (viii)
Total development pipeline
Estimated Density (NLA) at RioCan's Interest (i)
Number
of
Projects
(ii)
Total
PUD
(iii)
Residential
Inventory
(iv)
Components of PUD
Commercial
Residential
Rental
Air Rights
Sale
1
12
13
28
41
16
57
17
74
288
3,156
3,444
901
288
2,923
3,211
901
4,345
4,112
13,224
12,668
17,569
16,780
8,710
8,508
26,279
25,288
—
233
233
—
233
556
789
202
991
288
1,301
1,589
772
2,361
3,653
6,014
2,108
8,122
—
589
589
129
718
9,015
9,733
6,400
—
1,033
1,033
—
1,033
—
1,033
—
16,133
1,033
(i) Estimated density across the various components of the development pipeline is expressed as Net Leasable Area (NLA), which represents
approximately 90% of Gross Floor Area (GFA) for residential rental and inventory developments. This conversion factor is an estimate, which is
based on a number of assumptions including but not limited to, site plan approval, final building design and floor plans as well as the mix of
commercial and residential space in a multi-use development project.
(ii) Given the range of development activities and the multi-phase nature of the development projects included in the total development pipeline, a
single investment property could have more than one project. Therefore, the number of projects shall not be viewed as equivalent to number of
properties under development.
(iii) PUD NLA includes NLA for air right sales in addition to commercial and residential rental NLA, but excludes NLA for condominiums and townhouse
projects which are reported separately as Residential Inventory.
(iv) Represents the density associated with the development of our residential condominiums and townhouse projects, that are to be sold in the
normal course of business upon project completion, not to be held for long-term capital appreciation or rental income.
(v) Urban Intensification projects include approximately 0.1 million square feet that are currently IPP.
(vi) Expansion and Redevelopment projects include approximately 0.6 million square feet of vacant NLA which was primarily former Sears and Target
space prior to its redevelopment, with remaining 0.3 million square feet as incremental NLA.
(vii) Active projects with cost estimates in progress include approximately 2.5 million square feet that are currently IPP.
(viii) Future estimated density includes approximately 1.0 million square feet that are currently IPP.
The estimated 26.3 million square feet of development pipeline (at RioCan's interest) as of December 31, 2017 includes
commercial space, residential rental held for long-term rental income, condominiums and townhouses for sale, and density
associated with air rights sales. This development pipeline is to be developed in multiple phases. Approximately 4.1 million
square feet of NLA in the estimated development pipeline is existing NLA which is currently income producing, therefore the net
incremental density included in the total development pipeline is estimated at 22.2 million square feet as of December 31, 2017.
The 2.5 million square feet increase in NLA in the total development pipeline when compared to the third quarter of 2017 consists
of a 2.2 million square foot increase in projected future estimated density primarily due to the inclusion of all phases of estimated
density for the future Shoppers World Brampton development and a 0.3 million square foot increase due to the Trust's acquisition
of an additional 10% ownership in the commercial component of The Well project in October 2017, partially offset by the sale of
50% interest in the Dupont Street project in December 2017, and the transfer of certain expansion and redevelopment projects
from IPP to PUD, namely space associated with the units formerly occupied by Sears, net of transfers from PUD to IPP upon
project completion.
Estimated density for the condominium and townhouse developments sets out RioCan's current intention with respect to what it
plans to sell in the ordinary course of business once the projects are completed, rather than to hold on a long term basis for
capital appreciation or rental income purposes. As such, the costs associated with this NLA are treated as residential inventory
under IFRS and are thus not reported as PUD, even though this NLA forms part of the RioCan’s development program and is
included in the above estimated development pipeline. Condominium and townhouse developments are discussed under the
Residential Inventory section of this MD&A.
66
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Under IFRS, costs associated with air rights sales, which include, but are not limited to, the costs of underlying structure and
infrastructure required for the closing the air rights sales, are part of the costs of the properties under development. As a result,
density related to air rights sales is included as part of the PUD square footage.
Development projects that we have included in this discussion encompass a wide range of development activities, which may be
as simple as a pad addition at an existing site to a large Greenfield development project. Given the range of these development
activities and multi-phase nature of certain development projects, a single investment property could have more than one project.
Therefore, the number of projects shall not be viewed as equivalent to the number of properties under development.
A key milestone of the development process is to obtain the zoning approval. The following table breaks down the Trust's
estimated 26.3 million square feet of development pipeline (at RioCan's interest) by zoning status. As of the date of this MD&A,
52 projects or 12.3 million square feet of our development pipeline have zoning approvals, representing approximately 46.7% of
total estimated NLA in the Trust's current development pipeline. In addition the Trust has 5 projects or 5.3 million square feet with
zoning applications submitted, representing an additional 20.1% of the Trust's current development pipeline as of December 31,
2017.
During Q4 2017, the zoning approval was finalized for The Well and The Well - Residential Building 6 in Toronto. This was the
primary reason for the 1.5 million square feet increase in square feet of zoning approved from Q3 2017 to Q4 2017.
(thousands of square feet)
Zoning approved
Zoning application submitted
Future estimated density
Total development pipeline
Number of
Projects
% of square
footage
zoned
Total
PUD (ii)
Residential
Inventory
(iii)
Components of PUD
Commercial
Residential
Rental
Air Rights
Sale
Estimated Density (NLA) at RioCan's Interest (i)
52
5
17
74
46.7% 12,283
11,494
20.1%
33.2%
5,286
8,710
5,286
8,508
100.0% 26,279
25,288
789
—
202
991
5,032
982
2,108
8,122
5,429
4,304
6,400
1,033
—
—
16,133
1,033
(i) Estimated density across the various components of the development pipeline is expressed as NLA, which represents approximately 90% of GFA
for residential rental and inventory developments. This conversion factor is an estimate, which is based on a number of assumptions including but
not limited to, site plan approval, final building design and floor plans as well as the mix of commercial and residential space in a multi-use
development project.
(ii) PUD NLA includes NLA for air right sales in addition to commercial and residential rental NLA, but excludes NLA for condominiums and townhouse
projects which are reported separately as Residential Inventory.
(iii) Represents the density associated with the development of our residential condominiums and townhouse projects, that are to be sold in the
normal course of business upon project completion, not to be held for long-term capital appreciation or rental income.
Estimated Project Costs and Development Yield
RioCan's share of estimated development costs as of December 31, 2017 are summarized in the following table. This summary
includes estimated costs for the 41 active PUD projects with detailed cost estimates (described below), plus the current carrying
costs of the development lands and other, net of projected proceeds from dispositions. The 41 active PUD projects with detailed
cost estimates represent 4.1 million square feet or 16.3% of RioCan's estimated PUD development pipeline on an NLA basis. The
0.3 million increase in NLA in active projects with detailed cost estimates when compared to the third quarter of 2017 is primarily
due to the Trust's acquisition of an additional 10% ownership in the commercial component of The Well project in October 2017,
the transfer of certain expansion and redevelopment projects from IPP to PUD, namely space associated with the units formerly
occupied by Sears, net of the sale of 50% interest in the Dupont Street project in December 2017 and transfers from PUD to IPP
upon project completion.
The total estimated project costs excludes costs relating to condominiums or townhouse developments, which are included in
Residential Inventory in the consolidated financial statements and in this MD&A.
(thousands of dollars or
thousands of square feet)
Greenfield Development
Urban Intensification
Expansion & Redevelopment
Active projects with detailed cost estimates
Development Lands and Other (ii)
Projected proceeds from dispositions (iii)
Total
PUD Fair Value to Date
Number of
Projects
Total PUD
NLA (i)
Total PUD
Estimated
Costs
At RioCan's Interest
Costs incurred to date
Completed
(IPP)
PUD
Total
Estimated
PUD Costs
to Complete
1
12
13
28
41
288 $
108,778 $
37,314 $
42,510 $
79,824 $
28,954
2,923
3,211
901
1,457,597
1,566,375
459,875
20,460
57,774
—
458,523
501,033
270,048
478,983
978,614
558,807
1,007,568
270,048
189,827
4,112 $ 2,026,250 $
57,774 $
771,081 $
828,855 $ 1,197,395
297,449
(140,977)
297,449
297,449
—
—
(140,977)
$ 2,182,722 $
57,774 $ 1,068,530 $ 1,126,304 $ 1,056,418
$ 1,123,184
Total NLA includes NLA from commercial, residential rental and air rights sales and excludes NLA from residential inventory.
(i)
(ii) Development lands and other includes excess land and other properties that could be used for future developments.
67
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
(iii) Represents conditional land and air right sales that the Trust will sell instead of holding for long-term income, which management considers as
reductions to its overall development expenditures.
Total estimated project costs based on current assumptions for these projects, including the current carrying costs of
development lands and other, are $2.2 billion, net of estimated proceeds from land and air rights dispositions, with $1.1 billion of
costs incurred to date. Total estimated project costs include land acquisition costs, estimated construction costs, interest and
other carrying costs, as well as capitalized development staff compensation and other expenses. Phasing of the remaining $1.1
billion of estimated PUD costs to complete is discussed in the Project Phasing and NLA Completion section of this MD&A.
The relatively small $0.1 million increase in total estimated PUD costs for the development pipeline estimated as of December 31,
2017 when compared to the estimated costs as of September 30, 2017 was primarily due to the acquisition of an additional 10%
interest in the commercial component of The Well in October 2017, the transfer from IPP to PUD associated with the former
Sears space, partly offset by disposition of 50% interest in Dupont Street, PUD completions and transfers to IPP, and updated
costs estimates for a few projects.
The Trust has been funding and will continue to fund its development pipeline through its capital recycling program including net
proceeds from its strategic asset sales over the next two to three years as announced in October 2017, the sale of remaining
available-for-sale marketable securities, and strategic development partnerships.
The total estimated development costs, which includes the total costs of active projects with detailed cost estimates, development
lands and other, net of projected proceeds from dispositions, as at December 31, 2017 are further broken down by committed
and non-committed spending as follows:
(thousands of dollars)
Committed
Non-committed
Total
Total PUD
Estimated
Costs
At RioCan's Interest
Costs incurred to date
Completed
(IPP)
PUD
Total
Estimated
PUD Costs to
Complete
$
$
1,764,550 $
48,789 $
764,865 $
813,654 $
418,172
8,985
303,665
312,650
950,896
105,522
2,182,722 $
57,774 $
1,068,530 $
1,126,304 $
1,056,418
A project is considered to be committed when all major planning issues have been resolved, anchor tenant(s) has/have been
secured, and/or construction is about to commence or has commenced. Although a non-committed project may have a completed
portion, the Trust is not committed to completing the remaining phase(s) of the project if it so decides in due course. Development
Lands and Other are included in non-committed projects. The recent acquisition of the Yorkville property is included in
Development Lands and Other and therefore is categorized as non-committed in the table above until such time the project is
considered committed based on the above noted criteria.
On an aggregate basis, greenfield development and urban intensification projects (including residential rental development) are
currently estimated to generate a weighted average NOI yield of approximately 5% to 6%, although certain properties may be
outside either side of this range. This yield is derived from estimated stabilized net operating income following completion of a
project over total estimated project costs for the project net of estimated proceeds from dispositions including land and air right
sales. However, the actual development yield could differ if total estimated project costs and estimated stabilized net operating
income are different from those currently estimated, or if there are other unforeseen circumstances that cause actual results to
differ from assumptions.
Project Phasing and NLA Completion
As at December 31, 2017, the 41 active development projects with detailed costs estimates are currently expected to be
completed as follows in terms of NLA completion:
Estimated PUD NLA - At RioCan's Interest
(thousands of square feet)
Greenfield Development
Urban Intensification
Expansion & Redevelopment
Total
288
2,923
3,211
901
Active projects with detailed cost estimates
4,112
Greenfield Development and Urban
Intensification Only:
% of completion by year
100.0%
Cumulative % of completion by year
Completed
(IPP) (i)
136
63
199
—
199
6.2%
6.2%
PUD (ii)
2018
2019
2020
2021+
152
2,861
3,013
901
3,914
18
313
331
362
693
26
377
403
410
813
5
1,168
1,173
129
1,302
103
1,003
1,106
—
1,106
10.3%
16.5%
12.5%
29.0%
36.6%
65.6%
34.4%
100.0%
(i) Represents the portion of the development pipeline where tenants have taken possession and is included in income producing properties.
(ii) Represents the remaining portion of the NLA that is yet to be completed for the 41 active projects with detailed cost estimates as of December 31,
2017, including NLA for air right sales, and includes 0.6 million square feet of vacant NLA which is primarily former Sears and Target space prior to
its redevelopment.
68
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
As noted in an earlier section of this MD&A, estimates of NLA completion by year are subject to various factors which may or may
not be within management’s control. Estimates for the NLA to be completed decreased for 2018 while increased for 2019 when
compared to such estimates as of September 30, 2017, primarily as a result of timeline changes as the Trust rebalances the
staggering of projects and the inclusion of space formerly occupied by Sears, the redevelopment of which is estimated to be
substantially completed in 2019.
Annual costs for active PUD projects with detailed cost estimates are estimated in the $250 million to $300 million range over the
next two years. Together with the estimated $50 million to $100 million annual costs on residential inventory as noted in the
Residential Inventory section of this MD&A, total annual development costs are estimated in the $300 million to $400 million
range over the next two years. These estimates reflect management’s estimates as of December 31, 2017 and are subject to
changes due to potential changes in various underlying factors as noted earlier in this MD&A.
Approximately 362,000 square feet at RioCan’s interest of Expansion and Redevelopment projects are expected to be completed
during 2018. Of the 362,000 square feet, 185,000 square feet have committed leases and is expected to generate an annualized
net incremental IFRS rent revenue of $3.0 million, which is already included in the $9.0 million net incremental IFRS rent revenue
as disclosed under the In-place Occupancy section of this MD&A.
Mixed-Use Residential Development
Despite the rent control legislation introduced by the Government of Ontario in May 2017 which extends rent control to all
residential rental units regardless of when constructed, RioCan remains committed to its rental residential development program
while we assess the impact on individual projects and observe the broader market reactions.
RioCan targets to develop approximately 10,000 rental residential units over the next decade. However, 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, there is no
assurance as to the mix of commercial, residential rental and condominium residential developments, or the costs, or the phasing
of the projects.
RioCan has currently identified a number of properties that it considers to be strong possible intensification opportunities, all of
which are in the six major markets in which it operates and are typically located in the vicinity of existing or planned substantive
transit infrastructure. These properties are in various stages of development. The following table provides a summary of our
mixed-use residential development program, which accounts for 95.6% of our overall estimated 26.3 million square feet of
development pipeline as discussed earlier in this section of the MD&A. To further clarify, this summary does not include
Greenfield and Urban Intensification projects that have commercial components only.
69
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Locations
RioCan Ownership
% (Partner)
Total
NLA at
100%
Residential
Inventory
Total PUD (ii)
(iii) Commercial
Residential
Rental
Air Rights
Sale
Estimated Density (NLA) at RioCan's Interest (i)
PUD Components
(thousands of square feet)
A.
Active mixed-use residential projects
with detailed cost estimates (vi)
Urban Intensification
Brentwood Village -Residential (iv)
Calgary, AB
50% (Boardwalk)
Dupont Street (iv)
Toronto, ON
50% (Woodbourne)
Fifth and Third East Village (iv)
Calgary, AB
100%
Gloucester -Residential (iv)
Gloucester, ON
50% (Killam)
King-Portland Centre (iv)
Toronto, ON
50% (Allied)
Yonge Eglinton Northeast Corner (iv)
Toronto, ON
The Well (iv)
Toronto, ON
50% (Metropia /
Bazis)
50% commercial
( Allied )
40% residential
( Allied / Diamond)
College & Manning (iv)
Toronto, ON
50% (Allied)
The Well -Residential Bldg 6 (iv)
Toronto, ON
50% (Woodbourne)
145
181
755
185
425
707
72
90
755
93
213
354
72
90
755
93
166
168
2,563
1,173
1,173
113
375
56
188
56
188
—
—
—
—
47
186
—
—
—
5
16
158
3
166
22
737
32
—
5,449
2,994
2,761
233
1,139
Expansion and Redevelopment
Yonge Sheppard Centre (iv) (v)
Toronto, ON
50% (KingSett)
412
206
206
—
77
5,861
3,200
2,967
233
1,216
Total active mixed-use residential
projects with detailed cost estimates - 10
projects (vi)
B. Active mixed-use residential projects
with cost estimates in progress (vii)
Approved Zoning
Sunnybrook Plaza (iv)
Clarkson Village (iv)
Toronto, ON
50% (Concert)
Mississauga, ON
100%
Gloucester -Residential phase II (iv)
Gloucester, ON
50% (Killam)
Brentwood Village -Residential phase II
(iv)
Calgary, AB
100%
Edmonton, AB
40% (Bayfield)
2,010
316
418
472
955
158
418
236
955
804
727
744
972
158
418
236
955
804
727
744
972
—
—
—
—
—
—
—
—
100%
100%
100%
727
744
972
100% of
commercial, 50% of
residential (Tribute)
1,931
1,375
819
556
100%
100%
977
572
977
572
977
572
—
—
22
35
9
435
300
479
96
191
819
163
122
Victoria, BC
Ottawa, ON
Calgary, AB
Oshawa, ON
Toronto, ON
Ottawa, ON
10,094
7,938
7,382
556
2,671
4,711
Toronto, ON
50% (Talisker)
Mississauga, ON
Toronto, ON
Toronto, ON
Toronto, ON
100%
100%
100%
100%
614
330
582
307
330
582
2,760
2,760
1,307
1,307
5,593
5,286
307
330
582
2,760
1,307
5,286
—
—
—
—
—
—
64
120
61
600
137
982
243
210
521
2,160
1,170
4,304
15,687 13,224
12,668
556
3,653
9,015
67
74
—
90
—
146
—
—
597
—
—
—
—
436
24
188
589
129
718
136
383
227
520
504
248
648
781
—
814
450
—
—
1,033
—
1,033
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Millwoods (iv)
Tillicum (iv)
Westgate (iv)
Southland (iv)
Windfields Farm (iv)
Markington (iv)
Elmvale (iv)
Zoning applications submitted
Queensway
RioCan Grand Park
Dufferin Plaza
RioCan Scarborough Centre
RioCan Leaside Centre
Total active mixed-use residential
projects with cost estimates in progress -
16 projects (vii)
Total active mixed-use residential
projects - 26 projects
C.
Future estimated density - 17 projects
(viii), (ix)
Total mixed-use residential developments
- 43 projects
Mixed-use residential developments as a
percentage of total development pipeline
21,548 16,424
15,635
789
4,869
9,733
1,033
9,329
8,710
8,508
202
2,108
6,400
—
30,877 25,134
24,143
991
6,977
16,133
1,033
95.6% 95.5%
100.0%
85.9%
100.0%
100.0%
(i) Estimated density across the various components of the development pipeline is expressed as NLA, which represents approximately 90% of GFA
for residential rental and inventory developments. This conversion factor is an estimate, which is based on a number of assumptions including but
not limited to, site plan approval, final building design and floor plans as well as the mix of commercial and residential space in a multi-use development
project.
(ii) PUD NLA includes NLA for air right sales in addition to commercial and residential rental NLA, but excludes NLA for condominiums and townhouse
projects which are reported separately as Residential Inventory.
(iii) Represents the density associated with the development of residential condominiums and townhouse projects.
70
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
(iv) As at the date of this MD&A, RioCan has obtained final zoning approvals for the development of these properties. The above table includes only
mixed-use residential development projects and thus does not include Greenfield Development and Expansion and Redevelopment projects that do
not have residential components. As a result, the Trust has more projects with zoning approvals than what is included in this table.
(v) Commercial square footage at Yonge Sheppard Centre represents the redevelopment of the existing enclosed mall retail space, which is all incremental.
(vi) Active mixed-use residential projects with detailed cost estimates include approximately 0.1 million square feet that are currently IPP.
(vii) Active mixed-use projects with cost estimates in progress include approximately 2.5 million square feet that are currently IPP.
(viii) Future estimated density includes approximately 1.0 million square feet that is currently IPP.
(ix)
Includes the Yorkville property development site acquired in Q3 2017, which is expected to be developed into 0.5 million (at 100%) square feet of
mixed-use residential and retail space.
Out of the 26.3 million square feet of the Trust's estimated development pipeline, mixed-use residential projects account for
approximately 95.6% of its estimated development pipeline (RioCan's interest). This consists of 43 projects with currently estimated
25.1 million square feet of NLA, consisting of 7.0 million square feet of commercial NLA and 18.2 million square feet of residential
NLA, including residential rental, air right sales, and condominium or townhouse developments. Out of the 25.1 million square feet
(RioCan's interest) of residential development pipeline, approximately 3.5 million square feet of commercial NLA is currently income
producing.
Residential rental units and air rights sales (17.2 million square feet at RioCan's interest) account for 65.3% of the Trust's total
development pipeline of 26.3 million square feet as of December 31, 2017.
Out of the 43 identified mixed-use residential projects, RioCan has 26 projects that are currently active, out of which 21 projects
have zoning approvals and 5 projects are currently under zoning application.
If all planning applications pertaining to the 5 projects currently under zoning application are approved, the 26 active mixed-use
residential development projects are expected to generate a total of approximately 21.5 million square feet of NLA at 100% share.
At RioCan’s interests, these 26 active mixed-use residential developments are estimated to generate 16.4 million square feet of
NLA including, 4.9 million square feet of commercial NLA and 11.6 million square feet of residential NLA, including residential
rental and air rights sales.
In addition to the 26 active residential development projects, Riocan has also identified sites with future density which have the
potential of contributing an additional 8.7 million square feet of NLA at RioCan’s share, consisting of 2.1 million square feet of
commercial NLA and 6.6 million square feet of residential NLA. The 2.2 million increase in the estimated future density from Q3
2017 to Q4 2017 is primarily due to inclusion of all phases of future estimated density for our Shoppers World Brampton property
in the GTA while balancing the number of projects included in this estimate. Except for 1.0 million square feet that is currently
income producing, the remaining 7.7 million square feet is the estimated incremental density.
Overall, out of the 25.1 million square feet (RioCan's share) of mixed-use residential development, 11.1 million square feet or
44.3% currently have zoning approvals, 5.3 million square feet or 21% currently have zoning applications submitted.
Properties under Development Continuity
The change in the IFRS consolidated net carrying amount is as follows:
(thousands of dollars)
Balance, beginning of year
Acquisitions
Dispositions
Development expenditures
Transfers PUD to IPP - cost
Transfers PUD to IPP - fair value
Transfers IPP to PUD
Transfers to residential inventory
Fair value gains, net
Earn-out consideration
Other
Balance, end of year
Three months ended December 31,
Year ended December 31,
2017
2016
2017
$
1,039,775
$
891,029
$
915,508
$
25,425
(52,904)
95,261
(53,730)
5,992
51,424
(3,102)
15,043
—
—
319
(700)
78,689
(54,418)
(2,557)
142
—
3,004
—
—
63,933
(88,127)
324,596
(224,311)
4,240
112,473
(16,174)
27,437
3,609
—
2016
872,202
10,043
(5,436)
243,243
(264,832)
(9,308)
21,019
—
48,196
—
381
$
1,123,184
$
915,508
$
1,123,184
$
915,508
Development Property Acquisitions
During the fourth quarter of 2017, the Trust completed two development property acquisitions aggregating $25.4 million at
RioCan's interest. During the year ended December 31, 2017, the Trust completed six development property acquisitions
aggregating $63.9 million at RioCan's interest. Notable transactions that occurred during the year ended December 31, 2017
include:
71
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
•
•
•
•
Yorkville - During Q3 2017, RioCan acquired a 75% ownership interest in properties located in the prestigious Yorkville
area of Toronto, Ontario. The total consideration of these properties, including transaction costs was $67.5 million, which
was paid by $35.9 million in cash, $28.5 million repayment of a loan receivable, and $3.1 million assumption of debt.
After the sale of a 25% interest in the project by RioCan on October 12, 2017 to Capital Developments (CD) at a sale
price of $21.7 million, including certain cost recoveries, RioCan owns a 50% ownership interest in the properties at a
total consideration of $45.8 million including transaction costs, which consists of $36.9 million as residential inventory
and $8.9 million classified as properties under development. Subsequent to December 31, 2017, the partners acquired
three other adjacent properties for this development at an aggregate purchase price, including transaction costs, of
$31.1 million (at RioCan's 50% interest).
The partners are in the early stages of creating plans to redevelop the site, which has the potential for approximately
half a million square feet of luxury condominiums, retail uses and up to 82 residential rental replacement units. RioCan
has agreed to purchase the partners' interest in the retail portion upon project completion at a 6% capitalization rate and
has the right of first opportunity to acquire the residential rental replacement units.
Yonge Eglinton Northeast Corner - On July 5, 2017, RioCan entered into an agreement with its partners to purchase
the remaining 50% interest in the rental residential tower of the landmark, mixed-use, transit oriented project at the
northeast corner of Yonge Street and Eglinton Avenue, also known as ePlace. The purchase price is estimated in the
range of $95 to $105 million upon closing, which is expected to occur in the first quarter of 2019, subject to final cost
adjustments. Upon closing, the project will add 466 rental units, including 65 residential rental replacement units, to the
Trust's residential portfolio.
RioCan also has an agreement to acquire the remaining 50% interest in the retail component of the ePlace at a
purchase price based on a 7% capitalization rate and the stabilized net operating income upon completion in 2019.
The Well - On October 5, 2017, RioCan and its co-owner Allied acquired WNUF 2 undivided 20% interest in the
commercial component of The Well for a purchase price, including transaction costs, of $46.1 million ($23.0 million at
RioCan's additional 10% interest). As a result of this transaction, both Allied and RioCan each own an undivided 50%
interest in the commercial component and will pursue the construction and ultimate operation of the commercial
component as equal partners.
E2 Condos at Yonge & Eglinton - On December 11, 2017 RioCan acquired a 10% interest in E2 Condos, a
development adjacent to RioCan's residential rental project at the northeast corner of Yonge and Eglinton. RioCan will
invest a total of $3.0 million and will participate in project profits and earn fees for easement rights. During Q4 2017,
RioCan contributed $1.4 million of capital to the project. This investment is accounted for as other assets under IFRS in
our consolidated balance sheet and therefore, is not included in either Property Under Development or Residential
Inventory on the Trust's consolidated balance sheet.
In addition to above noted acquisitions, the Trust also completed the acquisition of one development property in Q1 2017 for $5.4
million, two parkland parcels in Q3 2017 for a total purchase price of $2.5 million, and acquisition of the former Sears space at
Garden City Mall in Winnipeg, Manitoba for $2.4 million (at RioCan's 30% interest).
Development Property Dispositions
During the year ended December 31, 2017, we completed nine development property dispositions aggregating $88.1 million at
our interest, as noted below. During the three months ended December 31, 2017, RioCan completed seven development
property dispositions aggregating $52.9 million at RioCan's interest.
• Gloucester Residential - On April 21, 2017, Killam and RioCan formed a 50/50 joint venture to develop a rental
residential community on a 7.1 acre site, also known as Frontier, located at Gloucester City Centre on the new
Confederation LRT in Ottawa, Ontario. The zoning is approved for a total of four residential towers containing up to 840
units (at 100%), with the first phase consisting of a 23-storey tower containing approximately 222 units (at 100%). The
first phase of project is currently under construction and is estimated to be completed in 2019. This leading edge
development will maximize efficiencies with the incorporation of a geothermal energy system for the building's heating
and cooling. Killam acquired its interest for $9.0 million (50% interest) including certain cost recoveries.
•
•
Sunnybrook Plaza - On June 14, 2017, RioCan formed a 50/50 joint venture with Concert to redevelop the
Sunnybrook Plaza property located on the new Eglinton LRT in Toronto, Ontario, into a 16-storey and an 11-storey
mixed-use project. Concert acquired its interest for $26.2 million (50% interest).
Yorkville - As discussed above, RioCan disposed of a 25% interest in the project to CD at a sale price of $21.7 million
on October 12, 2017, including certain cost recoveries.
• Windfield Townhouse Development - On October 27, 2017, RioCan completed the sale of a 50% interest in an
approximately 31 acre land parcel of RioCan's Windfields Farm development property to Tribute for a total sales price of
$3.1 million (50% interest). The land price in this transaction was low because Tribute is the exclusive party that can
remove the existing restrictions for townhouse development. The co-owners plan to develop 551 townhouses on the
land in several phases. 166 of the 170 units released in phase one and 14 of the 94 units in phase two have been sold.
Servicing and roadwork construction began in the third quarter of 2017 and building construction is projected to
commence in 2018.
• Brentwood Village - On November 23, 2017, RioCan completed the sale of a 50% interest in a discrete portion of its
Brentwood Village property in Calgary, Alberta to Boardwalk for total proceeds, including certain cost recoveries, of $4.8
million (50% interest). The co-owners plan to develop this discrete portion of the property into a mixed-use project with
72
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
163 residential rental units plus retail space. RioCan continues to own 100% of the main portion of the property
including existing retail and future density.
• Dupont Street - On December 15, 2017, RioCan completed the sale of a 50% interest in its 740 Dupont Avenue mixed-
use development project in Toronto, Ontario to Woodbourne for total proceeds, including certain cost recoveries, of $9.4
million (50% interest). The mixed-use project will consist of 210 residential rental units plus retail space. Woodbourne is
also the Trust's partner on the Trust's largest 584-unit residential development project - Building 6 at The Well in
downtown Toronto.
•
Excess land - RioCan also completed the sale of three parcels of excess land for total sale proceeds of $13.9 million.
Transfers to Residential Inventory
During the year ended December 31, 2017, RioCan announced changing the residential rental component of the King Portland
Centre to condominium units. In addition, the costs associated with the Windfields Farm residential development were transferred
to residential inventory upon formation of the joint venture with Tribute to develop townhomes.
Completed Developments in 2017
During the three months and year ended December 31, 2017, RioCan transferred $53.7 million and $224.3 million, respectively,
in costs to income producing properties pertaining to 117,000 and 849,000, respectively, square feet of completed greenfield
development and expansion and redevelopment projects.
A summary of RioCan’s NLA completed during the period is as follows:
(thousands of square feet, unless otherwise noted)
Property location
Greenfield Developments
East Hills, Calgary, AB
Expansion and Redevelopment
Brentwood Village, Calgary, AB
Burlington Mall, Burlington, ON
Charlottetown Mall, Charlottetown, PEI
Corbett Centre, Fredericton, NB
Desserte Ouest, Laval, QC
Empress Walk, Toronto, ON
Flamborough Power Centre, Hamilton, ON
Gates of Fergus, Fergus, ON
Grant Crossing, Ottawa, ON
Herongate Mall, Ottawa, ON
Millcroft Shopping Centre, Burlington, ON
Parkland Mall, Yorkton, SK
Place Greenfield Park, GP, QC
Riocan Durham Centre, Ajax, ON
RioCan West Ridge, Orillia, ON
Sage Hill Crossing, Calgary, AB
Shoppers City East, Ottawa, ON
Shoppers World Brampton, Brampton, ON
South Hamilton Square, Hamilton, ON
Stratford Centre, Stratford, ON
The Stockyards, Toronto, ON
Tanger Outlets Ottawa, Ottawa, ON
Trinity Common Brampton, Brampton, ON
Total development completion
Greenfield Development
NLA at RioCan's Interest
2017
RioCan’s %
ownership
Total
NLA
Q4
Q3
Q2
Q1
Tenants
40%
100%
50%
100%
100%
100%
100%
100%
100%
80%
75%
50%
100%
100%
100%
100%
50%
63%
100%
100%
100%
50%
50%
100%
3
3
4
24
26
21
94
14
40
9
5
33
50
21
55
69
7
28
4
111
32
42
77
12
68
849
—
—
4
24
—
—
—
14
—
—
—
—
35
—
—
20
—
—
—
—
—
—
—
—
20
117
—
—
—
—
—
7
—
—
—
9
—
10
—
—
5
43
—
3
—
111
—
17
—
—
48
—
—
—
—
—
—
94
—
40
—
—
—
15
—
50
6
7
20
—
—
—
—
—
—
—
3 Smitty's
3
— Titan's Vault Games
— Denninger's, Indigo, Real Fruit Bubble Tea
26 SportChek
14 NB Liquour
— JYSK, Gold's Gym, Staples
— Pet Smart
— Treasure Hunt
— Mark's Warehouse
5 Shoe Company
23 GoodLife Fitness
— Value Village, Movati Fitness
21 Winners
— JYSK, Giant Tiger
— Michaels, PetSmart, Structube, DSW
— Sports Medicine
5 Dollarama, Sally Beauty, Subway, 9-Round
Fitness, Great Canadian Pizza
4 Tim Horton's, Pita Pit, A&W
— GoodLife Fitness, Staples, JYSK, Giant Tiger
32 JYSK
25 Michaels, Value Village
77 Nations
12 Marshalls
— Michaels, Winners, DSW
253
232
247
During 2017, the Sage Hill project was substantially completed and transferred into income producing property. The project is a
380,000 square foot new format centre located in a growing residential suburb in northwest Calgary, co-owned with KingSett on a
50/50 basis. The 32 acre development site is anchored by Walmart and Calgary’s first Loblaws City Market banner, with an
73
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
excellent mix of strong national (London Drugs, Dollarama, Scotiabank, McDonalds, Royal Bank of Canada) and high quality
regional retailers.
As at December 31, 2017, RioCan currently has one greenfield development project with a detailed cost estimate. This project is
expected to add approximately 288,000 square feet of NLA at RioCan’s interest upon completion. Of this amount, 136,000 square
feet at RioCan's interest has been completed as at December 31, 2017 and is already income producing.
(thousands of dollars or
thousands of square feet)
RioCan's
%
ownership
Total PUD NLA upon project
completion
Completed
PUD
Total
Total
Estimated
PUD
Costs
At RioCan's Interest
Costs incurred to date
Completed
PUD
Total
Estimated
PUD
Costs to
Complete
%
commercial
leased (i)
Anticipated
Date of
Development
Completion
East Hills, Calgary, AB
40%
136
152
288 $ 108,778 $
37,314 $ 42,510 $ 79,824 $
28,954
55%
2021
PUD Fair Value to date
$ 46,596
(i) Leasing activity includes leasing that is conditional on receiving municipal approvals and meeting construction deadlines. The percentage of
commercial leasing activity is as at February 13, 2018.
During Q4 2017, the Trust reclassified approximately $17.0 million of the PUD costs to date for this project to the Development
and Other category as the costs are related to vacant land that the Trust does not plan to develop in the near future. As a result,
total estimated PUD costs and costs to complete were also adjusted downward.
For East Hills, approximately 160,000 square feet of NLA has committed leases in-place, which includes tenants that have taken
possession of the space, at a weighted average net rent rate of approximately $18.58 per square foot.
Urban Intensification
A focus within our development growth strategy is urban intensification, which is another name for our residential or mixed-use
development program. The Trust currently has 12 active urban intensification projects with detailed cost estimates that will
generate approximately 2.9 million square feet of NLA at RioCan’s interest of space upon completion over the next six years,
including air rights that have been or are expected to be sold. Excluding such air rights, these 12 active urban intensification
projects are expected to generate approximately1.8 million square feet of estimated NLA. Our urban intensification program
currently is focused on properties located in densely populated areas in the urban cores of Toronto, Ottawa and Calgary.
A summary of our urban intensification projects with detailed cost estimates as at December 31, 2017 is as follows:
(thousands of dollars
or thousands of square
feet)
491 College Street,
Toronto, ON (v)
Bathurst College
Centre, Toronto, ON (v)
Brentwood Village -
Residential, Calgary,
AB (v)
Dupont Street, Toronto,
ON (v)
Fifth and Third East
Village, Calgary, AB (v)
Gloucester -
Residential, Ottawa,
ON (v)
King-Portland Centre,
Toronto, ON (v)
642 King Street West,
Toronto, ON (v)
The Well, Toronto, ON
(iv), (v)
Yonge Eglinton
Northeast Corner,
Toronto, ON (v)
College &
Manning,Toronto, ON
The Well -Residential
Bldg 6, Toronto, ON(iii)
Total Estimated PUD
Costs (ii)
PUD Fair Value to date
Total PUD NLA upon project
completion
Costs incurred to date
At RioCan's Interest
RioCan’s
%
ownership Completed
PUD
Total
Total
Estimated
PUD Costs Completed
PUD
Total
Estimated
PUD Costs
to
Complete
%
commercial
leased (i)
Anticipated
Date of
Development
Completion
50%
100%
50%
50%
100%
50%
50%
50%
'50% of
commercial
; 40% of
residential
air rights
—
—
—
—
—
3
31
—
12
12 $
11,970 $
— $ 10,751 $ 10,751 $
1,219
139
139
107,433
— 79,730
79,730
27,703
63%
79%
2018
2019
72
90
72
90
38,632
70,221
—
—
5,503
5,503
33,129
—%
2020
9,710
9,710
60,511
13%
2021
755
755
134,433
— 57,554
57,554
76,879
70%
2021
90
93
41,910
226
17,438
17,664
24,246
100%
2019
135
166
82,355
11,249
42,631
53,880
28,475
13
13
17,704
— 14,834
14,834
2,870
94%
39%
2018 &
2019
2018
— 1,173
1,173
675,208
— 140,008
140,008
535,200
—%
2021
50%
—
167
167
117,994
— 74,147
74,147
43,847
31%
2018 &
2019
50%
50%
29
—
27
56
30,561
8,985
5,763
14,748
15,813
79%
2021
188
188
129,176
—
454
454
128,722
—%
2022+
63
2,861
2,923 $ 1,457,597 $
20,460 $458,523 $478,983 $ 978,614
$577,457
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
(i) Leasing activity includes leasing that is conditional on receiving municipal approvals and meeting construction deadlines. Leasing shown in this
table is calculated as a percentage of commercial square footage only as there is no pre-leasing for residential rental square footage. The
percentage of commercial leasing activity is as at February 13, 2018.
(ii) Total Estimated PUD Costs exclude fair value gains of $118.9 million.
(iii) This development project has not yet commenced construction, therefore, costs incurred to date have not been substantial.
(iv) Total estimated PUD costs for The Well do not include approximately $72.1 million (at RioCan's interest) of estimated proceeds from air rights
dispositions. Net of these estimated proceeds from dispositions, total estimated PUD costs for The Well (at RioCan's interest) would be $603.1
million.
(v) These projects are committed, representing projects where all planning issues have been resolved, anchor tenant(s) has or have been secured,
and/or construction is about to commence or has commenced.
As of the release date of this MD&A, approximately 364,000 square feet of the above urban intensification NLA under
development has committed or in-place leases, which includes tenants that have taken possession of the space, at a weighted
average net rent rate of approximately $29.98 per square foot.
The increase in total estimated PUD costs when compared to the third quarter of 2017 results primarily from the acquisition of an
additional 10% interest in the commercial component of The Well in October 2017, partly offset by disposition of a 50% interest in
Dupont Street in December 2017 and updates to costs estimates for certain projects.
Expansion & Redevelopment
As at December 31, 2017, RioCan’s expansion and redevelopment pipeline will, upon completion, comprise approximately 0.9
million square feet of NLA at RioCan’s ownership interest. Approximately 0.6 million square feet of NLA is not incremental as it
represents primarily vacant former Sears and Target space prior to its redevelopment. The 0.2 million increase in NLA during the
three months ended December 31, 2017 was primarily due to the transfer of certain projects from IPP to PUD, namely space
associated with the units formerly occupied by Sears, net of transfers from PUD to IPP upon project completion.
A summary of RioCan’s expansion and redevelopment projects as at December 31, 2017 is as follows:
(thousands of dollars or thousands of square feet)
Brentwood Village, Calgary, AB (iv)
Burlington Mall, Burlington, ON
Empress Walk, Toronto, ON
Northgate Village SC, Calgary, AB
Place Super Carnaval Laval, Laval, QC
RioCan Meadows, Edmonton, AB
Sage Hill, Calgary, AB
Tanger Outlets - Kanata, Kanata, ON
The Stockyards, Toronto, ON
Yonge Sheppard Centre, Toronto, ON
1208 1216 Dundas Street East, Whitby ON
RioCan Centre Victoria, Whitby, ON
Properties with former Target units (ii) - 6
projects
Properties with former Sears units (ii) - 10
projects
Total Estimated PUD Costs (i)
PUD Fair Value to date
At RioCan's interest
Costs incurred to date
RioCan's %
Ownership
Total PUD
NLA upon
project
completion
Total
Estimated
PUD Costs
Costs
incurred to
date
Historical
IPP Costs
(iii)
Estimated PUD
Cost to
Complete
Total
100%
50%
100%
100%
100%
100%
50%
50%
50%
50%
100%
50%
10 $
3,952 $
14 $
2,618 $
2,632 $
23
11
7
16
15
4
19
10
20,915
8,051
11,100
19,151
3,426
4,857
3,673
7,732
2,099
11,238
7,452
935
14
1,581
1,059
58
3,707
606
2,000
2,100
818
3,760
328
3,761
6,700
2,935
2,114
2,399
4,819
386
7,468
7,306
1,320
1,764
491
2,743
1,274
2,913
1,713
3,770
146
206
250,850
104,980
26,817
131,797
119,053
7
44
148
381
5,170
7,874
27
1,619
1,551
6,176
1,578
7,795
48,416
6,965
21,999
28,964
82,221
4,142
46,562
50,704
3,592
79
19,452
31,517
901 $
459,875 $ 133,758 $ 136,290 $ 270,048 $
189,827
$ 223,309
(i)
Total estimated PUD costs include carrying amounts transferred from IPP for redevelopment and exclude historical fair value losses of $46.7
million.
(ii) RioCan transferred carrying value associated with the spaces formerly occupied by Sears and Target from IPP to PUD. The estimated PUD costs
to complete are based upon various scenarios with the objective of developing these assets, such that RioCan can attract new tenants, achieve
higher rents and improve the overall shopping centre.
(iii) Historical costs were costs of IPP prior to the transfer to PUD.
(iv) Represents the commercial redevelopment project only, refer to Urban Intensification section of this MD&A for the residential component.
Residential Inventory
Residential inventory are properties acquired or developed for which RioCan intends to dispose of all or part of such properties in
the ordinary course of business, rather than to hold on a long term basis for capital appreciation or for rental income purposes. It
is expected that the Trust will earn a return on these assets through a combination of property operating income earned during
the relatively short holding period, which will be included in net income and sales proceeds.
Transfers of investment properties into residential inventory are based on a change in use evidenced by management's strategic
intent, together with the commencement of development activities with a view to sell, at which point an investment property would
be transferred to inventory. Transfers from inventory to investment property are based on a change in use evidenced by
management's commitment to use a property for rental purposes or the commencement of an operating lease to another party.
75
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at December 31, 2017, the costs of residential inventory include the costs incurred on the following four condominium or
townhouse projects:
•
Yonge Eglinton Northeast Corner (ePlace) - The 623-unit, fully pre-sold condominium project with Metropia and Bazis
Inc. is expected to be completed by the end of 2018 or Q1 2019.
• King & Portland (Kingly) - This is a 134-unit condominium project at the northwest corner of King Street West and
Portland Street in Toronto's trendy downtown neighbourhood of King West. RioCan and its 50/50 partner Allied
announced a change to the residential rental component of the project as originally contemplated, to condominium units
in September 2017. The partners subsequently fully pre-sold the condominium units with profitability of the project
exceeding initial expectations.
•
Yorkville - This is a 50/25/25 joint venture project among RioCan, Metropia and CD in the prestigious Toronto
neighborhood of Yorkville. As of February 13, 2018, the partners have completed acquisitions of adjacent properties
substantially required for the intensification project. The partners are in the early stages of creating plans to redevelop
the site, which has the potential for approximately half a million square feet of luxury condominiums, retail uses and up
to 82 residential rental replacement units.
• Windfield Townhouses - On October 27, 2017 RioCan and Tribute formed a joint venture to develop the Windfields
Farm 31-acre site located in Oshawa, Ontario also known as UC Towns 2. The 551 condominium townhouse project will
be constructed in three phases. 166 of the 170 units released in phase one and 14 of the 94 units in phase two have
been sold. Grading, servicing and roadwork construction began in the third quarter of 2017. Subdivision plan approval
was received in Q4 2017. Building construction is expected to commence in 2018.
Refer to Development Property Acquisitions and Dispositions sections of this MD&A for more details on these projects. The
following table shows the year to date changes in the aggregate carrying value of RioCan's residential inventory:
Year ended December 31,
Balance, beginning of year
Acquisitions (i)
Development expenditures
Transfers from investment properties (ii)
Balance, end of year
2017
48,414 $
36,870
30,545
16,174
132,003 $
$
$
2016
45,276
—
3,138
—
48,414
(i) Represents the carrying value of properties acquired located in the Yorkville area of Toronto, Ontario, with the intention of rezoning and developing
a high-rise residential condominium building. Refer to the Development Property Acquisitions section above of this MD&A for further details.
(ii) During the year ended December 31, 2017, RioCan announced changing the residential rental component of the King Portland Centre to
condominium units. In addition, the costs associated with the Windfields Farm residential development were transferred to residential inventory
upon formation of the joint venture with Tribute to develop townhomes.
Refer to the Mixed-Use Residential Development section of this MD&A for a summary of the Residential Inventory as currently
planned.
Annual costs for residential inventory are estimated in the $50 million to $100 million range over the next two years. Together
with the $250 million to $300 million annual costs of PUD projects as noted under Project Phasing and NLA Completion section of
this MD&A, total annual development costs are estimated to be in the $300 million to $400 million range over the next two years.
These annual costs estimates are management’s estimates as of December 31, 2017 and are subject to changes due to potential
changes in various underlying factors as noted earlier in this MD&A.
Mortgages and Loans Receivable
Contractual mortgages and loans receivable as at December 31, 2017 and December 31, 2016 are comprised of the following:
(thousands of dollars)
Mezzanine financing to co-owners
Vendor-take-back and other
Total
Contractual rates
Low
—%
4.0%
—%
High
7.2%
5.0%
7.2%
Weighted
Average
Rate December 31, 2017 December 31, 2016
5.5% $
107,745
126,868
$
4.7%
5.4% $
19,005
145,873
$
10,272
118,017
Prior to maturity, any payments on these mortgages and loans receivable from co-owners are made from the cash flows
generated from operations and capital transactions relating to the underlying properties.
RioCan’s Declaration of Trust contains provisions that have the effect of limiting the aggregate value of the investment by the
Trust in mortgages, other than mortgages taken back on the sale of RioCan’s properties, to a maximum of 30% of consolidated
unitholders’ equity. Additionally, RioCan is limited to the amount of capital that can be invested in greenfield developments and
development properties held for resale to no more than 15% of the book value of RioCan's total consolidated unitholders’ equity,
and this limitation also applies to any mortgages receivable to fund the co-owners’ share of such developments referred to as
mezzanine financing. At December 31, 2017, RioCan was in compliance with these restrictions.
76
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL RESOURCES AND LIQUIDITY
Liquidity and Cash Management
RioCan maintains a committed revolving unsecured operating credit facility to provide financial liquidity which can be drawn or
repaid at short notice, reducing the need to hold liquid resources in cash and deposits. This minimizes costs arising from the
difference between borrowing and deposit rates, while reducing credit exposure.
Capital Management Framework
RioCan defines capital as the aggregate of common unitholder and preferred unitholders’ equity and debt. The Trust’s capital
management framework is designed to maintain a level of capital that:
•
•
•
•
•
complies with investment and debt restrictions pursuant to the Trust’s Declaration;
complies with debt covenants;
enables RioCan to achieve target credit ratings;
funds the Trust’s business strategies; and
builds long-term unitholder value.
The key elements of RioCan’s capital management framework are set out in the Trust’s Declaration, and/or approved by the
Trust’s Board, through the Board’s annual review of the strategic plan and budget, supplemented by periodic Board and related
committee meetings. Capital adequacy is monitored by management of the Trust by assessing performance against the approved
annual plan throughout the year, which is updated accordingly, and by monitoring adherence to investment and debt restrictions
contained in the Declaration and debt covenants (refer to note 26 of RioCan's 2017 Annual Consolidated Financial Statements).
In selecting appropriate funding choices, RioCan’s objective is to manage its capital structure in such a way so as to diversify its
funding sources while minimizing its funding costs and risks. For 2018, RioCan expects to be able to satisfy all of its financing
requirements through the use of some or all of the following: cash on hand, cash generated by operations, refinancing of
maturing debt, utilization of its operating line of credit, credit facilities, construction financing facilities, sale of available-for-sale
marketable securities, sale of non-core properties and secondary markets properties, and through public offerings of unsecured
debentures and common equity. If market conditions become challenging, the Trust could finance certain assets currently
unencumbered by debt or issue preferred units.
Debt Metrics
RioCan’s debt metrics are tracked and disclosed on a quarterly basis to help facilitate financial statement users’ and stakeholders’
understanding of RioCan’s ability to service its debt and fixed charges. These metrics include ratios measuring interest coverage,
debt service coverage, fixed charge coverage, debt to Adjusted EBITDA, NOI expected to be generated from unencumbered
assets and unencumbered assets to unsecured debt.
Presented below are the Trust's key debt metrics presented on both an IFRS and RioCan's proportionate share basis in
comparison to our targeted ratios:
Targeted
Ratios
>3.00x
>2.25x
>1.10x
<8.0x
Interest coverage (i)
Debt service coverage (i)
Fixed charge coverage (i)
Debt to adjusted EBITDA (i)
(thousands of dollars)
As at
Unencumbered assets
Unsecured debt:
Debentures
Amounts drawn on revolving unsecured operating
line of credit
Amounts drawn on non-revolving unsecured
credit facilities
Total unsecured debt outstanding
Unencumbered assets to unsecured debt
% NOI generated from unencumbered assets (ii)
>200%
>50%
Rolling 12 months ended
IFRS
RioCan's proportionate share
December 31, December 31, December 31, December 31,
2017
3.87
3.08
1.17
7.49
2016
3.38
2.62
1.10
8.04
2017
3.84
3.06
1.17
7.57
IFRS
2016
3.36
2.61
1.10
8.10
December 31, December 31,
2017
2016
$ 7,663,381
$ 6,625,322
$ 2,700,000
$ 2,250,000
390,000
505,185
300,000
—
$ 3,390,000
$ 2,755,185
226%
56.7%
240%
49.5%
(i) Refer to section Non-GAAP Measures of this MD&A for further details. See tables below for calculation of Adjusted EBITDA for the respective
periods.
77
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
(ii) Ratio is calculated on a continuing operations basis.
As part of our capital management strategy, it is our objective to reduce leverage and further improve our unencumbered asset
and coverage ratios. As at December 31, 2017, we exceeded all of our debt metrics targets.
The interest and debt service coverage ratios calculated at RioCan's proportionate share for the year ended December 31, 2017
improved compared to December 31, 2016 mainly due to lower interest and debt service costs as a result of the repayment of
debt using the net proceeds from the U.S. sale and interest savings from mortgage refinancing, and an increase in Adjusted
EBITDA primarily as a result of acquisitions (net of dispositions), strong same property NOI growth, development completions,
and higher gains from sale of available-for-sale marketable securities.
The fixed charge coverage ratio calculated at RioCan's proportionate share for the year ended December 31, 2017 improved
compared to December 31, 2016, mainly due to lower total fixed charges (interest cost plus distributions to preferred and
common unitholders) resulting from lower interests as noted above and redemption of Series C preferred units in Q2 2017, as
well as increase in Adjusted EBITDA for reasons as described above.
Debt to Adjusted EBITDA at RioCan's proportionate share has improved to 7.57 for the year ended December 31, 2017 mainly as
a result of lower average debt balances outstanding as a result of the repayment of debt using the net proceeds from the U.S.
sale in the second quarter of 2016, and an increase in Adjusted EBITDA for reasons noted above.
The percentage NOI generated from unencumbered assets has improved from 49.5% to 56.7% as we continued to unencumber
assets during 2017. The unencumbered assets to unsecured debt ratio, however, decreased from 240% to 226% over this period
as the increase in our unsecured debt of $635 million, partially driven by tax payments relating to the U.S. portfolio sale and
redemption of the Trust's Series C preferred units, outpaced the $1.0 billion increase in unencumbered assets on a relative
percentage basis. Overall, we are still well over our 200% target for this measure.
The following tables present a reconciliation of consolidated net income from continuing and discontinued operations attributable
to unitholders to Adjusted EBITDA:
Year ended December 31,
2017
2016
(thousands of dollars)
Continuing
Operations
Discontinued
Operations
Total
Continuing
Operations
Discontinued
Operations
Total
Net income attributable to unitholders
$
708,265 $
7,021 $ 715,286 $
683,060 $
147,687 $ 830,747
IFRS
Add (deduct) the following items:
Income tax expenses (recovery):
Current
Deferred
—
(320)
(2,871)
—
(2,871)
(320)
—
135,139
135,139
(3,850)
(230,675)
(234,525)
Fair value (gains) on investment properties, net
(136,942)
— (136,942)
(182,888)
(16,899)
(199,787)
Accrued property taxes under IFRIC 21
Internal leasing costs
Non-cash unit based compensation expense
Interest costs
Depreciation and amortization
Transaction gains on the sale of investment
properties, net (i)
Transaction costs on investment properties
—
10,882
4,757
171,418
9,865
—
—
—
—
—
—
10,882
4,757
—
25,145
10,931
1,640
706
—
25,145
11,637
1,640
171,418
179,527
18,927
198,454
9,865
4,386
12
4,398
(1,275)
5,136
(1,651)
(549)
(2,926)
4,587
(6,075)
8,165
(65,116)
(71,191)
53,562
61,727
Adjusted EBITDA
$
771,786 $
1,950 $ 773,736 $
694,896 $
68,488 $ 763,384
Debt, net of cash and cash equivalents is
calculated as follows:
Average debt outstanding
Less: average cash and cash equivalents
Debt, net of cash and cash equivalents
Debt to Adjusted EBITDA
$ 5,848,033
(53,153)
$ 5,794,880
7.49
$ 6,200,515
(60,710)
$ 6,139,805
8.04
(i)
Includes transaction gains and losses realized on the disposal of Canadian and U.S. investment properties.
78
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Year ended December 31,
(thousands of dollars)
RioCan's proportionate share
2017
2016
Continuing
Operations
Discontinued
Operations
Total
Continuing
Operations
Discontinued
Operations
Total
Net income (loss) attributable to unitholders
$
708,265 $
7,021 $ 715,286 $
683,060 $
147,687 $ 830,747
Add (deduct) the following items:
Income tax expense (recovery):
Current
Deferred
—
(320)
(2,871)
—
(2,871)
(320)
—
135,139
135,139
(3,850)
(230,675)
(234,525)
Fair value gains on investment property, net
(136,534)
— (136,534)
(181,951)
(16,899)
(198,850)
Accrued property taxes under IFRIC 21
Internal leasing costs
Non-cash unit based compensation expense
Interest costs
Depreciation and amortization
Transaction gains on the sale of investment
properties, net (i)
Transaction costs
Adjusted EBITDA
Net debt is calculated as follows:
Average debt outstanding
Less: average cash and cash equivalents
Net debt
Debt to Adjusted EBITDA
—
10,882
4,757
173,791
9,865
—
—
—
—
—
—
10,882
4,757
—
25,145
10,931
1,640
706
—
25,145
11,637
1,640
173,791
181,496
18,927
200,423
9,865
4,386
12
4,398
(1,275)
5,136
(1,651)
(549)
(2,926)
4,587
(6,075)
8,165
(65,116)
(71,191)
53,562
61,727
$
774,567 $
1,950 $ 776,517 $
697,802 $
68,488 $ 766,290
$ 5,933,897
(55,498)
$ 5,878,399
7.57
$ 6,271,581
(62,165)
$ 6,209,416
8.10
(i)
Includes transaction gains and losses realized on the disposal of Canadian and U.S. investment properties.
Credit Ratings
RioCan intends to maintain strong debt service coverage and fixed charge coverage ratios as part of its commitment to
maintaining its investment-grade debt ratings from Standard and Poor’s (S&P) and from Dominion Bond Rating Services Limited
(DBRS). A credit rating generally provides an indication of the risk that the borrower will not fulfill its obligations in a timely manner
with respect to both interest and principal commitments. Rating categories range from highest credit quality (generally AAA) to
default payment (generally D). The addition of a rating outlook modifier, such as "Positive", "Negative", "Stable" or "Developing"
assesses the potential direction of a long-term credit rating over the intermediate term (typically six months to two years).
As at December 31, 2017, S&P provided RioCan with an issuer credit rating of BBB with a Stable outlook and rates the Trust's
senior unsecured debentures BBB. An obligor with a credit rating of BBB by S&P exhibits adequate capacity to meet its financial
obligations, however, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation. A credit rating of BBB- or higher is an investment grade rating.
As at December 31, 2017, DBRS provided RioCan with a credit rating of BBB (high) relating to the Debentures with a Stable
trend. A credit rating of BBB by DBRS is generally an indication of adequate credit quality, the capacity for the payment of
financial obligations is considered acceptable but the entity may be vulnerable to future events.
79
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Capital Structure
RioCan’s capital structure is as follows:
(thousands of dollars)
IFRS
RioCan's proportionate share
As at
Capital:
Debentures payable
Mortgages payable
Lines of credit and other bank loans
Mortgages on properties held for sale
Total debt
Preferred unit equity
Common unit equity
Total capital
Total assets
Cash and cash equivalents
Ratio of total debt to total assets
(net of cash and cash equivalents)
Ratio of floating rate debt to total debt
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
$
$
$
$
$
2,694,619
$
2,248,024
$
2,694,619
$
2,300,247
904,429
32,670
2,699,935
705,633
—
2,364,415
947,930
32,670
5,931,965
$
5,653,592
$
6,039,634
$
—
8,044,686
13,976,651
14,376,578
70,225
$
$
$
144,755
7,865,133
13,663,480
14,173,760
54,366
$
$
$
—
8,044,686
14,084,320
14,492,113
73,423
$
$
$
41.0%
16.5%
39.7%
13.8%
41.4%
17.1%
2,248,024
2,734,216
746,810
—
5,729,050
144,755
7,865,133
13,738,938
14,249,875
55,463
40.0%
14.3%
As at December 31, 2017, RioCan's ratio of floating rate debt to total debt at RioCan's proportionate share increased to 17.1%
(December 31, 2016 - 14.3%), mostly as a result of addition of two new non-revolving unsecured credit facilities in the amount of
$300 million in Q4 2017, partially offset by a partial repayment of our revolving unsecured operating line of credit with proceeds
from debentures issued during the year. RioCan continues to utilize floating rate debt for the purpose of interest rate risk
management and for the flexibility it offers, such as in the execution of investment transactions.
Our leverage ratio at RioCan's proportionate share increased from 40.0% at December 31, 2016 to 41.4% at December 31, 2017
primarily due to the payment of U.S. taxes that were accrued in 2016, relating to the sale of our U.S. portfolio, as well as
redemption of the Trust's Series C preferred trust units on June 30, 2017. We expect our total debt to total asset ratio to fluctuate
between 38% to approximately 42%. Over the next 12 to 18 months, we expect this ratio to rise toward the higher end of this
range.
Debentures Payable
We have the following series of senior unsecured debentures outstanding as at December 31, 2017 and 2016:
Series
P
S
Q
U
X
Z
R
V
Y
T
W
I
Contractual obligations
Maturity date
March 1, 2017
March 5, 2018
June 28, 2019
June 1, 2020
August 26, 2020
April 9, 2021
December 13, 2021
May 30, 2022
October 3, 2022
April 18, 2023
February 12, 2024
February 6, 2026
Unamortized debt financing costs
Balance - end of year
Coupon rate
3.80%
2.87%
3.85%
3.62%
2.19%
2.19%
3.72%
3.75%
2.83%
3.73%
3.29%
5.95%
Interest payment frequency
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
$
2017
— $
2016
150,000
250,000
350,000
150,000
250,000
—
250,000
250,000
—
200,000
300,000
100,000
$ 2,700,000 $ 2,250,000
250,000
350,000
150,000
250,000
300,000
250,000
250,000
300,000
200,000
300,000
100,000
(5,381) $
(1,976)
$ 2,694,619 $ 2,248,024
As at December 31, 2017, RioCan had debentures outstanding totalling $2.7 billion, net of unamortized debt financing costs
(December 31, 2016 – $2.2 billion).
80
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Changes in the carrying amount of debentures resulted primarily from the following:
(thousands of dollars)
Balance, beginning of period
Issuances
Repayments
Foreign currency translation
Contractual obligations
Unamortized debt financing costs
Balance, end of period
Three months ended December 31,
Year ended December 31,
2017
2016
2017
$
2,700,000 $
2,250,000 $
2,250,000 $
—
—
—
—
—
—
2,700,000
(5,381)
2,250,000
(1,976)
600,000
(150,000)
—
2,700,000
(5,381)
2016
2,000,000
250,000
—
—
2,250,000
(1,976)
$
2,694,619 $
2,248,024 $
2,694,619 $
2,248,024
The debentures have covenants relating to our 60% leverage limit to Aggregate Assets as set out in RioCan’s Declaration of
Trust, the maintenance of at least $1.0 billion in consolidated unitholders' equity and maintenance of an interest coverage ratio of
1.65 times or better. There are no requirements under the unsecured debenture covenants that require RioCan to maintain
unencumbered assets. The Series I debentures, which are due in 2026 and are $100 million in aggregate, have an additional
provision that provides RioCan with the right, at any time, to convert these debentures to mortgage debt, subject to the
acceptability of the security given to the debenture holders. In such an event, the covenants relating to the 60% leverage limit,
minimum consolidated unitholders' equity and interest coverage ratio would be eliminated for this series of debentures.
Issuances
On January 16, 2017, the Trust issued $300 million principal amount of Series Y senior unsecured debentures, which mature on
October 3, 2022 and carry a coupon rate of 2.83%. The interest on these debentures is payable semi-annually commencing
April 3, 2017. These debentures were sold at a price of $999.97 per $1,000 principal amount with an effective yield of 2.831% if
held to maturity.
On April 10, 2017, the Trust issued $300 million principal amount of Series Z senior unsecured debentures at par, which mature
on April 9, 2021 and carry a coupon rate of 2.194%. The interest on these debentures is payable semi-annually commencing
October 9, 2017.
On January 31, 2018, the Trust issued $300 million of Series AA senior unsecured debentures, which mature on September 29,
2023 and carry a coupon rate of 3.209%. The interest on these debentures is payable semi-annually commencing September 29,
2018. The debentures were sold at a price of $999.95 per $1,000 principal amount with an effective yield of 3.209% if held to
maturity. The Series AA debentures can be redeemed in whole or in part at par on or after August 29, 2023 prior to maturity.
Each of Series Y, Series Z and Series AA senior unsecured debentures have similar terms as the rest of RioCan's debentures,
with the exception of the additional provision for the Series I debentures, as described above, and a double trigger change of
control provision for Series AA debentures (refer to the prospectus and indenture agreement publicly filed). The net proceeds
from these issuances are used by RioCan to fund development and property acquisitions, repayment of certain indebtedness and
other general trust purposes.
Redemptions
On March 1, 2017, RioCan redeemed, in full, its $150 million 3.80% Series P senior unsecured debentures in accordance with its
terms.
Mortgages Payable
Mortgages payable consist of the following and are presented net of unamortized financing costs:
As at
Mortgages payable
Mortgages on properties held for sale
Fixed rate mortgages
Floating rate mortgages
December 31, 2017 December 31, 2016
$
$
$
$
2,300,247 $
2,699,935
32,670
—
2,332,917 $
2,699,935
2,181,976 $
150,941
2,332,917 $
2,627,590
72,345
2,699,935
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Changes in the carrying amount of the mortgages payable resulted primarily from the following:
(thousands of dollars)
Year ended December 31,
Contractual obligations, beginning of year
New borrowings:
Fixed rate term mortgages
Floating rate term mortgages
Principal repayments:
Scheduled amortization
At maturity: Fixed rate term mortgages
Disposed on the sale of properties
Assumed on the acquisition of properties
Foreign currency translation
Contractual obligations, end of year
Unamortized differential between contractual and market interest rates on liabilities assumed
at the acquisition of properties
Unamortized debt financing costs, net of premiums and discounts
Balance, end of year
Less: Mortgages associated with properties held for sale
2017
2016
$
2,687,059 $
3,441,106
267,375
67,500
(51,136)
(667,559)
(1,024)
22,037
—
91,300
72,590
(61,715)
(853,484)
(29,359)
62,697
(36,076)
2,324,252
2,687,059
12,005
(3,340)
16,658
(3,782)
2,332,917 $
2,699,935
32,670
—
2,300,247 $
2,699,935
$
$
RioCan’s mortgages maturity profile and future repayments are as outlined below:
Fixed rate
Floating rate
(thousands of dollars, except
percentage amounts)
Contractual
principal
Year of mortgage maturity
Weighted
average
interest rate
Contractual
principal
Weighted
average
interest rate
Scheduled
principal
amortization
Total
mortgages
payable
2018
2019
2020
2021
2022
Thereafter
$
469,590
281,197
427,888
348,782
124,544
385,419
$ 2,037,420
3.80% $
4.30%
3.69%
4.40%
3.15%
3.70%
3.89% $
61,132
67,500
22,590
—
—
—
151,222
2.59% $
2.62%
2.83%
—%
—%
—%
2.64% $
48,129 $
36,853
22,689
12,004
7,924
8,011
135,610 $
578,851
385,550
473,167
360,786
132,468
393,430
2,324,252
Unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition
of properties
Unamortized debt financing costs, net of premiums and discounts
Balance
12,005
(3,340)
2,332,917
$
Weighted
average
interest
rate
3.67%
4.01%
3.65%
4.40%
3.15%
3.70%
3.81%
The weighted average contractual and effective rates for fixed and floating rate mortgages payable are as follows:
Fixed rate
Floating rate
Total
Contractual
Effective
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
3.89%
2.64%
3.81%
4.07%
2.21%
4.02%
3.86%
2.89%
3.80%
4.04%
2.46%
3.99%
At the outset of 2017, RioCan had $702.7 million of mortgage principal maturing in 2017 at a weighted average contractual
interest rate of 4.18%. For the year ended December 31, 2017, RioCan completed new term mortgage borrowings of $334.9
million at a weighted average interest rate of 3.04% and a weighted average term of 4.7 years. For the year ended December 31,
2017, repayments of maturing mortgage balances and scheduled amortization amounted to $718.7 million.
The majority of our mortgage debt provides recourse to the assets of the Trust, as opposed to only having recourse to the specific
property charged. We follow this policy as it generally results in lower interest rates for the Trust.
82
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Lines of Credit and Other Bank Loans
Lines of credit and other bank loans consist of the following:
As at
Revolving unsecured operating line of credit (i)
Non-revolving unsecured credit facilities
Construction lines and other bank loans
(i) Amount outstanding is net of $3.5 million in unamortized financing costs.
Revolving unsecured operating line of credit
December 31, 2017 December 31, 2016
$
$
387,093 $
299,360
217,976
904,429 $
502,359
—
203,274
705,633
RioCan had cash advances of $390.0 million and $610.0 million in cash available to be drawn from this revolving unsecured
operating line of credit at December 31, 2017.
During the second quarter of 2017, the Trust exercised its option to extend the maturity date on this revolving unsecured
operating line of credit to May 31, 2022. All other terms and conditions remained the same.
Non-revolving unsecured credit facilities
On October 31, 2017, the Trust entered into a $200 million non-revolving unsecured credit facility with two financial institutions
(consisting of a Schedule I and a Schedule III bank), maturing January 31, 2023 bearing interest at a rate of Bankers'
Acceptances plus 110 basis points per annum. In addition, the Trust entered into a $100 million non-revolving unsecured credit
facility on December 27, 2017 with a Schedule I bank, maturing December 27, 2019 bearing interest at a rate of Bankers'
Acceptances plus 100 basis points per annum. The second facility provided the Trust with an option to increase the facility by up
to $50 million with the addition of a lender. As of December 31, 2017, the Trust has drawn $300 million on the two non-revolving
unsecured credit facilities. Subsequent to year end, the Trust exercised its option and borrowed an additional $50 million from a
Schedule III bank under the second facility.
The $300 million in total draws on the non-revolving unsecured credit facilities as of December 31, 2017 were used to pay down
the Trust's revolving unsecured operating line of credit and mortgages payable. The agreements governing these non-revolving
unsecured credit facilities require the Trust to maintain certain financial covenants similar to those of RioCan's $1 billion revolving
unsecured operating line of credit. Refer to note 26 of the 2017 Annual Consolidated Financial Statements for additional details.
Construction lines of credit and other bank loans
In addition to the revolving unsecured operating line of credit and non-revolving unsecured credit facilities, the Trust has secured
credit facilities and other bank loans, which include variable rate non-revolving secured construction facilities for the funding of
certain development properties. At December 31, 2017, these secured facilities and other bank loans have an aggregate
maximum borrowing capacity of $387.9 million and mature between 2018 and 2019, of which the Trust had drawn $218.0 million
(December 31, 2016 - $203.3 million). The weighted average contractual interest rate on the aggregate amounts outstanding is
2.28% (December 31, 2016 - 1.42%).
Letter of Credit Facilities
The Trust has aggregate letter of credit facilities with certain Schedule I banks totaling $79.0 million (December 31, 2016 - $80.5
million). As at December 31, 2017, the Trust’s outstanding letters of credit under these facilities was $37.2 million (December 31,
2016 - $28.9 million).
Total Debt Profile
As at December 31, 2017, RioCan’s total debt had a 3.3 year weighted average term to maturity (December 31, 2016 – 3.4
years) bearing interest at a weighted average contractual interest rate of 3.37% (December 31, 2016 – 3.54%). As at
December 31, 2017, 16.5% of the Trust’s total debt is at floating interest rates compared to 13.8% at December 31, 2016.
RioCan's fixed and floating rate debt as a percentage of total debt and term to maturity are as follows:
As at December 31, 2017
Total debt at:
Fixed rate debt
Floating rate debt
Total debt
Total debt
Percentage of total
RioCan's aggregate debt
Weighted average
term to maturity in years
$
$
4,951,392
980,573
5,931,965
83.5%
16.5%
100.0%
3.37
3.08
3.32
83
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
The weighted average contractual and effective rates for fixed and floating aggregate debt including mortgages payable, lines of
credit and other bank loans, debentures and the impact of hedging programs, where applicable, are as follows:
Fixed rate
Floating rate
Total
Contractual
Effective
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
3.55%
2.47%
3.37%
3.81%
1.81%
3.54%
3.52%
2.50%
3.35%
3.77%
1.85%
3.50%
RioCan’s debt maturity profile and future repayments are as outlined below:
(thousands of dollars,
except percentage
amounts)
Year of debt maturity
2018
2019
2020
2021
2022
Thereafter
Contractual principal maturities and interest rates
Lines of credit
and other
bank loans
Weighted
average
interest rate
Mortgages
payable
Weighted
average
interest rate
Debentures
payable
Weighted
average
interest rate
Total
aggregate
debt
Weighted
average
interest rate
$
127,523
2.01% $
578,851
3.67% $
250,000
2.87% $
956,374
190,454
—
—
390,000
200,000
2.52%
—%
—%
2.53%
2.68%
385,550
473,167
360,786
132,468
393,430
4.01%
3.65%
4.40%
3.15%
3.70%
350,000
400,000
550,000
550,000
600,000
3.85%
2.72%
2.89%
3.25%
3.88%
926,004
873,167
910,786
1,072,468
1,193,430
$
907,977
2.49% $ 2,324,252
3.81% $ 2,700,000
3.28% $ 5,932,229
3.24%
3.64%
3.23%
3.48%
2.97%
3.62%
3.37%
Unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition of properties
Unamortized debt financing costs, net of premiums and discounts
Balance
Liquidity
12,005
(12,269)
$ 5,931,965
Liquidity refers to the Trust having and/or generating sufficient amounts of cash and equivalents to fund the ongoing operational
commitments, distributions to unitholders and planned growth in the business.
RioCan retains a portion of its operating cash flows to help fund ongoing maintenance capital expenditures including tenant
improvements costs and long term unfunded contractual obligations, among other items.
Cash on hand, borrowings under the revolving unsecured operating line of credit, non-revolving unsecured credit facilities,
construction financing facilities, equity and debt capital markets and the potential sale of assets also provide the necessary
liquidity to fund ongoing and future capital expenditures and obligations.
As at December 31, 2017, RioCan had the following sources of liquidity available:
•
•
•
•
$70.2 million of cash and cash equivalents;
$610.0 million of cash available under its undrawn revolving unsecured operating line of credit;
$169.9 million of cash available under undrawn construction facilities to fund future construction commitments; and
187 unencumbered investment properties with a fair value of $7.7 billion.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
RioCan’s liquidity profile is as follows:
(thousands of dollars)
As at
Cash and cash equivalents
Undrawn revolving unsecured
operating line of credit
Undrawn construction lines of credit
and other bank loans
Liquidity
Contractual debt:
Debentures payable
Mortgages payable
Lines of credit and other bank loans
Total contractual debt
Percentage of total contractual debt:
$
$
$
$
Liquidity
Unsecured debt
Secured debt
IFRS
RioCan's proportionate share
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
70,225
$
54,366
$
73,423
$
55,463
610,000
169,927
850,152
2,700,000
2,324,252
907,977
$
$
494,380
144,534
693,280
2,250,000
2,687,058
708,459
$
$
610,000
169,927
853,350
2,700,000
2,388,481
951,477
$
$
5,932,229
$
5,645,517
$
6,039,958
$
14.3%
57.1%
42.9%
12.3%
48.8%
51.2%
14.1%
56.1%
43.9%
494,380
144,534
694,377
2,250,000
2,719,688
750,447
5,720,135
12.1%
48.2%
51.8%
Our liquidity is impacted by contractual debt commitments and committed expenditures on active development projects. Our
contractual debt commitments and committed development expenditures for the next five years are as follows:
(thousands of dollars)
Contractual obligations:
2018
2019
2020
2021
2022
Thereafter
Total
Lines of credit and other bank loans
$
127,523 $
190,454 $
— $
— $
390,000 $
200,000 $
907,977
Mortgages payable
Unsecured debentures
Lease commitments
Total
578,851
250,000
3,752
385,550
350,000
3,672
473,167
400,000
3,422
360,786
550,000
3,124
132,468
550,000
3,061
393,430
2,324,252
600,000
2,700,000
24,064
41,095
$
960,126 $
929,676 $
876,589 $
913,910 $ 1,075,529 $ 1,217,494 $ 5,973,324
Active committed developments (i)
329,437
331,371
196,057
87,965
6,066
—
950,896
Total
$ 1,289,563 $ 1,261,047 $ 1,072,646 $ 1,001,875 $ 1,081,595 $ 1,217,494 $ 6,924,220
(i) Represents estimated costs to complete properties under active development only where funds have been committed due to leases having been
signed and/or construction activities are underway.
The Trust's contractual debt obligations and projected development expenditures can be funded by net proceeds from the sale of
non-core and secondary markets assets (including, but not limited to, sale of excess land and potential air rights), existing cash
on hand, our revolving unsecured operating line of credit, non-revolving unsecured credit facilities, proceeds from mortgage
refinancing and proceeds from the issuance of unsecured debentures or issuance of equity units. In addition, RioCan has
undrawn construction facilities to fund future construction commitments as it pertains to certain development projects and our
debt strategy has resulted in an unencumbered asset pool with an approximate fair value of $7.7 billion as at December 31, 2017,
which can generate additional liquidity, if needed.
Our unitholder dividend reinvestment plan ("DRIP") and our direct purchase plans result in the issuance of units, as opposed to a
cash outlay, thereby providing an additional source of capital to fund RioCan’s activities. Refer to Distributions to Unitholders
section of this MD&A for further discussion.
As announced on October 2, 2017, RioCan suspended its DRIP effective November 1, 2017. Unitholders that are enrolled in the
DRIP will receive the future distributions in cash commencing with any distribution declared in November 2017. If RioCan elects
to reinstate the DRIP in the future, unitholders that were enrolled in the DRIP at the time of its suspension and remain enrolled at
the time of its reinstatement will automatically resume participation in the DRIP.
Unencumbered Assets
RioCan has the continued flexibility to generate additional funds in 2018 through upward refinancing of maturing mortgage
balances.
As at December 31, 2017, our debt strategy has resulted in approximately 56.7% of annualized NOI being generated by
unencumbered assets, providing us with access to a pool of assets for obtaining additional secured debt (December 31, 2016 -
49.5%). The fair value of the unencumbered investment property assets as at December 31, 2017 is estimated at approximately
$7.7 billion for 187 properties or 58.2% of the total fair value of investment properties as compared to 183 properties with a fair
value of $6.6 billion as at December 31, 2016.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
The table below presents RioCan’s investment properties at fair value that are available to finance and/or refinance mortgages
maturing in 2018, 2019 and thereafter:
(thousands of dollars)
As at December 31, 2017
Unencumbered assets (i)
Encumbered assets with mortgages maturing in 2018
Encumbered assets with mortgages maturing in 2019
Encumbered assets with mortgages maturing thereafter
Total
Number of
Properties
Investment
Properties
Total contractual mortgages payable
2018
2019
Thereafter
187 $
7,663,381 $
— $
16
19
67
1,311,099
578,851
772,760
3,823,182
—
—
— $
—
385,550
—
—
—
— 1,359,850
289 $
13,570,422 $
578,851 $
385,550 $ 1,359,850
(i) Substantially all of the Trust's unencumbered assets are income producing properties and 100% owned.
Considering the availability of our revolving operating line of credit, unencumbered asset pool, relatively low leverage and
demonstrated historical access to debt capital markets, we expect that all maturities will be refinanced or repaid in the normal
course of business, and as such, do not anticipate that we will be required to sell assets in 2018 to meet our maturing debt
obligations in 2018, although we will sell assets as part of our acceleration of major markets focus strategy.
Guarantees
As at December 31, 2017, the maximum exposure to loss resulting from the Trust's mortgage guarantees, on behalf of certain of
our co-owners' interests and mortgages assumed by purchasers on property dispositions, is approximately $385.0 million, with
expiries between 2018 and 2034 (December 31, 2016 - $427.7 million). The maximum exposure to credit risk relating to a
guarantee is the maximum risk of loss if there was a total default, without consideration of recoveries under recourse provisions
against the aforementioned parties or the properties secured.
As at and for the year ended December 31, 2017, there have been no defaults by the primary obligors for debts on which we
have provided guarantees and, as a result, no contingent loss on these guarantees has been recognized in our 2017 Annual
Consolidated Financial Statements.
The parties on behalf of which RioCan has outstanding guarantees are as follows:
(thousands of dollars)
As at
Partners and co-owners
HBC (RioCan-HBC JV)
KingSett
Bayfield
Metropia and Bazis
Trinity
Other
Assumption of mortgages by purchasers on property dispositions
Hedging Activities
Interest rate risk
December 31, 2017 December 31, 2016
122,467 $
124,082
60,368
63,230
72,834
22,614
7,410
348,923 $
36,103
385,026 $
83,750
63,230
39,679
22,614
7,555
340,910
86,826
427,736
$
$
$
As at December 31, 2017, the outstanding notional amount of floating-to-fixed interest rate swaps was $682.5 million (December
31, 2016 – $682.6 million) and the term to maturity of these agreements ranges from May 2018 to April 2024. We assess the
effectiveness of the hedging relationship on a quarterly basis and have determined there is no ineffectiveness in the hedging of
interest rate exposures as at December 31, 2017.
Refer to note 25 of the 2017 Annual Consolidated Financial Statements for further details.
Foreign currency risk
Foreign exchange risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in
foreign exchange rates. As a result of the Trust's disposal of its U.S. property portfolio in 2016 and the associated repayment of
U.S. denominated debt, RioCan has significantly reduced its foreign exchange risk.
Refer to note 25 of the 2017 Annual Consolidated Financial Statements for further details.
Cross currency interest rate swaps
On occasion, we will fund our Canadian assets by electing to draw on our operating credit facility in U.S. dollars bearing interest
at U.S. LIBOR when it is determined that it is economically advantageous to do so.
In such circumstances, the Trust enters into cross currency interest rate swaps with Schedule I bank counterparties as part of its
strategy to hedge such U.S. dollar denominated borrowings on the Trust's unsecured operating credit facility. These have the
86
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
economic effect of converting floating rate U.S. dollar borrowings to floating rate Canadian dollar borrowings. These cash flow
hedges are short-term in nature and qualify for hedge accounting. The hedges are expected to be highly effective since all critical
terms of the hedged item and hedging instrument match. As at December 31, 2017, the Trust has no cross currency interest rate
swaps outstanding.
Trust Units
As at December 31, 2017, there are 323.7 million common trust units outstanding, including exchangeable limited partnership
units. All common units outstanding have equal rights and privileges and entitle the holder to one vote for each unit at all
meetings of unitholders. During the quarter and year ended December 31, 2017 and 2016, we issued common units as follows:
(number of units in thousands)
Units outstanding, beginning of period (i)
Units issued:
Distribution reinvestment plan
Unit option plan
Direct purchase plan
Exchangeable limited partnership units
Units repurchased and cancelled
Units outstanding, end of period (i)
Three months ended December 31,
Year ended December 31,
2017
327,470
2016
325,845
186
—
8
—
(3,930)
323,734
551
202
17
—
—
326,615
2017
326,615
1,003
10
36
—
(3,930)
323,734
2016
322,483
2,399
1,671
36
26
—
326,615
(i)
Included in units outstanding are exchangeable limited partnership units of three limited partnerships that are subsidiaries of the Trust (the LP
units) which were issued to vendors, as partial consideration for income properties acquired by RioCan (December 31, 2017 – 1,030,342 LP units,
December 31, 2016 – 1,164,010 LP units). During the year ended December 31, 2017, 133,668 common trust units were issued pursuant to the
exercise of exchangeable limited partnership units in connection with previous acquisitions, followed by an equivalent reduction in exchangeable
limited partnership units which are included as part of the total Units outstanding. RioCan is the general partner of the limited partnerships. The LP
units are entitled to distributions equivalent to distributions on RioCan units, must be exchanged for RioCan units on a one-for-one basis and are
exchangeable at any time at the option of the holder. Subsequent to the year ended December 31, 2017, 150,000 common trust units were issued
pursuant to the exercise of exchangeable limited partnership units in connection with previous acquisitions, followed by an equivalent reduction in
exchangeable limited partnership units which are included as part of the total Units outstanding.
As of February 13, 2018, there are 323.7 million common units issued and 7.8 million unit options issued and outstanding under
the Trust’s incentive unit option plan.
Distribution Reinvestment Plan ("DRIP")
During the three months ended December 31, 2017, 0.2 million units were issued pursuant to our DRIP resulting in $4.6 million in
equity capital and representing a participation rate of 4.0%. During the same period in 2016, the Trust issued 0.6 million units
resulting in $7.1 million in equity capital, representing a participation rate of 6.2%.
During the year ended December 31, 2017, 1.0 million units were issued pursuant to our DRIP resulting in $25.3 million in equity
capital, representing a participation rate of 5.5%. During the same period in 2016, the Trust issued 2.4 million units pursuant to
our DRIP resulting in $60.8 million in equity capital, representing a participation rate of 13.3%. During the first quarter of 2016, we
eliminated our 3.1% discount on the distribution reinvestment plan, resulting in a decline in our DRIP participation rate.
As announced on October 2, 2017, RioCan suspended its DRIP effective November 1, 2017. Unitholders that are enrolled in the
DRIP will receive the future distributions in cash commencing with any distribution declared in November 2017. If RioCan elects
to reinstate the DRIP in the future, unitholders that were enrolled in the DRIP at the time of its suspension and remain enrolled at
the time of its reinstatement will automatically resume participation in the DRIP.
Senior Executive Restricted Equity Plan (Senior Executive REU Plan)
The Senior Executive REU Plan, as referenced above, is a new plan introduced in 2017 that provides for the allotment of REUs
to the Chief Executive Officer (CEO), President & Chief Operating Officer and Chief Financial Officer of the Trust, and such other
officers or executive employees of the Trust that are determined by the CEO and approved by RioCan's Human Resources and
Compensation Committee. Each REU notionally represents the value of one unit of the Trust on the date of grant. Unit
distributions paid during the period from grant date until settlement date will be credited to each REU participant in the form of
additional REUs.
The number of REUs granted shall vest one-third on each of the first, second and third anniversary of the grant date, provided
however that all vested REUs are only eligible for settlement upon the third anniversary of the grant date (the Settlement Date).
Settlement of vested REUs is generally made within 30 days after the Settlement Date by the delivery of an equivalent number of
common trust units purchased on the secondary market, net of applicable withholding taxes.
On February 28, 2017, the Trust granted 78,969 REUs under its New Senior Executive REU Plan. The grant date price was
$26.68 per unit based on the five-day volume weighted average market price of RioCan's common trust units traded on the TSX
prior to the grant date, resulting in an aggregate fair value of $2.1 million.
New Employee Restricted Equity Plan (Employee REU Plan)
The Employee REU Plan is a new plan introduced in 2017 that provides for the allotment of REUs to certain senior level
employees of the Trust that do not participate in the Senior Executive REU Plan. Each REU notionally represents the value of
87
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
one unit of the Trust on the date of grant. Unit distributions paid during the period from grant date until settlement date will be
credited to each REU participant in the form of additional REUs.
The number of REUs granted shall vest fully on the third anniversary of the grant date (the Settlement Date), including distribution
equivalents that have accumulated during the vesting period. Settlement of vested REUs is generally made within 30 days after
the Settlement Date by way by the delivery of an equivalent number of common trust units purchased on the secondary market,
net of applicable withholding taxes.
On February 28, 2017, the Trust granted 67,063 REUs under its Employee REU Plan. The grant date price was $26.68 per unit
based on the five-day volume weighted average market price of RioCan's common trust units traded on the TSX prior the grant
date, resulting in an aggregate fair value of $1.8 million.
New Performance Equity Unit Plan (New PEU Plan)
Effective January 1, 2017, the Trust implemented several changes to its executive pay program which takes into account
unitholder feedback received during 2016. Included in these changes was a modification made to the comparator group for
compensation benchmarking to include only peers that are domiciled in Canada. Specifically, RioCan adopted a single
performance metric for its New PEU Plan, which is relative total unitholder return (TUR) against a peer group of S&P/TSX
Capped REIT companies with a market capitalization above $1.0 billion (excluding RioCan), plus First Capital Realty Inc. The
second main change to this plan is that settlement on the vesting date will be effected via the delivery of an equivalent number of
common trust units purchased on the secondary market, net of applicable withholding taxes.
During February 2017, the Trust granted 157,939 PEUs under its New PEU Plan at a fair value of $4.3 million on grant date,
where PEUs will fully vest in February 2020 with one-third vested each year over the three-year period.
Incentive unit option plan
As part of comprehensive changes to its executive compensation program, the Trust has enhanced the design of its long-term
incentive program to reduce the frequency of option grants while replacing that portion of the overall long-term incentive
compensation in 2017 with grants of New REU Plans and New PEU Plan as described above. As a result, RioCan did not grant
any unit options during the year ended 2017.
As at December 31, 2017, 12.1 million unit options remain available for grant under the Plan (December 31, 2016 – 11.6 million
unit options).
Normal course issuer bid
On October 10, 2017, RioCan announced the TSX approval of its notice of intention to make a normal course issuer bid (NCIB)
for a portion of its common trust units as appropriate opportunities arise from time to time. During the year ended December 31,
2017, the Trust acquired and cancelled 3,930,174 units at a weighted average price of $25.30 per unit, for a total cost of $99.6
million. See note 15 in RioCan's 2017 Annual Consolidated Financial Statements for further details.
Preferred Units
On June 30, 2017, the Trust exercised its option to redeem all 5.98 million outstanding Series C preferred trust units at the cash
redemption price of $25.00 per Series C unit, for a total redemption price of $149.5 million paid on June 30, 2017. Unit issue
costs totalling $4.7 million were recorded as a charge to retained earnings upon redemption.
On March 31, 2016, the Trust exercised its option to redeem all 5 million outstanding Series A preferred trust units at the cash
redemption price of $25.00 per Series A preferred trust unit, for total cash proceeds of $125.0 million paid on April 1, 2016. Unit
issue costs totaling $4.3 million were recorded as a charge to retained earnings upon redemption, representing the excess of par
redemption value over the carrying value of the preferred trust units.
Distributions to Unitholders
RioCan qualifies as a mutual fund trust and a “real estate investment trust” (“REIT Exemption”) for Canadian income tax
purposes. We expect to distribute all of our taxable income to unitholders and are entitled to deduct such distributions for
Canadian income tax purposes. From time to time, RioCan may retain some taxable income and net capital gains, when
appropriate, in order to utilize the capital gains refund available to mutual fund trusts without incurring any income taxes.
Accordingly, no provision for current income taxes payable is required, except for amounts incurred in our incorporated Canadian
subsidiaries.
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. The subsidiary distributed all of its U.S. taxable income 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. Our U.S.
subsidiary was subject to a 30% or 35% withholding tax on distributions of its U.S. taxable income to Canada. We do not intend
to 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 25th, 2016, certain statements contained in this MD&A may
need to be modified.
We consolidate certain wholly owned incorporated entities that are subject to tax. The tax disclosures, expense and deferred tax
balances relate only to these entities.
If we were to cease to qualify for the REIT Exemption for Canadian income tax purposes, certain distributions would not be
deductible in computing income for Canadian income tax purposes and we would be subject to tax on such distributions at a rate
substantially equivalent to the general corporate income tax rate. Other distributions would generally continue to be treated as
88
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
returns of capital to unitholders.
From year to year, the taxability of the Trust's distributions may fluctuate depending upon the timing of recognition of certain gains
and losses based on the activities of the Trust.
Our monthly distribution during 2017 was $0.1175 per unit, representing $1.41 per unit on an annualized basis.
Distributions to unitholders are as follows:
(thousands of dollars, except when otherwise noted)
Year ended December 31,
Distributions declared to unitholders
Distributions reinvested through the distribution reinvestment plan
Distributions to common unitholders, net of distribution reinvestment plan
Distribution reinvestment plan participation rate
$
$
2017
460,627
(25,273)
435,354
$
$
5.5%
2016
458,388
(60,782)
397,606
13.3%
As announced on October 2, 2017, RioCan suspended its DRIP effective November 1, 2017. Unitholders that are enrolled in the
DRIP will receive the future distributions in cash commencing with any distribution declared in November 2017. If RioCan elects
to reinstate the DRIP in the future, unitholders that were enrolled in the DRIP at the time of its suspension and remain enrolled at
the time of its reinstatement will automatically resume participation in the DRIP.
As announced on December 1, 2017, the Trust increased its annual distribution to unitholders by $0.03 per unit or 2.1% to $1.44
per unit effective January 1, 2018.
Difference between cash flows provided by (used in) operating activities and distributions to unitholders
A comparison of distributions to unitholders with cash flows provided by operating activities and distributions, net of our
distribution reinvestment plan, is as follows:
(thousands of dollars)
Year ended December 31,
Cash flows provided by operating activities
Add / (deduct) the (increase) / decrease in non-cash working capital items
Cash flows provided by operating activities, excluding non-cash working capital items
Less: Distributions declared to unitholders
Excess (Deficit)
Add: Distributions reinvested through the distribution reinvestment plan
2017
$
354,028 $
168,141
522,169
(460,627)
61,542
25,273
Excess (Deficit), net of distribution reinvestment plan
$
86,815 $
2016
425,096
(125,741)
299,355
(458,388)
(159,033)
67,857
(91,176)
For year ended December 31, 2017, cash flows provided by operating activities, excluding non-cash working capital items, was
higher than distributions declared to unitholders during the period by $61.5 million. Accordingly, we expect to maintain adequate
cash flows to fund future unitholder distributions.
For the year ended December 31, 2016, there was a shortfall of $159.0 million primarily caused by $188.7 million in income tax
and transaction costs over the respective periods, in connection with the sale of our U.S. property portfolio in May of 2016.
Excluding such taxes and transaction costs (which, for greater certainty, were funded from the sale proceeds of the U.S. property
portfolio), RioCan would have generated approximately $29.7 million of cash flow in excess of distributions to unitholders
(excluding non-cash working capital items).
The following table summarizes the costs associated with the disposal of our U.S. properties in the years ended December 31,
2017 and 2016:
(thousands of dollars)
Year ended December 31,
Current income tax expense (recoveries)
Transaction costs (recoveries)
$
$
2017
(2,871) $
(549)
(3,420) $
2016
135,139
53,562
188,701
In determining the annual level of distributions to unitholders, we consider forward-looking cash flow information including
forecasts and budgets and the future business prospects of the Trust. Furthermore, RioCan does not consider periodic cash flow
fluctuations resulting from working capital items such as the timing of property operating costs and tax installments, and semi-
annual debenture and mortgages payable interest payments in determining the level of distributions to unitholders in any
particular period. In determining the annual level of distributions to unitholders, RioCan also considers the impact of its
distribution reinvestment plan on its ability to sustain current distribution levels during the current period and on a rolling twelve
month basis.
Additionally, in establishing the level of cash distributions to unitholders we consider the impact of, among other items, the future
growth in the income producing portfolio, the current interest rate environment and cost of capital, completion of properties under
development and residential inventory, impact of future acquisitions and dispositions, capital expenditures and leasing
89
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
expenditures related to our income producing portfolio. Distributions to unitholders are expected to continue to be funded by cash
flows generated from our real estate investments and fee generating activities.
The Trust does not use net income in accordance with IFRS as the basis to establish the level of unitholders’ distributions as net
income includes, among other items, non-cash fair value adjustments related to its investment property portfolio and deferred
income taxes. In establishing the level of annual distributions to unitholders, consideration is given by RioCan to the level of cash
flow from operating activities, capital expenditures for the property portfolio, preferred unitholder distributions (if any) and
proceeds on the sale of available-for-sale marketable securities.
QUARTERLY RESULTS AND TREND ANALYSIS
(millions of dollars, except per unit amounts)
2017
2016
As at and for the quarter ended (i)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
$
$
$
$
$
$
$
Revenue
Net income attributable to unitholders
Net income from continuing operations
attributable to unitholders
NOI (v)
FFO (v)
ACFO (v)
Total assets
Total debt (ii)
Common unitholder distributions
DRIP participation rate
Weighted average common units outstanding
– diluted (in thousands)
Per unit basis (diluted)
Net income attributable to unitholders from
continuing operations
Net income attributable to unitholders
FFO (v)
Common unitholder distributions
Net book value per unit (iii)
Closing market price per common unit
Key Performance Indicator Ratios
Same Property NOI growth (decline) % (v)
FFO payout ratio (v)
ACFO payout ratio (v)
Debt to total assets
Debt to total assets
(RioCan's proportionate share) (v)
Interest coverage
(RioCan's proportionate share) (v)
Debt to Adjusted EBITDA
(RioCan's proportionate share) (v)
Weighted average contractual interest rate
Unencumbered assets to unsecured debt (v)
% NOI generated from unencumbered assets
(v)
Other
Number of employees
Residency of unitholders (iv)
– Canadian
– Non-resident
$
293
210
210
184
144
186
$
287
185
180
183
151
149
$
286
156
155
180
147
135
$
290
165
163
176
143
118
$
292
164
178
179
132
122
$
282
248
254
174
140
130
$
276
271
143
166
133
109
284
147
108
167
143
122
14,377
14,376
14,275
14,273
14,174
14,056
13,469
15,856
5,932
115
4.0%
5,950
115
6.1%
5,904
115
5.6%
5,801
115
6.3%
5,654
115
6.2%
5,606
115
7.0%
5,112
115
9.1%
7,218
114
30.7%
326,155
327,438
327,201
326,956
326,639
326,658
325,811
323,812
0.64
0.64
0.44
0.35
24.85
24.36
2.9%
78.8%
78.3%
41.0%
41.4%
3.84
7.57
3.37%
226%
56.7%
$
$
$
$
$
$
0.55
0.56
0.46
0.35
24.54
23.93
2.4%
80.5%
87.9%
41.1%
41.5%
3.78
7.63
3.42%
229%
53.4%
$
$
$
$
$
$
0.47
0.47
0.45
0.35
24.35
24.07
1.9%
82.0%
91.1%
41.2%
41.5%
3.74
7.51
3.40%
231%
52.6%
$
$
$
$
$
$
0.50
0.50
0.44
0.35
24.25
26.20
1.5%
83.9%
95.9%
40.5%
40.8%
3.54
7.90
3.44%
236%
52.9%
$
$
$
$
$
$
0.54
0.50
0.40
0.35
24.08
26.63
2.2%
83.6%
94.6%
39.7%
40.0%
3.36
8.10
3.54%
240%
49.5%
$
$
$
$
$
$
0.77
0.75
0.43
0.35
23.89
27.22
2.0%
72.0%
75.8%
39.6%
39.9%
3.23
8.07
3.63%
245%
46.3%
$
$
$
$
$
$
0.43
0.83
0.41
0.35
$
$
$
$
0.31
0.43
0.44
0.35
23.59
$ 23.73
29.33
$ 26.60
0.1%
71.7%
75.1%
37.7%
38.0%
(2.2%)
71.2%
71.9%
45.4%
45.6%
3.11
3.11
8.17
8.46
3.91%
256%
43.7%
3.60%
167%
26.7%
650
666
659
673
669
660
655
726
68.6%
31.4%
69.0%
31.0%
69.2%
30.8%
69.9%
30.1%
69.9%
30.1%
71.3%
28.7%
71.8%
28.2%
72.2%
27.8%
(i) Refer to RioCan’s respective annual and interim MD&As issued for a discussion and analysis relating to those periods.
(ii) Total debt is defined as the sum of mortgages payable, lines of credit and other bank loans, mortgages on properties held for sale and debentures payable.
(iii) A non-GAAP measurement. Calculated by RioCan as common unitholders’ equity divided by the number of units outstanding at the end of the reporting
period. RioCan’s method of calculating net book value per unit may differ from other issuers’ methods and, accordingly, may not be comparable to net book
value per unit reported by other issuers.
(iv) Estimates based on unitholder mailing addresses on record at the end of each reporting period.
(v) For definitions and basis of presentation of RioCan's non-GAAP measures, refer to the section Presentation of Financial Information and Non-GAAP
Measures in this MD&A.
90
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Our revenue and operating results are not materially impacted by seasonal factors. However, macroeconomic and market
trends, as described under the Outlook section of this MD&A, do have an influence on the demand for space, occupancy levels
and, consequently, our revenue and operating performance.
Overall, quarterly fluctuations in our revenue and operating results are mainly attributable to occupancy and same property
growth, acquisitions and dispositions, the sale of available-for-sale marketable securities, Target backfill progress and fair value
gains and losses on investment properties.
The revenue decline from Q1 2016 to Q2 2016 was mainly related to the sale of our U.S. portfolio in late May 2016. The further
decline in revenue in Q3 2016 was due to a full quarter effect of the sale of the U.S. portfolio, partially offset by the CPPIB and
Kimco portfolio acquisitions completed in Q3 2016. The subsequent revenue increase in Q4 2016 is largely due to the full quarter
effects of our portfolio acquisitions and stronger same property growth. The lower revenues in Q1 2017 to Q3 2017 compared to
Q4 2016 was primarily due the timing of common area maintenance and realty tax recoveries and no residential inventory sales.
Revenue improved in Q4 2017 relative to Q3 2017 due to the timing of common area maintenance and realty tax recoveries,
higher percentage rent and an increase in lease cancellation fees.
The above factors for quarterly revenue variations also affect the quarterly variations in net income, NOI, FFO and ACFO. The
increase in net income from Q2 2017 to Q4 2017 was also related to higher fair market value gains on investment properties and
higher gains on sale of marketable securities.
FFO over the same periods were relatively stable as compared to net income as fair value gains and losses are excluded from
FFO. The increase in Q1 2017 FFO was mainly due to higher gains on sale of available-for-sale marketable securities, improved
property operations and lower general and administrative costs. The increase in Q2 2017 FFO compared to Q1 2017, was mainly
due to strong property operations. The increase in Q3 2017 FFO compared to Q2 2017 was mainly due to higher gains on sale of
available-for-sale marketable securities and strong same property growth. The decrease in Q4 2017 FFO compared to Q3 2017
was mainly due to lower gains on sale of available-for-sale marketable securities, accelerated depreciation and amortization
costs of certain management information systems and a one-time fair value adjustment to a loan receivable, partially offset by
higher operating income and lower interest.
Quarterly changes in ACFO were driven by similar factors as for FFO, except for the quarterly net working capital changes
included in ACFO. The decrease in ACFO from Q4 2016 to Q1 2017 was primarily due to inclusion of $11.3 million net working
capital decrease in ACFO in Q1 2017, as opposed to working capital increase of $6.0 million in Q4 2016, which was further offset
by higher gains on the sale of available-for-sale marketable securities, strong same property operations and general and
administrative cost savings. The increase in ACFO from Q1 2017 to Q2 2017 was primarily due to inclusion of $0.9 million net
working capital decrease in ACFO in Q2 2017, as opposed to working capital decrease of $11.3 million in Q1 2017, and strong
same property operations. The increase in ACFO from Q3 2017 to Q4 2017 was primarily due to a one-time $29.2 million special
distribution from equity accounted investments in Q4 2017 and inclusion of $22.9 million net working capital increase in ACFO in
Q4 2017, as opposed to working capital increase of $13.9 million in Q3 2017, as well as strong same property growth.
Aggregate debt levels and overall leverage declined by approximately 7% in Q2 2016 mainly due to the sale of our U.S. portfolio
and the use of the net proceeds to lower our debt levels. The subsequent approximate 2% increase in debt levels in Q3 2016
was mainly attributable to Canadian acquisitions in Q3 2016 funded by debt. The 0.8% increase in leverage in Q1 2017 and
further 0.8% increase in Q2 2017, was mainly attributable to payment of income taxes relating to the sale of U.S. taxes in Q1
2017 and redemption of the Series C preferred trust units in Q2 2017. The overall trend of improvement in interest coverage and
debt to adjusted EBITDA from 2016 to 2017 was primarily due to the sale of the U.S. portfolio and use of the net proceeds to
lower our debt levels, interest savings from our mortgage refinancing. higher gains on sale of available-for-sale marketable
securities, and strong property operations.
The significant improvement in our unencumbered assets to unsecured debt and percentage of NOI expected to be generated
from unencumbered assets in 2016 was mainly due to the sale of our U.S. portfolio and repayment of related mortgages,
utilization of net proceeds from the sale to pay down secured Canadian mortgages, and the conversion of a secured line of credit
facility to an unsecured credit facilities. In 2017, percentage of NOI from unencumbered assets continued to grow from 2016 as a
result of strong property operations and our capital management strategy to prudently increase our unencumbered assets pool.
Unencumbered assets to unsecured debt ratio declined to an extent over 2017 but well ahead of our 200% target. This was
mainly because increase in our unsecured debt outpaced the increase in our unencumbered assets to an extent on relative
percentage basis.
The FFO and ACFO payout ratios for Q1 2016 to Q3 2016 were lower than most of the comparable periods mainly due to $88.3
million Target settlement in Q4 2015 FFO and that our FFO payout ratios are calculated on twelve month trailing basis. The 1.3%
increase in ACFO payout ratio from Q4 2016 to Q1 2017 was partly due to the increase in weighted average units outstanding
and partly due to no preferred unit redemption loss during the twelve month period ended March 31, 2017. The FFO and ACFO
payout ratio decreases since Q1 2017 was due to growth in FFO and ACFO as noted above. The large 9.6% decrease in ACFO
payout ratio from Q3 2017 to Q4 2017 was mostly due to a one-time $29.2 million special distribution from equity accounted
investments in Q4 2017 and higher working capital increases as noted above.
In consideration of the funds received as a result of the sale of our U.S. portfolio, management determined that an additional
incentive for participants in the distribution reinvestment plan was no longer necessary. During the first quarter of 2016, we
eliminated the 3.1% discount on the distribution reinvestment plan, which resulted in a subsequent decline in the participation
rate. The distribution reinvestment plan's lower participation rate since Q2 2016 was the main cause of the lower than historical
average quarterly increase in weighted average common units outstanding from Q4 2016 to Q3 2017. During Q4 2017, the Trust
commenced the purchase and cancellation of its units pursuant to its NCIB which resulted in a decline in the weighted average
common units outstanding relative to Q3 2017.
91
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Unaudited Consolidated Statements of Income
(In thousands of Canadian dollars, except per unit amounts)
Three months ended December 31,
Revenue
Rental revenue
Property and asset management fees
Residential inventory sales
Operating costs
Rental operating costs
Recoverable under tenant leases
Non-recoverable costs
Residential inventory cost of sales
Operating income
Other income
Interest income
Income from equity accounted investments
Fair value gain on investment properties, net
Investment and other income
Other expenses
Interest costs
General and administrative
Internal leasing costs
Transaction and other costs
Income before income taxes
Deferred income tax recovery
Net income from continuing operations
Net loss from discontinued operations
Net income
Net income attributable to
Unitholders
Non-controlling interests
Net income (loss) per unit - basic:
From continuing operations
From discontinued operations
Net income per unit - basic
Net income (loss) per unit - diluted:
From continuing operations
From discontinued operations
Net income per unit - diluted
Weighted average number of units (in thousands):
Basic
Diluted
92
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
2017
2016
$
289,403
$
285,257
3,823
—
2,968
3,353
293,226
291,578
100,110
101,058
5,353
—
105,463
187,763
1,950
3,782
71,013
11,979
88,724
42,389
18,123
3,265
4,295
5,233
4,550
110,841
180,737
1,657
4,521
44,371
6,762
57,311
43,464
14,000
2,663
2,449
$
$
$
$
$
$
$
$
68,072
208,415
(1,320)
62,576
175,472
(3,000)
209,735
$
178,472
(62)
(14,013)
209,673 $
164,459
209,673 $
164,459
—
—
209,673 $
164,459
0.64
$
—
0.64 $
0.64
$
—
0.64 $
0.54
(0.04)
0.50
0.54
(0.04)
0.50
326,040
326,155
326,466
326,639
MANAGEMENT’S DISCUSSION AND ANALYSIS
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in note 3 of RioCan's 2017 Annual Consolidated Financial Statements. The
preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates under different
assumptions and conditions.
Our critical accounting judgments, estimates and assumptions relate to the following areas: fair value, the recognition and
valuation of deferred tax assets and liabilities, capitalization of costs to investment property, determination of significant influence
over equity investees, classification of disposal groups and discontinued operations and the determination of the type of lease
where we are the lessor. Our critical accounting policies and estimates have been reviewed and approved by our Audit
Committee, in consultation with senior management, as part of their review and approval of our significant accounting policies
and judgments.
Fair value
Fair value is the amount at which an item could be bought or sold in a current transaction between independent, knowledgeable
willing parties, as opposed to a forced or liquidation sale, in an arm’s length transaction under no compulsion to act.
Quoted market prices in active markets are the best evidence of fair value and are used as the basis for fair value measurement,
when available. When quoted market prices are not available, estimates of fair value are based on the best information available,
including prices for similar items and the results of other valuation techniques. Valuation techniques used would be consistent
with the objective of measuring fair value.
The techniques used to estimate future cash flows will vary from one situation to another depending on the circumstances
surrounding the asset or liability in question.
The Trust’s financial statements are affected by the fair value-based method of accounting, the most significant areas of which
are as follows:
•
The determination of fair value of investment property is based upon, among other things, rental revenue from current leases
and reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume about rental
revenue from future leases in light of current conditions, less future cash outflows in respect of tenant installation costs,
capital expenditures and investment property operations. The Trust uses the direct capitalization method to fair value its
income properties. Under this valuation method a capitalization rate is applied to normalized NOI to yield a fair value.
RioCan has recently involved third party appraisers in its valuation process. For the year ended December 31, 2017,
RioCan had 35 properties including 11 land parcels (year ended December 31, 2016 - 22 properties including 13 land
parcels) valued by experienced valuation professionals having the required qualifications in property appraisals. Going
forward, our plan is to select a sample of investment properties (approximately six each quarter) on a rotational basis for
external appraisal. Refer to the Asset Profile section of this MD&A for further discussion of fair values of investment
property.
• Unit based compensation expense is measured at fair value and expensed over the option vesting period, calculated using
the Black-Scholes Model for unit option valuation and the Monte-Carlo simulation pricing model for the performance equity
unit plan. For the year ended December 31, 2017, we recorded unit-based compensation expense of $3.9 million (December
31, 2016 - $6.7 million).
•
•
IAS 39, Financial Instruments: Recognition and Measurement establishes the standard for recognizing and measuring
financial assets, financial liabilities and non-financial derivatives. All financial instruments are required to be measured at fair
value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on
whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and
receivables or other liabilities.
At least annually, RioCan reports in its financial statements the fair value of its mortgages and debentures payable, which
amounts are based upon discounted future cash flows using discount rates that reflect current market conditions for
instruments with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts that RioCan
might pay or receive in actual market transactions. Potential transaction costs have also not been considered in estimating
fair value.
The carrying cost of RioCan’s mortgages and debentures payable at December 31, 2017 is $5.0 billion. The Trust reported a $4.9
billion fair value relating to these mortgages and debentures payable in note 24 to the 2017 Annual Consolidated Financial
Statements.
Capitalization of costs to investment property
RioCan's accounting policies relating to investment properties are described in note 3(c) to the 2017 Annual Consolidated
Financial Statements. In applying these policies, judgment is required in determining whether certain costs represent additions to
the carrying amount of the property and in distinguishing between tenant incentives and capital improvements.
Development costs for properties under development are capitalized in accordance with the accounting policy in note 3(c) to the
2017 Annual Consolidated Financial Statements. Initial capitalization of costs requires management’s judgment in determining
when the project commences with active development and identifying at which time a development property is substantially
completed. This amount includes capitalized common area maintenance, property taxes and borrowing costs on both specific
and general debt.
93
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Leases - RioCan as a lessor
We make judgments in determining whether certain leases, in particular tenant leases where we are the lessor, are either
operating or finance leases. RioCan has determined, based on an evaluation of terms and conditions of the lease arrangements,
that the Trust retains all the significant risks and rewards of ownership of these properties and accounts for these arrangements
as operating leases.
Income taxes
The Trust uses judgment to interpret tax rules and regulations and determining the appropriate rates and amounts in recording
current and deferred income taxes, giving consideration to timing and probability. Actual income taxes could significantly vary
from these estimates as a result of future events, including changes in income tax law or the outcome of reviews by tax
authorities and related appeals. To the extent that the final tax outcome is different from the amounts that were initially recorded,
such difference will impact the income tax provision in the period in which such determination is made.
The recognition of deferred income tax assets and liabilities also requires significant judgment as the recognition is dependent on
RioCan's projection of future taxable profits and tax rates that are expected to be in effect in the period the asset will be realized
or the liability settled. Any changes to this projection will result in changes in the amount of deferred tax assets and liabilities on
the consolidated balance sheets and the deferred tax expense in the consolidated statements of income.
Classification of assets and liabilities as held for sale and discontinued operations
Classification of assets or a disposal group as held for sale and discontinued operations requires judgment on whether the
carrying amount will be recovered principally through a sale transaction rather than through continuing use and whether the sale
is highly probable.
Significant influence
When determining the appropriate basis of accounting for RioCan's investees, we make judgments about the degree of influence
that RioCan exerts directly or through an arrangement over the investees' relevant activities. This may include the ability to elect
investee directors, appoint management or influence key decisions.
FUTURE CHANGES IN ACCOUNTING POLICIES
RioCan monitors the potential changes proposed by the IASB and analyzes the effect that changes in the standards may have on
RioCan’s operations. Standards issued, but not yet effective, up to the date of issuance of the consolidated financial statements
for the year ended December 31, 2017, are described below. This description is of standards and interpretations issued, which
we reasonably expect to be applicable at a future date. We intend to adopt these standards when they become effective.
IFRS 15, Revenue from Contracts with Customers (IFRS 15)
IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with
customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured
approach to measuring and recording revenue. The new revenue standard is applicable to all entities and will supersede all
current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual
periods beginning on or after January 1, 2018, with early adoption permitted. The Trust's assessment includes a review of
relevant contracts for the following key areas which RioCan believes are in scope of IFRS 15 including, but not limited to,
residential inventory sales, common area maintenance recoveries, and property and asset management fees. The Trust has
assessed the impact of IFRS 15 and has concluded that the pattern of revenue recognition will remain unchanged upon adoption
of the standard. The impact may be limited to additional note disclosure on the disaggregation of its revenue streams, specifically
common area maintenance recoveries. The Trust intends to adopt the new standard on the required effective date on modified
retrospective without restatement of prior period comparatives.
IFRS 9, Financial Instruments (IFRS 9)
In July 2014, the IASB issued the final version of IFRS 9, which reflects all phases of the financial instruments project and
replaces IAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9. The standard
introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 establishes
principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to
users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. This
new standard also includes new general hedge accounting guidance, which will align hedge accounting more closely with risk
management. It does not completely change the types of hedging relationships or the requirement to measure and recognize
ineffectiveness; however, it will allow more hedging strategies that are used for risk management to qualify for hedge accounting
and introduce more judgment to assess the effectiveness of a hedging relationship. IFRS 9 also introduces an expected loss
impairment model for all financial assets not measured at fair value through profit or loss that requires recognition of expected
credit losses, rather than incurred losses as applied under the current standard. During 2017, the Trust performed an assessment
of key areas within the scope of IFRS 9 which includes, but not limited to, the classification and measurement of mortgages and
loans receivable and available-for-sale securities. The Trust intends to adopt the new standard on the required effective date of
January 1, 2018 and will not restate comparative information.
94
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Classification and measurement
Quoted equity instruments currently held as available-for-sale financial assets with unrealized gains and losses recorded in OCI
will, instead, be measured at fair value through profit or loss, which will increase volatility due to unrealized gains and losses
being recorded in profit or loss. The AFS cumulative unrealized gain of $68.7 million related to those securities, which is currently
presented as accumulated OCI, will be reclassified to retained earnings upon adoption. The Trust does not expect a significant
impact on its balance sheet or equity as a result of this change in classification and measurement.
The Trust is currently analyzing the contractual cash flow characteristics of the Trust’s mortgage and loan receivables and
assessing various business model considerations and will be in a position to conclude as at the first quarter of 2018.
IFRS 16, Leases (IFRS 16)
In January 2016, the IASB issued IFRS 16. The new standard brings most leases on-balance sheet for lessees under a single
model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely
unchanged, and the distinction between operating and finance leases is retained. This standard would be effective for the Trust's
annual periods beginning on or after January 1, 2019, with early adoption permitted. To assess the impact of this new standard,
RioCan has formed an internal working group and continues to progress on its in-depth assessment of IFRS 16 on the Trust's
Consolidated Financial Statements. RioCan does not expect a significant impact to the Trust's Consolidated Financial Statements
on adoption of this IFRS. RioCan intends to adopt the standard effective January 1, 2019 without restatement of prior period
comparatives.
IAS 40, Investment Property (IAS 40)
In December 2016, the IASB issued an amendment to IAS 40 clarifying certain existing requirements. The amendment requires
that an asset be transferred to or from investment property only when there is a change in use. A change in use occurs when the
property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. In isolation, a
change in management’s intentions for the use of a property does not provide evidence of a change in use. These amendments
are effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. RioCan will apply the
amendments when they become effective prospectively, however, since the current policy and practice is in line with the
clarifications issued, RioCan does not expect any impact to the Trust's Consolidated Financial Statements.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER
FINANCIAL REPORTING
Disclosure Controls and Procedures (DCP)
The CEO and CFO of the Trust have designed or caused to be designed under their direct supervision the Trust’s DCP to provide
reasonable assurance that: i) material information relating to the Trust is made known to management by others, particularly
during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the
Trust in its annual and interim fillings or other reports filed or submitted under securities legislation is recorded, processed,
summarized and reported within the time period specified in securities legislation. The CEO and CFO are assisted in this
responsibility by a Disclosure Committee, which is composed of RioCan senior management. The Disclosure Committee has
established disclosure controls and procedures so that it becomes aware of any material information affecting RioCan in order to
evaluate and communicate this information to management of the Trust, including the CEO and CFO, as appropriate and
determine the appropriateness and timing of any required disclosure. It was determined, as at December 31, 2017, RioCan’s
DCP were adequate and effective.
Internal Controls over Financial Reporting (ICFR)
RioCan has established adequate ICFR to provide reasonable assurance regarding the reliability of the Trust’s financial reporting
and the preparation of the financial statements for external purposes in accordance with IFRS. Management, including RioCan’s
CEO and CFO has assessed or caused an assessment under their direct supervision, of the design and operating effectiveness
of the Trust’s ICFR as at December 31, 2017 on the criteria set forth in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, it was determined that, as
at December 31, 2017, RioCan’s ICFR were appropriately designed and were operating effectively based on the criteria
established in the Internal Control - Integrated Framework (2013).
There were no changes in the Trust’s ICFR during the financial year ended December 31, 2017 that have materially affected, or
are reasonably likely to materially affect, the Trust’s ICFR.
Inherent Limitations
It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Given the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These
inherent limitations include, among other items: (i) that management’s assumptions and judgments could ultimately prove to be
incorrect under varying conditions and circumstances; (ii) the impact of any undetected errors; and (iii) controls may be
circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override.
Canadian REIT Status and Monitoring
RioCan currently qualifies for the REIT Exemption for purposes of the Income Tax Act (Canada). Accordingly, RioCan continues
to be able to flow taxable income through to unitholders on a tax effective basis. Generally, to qualify for the REIT Exemption,
95
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
RioCan's Canadian assets must be comprised primarily of real estate and substantially all of our Canadian source revenues must
be derived from rental revenue, capital gains and fee income from properties in which we have an interest.
RioCan monitors its REIT Exemption status to ensure that we continue to qualify as a Canadian REIT. From time to time, the
members of the Board of Trustees, Audit Committee and senior management are updated on RioCan's continued REIT
Exemption qualification, including any significant legislation updates.
U.S. Income Tax Legislation
On December 18th, 2015, the House of Representatives passed new tax legislation known as the PATH Act, which makes
significant changes to the U.S. federal income tax rules on foreign investment in U.S. real property (the Foreign Investment in
Real Property Act or "FIRPTA") by certain "qualified shareholders". The impact of these proposed changes on our U.S. portfolio
sale is that it may have the potential to reduce a qualifying foreign investor’s withholding tax rate from 35% to 30% and other
potential tax reductions. We are awaiting additional guidance from the Internal Revenue Service to determine whether the Trust
can potentially benefit from the new tax legislation. There can be no assurance that we will benefit from any changes in the tax
legislation related to FIRPTA.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, we may enter into transactions with entities whose directors or trustees are also RioCan
trustees and/or part of RioCan's senior management. All such transactions are in the normal course of operations and are
measured at market-based exchange amounts.
Transactions subsequent to the formation of a co-ownership that are not contemplated by the co-ownership agreement are
considered related party transactions for financial statement purposes.
Key management personnel are those individuals that have the authority and responsibility for planning, directing and controlling
the Trust's activities, directly or indirectly.
The Trust’s key management personnel include each of the Trustees and the following individuals: Chief Executive Officer,
Edward Sonshine; President and Chief Operating Officer, Raghunath Davloor; and Senior Vice President and Chief Financial
Officer, Qi Tang, effective June 8, 2017 (collectively, the Key Executives).
On June 8, 2017, RioCan announced the appointment of Qi Tang, Senior Vice President and Acting Chief Financial Officer, as the
Senior Vice President and Chief Financial Officer of the Trust, effective June 8, 2017.
Remuneration of the Trust’s Trustees and Key Executives during the year ended December 31, 2017 and 2016 is as follows:
Year ended December 31,
Compensation and benefits
Unit-based payments
Post-employment benefit costs
Trustees
Key Executives
2017
2016
2017
2016 (i)
261 $
301 $
5,226 $
1,537
—
2,253
—
2,214
36
5,756
5,341
57
1,798 $
2,554 $
7,476 $
11,154
$
$
(i)
Includes remuneration of Cynthia Devine, former Chief Financial Officer of the Trust.
During February 2016, RioCan's Chief Executive Officer (CEO), Edward Sonshine, agreed to commit to remain CEO of the Trust
until December 31, 2018 and has agreed to use his best efforts to provide the Trust with 12 month's notice if he is interested in
resigning or retiring.
For further details on related party transactions, refer to note 31 of our 2017 Annual Consolidated Financial Statements.
RISKS AND UNCERTAINTIES
The achievement of RioCan’s objectives is, in part, dependent on the successful mitigation of business risks identified. Real
estate investments are subject to a degree of risk. They are affected by various factors including changes in general economic
and local market conditions, equity and credit markets, fluctuations in interest costs, the attractiveness of the properties to
tenants, competition from other available space, the stability and credit-worthiness of tenants, and various other factors.
On June 17, 2015, RioCan amended its Declaration of Trust (the "Declaration") to further align the Declaration with evolving
governance best practices, as further described in RioCan's Management Information Circular dated April 4, 2016. The rights
granted in the amended Declaration are granted as contractual rights afforded to Unitholders (rather than as statutory rights).
Similar to other existing rights contained in the Declaration (i.e. the take-over bid provisions and conflict of interest provisions),
making these rights and remedies and certain procedures available by contract is structurally different from the manner in which
the equivalent rights and remedies or procedures (including the procedure for enforcing such remedies) are made available to
shareholders of a corporation, who benefit from those rights and remedies or procedures by the corporate statute that governs
the corporation, such as the Canada Business Corporations Act. As such, there is no certainty how these rights, remedies or
procedures may be treated by the courts in the non-corporate context or that a Unitholder will be able to enforce the rights and
remedies in the manner contemplated by the proposed amendments. Furthermore, how the courts will treat these rights,
remedies and procedures will be in the discretion of the court, and the courts may choose to not accept jurisdiction to consider
any claim contemplated in the proposed provisions.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Development Risk
Development risk arises from the possibility that completed developments will not be leased or that costs of development will
exceed original estimates, resulting in an uneconomic return from the leasing of such space. RioCan also expects to be
increasingly involved in mixed-use development projects that include residential condominiums and rental apartments. Purchaser
demand for residential condominiums is cyclical and is affected by changes in general market and economic conditions, such as
consumer confidence, employment levels, availability of financing for home buyers, interest rates, demographic trends, and
housing demand. Furthermore, the market value of undeveloped land, buildable lots and housing inventories held by RioCan can
fluctuate significantly as a result of changing economic and real estate market conditions.
RioCan’s construction commitments are subject to those risks usually attributable to construction projects, which include:
(i) construction or other unforeseen delays including municipal approvals; (ii) cost overruns; and (iii) the failure of tenants to
occupy and pay rent in accordance with existing lease agreements, some of which are conditional. Construction risks are
minimized through the provisions of the Trust’s Declaration, which have the effect of limiting direct and indirect investments in
greenfield developments and development properties held for resale (each net of related mortgage debt and mezzanine financing
to fund co-owners’ share of such developments) to no more than 15% of total consolidated unitholders’ equity of the Trust, as
determined under IFRS. RioCan also seeks to undertake such developments with established developers. With some exceptions
for land in the major markets, RioCan will generally not acquire or fund significant expenditures for undeveloped land unless it is
zoned and an acceptable level of space has been pre-leased or pre-sold. An advantage of unenclosed, new format retail is that it
lends itself to phased construction keyed to leasing levels, which reduces the creation of significant amounts of vacant but
developed space. Further, RioCan uses a staggered approach in its development program to avoid unnecessary concentration of
development projects in a single period of time so as to manage our development risk exposure and properly allocate our capital
and personnel resources.
Liquidity and General Market Conditions
RioCan faces risks associated with general market conditions and their potential consequent effects. Current general market
conditions may include, among other things, the insolvency of market participants, tightening lending standards and decreased
availability of cash, and changes in unemployment levels, retail sales levels, and real estate values. These market conditions may
affect occupancy levels and RioCan’s ability to obtain credit on favourable terms or to conduct financings through the public
market.
Ownership of Real Estate
Tenant Concentration
With respect to tenant concentration risk, in the event a given tenant, or group of tenants, experience financial difficulty and is
unable to fulfill its lease commitments, a given geographical area suffers an economic decline, or the changing consumer/retail
trends result in less demand for rental space, we could experience a decline in revenue.
RioCan strives to manage tenant concentration risk through geographical diversification and diversification of revenue sources in
order to avoid dependence on any single tenant. RioCan’s objective, as exemplified by the requirements of its Declaration noted
above, is that no individual tenant contributes a significant percentage of its gross revenue and that a considerable portion of our
revenue is earned from national and anchor tenants. RioCan attempts to lease to credit worthy tenants, will generally conduct
credit assessments for new tenants and generally is provided security by the tenants as part of negotiated deals. RioCan
attempts to reduce its risks associated with occupancy levels and lease renewal risk by having staggered lease maturities,
negotiating leases with base terms between five and ten years, and by negotiating longer term leases with built-in minimum rent
escalations where deemed appropriate.
In order to reduce RioCan’s exposure to the risks relating to credit and the financial stability of tenants, the Trust’s Declaration
restricts the amount of space which can be leased to any person and that person’s affiliates, other than in respect of leases with
or guaranteed by the Government of Canada, a province of Canada, a municipality in Canada or any agency thereof and certain
corporations, the securities of which meet stated investment criteria, to a maximum premises or space having an aggregate gross
leasable area of 20% of the aggregate gross leasable area of all real property held by RioCan. At December 31, 2017, RioCan
was in compliance with this restriction.
It is common practice for a major tenant, such as Canadian Tire or Loblaws/Shoppers Drug Mart, to lease space from other
landlords similar to RioCan in addition to owning real estate either within a controlled publicly traded REIT or within its own
operating entity. Past experience and industry practice has dictated that it is the strength of a location more than the ownership
of the property that drives the business decisions of RioCan’s tenants. Despite this, there may be instances where a tenant may
forgo the competitive advantage of RioCan’s property location in order to better utilize its own real estate, RioCan does not
consider the collective impact of risk to be significant.
Tenant Bankruptcies
Several of RioCan's properties are anchored by large national tenants. The value of some of our properties, including any
improvements thereto, could be adversely affected if these anchor stores or major tenants fail to comply with their contractual
obligations, experience credit or financial instability or cease their operations.
Bankruptcy filings by retailers occur periodically in the course of normal operations for reasons, such as increased competition,
Internet sales, changing population demographics, poor economic conditions, rising costs and changing shopping trends and/or
perceptions. RioCan continually seeks to re-lease vacant spaces resulting from tenant terminations. The bankruptcy of a tenant,
particularly an anchor tenant, may make it more difficult to lease the remainder of the affected properties or may give rise to
certain rights under existing leases with other tenants.
97
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Lease Renewals and Rental Increases
Growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are
found promptly to fill vacancies at rental rates similar to those paid by existing tenants in order for us to maintain our existing
occupancy levels of our properties. It is possible that we may face a disproportionate amount of space expiring in any one
period. Additionally, rental rates could decline, tenant bankruptcies could increase and tenant renewals may not be achieved,
particularly in the event of a protracted disruption in the economy, such as a recession.
At December 31, 2017, RioCan had NLA, at its interest, of 44,099,000 square feet and a portfolio economic occupancy rate of
95.6%. Based on our current annualized portfolio weighted average rental revenue of approximately $26 per square foot, for
every fluctuation in occupancy by a differential of 1%, our operations would be impacted by approximately $11.4 million annually.
RioCan's aggregate rentals expiring over the next five years is $424 million based on current contractual rental rates. If the
leases associated with these expiring rents are renewed upon maturity at an aggregate rental rate differential of 100 basis points,
our net income would be impacted by approximately $4.2 million annually.
Some of our retail lease agreements include co-tenancy clauses which allow the tenant to pay a reduced rent amount and, in
certain instances, terminate the lease, if RioCan fails to maintain certain occupancy levels or retain certain anchor tenancies. In
addition, certain of our tenants have the ability to terminate their leases prior to the lease expiration date if their sales do not meet
agreed upon thresholds. If occupancy, tenancy or sales fall below certain thresholds, rents that we are entitled to receive from
tenants could be reduced.
Ontario Rent Control Legislation
In May 2017, the Ontario government introduced legislation that expands the limits on annual residential rent increases to all
rental properties, including newly constructed units, instead of just units constructed prior to 1991. The impact of the new
legislation on RioCan's residential development program is to be further assessed and observed in terms of broader market
reactions. The legislation could impact the Trust's certain mixed-use development projects' future NOI growth potential, and thus,
there can be no assurance that all of our proposed residential projects as described herein would be undertaken, and if so, with
what mix of residential and commercial development and at what costs. There could also be changes to the mix of condominium
versus residential rental units or air rights sales for certain projects.
Financial and Liquidity Risk
Access to capital
A risk to the Trust’s growth program and the refinancing of its debt upon maturity is that of not having sufficient debt and equity
capital available to RioCan. Given the relatively small size of the Canadian marketplace, there are a limited number of lenders
from which RioCan can borrow. RioCan’s financial condition and results of operations would be adversely affected if it were
unable to obtain financing or cost-effective financing.
As at December 31, 2017, RioCan’s total indebtedness had a 3.32 year weighted average term to maturity bearing interest at a
weighted average contractual interest rate of 3.37% per annum.
Interest rate and financing risk
The terms of RioCan's credit agreements require the Trust to comply with a number of customary financial and other covenants,
such as maintaining debt service coverage and leverage ratios, adequate insurance coverage and certain credit ratings. These
covenants may limit our flexibility in conducting our operations and breaches of these covenants could result in defaults under the
instruments governing the applicable indebtedness.
RioCan’s operations are also impacted by interest rates, as interest expense represents a significant cost in the ownership of real
estate investments. We seek to reduce our interest rate risk by staggering the maturities of long term debt and limiting the use of
floating rate debt so as to minimize exposure to interest rate fluctuations. As at December 31, 2017, 17.1% of our total debt was
at floating interest rates on RioCan's proportionate basis.
From time to time, the Trust may enter into floating-for-fixed interest rate swaps as part of its strategy for managing interest rate
risk. As at December 31, 2017, the carrying value of our floating rate debt, not subject to a hedging strategy, is $1.0 billion. A 50
basis point increase in market interest rates would result in a $4.9 million decrease in our net income.
Joint Ventures and Co-ownerships
RioCan participates in joint ventures, partnerships and similar arrangements that may involve risks and uncertainties not present
absent third-party involvement, including, but not limited to, RioCan's dependency on partners, co-tenants or co-venturers that
are not under our control and that might compete with RioCan for opportunities, become bankrupt or otherwise fail to fund their
share of required capital contributions, or suffer reputational damage that could have an adverse impact on the Trust. Additionally,
our partners might at any time have economic or other business interests or goals that are different than or inconsistent with
those of the Trust, and we may be required to take actions that are in the interest of the partners collectively, but not in RioCan's
sole best interests. Accordingly, we may not be able to favourably resolve issues with respect to such decisions, or we could
become engaged in a dispute with any of them that might affect our ability to operate the business or assets in question.
Relative Illiquidity of Real Property
Real estate investments are relatively illiquid as a large proportion of RioCan's capital is invested in physical assets which can be
difficult to sell, especially if local market conditions are poor. A lack of liquidity could limit our ability to sell components of the
98
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
portfolio promptly in response to changing economic or investment conditions. If RioCan were required to quickly liquidate its
assets, there is a risk that we would realize sale proceeds of less than the current book value of our real estate investments.
As well, certain significant expenditures involved in real property investments, such as property taxes, maintenance costs and
mortgage payments, represent obligations that must be met regardless of whether the property is producing sufficient, or any,
revenue.
Unexpected Costs or Liabilities Related to Acquisitions
A risk associated with a real property acquisition is that there may be an undisclosed or unknown liability concerning the acquired
properties, and RioCan may not be indemnified for some or all of these liabilities. Following an acquisition, RioCan may discover
that it has acquired undisclosed liabilities, which may be material.
RioCan conducts what it believes to be an appropriate level of investigation in connection with its acquisition of properties and
seeks through contract to ensure that risks lie with the appropriate party.
Environmental Matters
Environmental and ecological related policies have become increasingly important in recent years. Under various federal,
provincial, state and municipal laws, RioCan, as an owner or operator of real property, could become liable for the costs of
removal or remediation of certain hazardous or toxic substances released on or in its properties or disposed of at other locations.
The failure to remove or remediate such substances, or address such matters through alternative measures prescribed by the
governing authority, may adversely affect RioCan’s ability to sell such real estate or to borrow using such real estate as collateral,
and could, potentially, also result in claims against the Trust. RioCan is not currently aware of any material non-compliance,
liability or other claim in connection with any of its properties, nor is RioCan currently aware of any environmental condition with
respect to any properties that it believes would involve material expenditures by the Trust.
It is our policy to obtain a Phase I environmental audit conducted by a qualified environmental consultant prior to acquiring any
additional property. In addition, where appropriate, tenant leases generally specify that the tenant will conduct its business in
accordance with environmental regulations and be responsible for any liabilities arising out of infractions to such regulations. It is
RioCan’s practice to regularly inspect tenant premises that may be subject to environmental risk. We maintain insurance to cover
a sudden and/or accidental environmental mishap.
Litigation
RioCan’s operations are subject to a wide variety of laws and regulations across all of its operating jurisdictions and RioCan faces
risks associated with legal and regulatory changes and litigation. In the normal course of operations, RioCan becomes involved in
various legal actions, including claims relating to personal injury, property damage, property taxes, land rights, and contractual
and other commercial disputes. The final outcome with respect to outstanding, pending or future actions cannot be predicted with
certainty, and the resolution of such actions may have an adverse effect on our financial position or results of operations.
RioCan retains external legal consultants to assist it in remaining current and compliant with legal and regulatory changes and to
respond to litigation.
Key Personnel
RioCan's executive and other senior officers have a significant role in our success and oversee the execution of RioCan's
strategy. Our ability to retain our management team or attract suitable replacements should any members of the management
group leave is dependent on, among other things, the competitive nature of the employment market. RioCan has experienced
departures of key professionals in the past and may do so in the future, and we cannot predict the impact that any such
departures will have on its ability to achieve its objectives. The loss of services from key members of the management team or a
limitation in their availability could adversely impact our financial condition and cash flow.
We rely on the services of key personnel on our executive team, including its Chief Executive Officer, Edward Sonshine, our
President and Chief Operating Officer, Raghunath Davloor and our Senior Vice President and Chief Financial Officer, Qi Tang and
the loss of their services could have an adverse effect on RioCan. We mitigate key personnel risk through succession planning,
but do not maintain key personnel insurance.
Unitholder Liability
There is a risk that RioCan’s unitholders could become subject to liability. The Trust’s Declaration provides that no unitholder or
annuitant under a plan of which a unitholder acts as trustee or carrier will be held to have any personal liability as such, and that
no resort shall be had to the private property of any unitholder or annuitant for satisfaction of any obligation or claim arising out of
or in connection with any contract or obligation of RioCan. Only RioCan’s assets are intended to be subject to levy or execution.
The Declaration further provides that, whenever possible, certain written instruments signed by RioCan must contain a provision
to the effect that such obligation will not be binding upon unitholders personally or upon any annuitant under a plan of which a
unitholder acts as trustee or carrier. In conducting its affairs, RioCan has acquired and may acquire real property investments
subject to existing contractual obligations, including obligations under mortgages and leases that do not include such provisions.
RioCan will use its best efforts to ensure that provisions disclaiming personal liability are included in contractual obligations
related to properties acquired, and leases entered into, in the future.
Certain provinces have legislation relating to unitholder liability protection, including British Columbia, Alberta, Saskatchewan,
Manitoba, Ontario and Quebec. To RioCan’s knowledge, certain of these statutes have not yet been judicially considered and it is
possible that reliance on such statute by a unitholder could be successfully challenged on jurisdictional or other grounds.
99
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Taxes
RioCan currently qualifies as a mutual fund trust and for the REIT Exemption for income tax purposes. RioCan expects to
distribute the Trust's taxable income to unitholders such that it will not be subject to tax. From time to time, RioCan may retain
some taxable income and net capital gains in order to utilize the capital gains refund available to mutual fund trusts without
incurring any income taxes. In order to maintain RioCan's current mutual fund trust status, the Trust is required to comply with
specific restrictions regarding its activities and the investments held by the Trust. If the Trust was to cease to qualify as a mutual
fund trust, or for the REIT Exemption for income tax purposes, the consequences could be material and adverse.
No assurance can be given that the provisions of the Income Tax Act (Canada) regarding mutual fund trusts and the REIT
Exemption will not be changed in a manner that adversely affects RioCan and its unitholders. From year to year, there is a risk
that the taxable allocation to unitholders can change depending upon the Trust's activities.
Foreign Currency Risk
Foreign exchange risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in
foreign exchange rates. As a result of the Trust's disposal of its U.S. property portfolio in 2016 and the associated repayment of
U.S. denominated debt, RioCan has significantly reduced its foreign exchange risk.
Credit Ratings
Real or anticipated changes in credit ratings on our debentures or preferred units may affect the market value thereof. In addition,
real or anticipated change in credit ratings can affect the cost at which we can access the debenture or preferred unit market, as
applicable.
100
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RioCan
AUDITED ANNUAL
CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2017 AND 2016
TABLE OF CONTENTS
Audited Annual
Consolidated Financial Statements
102 Management’s Responsibility for Financial Reporting
103
Independent Auditors’ Report
104 Consolidated Balance Sheets
105 Consolidated Statements of Income
106 Consolidated Statements of Comprehensive Income
107 Consolidated Statements of Changes in Equity
108 Consolidated Statements of Cash Flows
109 Notes to Consolidated Financial Statements
101
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of RioCan Real Estate Investment Trust (RioCan) is responsible for the preparation and fair presentation of the
accompanying annual consolidated financial statements and Management's Discussion and Analysis (MD&A). The consolidated
financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).
The consolidated financial statements and information in the MD&A necessarily include amounts based on best estimates and
judgments by management of the expected effects of current events and transactions with the appropriate consideration to
materiality. In addition, in preparing this financial information, we must make determinations about the relevancy of information to
be included, and estimates and assumptions that affect the reported information. The MD&A also includes information regarding
the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties.
Actual results in the future may differ materially from our present assessment of this information because future events and
circumstances may not occur as expected.
In meeting our responsibility for the integrity and fairness of the annual consolidated financial statements and MD&A and for the
accounting systems from which they are derived, management has established the necessary internal controls designed to
ensure that our financial records are reliable for preparing consolidated financial statements and other financial information,
transactions are properly authorized and recorded, and assets are safeguarded against unauthorized use or disposition.
As at December 31, 2017, our Chief Executive Officer and Chief Financial Officer evaluated, or caused an evaluation under their
direct supervision, the design and operation of our internal controls over financial reporting (as defined in National Instrument
52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings) and, based on that assessment, determined that our
internal controls over financial reporting were appropriately designed and operating effectively.
The Board of Trustees oversees management’s responsibility for financial reporting through an Audit Committee, which is
composed entirely of independent trustees. This committee reviews RioCan’s annual consolidated financial statements and
MD&A with both management and the independent auditors before such statements are approved by the Board of Trustees.
Other key responsibilities of the Audit Committee include selecting RioCan’s auditors, approving the consolidated financial
statements and MD&A, and monitoring RioCan’s existing systems of internal controls.
Ernst & Young LLP, independent auditors appointed by the unitholders of RioCan upon the recommendation of the Board of
Trustees, have examined our 2017 and 2016 annual consolidated financial statements and have expressed their opinion upon
the completion of such examination in the following report to the unitholders. The auditors have full and free access to, and meet
at least quarterly with, the Audit Committee to discuss their audits and related matters.
Edward Sonshine, O.Ont., Q.C.
Qi Tang
Chief Executive Officer
Senior Vice President and Chief Financial Officer
Toronto, Canada
February 13, 2018
102
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
INDEPENDENT AUDITORS’ REPORT
To the Unitholders of
RioCan Real Estate Investment Trust
We have audited the accompanying consolidated financial statements of RioCan Real Estate Investment Trust, which comprise
the consolidated balance sheets as at December 31, 2017 and 2016, and the consolidated statements of income, comprehensive
income, changes in equity, and cash flows for the years then ended, and a summary of significant accounting policies and other
explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the
auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of RioCan Real
Estate Investment Trust as at December 31, 2017 and 2016, and its financial performance and its cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Toronto, Canada
February 13, 2018
103
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
As at
Assets
Investment properties
Deferred tax assets
Equity accounted investments
Mortgages and loans receivable
Residential inventory
Assets held for sale
Receivables and other assets
Cash and cash equivalents
Total assets
Liabilities
Debentures payable
Mortgages payable
Lines of credit and other bank loans
Liabilities associated with assets held for sale
Accounts payable and other liabilities
Total liabilities
Equity
Unitholders' equity:
Preferred
Common
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
Note
December 31, 2017
December 31, 2016
5
10
6
7
8
4
9
13
12
11
4
14
15
15
$
13,160,244
$
13,287,038
11,929
176,256
145,873
132,003
410,178
269,870
70,225
11,609
185,278
118,017
48,414
60,530
408,508
54,366
14,376,578
$
14,173,760
2,694,619
$
2,300,247
904,429
32,670
399,927
6,331,892
$
— $
8,044,686
8,044,686
2,248,024
2,699,935
705,633
—
510,280
6,163,872
144,755
7,865,133
8,009,888
14,376,578
$
14,173,760
$
$
$
$
$
104
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Canadian dollars, except per unit amounts)
Years ended December 31,
Revenue
Rental revenue
Property and asset management fees
Residential inventory sales
Operating costs
Rental operating costs
Recoverable under tenant leases
Non-recoverable costs
Residential inventory cost of sales
Operating income
Other income
Interest income
Income from equity accounted investments
Fair value gains on investment properties, net
Investment and other income
Other expenses
Interest costs
General and administrative
Internal leasing costs
Transaction and other costs
Income before income taxes
Deferred income tax recovery
Net income from continuing operations
Net income from discontinued operations
Net income
Net income attributable to:
Unitholders
Non-controlling interests
Net income per unit - basic:
From continuing operations
From discontinued operations
Net income per unit - basic
Net income per unit - diluted:
From continuing operations
From discontinued operations
Net income per unit - diluted
Weighted average number of units (in thousands):
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
Note
2017
2016
18
$
1,140,665
$
1,103,884
14,554
—
13,186
16,262
1,155,219
1,133,332
399,580
18,270
—
417,850
737,369
7,586
15,719
136,942
57,014
217,261
171,418
52,560
10,882
11,825
246,685
707,945
(320)
708,265
7,021
715,286
715,286
—
715,286
2.16
0.02
2.18
2.16
0.02
2.18
$
$
$
$
$
$
$
$
397,776
19,684
16,188
433,648
699,684
5,744
9,972
182,888
33,268
231,872
179,527
52,220
10,931
9,577
252,255
679,301
(3,850)
683,151
147,687
830,838
830,747
91
830,838
2.06
0.45
2.51
2.06
0.45
2.51
326,805
326,929
325,386
325,665
6
19
20
21
22
4
23
23
23
23
23
23
$
$
$
$
$
$
$
$
105
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian dollars)
Years ended December 31,
Net income
Other comprehensive income (loss):
Items that may be reclassified subsequently to income, net of tax:
Translation of foreign operations:
Unrealized loss during the year
Reclassified during the year to income
Interest rate swap agreements:
Unrealized gain during the year
Reclassified during the year to income
Unrealized gain (loss) on cross-currency interest rate swap agreements
Available-for-sale investment:
Unrealized gain during the year
Reclassified during the year to income
Items that are not to be reclassified to net income, net of tax:
Actuarial (loss) gain on pension plan
Other comprehensive income (loss), net of tax
Comprehensive income, net of tax
Comprehensive income, net of tax attributable to:
Unitholders
Non-controlling interests
The accompanying notes are an integral part of the consolidated financial statements.
Note
2017
$
715,286 $
2016
830,838
—
—
12,901
—
(74)
35,698
(45,981)
(984)
1,560
716,846 $
716,846 $
— $
(53,391)
(254,989)
16,125
(2,697)
74
51,408
(14,040)
693
(256,817)
574,021
573,930
91
15
15
15
15
15
15
$
$
$
106
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands of Canadian dollars)
Balance, December 31, 2015
Changes during the year:
Net income
Other comprehensive loss
Units issued
Unit-based compensation awards
Unit option exercises
Unit redemptions
Preferred trust unit issue costs
Distributions to unitholders
Balance, December 31, 2016
Note
Preferred
equity
Common
trust units
Contributed
surplus
Retained
earnings
Accumulated
other
comprehensive
income
Total
unitholders’
equity
Non-
controlling
interests Total equity
$ 265,451 $ 4,684,194 $
24,971 $ 2,626,789 $
324,634 $ 7,926,039 $
782 $ 7,926,821
830,747
—
830,747
(256,817)
(256,817)
—
—
—
—
—
(125,000)
4,304
—
15
15
15
15
17
—
—
100,334
—
3,992
—
—
—
—
—
—
1,640
(3,992)
—
—
—
—
—
—
—
—
(4,304)
(467,055)
91
830,838
— (256,817)
—
—
—
100,334
1,640
—
100,334
1,640
—
—
—
—
—
—
—
(125,000)
(782)
(125,782)
—
—
—
(467,055)
(91)
(467,146)
$ 144,755 $ 4,788,520 $
22,619 $ 2,986,177 $
67,817 $ 8,009,888 $
— $ 8,009,888
Balance, December 31, 2016
$ 144,755 $ 4,788,520 $
22,619 $ 2,986,177 $
67,817 $ 8,009,888 $
— $ 8,009,888
Note
Preferred
equity
Common
trust units
Contributed
surplus
Retained
earnings
Accumulated
other
comprehensive
income
Total
unitholders’
equity
Non-
controlling
interests Total equity
Changes during the year:
Net income
Other comprehensive income
Units issued
Units purchased and cancelled
Unit-based compensation awards
Unit option exercises
Unit redemptions
Preferred trust unit issue costs
Distributions to unitholders
Balance, December 31, 2017
715,286
—
715,286
—
—
—
—
—
—
(149,500)
4,745
—
15
15
15
15
15
15
15
17
—
—
26,411
(57,870)
—
10
—
—
—
—
—
—
—
4,757
(10)
—
—
—
—
—
(41,705)
—
—
—
(4,745)
(464,141)
1,560
—
—
—
—
—
—
—
1,560
26,411
(99,575)
4,757
—
—
—
—
—
—
—
715,286
1,560
26,411
(99,575)
4,757
—
(149,500)
— (149,500)
—
—
—
(464,141)
— (464,141)
$
— $ 4,757,071 $
27,366 $ 3,190,872 $
69,377 $ 8,044,686 $
— $ 8,044,686
The accompanying notes are an integral part of the consolidated financial statements.
107
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
Years ended December 31,
Operating activities
Net income from:
Continuing operations
Discontinued operations
Net income
Items not affecting cash:
Depreciation and amortization
Amortization of straight-line rent
Unit-based compensation expense
Income from equity accounted investments
Fair value gains on investment properties, net
Deferred income taxes recovery
Transaction gains, net on disposition of:
Available-for-sale securities
Canadian investment properties
U.S. investment properties
Adjustments for other changes in working capital items
Cash provided by operating activities
Investing activities
Acquisitions of investment property
Construction expenditures on properties under development
Capital expenditures on income properties:
Recoverable and non-recoverable costs
Tenant improvements and external leasing commissions
Proceeds from sale of investment properties
Earn-outs on investment properties
Contributions to equity accounted investments
Distributions received from equity accounted investments
Advances of mortgages and loans receivable
Repayments of mortgages and loans receivable
Proceeds from sale of available-for-sale securities, net of selling costs
Cash provided by investing activities
Financing activities
Proceeds from mortgage financing, net of issue costs
Repayments of mortgage principal
Advances from bank credit lines, net of issue costs
Repayment of bank credit lines
Proceeds from issuance of debentures, net of issue costs
Repayment of unsecured debentures
Distributions to common trust unitholders, net of distributions reinvested
Distributions to preferred trust unitholders
Distributions paid to non-controlling interests
Units repurchased under normal course issuer bid
Return of capital to non-controlling interests
Proceeds received from issuance of common units, net
Redemption of preferred units
Cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Note
2017
2016
4
21
15
6
5
$ 708,265
$ 683,151
7,021
715,286
147,687
830,838
9,865
(7,806)
4,757
(15,719)
4,398
(8,006)
1,640
(9,972)
(136,942)
(199,787)
(320)
(234,525)
(45,981)
(971)
—
30
(168,141)
354,028
(14,040)
(6,075)
(65,116)
125,741
425,096
(46,137)
(556,203)
(312,237)
(249,429)
(33,683)
(35,500)
(46,780)
(47,593)
381,579
2,042,829
(1,567)
(18,475)
44,415
(60,396)
14,221
153,696
(7,022)
(26,750)
11,196
(3,894)
25,301
51,974
85,916
1,193,629
334,875
204,281
(719,719)
(1,599,076)
563,198
1,145,752
(362,265)
(1,154,814)
596,948
248,669
(150,000)
—
(435,671)
(397,143)
(3,514)
(8,667)
—
(99,575)
—
1,138
(91)
—
(782)
39,194
(149,500)
(125,000)
(424,085)
(1,647,677)
15,859
54,366
(28,952)
83,318
$
70,225
$
54,366
6
6
13
13
29
17
29
The accompanying notes are an integral part of the consolidated financial statements.
108
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RioCan
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS
(Audited – Canadian dollars, tabular amounts
in millions, except per unit amounts or unless
otherwise noted)
FOR THE YEARS ENDED
DECEMBER 31, 2017 AND 2016
To facilitate a better understanding of RioCan Real Estate Investment Trust’s
consolidated financial statements, significant accounting policies and related
disclosures, a listing of all the notes is provided below:
TABLE OF CONTENTS
Notes to Consolidated Financial Statements
1. General Information
2. Basis of Preparation and Statement of Compliance
3. Significant Accounting Policies
4. Assets Held for Sale and Discontinued Operations
5. Investment Properties
6. Equity Accounted Investments
7. Mortgages and Loans Receivable
8. Residential Inventory
9. Receivables and Other Assets
10. Income Taxes
11. Lines of Credit and Other Bank Loans
12. Mortgages Payable
13. Debentures Payable
14. Accounts Payable and Other Liabilities
15. Unitholders’ Equity
16. Unit-based Compensation Plans
17. Distributions to Unitholders
18. Rental Revenue
Investment and Other Income
Interest Costs
19.
20.
21. General and Administrative
22. Transaction and Other Costs
23. Net Income per Unit
24. Fair Value Measurement
25. Risk Management
26. Capital Management
27. Operating Leases
28. Subsidiaries
29. Supplemental Cash Flow Information
30. Changes in Other Working Capital Items
31. Related Party Transactions
32. Employee Benefits
33. Segmented Information
34. Contingencies and Other Commitments
35. Events after the Balance Sheet Date
110
110
112
120
122
126
127
128
128
129
129
130
130
132
132
133
135
136
136
136
136
136
137
137
138
139
141
142
142
143
143
143
144
144
145
109
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
1. GENERAL INFORMATION
RioCan Real Estate Investment Trust and its consolidated subsidiaries (collectively, the Trust or RioCan) own, develop and
operate Canada's largest portfolio of retail focused, increasingly mixed-use properties. The parent trust, RioCan Real Estate
Investment Trust, is an unincorporated closed-end trust governed under the laws of the Province of Ontario, Canada, and
constituted pursuant to a Declaration of Trust dated November 30, 1993, as most recently amended and restated on June 17,
2015. The Trust’s corporate headquarters and registered head office are located at the RioCan Yonge Eglinton Centre,
2300 Yonge Street, Toronto, Ontario, Canada.
RioCan's common trust units (units) are listed on the Toronto Stock Exchange (TSX) under the ticker symbols REI.UN.
These consolidated financial statements were authorized for issue by Board of Trustees on February 13, 2018.
2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE
(a) Statement of compliance
RioCan’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB).
(b) Basis of presentation
These consolidated financial statements are prepared on a going concern basis using the historical cost method modified to
include the fair value measurement of investment property and certain financial instruments, as set out in the relevant accounting
policies. The Trust presents its consolidated balance sheets based on the liquidity method, whereby all assets and liabilities are
presented in increasing order of liquidity. RioCan considers this presentation to be more relevant than a classified balance sheet
as the Trust considers its operating cycle to be longer than one year. The notes to the consolidated financial statements
distinguish between current and non-current assets and liabilities. Current assets and liabilities are those expected to be
recovered or settled within one year from the reporting period, and non-current assets and liabilities are those where the recovery
or settlement is expected to be greater than a year from the reporting period. The accounting policies set out below have been
applied consistently in all material respects. Any IFRS not effective for the current accounting year are described in note 3.
Certain comparative amounts have been reclassified to conform to the current year's presentation.
(c) Principles of consolidation
These consolidated financial statements include the accounts of the parent trust, RioCan Real Estate Investment Trust, and its
subsidiaries, after elimination of intercompany transactions, balances, revenues and expenses.
(i) Subsidiaries
Subsidiaries are entities over which the Trust has control. Control is achieved when RioCan is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect those returns through its power over the
investee. Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual
arrangements. The Trust reassesses whether or not it controls an investee based on current facts and circumstances.
All subsidiaries are consolidated from the date RioCan obtains control and continue to be consolidated until the date that
such control ceases. When RioCan does not own all of the equity in a consolidated subsidiary, the non-controlling equity
interest is presented as a separate component of total equity on the consolidated balance sheets. The net income
attributable to non-controlling interests is separately disclosed in the Trust's consolidated statements of income.
(ii) Associates and joint ventures
Associates are entities over which RioCan has significant influence but not control or joint control, generally accompanying
an ownership between 20% to 50% of the voting rights, although other factors such as the ability to impact key operating
decisions could also indicate significant influence.
Joint ventures are entities over which the Trust has joint control and whereby the parties that share joint control have rights
to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which
exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
Investments in associates and joint ventures are accounted using the equity method. Under the equity method, the
investment is initially recorded at cost and adjusted by RioCan's share of the post-acquisition results of operations and
changes in the net assets of the associate or joint venture. The financial statements of RioCan's associates and joint
ventures are prepared for the same reporting period as the Trust and where necessary, adjustments are made to bring the
accounting policies of such entities in line with those of the Trust.
(iii) Joint operations
A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to
the assets and obligations for the liabilities relating to the arrangement. RioCan records only its share of the assets, liabilities
and share of the results of operations of the joint operation. The assets, liabilities and results of joint operations are included
within the respective line items of the consolidated balance sheets, consolidated statements of income and consolidated
statements of comprehensive income.
110
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
(d) Significant judgments
The preparation of RioCan's consolidated financial statements requires management to make significant judgments that affect the
carrying amounts of assets and liabilities, and the reported amounts of revenues and expenses. In the process of applying
RioCan's accounting policies, management was required to apply judgment in the areas discussed below.
Investment properties
RioCan's accounting policies relating to investment properties are described in note 3(c). In applying these policies, judgment is
required in determining whether certain costs represent additions to the carrying amount of the property and in distinguishing
between tenant incentives and capital improvements.
Development properties
Development costs for properties under development are capitalized in accordance with the accounting policy in note 3(c). Initial
capitalization of costs requires management’s judgment in determining when the project commences with active development
and identifying at which time a development property is substantially completed. This amount includes capitalized common area
maintenance, property taxes and borrowing costs on both specific and general debt.
Leases - RioCan as a lessor
The Trust makes judgments in determining whether certain leases, in particular tenant leases where the Trust is the lessor, are
either operating or finance leases. RioCan has determined, based on an evaluation of terms and conditions of the lease
arrangements, that the Trust retains all the significant risks and rewards of ownership of these properties and accounts for these
arrangements as operating leases.
Income taxes
The Trust uses judgment to interpret tax rules and regulations and determining the appropriate rates and amounts in recording
current and deferred income taxes, giving consideration to timing and probability. Actual income taxes could significantly vary
from these estimates as a result of future events, including changes in income tax law or the outcome of reviews by tax
authorities and related appeals. To the extent that the final tax outcome is different from the amounts that were initially recorded,
such difference will impact the income tax provision in the period in which such determination is made.
The recognition of deferred income tax assets and liabilities also requires significant judgment as the recognition is dependent on
RioCan's projection of future taxable profits and tax rates that are expected to be in effect in the period the asset will be realized
or the liability settled. Any changes to this projection will result in changes in the amount of deferred tax assets and liabilities on
the consolidated balance sheets and the deferred tax expense in the consolidated statements of income.
Classification of assets and liabilities as held for sale and discontinued operations
Classification of assets or a disposal group as held for sale and discontinued operations requires judgment on whether the
carrying amount will be recovered principally through a sale transaction rather than through continuing use and whether the sale
is highly probable.
Significant influence
When determining the appropriate basis of accounting for RioCan's investees, the Trust makes judgments about the degree of
influence that RioCan exerts directly or through an arrangement over the investees' relevant activities. This may include the ability
to elect investee directors, appoint management or influence key decisions.
(e) Use of estimates and assumptions
The preparation of RioCan's consolidated financial statements requires management to make estimates and assumptions that
have a significant risk of causing a material adjustment to the reported amounts of assets, liabilities, net income and related
disclosures over the following reporting period. Estimates made by management are based on events and circumstances that
existed at the consolidated balance sheet date. Accordingly, actual results may differ from these estimates.
Investment properties
Estimates and assumptions used in determining fair value of the Trust's investment properties include capitalization rates and
stabilized net operating income (which is influenced by vacancy rates) used in the direct capitalization income approach. A
change to any of these inputs could significantly alter the fair value of an investment property.
Unit-based compensation
RioCan uses estimates and assumptions when determining the unit-based compensation expense during a reporting period. The
determination of the unit-based compensation expense resulting from the Trust's granting of employee unit options and
performance equity unit awards depends on valuation models, which by their nature are subject to measurement uncertainty.
The valuation method used to measure the fair value for each unit option awarded by RioCan is the Black-Scholes option pricing
model. This model requires the use of assumptions, such as expected stock price volatility and the use of historical data, that
may not be reflective of future performance. The valuation method used to measure the fair value for each performance equity
unit awarded by RioCan is the Monte Carlo simulation model, which requires the use of similar input assumptions.
111
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
3. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies (and any changes thereto) used in the preparation of these consolidated financial statements
are summarized below. These accounting policies conform, in all material respects, to IFRS.
Change in accounting policy
IAS 7 Statement of Cash Flows (IAS 7)
On January 1, 2017, the Trust adopted an amendment to IAS 7 which requires specific disclosures for movements in certain
liabilities on the statement of cash flows. This amendment did not result in a material impact to these consolidated financial
statements.
Significant accounting policies
(a) Business combinations
At the time of acquisition of property, whether through a controlling share investment or directly, the Trust considers whether the
acquisition represents the acquisition of a business. The Trust accounts for an acquisition as a business combination where an
integrated set of activities is acquired in addition to the property. More specifically, consideration is made of the extent to which
significant processes are acquired. If no significant processes, or only insignificant processes, are acquired, the acquisition is
treated as an asset acquisition rather than a business combination.
The cost of a business combination is measured as the fair value of the assets given, equity instruments issued and liabilities
incurred or assumed at the acquisition date. Identifiable assets acquired and liabilities and contingent liabilities assumed in a
business combination are measured initially at fair value at the date of acquisition. The Trust recognizes assets or liabilities, if
any, resulting from a contingent consideration arrangement at their acquisition date fair value and such amounts form part of the
cost of the business combination. Subsequent changes in the fair value of contingent consideration arrangements are recognized
in net income. The difference between the purchase price and the Trust’s net fair value of the acquired identifiable net assets and
liabilities is goodwill. On the date of acquisition, the purchaser records positive goodwill as an asset. Negative goodwill is
immediately recognized in the consolidated statements of income. Goodwill is not amortized and must be tested for impairment at
least annually, or more frequently, if events or changes in circumstances indicate that impairment has occurred.
RioCan expenses transaction costs associated with business combinations in the period incurred.
When an acquisition does not meet the criteria for a business, it is accounted for as an acquisition of a group of assets and
liabilities, the cost of which includes transaction costs that are allocated to the assets and liabilities acquired based upon their
relative fair values. No goodwill is recognized for asset acquisitions.
(b) Fair value measurement
The Trust measures certain financial instruments, such as derivatives, and non-financial assets, such as investment properties, at
fair value at each consolidated balance sheet date. Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined by
incorporating all factors that market participants would consider in setting a price acting in their economic best interests, including
commonly accepted valuation approaches. The fair value measurement is based on the presumption that the transaction to sell
the asset or transfer the liability takes place either:
•
•
In the principal market for the asset or liability; or
In the absence of a principal market, in the most advantageous market for the asset or liability that is accessible by
RioCan.
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits
by using the asset in its "highest and best use" or by selling it to another market participant that would use the asset in its highest
and best use.
The Trust uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to
measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized
within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value
measurement as a whole:
•
•
•
Level 1 - quoted (unadjusted) market prices in active markets for identical assets or liabilities
Level 2 - valuation techniques for which the lowest level input that is significant to the fair value measurement is directly
or indirectly observable
Level 3 - valuation techniques for which the lowest level input that is significant to the fair value measurement is
unobservable
For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Trust determines
whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input
that is significant to the fair value measurement as a whole) at the end of each reporting period.
112
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
For the purpose of fair value disclosures, RioCan has determined classes of assets and liabilities on the basis of the nature,
characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.
(c)
Investment properties
Investment properties are held to earn rental revenue or for capital appreciation or both. A key characteristic of an investment
property is that it generates cash flows largely independently of the other assets held by an entity.
Real estate property held under an operating lease is not classified as investment property. Instead, these leases are accounted
for in accordance with IAS 17, Leases. Certain land leases held under an operating lease, however, are classified as investment
property when the definition of an investment property is met. At the inception of these leases, investment property is recognized
at the lower of the fair value of the property and the present value of the future minimum lease payments and an equivalent
amount is recognized as a lease obligation.
(i) Income properties
Income properties are initially measured at cost. Subsequent to initial recognition, income properties are recorded at fair
value and related gains or losses arising from changes in fair value are recognized in net income in the period of change.
The determination of fair value is based on, among other things, rental revenue from current leases and reasonable and
supportable assumptions that represent what knowledgeable, willing parties would assume about rental revenue from future
leases in light of current conditions, less future cash outflows in respect of tenant installation costs, income property
operations and capital expenditures.
(ii) Properties under development
Properties under development include those properties, or components thereof, that will undergo activities that will take a
substantial period of time to prepare the properties for their intended use as income properties.
The cost of a development property that is an asset acquisition comprises the amount of cash, or the fair value of other
consideration, paid to acquire the property, including transaction costs. Subsequent to the acquisition, the cost of a
development property includes costs that are directly attributable to these assets, including development costs, property
taxes and borrowing costs on both specific and general debt. Direct and indirect borrowing costs, development costs and
property taxes are capitalized when the activities necessary to prepare an asset for development or redevelopment begin,
and continue until the date that construction is substantially complete and all necessary occupancy and related permits have
been received, whether or not the space is leased. If RioCan is required as a condition of a lease to construct tenant
improvements that enhance the value of the property, then capitalization of costs continues until such improvements are
completed. Capitalization of finance costs is suspended if there are prolonged periods when development activity is
interrupted.
Interest capitalized is calculated using the Trust’s weighted average cost of borrowing after adjusting for borrowing
associated with specific developments. Where borrowing is associated with specific developments, the amount capitalized is
the gross interest incurred on such borrowing less any investment income arising on temporary investment of such
borrowing.
Properties under development are also adjusted to fair value at each consolidated balance sheet date with fair value
adjustments recognized in net income.
(d) Residential inventory
Residential inventory is assets acquired or developed that RioCan has no intention of using for rental income purposes and plans
to sell in the ordinary course of business. The Trust expects to earn a return on such assets through a combination of property
operating income earned during the holding period and sales proceeds. Residential inventory is recorded at the lower of cost,
including pre-development expenditures and capitalized borrowing costs, and net realizable value, which RioCan determines
using the estimated selling price in the ordinary course of business, less estimated selling costs and development costs to
complete.
Residential inventory is reviewed for impairment at each reporting period date. An impairment loss is recognized in net income
when the carrying value of the asset exceeds its net realizable value.
Transfers into residential inventory are based on a change in use evidenced by the commencement of development expenditures
with a view to sell, at which point an investment property would be transferred to inventory. Transfers from inventory to
investment property are based on a change in use evidenced by management's commitment to use a property for rental
purposes or the commencement of an operating lease to another party.
(e) Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Trust and the revenue can be
reliably measured. Revenue is measured at the fair value of the consideration received. The following specific recognition criteria
must also be met before revenue is recognized:
113
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
(i) Rental revenue
Base rent
The Trust has not transferred substantially all of the benefits and risks of ownership of its investment properties and,
therefore, accounts for leases with its tenants as operating leases. Rental revenue includes all amounts earned from tenants
related to lease agreements including property tax and operating cost recoveries. Revenue recognition under a lease
commences when the tenant has the right to use the leased asset, which is typically when the tenant takes possession of, or
controls, the physical use of the leased property. Generally, this occurs on the lease commencement date. When RioCan is
required to make additions to the property in the form of tenant improvements that enhance the value of the property,
revenue recognition begins upon substantial completion of such additions.
Tenant incentives are recognized as a reduction of rental revenue on a straight-line basis over the term of the lease where it
is determined that the tenant fixturing has no benefit to RioCan beyond the existing tenancy.
Straight-line rent
Certain leases contain rent escalation clauses or provide for tenant occupancy during periods for which no rent is due.
RioCan records the total rental income on a straight-line basis over the full term of the lease, including the tenant fixturing
period. An accrued straight-line rent receivable is recorded from tenants for the difference between the straight-line rent and
the rent that is contractually owing.
Percentage rent
Percentage rent is typically calculated based on a percentage of tenant sales over a specified threshold, which is in addition
to base rent. Percentage rents are recognized once the specified threshold has been achieved in accordance with each
tenant lease.
Lease cancellation fees
Amounts payable by tenants to terminate their lease prior to the contractual expiry date are included in rental revenue as
lease cancellation fees at the effective date of the lease termination.
(ii) Residential inventory
Income earned from the sale of residential inventory is recognized when all of the following conditions are met: a) the Trust
has transferred to the purchaser the significant risks and rewards of ownership; b) income and costs can be reliably
measured; c) the purchaser has made a substantial commitment demonstrating its intent to honour its obligation; and d)
collection of any additional consideration is reasonably assured.
Income from residential land sales, the sale of homes and residential condominium projects is recorded at the time that the
risks and rewards of ownership have been transferred and collectibility of all proceeds is reasonably assured, which is
generally when possession or title passes to the purchaser upon closing, all material conditions of the sales contract have
been met and a significant cash down payment or appropriate security is received.
Directly attributable selling and disposition costs are expensed as incurred.
(iii) Property and asset management fees
RioCan has interests in various investment properties through joint arrangements and investments in associates. The Trust
provides asset and property management services to co-owners, partners and third parties for which it earns market-based
construction, development, financing and arranging fees.
Fees are recognized as the service or contract activity is performed using the percentage of completion method. Under the
percentage of completion method, where services are provided over a specific period of time, revenue is recognized on a
straight-line basis unless there is evidence that some other method would better reflect the pattern of performance. Where
the contract outcome cannot be measured reliably, revenue is recognized only to the extent that the expenses incurred are
eligible to be recovered.
(iv) Interest income
Revenue is recognized as interest accrues using the effective interest method.
(v) Other income
Transaction gains and losses
Transaction gains and losses are recognized on the settlement date and represent the excess proceeds of disposition
relating to subsidiaries, investments or assets over their carrying values in the case of gains and the excess carrying value of
assets over proceeds of disposition in the case of transaction losses. Transaction gains and losses may also arise from the
settlement of liabilities for more or less than their carrying values.
Available-for-sale investments
Other income also includes dividends and/or distributions arising on available-for-sale investments, which are recorded when
the Trust's right to receive payment has been established, which is generally when the dividends and/or distributions are
declared payable.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
(f) Unit-based compensation
RioCan and its subsidiaries issue unit-based equity-settled awards to certain employees. The cost of these unit-based payments
equals the fair value of each tranche of options at their grant date. The cost of the unit options is recognized on a proportionate
basis consistent with the vesting features of each tranche of the grant.
RioCan has unit-based cash-settled compensation plans for independent trustees and certain employees. The cost of these unit-
based payments is measured at fair value and expensed over the vesting period with the recognition of a corresponding liability.
The liability is remeasured at fair value at each reporting period date with the vested changes in fair value recorded in
consolidated statements of income.
(g) Financial assets and financial liabilities
Financial assets include RioCan's contractual rents receivable, mortgages and loans receivable, cash and cash equivalents,
funds held in trust, available-for-sale securities and derivative contracts. Financial liabilities include RioCan's secured operating
lines of credit, mortgages payable, debentures payable and accounts payable and certain other liabilities.
The fair value of a financial instrument is the amount of consideration that could be agreed upon in an arm’s length transaction
between knowledgeable, willing parties who are under no compulsion to act. In certain circumstances, however, the initial fair
value may be based on other observable current market transactions in the same instrument without modification or on a
valuation technique using market based inputs. The fair values of mortgages and loans receivable and debentures are based on
the current market conditions for instruments with similar terms and risks. The fair values of term mortgages, designated hedging
derivative instruments included in receivables and other assets and accounts payable and certain other liabilities are estimated
based on discounted future cash flows using discount rates that reflect current market conditions for instruments with similar
terms and risks.
(h) Recognition and measurement of financial instruments
The Trust determines the classification of its financial assets and liabilities at initial recognition. Financial instruments are
recorded initially at fair value and, in the case of financial assets and liabilities carried at amortized cost, adjusted for directly
attributable transaction costs.
Measurement in subsequent periods depends on whether the financial instrument has been classified as held for trading, held to
maturity, loans and receivables, available-for-sale or other liabilities.
(i) Held-for-trading
Financial assets and financial liabilities classified as held for trading are measured at fair value with gains and losses
recognized in net income. Transaction costs are expensed as incurred. Other than cash and cash equivalents, the Trust has
no significant financial instruments classified as held for trading.
Derivative instruments are recorded on the consolidated balance sheets at fair value. Changes in the fair values of derivative
instruments are required to be recognized in net income, except for derivatives that are designated as cash flow hedges, in
which case the fair value change for the effective portion of such hedging relationship is required to be recognized in OCI.
See note 2(l) for further discussion of hedge accounting policies.
(ii) Held to maturity, loans and receivables
Financial assets classified as held to maturity, loans and receivables and other liabilities (other than those held for trading)
are required to be measured at amortized cost using the effective interest method. This method uses an effective interest
rate that discounts estimated future cash receipts through the expected life of the financial asset or liability to the net carrying
amount of the financial asset or liability. Amortized cost is computed using the effective interest method less any allowance
for impairment. Gains and losses are recognized in net income when the loans and receivables are derecognized or
impaired, as well as through amortization.
The principal categories of the Trust’s financial assets and liabilities measured at amortized cost using the effective interest
method include: (a) accounts receivable and payable; (b) mortgages and loans receivable, mortgages payable and
mortgages payable associated with assets held for sale; and (c) debentures payable.
Loans and receivables are financial instruments with fixed or determinable payments that are not quoted in an active market.
Financial instruments with fixed or determinable payments and fixed maturities are classified as held to maturity only when
the Trust has the positive intention and ability to hold it to maturity.
(iii) Available for sale
Available for sale financial assets are financial assets that are not categorized as either held for trading or designated at fair
value. Available-for-sale financial assets are initially measured at fair value with direct transaction costs included in the
carrying value of the asset. Available for sale financial assets are subsequently measured at fair value with unrealized gains
and losses recognized in OCI until the investment is derecognized or impaired, at which time the cumulative unrealized gain
or loss is recognized in net income.
Investments in equity instruments classified as available for sale that do not have a quoted market price in an active market
and whose fair value cannot be reliably measured are measured at cost.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
(i)
Impairment of financial assets
The Trust assesses at each consolidated balance sheet date whether there is any objective evidence of impairment for each
financial asset (or a group of financial assets). A financial asset is deemed to be impaired if there is objective evidence of
impairment as a result of an event that has occurred after the initial recognition of the asset and that loss event has an impact on
the estimated future cash flows of the financial asset that can be reliably estimated. Evidence of impairment may include
indications that the debtor is experiencing financial difficulty, which may include default or delinquency in interest or principal
payments, the probability that it will enter bankruptcy or other financial reorganization, and where observable data indicate that
there is a measurable decrease in the estimated future cash flows, such as changes in arrears payments or economic conditions
that correlate with defaults.
(i) Impairment of loans and receivables
Loans and receivables are considered impaired when there is objective evidence that the full carrying amount of the loan or
receivable is not collectible.
When an impaired loan is identified, the amount of the loss is measured as the difference between the asset’s carrying
amount and the estimated realizable amount, which is measured by discounting the expected future cash flows at the
original effective interest rate of the loan or receivable. This difference between the carrying amount and the estimated
realizable value of the loan or receivable represents an impairment loss that is recognized in net income. Interest income
continues to be accrued on the reduced carrying amount based on the original effective interest rate of the loan. Loans and
receivables, together with the associated allowance, are written off when there is no realistic prospect of future recovery and
all collateral has been realized or has been transferred to RioCan. If, in a subsequent year, the amount of the estimated
impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously
recognized impairment loss is increased or decreased by adjusting the carrying value of the loan or receivable. If a past
write-off is later recovered, the recovery is recognized in net income.
(ii) Impairment of available-for-sale financial assets
For available-for-sale financial assets, the Trust assesses at each consolidated balance sheet date whether there is objective
evidence that an asset is impaired, which would include a significant or prolonged decline in the fair value of the investment
below its cost. If the evaluation indicates that there is objective evidence of impairment, the investment is written down to its
current fair value and a loss is recognized in net income. Subsequent increases in the fair value of available-for-sale assets
are recognized in OCI.
In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as
financial assets carried at amortized cost. Interest continues to be accrued at the original effective interest rate on the
reduced carrying amount of the asset and is recorded in interest income. If, in a subsequent year, the fair value of a debt
instrument increases and the increase can be objectively related to an event occurring after the impairment loss was
recognized in net income, the impairment loss is reversed through net income.
(j) Financial guarantee contracts
Financial guarantee contracts are contracts issued by RioCan that contingently require the Trust to make specified payments to
reimburse the holder for a loss it incurs because the specified debtor fails to make payment when due in accordance with the
terms of a debt instrument. When a debtor default occurs, financial guarantees are recognized on the consolidated balance
sheets initially as a liability measured at the fair value of the obligation undertaken in issuing the guarantee, adjusted for
transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the
higher of (i) the amount initially recognized and (ii) the best estimate of the expenditure required to settle the present obligation at
the consolidated balance sheet date.
(k) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amounts are reported in the consolidated balance sheets if there is
an enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the
assets and settle the liabilities simultaneously.
(l) Hedges
From time to time, the Trust may enter into foreign currency contracts and interest rate swaps to hedge its foreign currency risks
and interest rate risks, respectively. Such derivative financial instruments are initially recognized at fair value on the date on
which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial
assets when the fair value is positive and as financial liabilities when the fair value is negative.
For the purpose of hedge accounting, hedges are classified as fair value hedges, cash flow hedges or hedges of a foreign
currency exposure related to the net investment in a foreign operation.
At the inception of a hedging relationship, RioCan formally designates and documents the hedging relationship to which the Trust
is applying hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation
includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the
Trust will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s cash flows
attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or
116
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the
financial reporting periods for which they were designated.
Cash flow hedges
A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a
recognized asset or liability or a highly probable forecast transaction. In a cash flow hedging relationship, the effective portion of
the gain or loss on the hedging instrument is recognized in OCI. The ineffective portion is recognized in net income.
Hedge accounting ceases when the Trust revokes the hedging relationship; when the hedging instrument expires or is sold,
terminated or exercised without replacement or rollover (as part of the hedging strategy); or when it no longer qualifies for hedge
accounting. Any gain or loss recognized in OCI and accumulated in equity at that time remains in equity until the forecast
transaction is ultimately recognized in the consolidated statements of income. When a forecast transaction is no longer expected
to occur, the gain or loss accumulated in equity is immediately recognized in the consolidated statements of income.
Net investment hedges
In hedging a foreign currency exposure of a net investment in a foreign operation, the effective portion of foreign exchange gains
and losses on the hedging instrument is recognized in OCI and the ineffective portion is recognized in net income. The amounts,
or a portion thereof, previously recorded in OCI within equity are recognized in net income on the disposal or partial disposal of
the foreign operation.
(m) Comprehensive income
Comprehensive income comprises net income and OCI, which generally would include unrealized gains and losses on financial
assets classified as available for sale, unrealized foreign currency translation adjustments (net of hedging) arising from foreign
operations, changes in the fair value of the effective portion of cash flow hedging instruments, and actuarial gains and losses
related to RioCan's defined benefit pension plans. The Trust reports consolidated statements of comprehensive income
comprising net income and OCI for the year.
(n) Income taxes
Upon qualifying as a "real estate investment trust" ("REIT Exemption") for Canadian income tax purposes in 2010, the Trust is
considered, in substance, tax exempt and therefore does not account for income taxes. Prior to qualifying for the REIT
Exemption, the Trust was considered taxable. Upon the Trust’s change in tax status, all deferred taxes of the Trust were reversed
through net income or OCI based upon where the amounts initially arose. The Trust’s U.S. operations are qualifying U.S. REITs
up to May 25, 2016 and are not subject to U.S. corporate income taxes. The Trust is subject to 30% or 35% withholding taxes on
its distributions to Canada. The Trust consolidates certain wholly owned incorporated entities that continue to be subject to
income taxes. These taxable subsidiaries, and the Trust prior to its change in tax status, account for income taxes as follows:
(i) Current income taxes
The Trust qualifies as a mutual fund trust and for the REIT Exemption for income tax purposes. The Trust intends to
distribute all of its taxable income to unitholders and is entitled to deduct such distributions for income tax purposes. From
time to time, RioCan may retain some taxable income and net capital gains in order to utilize the capital gains refund
available to mutual fund trusts without incurring any income taxes. Accordingly, a provision for current income taxes payable
is not required, except for amounts incurred in its incorporated Canadian taxable subsidiaries.
The Trust’s U.S. subsidiary qualifies as a REIT for U.S. income tax purposes up to May 25, 2016. The subsidiary has
distributed all of its U.S. taxable income to Canada and is entitled to deduct such distributions for U.S. income tax purposes.
The Trust is subject to a 30% or 35% withholding tax on distributions to Canada. Any withholding taxes paid are recorded as
distributions or income tax expense, depending on whether the tax is passed on to unitholders.
(ii) Deferred income taxes
Deferred income taxes are provided using the liability method for temporary differences at the consolidated balance sheet
dates between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
1. Where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that
is not a business combination and, at the time of the transaction, affects neither the accounting nor taxable income
or loss; and
In respect of taxable temporary differences associated with investments in subsidiaries and interests in joint
arrangements, where RioCan is able to control the timing of the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the foreseeable future.
2.
Deferred income tax assets are recognized for all deductible temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits
and unused tax losses, can be utilized except:
1. Where the deferred income tax asset relating to the deductible temporary difference arises from the initial
recognition of an asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss; and
117
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
2.
In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests
in jointly controlled entities, deferred income tax assets are recognized only to the extent that it is probable that the
temporary differences will reverse in the foreseeable future and taxable profit will be available against which the
temporary differences can be utilized.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to undistributed profits in
the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or
substantively enacted at the consolidated balance sheet dates and reflect the tax consequences that would follow from the
manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets
and liabilities. Deferred income taxes relating to temporary differences that are in equity are recognized in equity.
Deferred income tax assets and deferred income tax liabilities of the same taxable entity related to the same taxation
authority are offset.
(o) Equipment and leasehold improvements
Equipment and leasehold improvements are stated at cost less accumulated depreciation and accumulated impairment in value,
if any. Depreciation is recorded on a straight-line basis over the following expected useful lives:
Computer hardware
Furniture and equipment
Management information systems
Leasehold improvements
(p) Intangible assets
3 to 5 years
5 years
5 to 10 years
Lease term plus first renewal, if renewal is reasonably assured
The Trust’s intangible assets comprise its management information systems and computer application software that is initially
recognized at cost and amortized over its estimated useful life (5 to 10 years) on a straight-line basis. The cost of self-built
management information systems and software includes the cost of materials, direct labour, and interest expense. Capitalization
ceases and depreciation commences once the asset is in the location and condition necessary for it to be capable of operating in
the manner intended by management.
(q) Cash and cash equivalents
Cash and cash equivalents comprise cash and short-term investments with original maturities from the date of acquisition for
three months or less.
(r) Provisions
Provisions are recognized when the Trust has a present obligation (legal or constructive) as a result of a past event, when it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable
estimate can be made of the amount of the obligation. Where the Trust expects some or all of a provision to be reimbursed, for
example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is
virtually certain. The expense relating to any provision is presented in net income, net of any reimbursement. If the effect of the
time value of money is material, provisions are discounted using a current rate that reflects, where appropriate, the risks specific
to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance
cost.
(s) Foreign currency translation
These consolidated financial statements are presented in Canadian dollars, which is the functional and presentation currency of
the Trust.
Assets and liabilities of operations having a functional currency other than the Canadian dollars are translated at the rate of
exchange at the consolidated balance sheet dates. Revenue and expenses are translated at average rates for the year, unless
exchange rates fluctuated significantly during the year, in which case the exchange rates at the dates of the transaction are used.
Gains or losses on translating a foreign operation are included in OCI as a component of equity.
Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the
transactions. Foreign currency denominated monetary assets and liabilities are translated using the prevailing rate of exchange at
the consolidated balance sheet dates. Gains and losses on translation of monetary items are recognized in the consolidated
statements of income in general and administrative expenses, except for those related to monetary liabilities qualifying as hedges
of the Trust’s investment in foreign operations or certain intercompany loans to a foreign operation for which settlement is neither
planned nor likely to occur in the foreseeable future, which are included in OCI as a component of equity.
(t) Non-current assets held for sale and discontinued operations
Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally
through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for immediate
sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount
and fair value less costs to sell and are presented separately from other assets on the Trust's consolidated balance sheets.
118
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
These measurement requirements do not apply to non-current assets, including the Trust's properties held for sale, that are
accounted for in accordance with the fair value model in IAS 40. Comparative information is not adjusted to reflect the held for
sale classification in the consolidated balance sheet for the latest period presented.
A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can be
distinguished operationally and financially from the rest of the Trust's operations and (ii) it represents either a separate major line
of business or geographic area or is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations. Disposal groups classified as discontinued operations are presented separately from continuing
operations in the consolidated statements of income. The comparative consolidated statement of income is presented as if the
operation had been discontinued from the start of the comparative year.
(u) Employee future benefits
The Trust operates a defined contribution pension plan and three defined benefit pension plans for certain employees.
The cost of providing benefits under the defined benefit plans is determined separately for each plan. Actuarial gains and losses
for the defined benefit plans are recognized in OCI, in full, in the period in which they occur and are not reclassified to profit or
loss in subsequent periods. The past service costs are recognized as an expense on a straight-line basis over the average period
until the benefits become vested. If the benefits have already vested, immediately following the introduction of, or changes to, a
pension plan, past service costs are recognized immediately.
The defined benefit asset or liability comprises the present value of the defined benefit obligation (using a discount rate based on
non-callable investment grade fixed income securities), less unamortized past service costs and less the fair value of plan assets
out of which the obligations are to be settled.
The Trust expenses its required contributions to the defined contribution pension plan.
(v) Future changes in accounting policies
RioCan monitors the potential changes proposed by the IASB and analyses the effect that changes in the standards may have on
its operations.
Standards issued but not yet effective up to the date of issuance of these consolidated financial statements are described below.
This description is of the standards and interpretations issued that the Trust reasonably expects to be applicable at a future date.
The Trust intends to adopt these standards when they become effective.
IFRS 15, Revenue from Contracts with Customers (IFRS 15)
IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with
customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured
approach to measuring and recording revenue. The new revenue standard is applicable to all entities and will supersede all
current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual
periods beginning on or after January 1, 2018, with early adoption permitted. The Trust's assessment includes a review of
relevant contracts for the following key areas which RioCan believes are in scope of IFRS 15 including, but not limited to,
residential inventory sales, common area maintenance recoveries, and property and asset management fees. The Trust has
assessed the impact of IFRS 15 and has concluded that the pattern of revenue recognition will remain unchanged upon adoption
of the standard. The impact may be limited to additional note disclosure on the disaggregation of its revenue streams, specifically
common area maintenance recoveries. The Trust intends to adopt the new standard on the required effective date on modified
retrospective without restatement of prior period comparatives.
IFRS 9, Financial Instruments (IFRS 9)
In July 2014, the IASB issued the final version of IFRS 9, which reflects all phases of the financial instruments project and
replaces IAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9. The standard
introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 establishes
principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to
users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. This
new standard also includes new general hedge accounting guidance, which will align hedge accounting more closely with risk
management. It does not completely change the types of hedging relationships or the requirement to measure and recognize
ineffectiveness; however, it will allow more hedging strategies that are used for risk management to qualify for hedge accounting
and introduce more judgment to assess the effectiveness of a hedging relationship. IFRS 9 also introduces an expected loss
impairment model for all financial assets not measured at fair value through profit or loss that requires recognition of expected
credit losses, rather than incurred losses as applied under the current standard. During 2017, the Trust performed an assessment
of key areas within the scope of IFRS 9 which includes, but not limited to, the classification and measurement of mortgages and
loans receivable and available-for-sale securities. The Trust intends to adopt the new standard on the required effective date of
January 1, 2018 and will not restate comparative information.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Classification and measurement
Quoted equity instruments currently held as available-for-sale financial assets with unrealized gains and losses recorded in OCI
will, instead, be measured at fair value through profit or loss, which will increase volatility due to unrealized gains and losses
being recorded in profit or loss. The AFS cumulative unrealized gain of $68.7 million related to those securities, which is currently
presented as accumulated OCI, will be reclassified to retained earnings upon adoption. The Trust does not expect a significant
impact on its balance sheet or equity as a result of this change in classification and measurement.
The Trust is currently analyzing the contractual cash flow characteristics of the Trust’s mortgage and loan receivables and
assessing various business model considerations and will be in a position to conclude as at the first quarter of 2018.
IFRS 16, Leases (IFRS 16)
In January 2016, the IASB issued IFRS 16. The new standard brings most leases on-balance sheet for lessees under a single
model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely
unchanged, and the distinction between operating and finance leases is retained. This standard would be effective for the Trust's
annual periods beginning on or after January 1, 2019, with early adoption permitted. To assess the impact of this new standard,
RioCan has formed an internal working group and continues to progress on its in-depth assessment of IFRS 16 on the Trust's
Consolidated Financial Statements. RioCan does not expect a significant impact to the Trust's Consolidated Financial Statements
on adoption of this IFRS. RioCan intends to adopt the standard effective January 1, 2019 without restatement of prior period
comparatives.
IAS 40, Investment Property (IAS 40)
In December 2016, the IASB issued an amendment to IAS 40 clarifying certain existing requirements. The amendment requires
that an asset be transferred to or from investment property only when there is a change in use. A change in use occurs when the
property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. In isolation, a
change in management’s intentions for the use of a property does not provide evidence of a change in use. These amendments
are effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. RioCan will apply the
amendments when they become effective prospectively, however, since the current policy and practice is in line with the
clarifications issued, RioCan does not expect any impact to the Trust's Consolidated Financial Statements.
4. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Discontinued operations
On May 24, 2016, RioCan completed the sale of 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.
The results of the Trust's discontinued operations are as follows:
Year ended December 31,
Rental revenue
Rental operating costs
Recoverable under tenant leases
Non-recoverable costs
Operating income
Other income
Fair value gains on investment property, net
Other income
Other expenses
Interest costs
General and administrative expenses (recoveries)
Internal leasing costs
Transaction costs (recoveries)
Income before income taxes
Income tax expense (recovery)
Current
Deferred
Net income from discontinued operations
$
$
2017
— $
—
—
—
—
—
2,560
2,560
—
(1,041)
—
(549)
(1,590)
4,150
2016
98,704
51,995
3,175
55,170
43,534
16,899
66,404
83,303
18,927
1,491
706
53,562
74,686
52,151
(2,871)
—
7,021 $
135,139
(230,675)
147,687
120
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Other income
For 2017, other income includes a partial reversal of provisions based on receivable collections, and favourable post-closing
working capital adjustments related to RioCan's disposed U.S. property portfolio.
Transaction costs
Included in transaction costs is the partial reversal of an accrual connected with a settlement of a legal dispute with a former
tenant located in the U.S.
Income taxes
For the year ended December 31 2017, RioCan's current income tax expense (recovery) includes the impact of foreign exchange
translation.
Cash flows associated with discontinued operations
The net cash flows associated with discontinued operations are as follows:
Years ended December 31,
Net income from discontinued operations
Adjustments for non-cash items:
Deferred income taxes
Fair value gains on investment properties, net
Net gain on sale of income properties
Adjustments for net changes in operating assets and liabilities
Net operating cash flow activities
Proceeds from the sale of income properties
$
Other
Net investing cash flow activities
Repayment of mortgages payable
Repayment of parent REIT loan
Loan advances from parent REIT
Other
Net financing cash flow activities
Net change in cash
Properties held for sale
2017
7,021 $
—
—
—
(6,069)
952
—
—
—
—
—
—
—
—
2016
147,687
(230,675)
(16,899)
(65,116)
110,083
(54,920)
1,951,312
(4,776)
1,946,536
(668,253)
(566,433)
(672,119)
—
(1,906,805)
(15,189)
$
952 $
Presented below are details of the Trust's properties held for sale from continuing operations:
As at
Assets
Income properties
Properties under development
Total assets held for sale
Liabilities
Mortgages payable
Total liabilities held for sale
Net assets
December 31, 2017
December 31, 2016
$
$
$
$
371,299
38,879
410,178
32,670
32,670
377,508
$
$
$
$
25,341
35,189
60,530
—
—
60,530
As at December 31, 2017, RioCan, pursuant to its plan to accelerate its portfolio focus in Canada’s six major markets through the
sale of approximately 100 investment properties located primarily in secondary markets across Canada, has eight income
properties held for sale,with an aggregate carrying value of $371.3 million and mortgage payable of $32.7 million.
As at December 31, 2017, RioCan has four development property land parcels held for sale with an aggregate carrying value of
$38.9 million.
121
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
5. INVESTMENT PROPERTIES
As at December 31,
Income properties
Properties under development
Year ended December 31, 2017
Balance, beginning of year
Acquisitions
Dispositions
Development expenditures
Addition to properties held under a lease
Capital expenditures:
Recoverable and non-recoverable expenditures
Leasing commissions and tenant improvements
Transfers, net (i)
Transfers to residential inventory (ii)
Fair value gains, net
Straight-line rent (iii)
Earn-out consideration
Balance, end of year
Investment properties
Properties held for sale
2017
2016
$
$
12,075,939
1,084,305
13,160,244
$
$
12,406,719
880,319
13,287,038
Income properties
$
12,432,060
$
Properties under
development
915,508
Total
$
13,347,568
16,484
(294,820)
—
9,232
26,208
31,446
107,598
—
109,505
7,806
1,719
$
$
$
12,447,238
12,075,939
371,299
12,447,238
$
$
$
63,933
(88,127)
324,596
—
—
—
(107,598)
(16,174)
27,437
—
3,609
1,123,184
1,084,305
38,879
1,123,184
80,417
(382,947)
324,596
9,232
26,208
31,446
—
(16,174)
136,942
7,806
5,328
$
$
$
13,570,422
13,160,244
410,178
13,570,422
(i) During the year ended December 31, 2017, transfers to income properties from properties under development totalled $220.1 million reflecting
completed developments. Transfers from income properties to properties under development totalled $112.5 million reflecting the commencement
of active development on certain income properties during the period.
(ii) During the year ended December 31, 2017, RioCan announced changing the residential rental component of the King Portland Centre to
condominium units. In addition, the costs associated with the Windfields Farm residential development were transferred to residential inventory
upon formation of the joint venture with Tribute to develop townhomes. As such, a portion of the fair value of these properties have been
transferred to residential inventory.
Included in investment properties is $108.2 million of net rents receivable arising from the recognition of rental revenue on a straight-line basis
over the lease term (December 31, 2016 - $104.6 million).
(iii)
Year ended December 31, 2016
Balance, beginning of year
Acquisitions
Dispositions
Development expenditures
Capital expenditures:
Recoverable and non-recoverable expenditures
Leasing commissions and tenant improvements
Transfers, net
Fair value gains, net
Straight-line rent (i)
Earn-out consideration
Other changes
Balance, end of year
Investment properties
Properties held for sale
Income properties
$
11,451,096
$
Properties under
development
872,202
Total
$
12,323,298
594,538
(119,813)
—
52,899
48,261
253,121
134,692
7,263
7,380
2,623
10,043
(5,436)
243,243
—
—
(253,121)
48,196
—
—
381
$
$
$
12,432,060
12,406,719
25,341
12,432,060
$
$
$
915,508
880,319
35,189
915,508
$
$
$
604,581
(125,249)
243,243
52,899
48,261
—
182,888
7,263
7,380
3,004
13,347,568
13,287,038
60,530
13,347,568
(i)
Included in investment properties is $104.6 million of net rents receivable arising from the recognition of rental revenue on a straight-line basis
over the lease term.
122
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Acquisitions
The following table summarizes the Trust's acquisitions of properties:
As at December 31,
Properties acquired during the year:
Investment properties
Residential inventory properties
Total consideration
Loan receivable payment
Debt assumed
Difference between contractual amount and fair value of debt
assumed
Total consideration, net of related debt and loan receivable
Total consideration, net of related debt and loan receivable
allocated to:
Investment properties
Residential inventory properties
Total
Income Properties Acquisitions
Income properties
Properties under development
2017
2016
2017
2016
$
16,484 $
594,538 $
63,933 $
10,043
—
—
16,484
594,538
—
—
(8,631)
(48,416)
36,870
100,803
(28,467)
(13,406)
—
(757)
—
—
10,043
—
—
—
7,853 $
545,365 $
58,930 $
10,043
7,853
—
545,365
—
39,280
19,650
10,043
—
7,853 $
545,365 $
58,930 $
10,043
$
$
During the year ended December 31, 2017, RioCan acquired the remaining 20% interest in a co-owned income property for
$16.5 million and assumed a related $8.6 million mortgage.
Properties Under Development Acquisitions
During August and September 2017, RioCan acquired a 75% ownership interest in properties located in the Yorkville area of
Toronto, Ontario, with the intention of rezoning and developing a high-rise residential condominium building with rental
replacement units and commercial components. The total consideration of these properties, including transaction costs was
$67.5 million, which was paid by $35.9 million in cash, $28.5 million repayment of loan receivable, and $3.1 million assumption of
debt. After the sale by RioCan on October 12, 2017 of a 25% interest in the project to Capital Developments (CD) at a sale price
of $21.7 million, including certain cost recoveries, RioCan owns a 50% ownership interest in the properties at a total
consideration of $45.8 million including transaction costs, which was recorded to the following items on the consolidated balance
sheet: $36.9 million as residential development inventory, representing RioCan's 50% interest in the planned high-rise
condominium component of the property and $8.9 million classified as properties under development.
On October 5, 2017, RioCan acquired a 10% undivided interest in WNUF 2's interest in the commercial component of The Well
for a purchase price, including transaction costs, of $23.0 million including a $10.3 million assumption of debt. As a result of this
transaction, RioCan owns an undivided 50% interest in the commercial component of the project.
Also, RioCan and its partner Hudson Bay Company have secured a surrender agreement with Sears Canada Inc. for its location
at RioCan Oakville Place, in Oakville, Ontario, for a fee of $2.0 million. In addition, at Garden City Shopping Centre in Winnipeg,
Manitoba, RioCan and its partner Bayfield Realty Advisors acquired the freehold interest in the Sears location for a purchase
price of $2.4 million. The remaining acquisitions which occurred during the year ended December 31, 2017 totalled $8.0 million
and consisted of parkland dedication sites.
Purchase Obligations
On July 5, 2017, RioCan entered into an agreement to purchase from its partners the remaining 50% interest in the rental
residential tower of its landmark mixed-use, transit oriented project at the northeast corner of Yonge Street and Eglinton Avenue,
also known as ePlace. The purchase price for the remaining interest in the rental residential tower is estimated to be in the range
of $95 to $105 million upon closing estimated in the first quarter of 2019, subject to final costs incurred.
Also, the Trust has an agreement to acquire the remaining 50% interest in the retail component of the ePlace, from its partners at
a purchase price based on a 7% capitalization rate on the stabilized net operating income upon completion in 2019.
The Trust has also agreed to purchase the partners' interest in the retail portion of the Yorkville project upon completion at a 6%
capitalization rate.
123
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Dispositions
The following table summarizes the Trust's dispositions of investment property:
As at December 31,
Investment properties disposed
Gain on disposition recorded in other income
Total consideration
Mortgages associated with investment property dispositions
Vendor-take-back mortgages receivables on dispositions
Total consideration, net of related debt
Income Properties Dispositions
Income properties
Properties under development
2017
2016
2017
294,820 $
119,813 $
88,127 $
—
6,075
—
294,820 $
125,888 $
88,127 $
—
(2,500)
(29,359)
—
(1,024)
—
2016
5,436
—
5,436
—
—
292,320 $
96,529 $
87,103 $
5,436
$
$
$
On June 29, 2017 RioCan completed the sale of its Cambie Street property in Vancouver, British Columbia, for a sale price
of $94.2 million at a capitalization rate of 3.29%. On August 3, 2017, the Trust completed the sale of a portfolio of six chartered
bank branches located in British Columbia at a sale price of $30.3 million, at a capitalization rate of 3.72%. There was no debt
associated with either disposition.
During the year ended December 31, 2017, the Trust entered into a firm agreement with CT REIT to sell seven properties for a
total sale proceed of $200 million at a weighted average capitalization rate of 6.12%. These seven properties were all anchored
by a Canadian Tire banner and formed part of the first major sale transaction announced pursuant to the Trust's plan to
accelerate its portfolio focus in Canada’s six major markets through the sale of approximately 100 investment properties located
primarily in secondary markets across Canada.
On December 18, 2017, RioCan closed the sale of five income properties for a total sale price of $135.2 million, with the sale of
the remaining two properties expected to be completed in 2018.
Properties Under Development Dispositions
During the year ended December 31, 2017, RioCan completed nine development property dispositions aggregating $88.1 million.
These dispositions were comprised of the disposal to CD pertaining to the Yorkville project at a sale price of $21.7 million,
including certain cost recoveries and $52.6 million from selling interests in existing properties pursuant to the formation of five
50/50 joint ventures. The remaining proceeds were from the sale of excess lands.
Properties held under a lease
Included in investment properties are four properties that are subject to operating leases with third parties. Two of the leases
expire in 2029 and do not include buy-out options, whereas the third lease expires in 2020 and carries a buy-out option. The
remaining operating lease expires in 2035 and does not include a buy-out option.
In accordance with IFRS, the Trust has elected to recognize these operating leases as investment properties and record a related
finance lease obligation. The carrying amount of these properties is $273.8 million (December 31, 2016 - $274.1 million) and the
corresponding finance lease obligation is $21.5 million (December 31, 2016 - $18.7 million) and is included in accounts payable
and other liabilities.
Future minimum lease payments under these operating leases are as follows:
Within twelve months
Two to five years
Over five years
Total minimum lease payments
Less: Future interest costs
Present value of minimum lease payments
Valuation methodology
Fair value
December 31, 2017
December 31, 2016
$
$
$
2,532 $
9,342
17,506
29,380 $
7,855
21,525 $
2,232
8,461
15,057
25,750
7,097
18,653
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (i.e. an exit price). Expectations about future improvements or modifications to be
made to the investment property to reflect its highest and best use may be considered in the valuation.
Investment properties and properties held for sale are carried at fair value and the Trust uses significant unobservable inputs to
estimate fair value of these assets at each reporting date. See below for further description of inputs used by the Trust in
estimating the fair value of its properties. Significant unobservable inputs are classified as Level 3 inputs under IFRS. See note
24 for further details.
124
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Quoted market prices in active markets are the best evidence of fair value and are used as the basis for fair value measurement,
when available. When quoted market prices are not available, judgment is required to estimate fair value based on the best
information available, including prices for similar assets and the use of other valuation techniques. These valuation techniques
are consistent with the objective of measuring fair value and involve a degree of estimation depending on the availability of
market-based information.
Valuation processes
Internal valuations
RioCan measures the vast majority of its investment properties, including co-owned properties, using valuations prepared by its
internal valuation team. This team consists of individuals who are knowledgeable and have specialized industry experience in
real estate valuations and report directly to a senior member of the Trust's management. The internal valuation team's processes
and results are reviewed and approved by the Valuations Committee on a quarterly basis, in line with the Trust's quarterly
reporting dates.
The Trust's Valuations Committee is responsible for approving any fair value changes to the investment properties and consists of
senior management of the Trust including the President & Chief Operating Officer; Chief Financial Officer; and other executive
members.
External valuations
Depending on the property asset type and location, management may opt to obtain independent third party valuations from firms
that employ experienced valuation professionals having the required qualifications in property appraisals for purposes of adopting
such appraised values in the case of land parcels or assessing the reasonableness of its internal investment property valuations.
During the year, the Trust obtained a total of 35 external property appraisals (including 11 vacant land parcels), which supported
an IFRS fair value of approximately $3.0 billion or 22% of the Trust's investment property portfolio as at December 31, 2017.
The internal valuation team also verifies all major inputs used by the external valuator in preparing the valuation report, assesses
changes to fair value by comparing the current year fair value against the fair value determined in the prior year valuation report,
and holds discussions with the external valuator. In 2018, the Trust intends to select approximately six income properties for
external appraisal on a quarterly basis.
Valuation techniques
Income properties
The internal valuation team estimates the fair value of each income property based on a valuation technique known as the direct
capitalization income approach. The fair value is determined by applying a capitalization rate to stabilized net operating income
(SNOI). The significant unobservable inputs are based on:
•
•
SNOI - is based on budgeted rents and expenses and supported by the terms of any existing lease, other contracts or
external evidence such as current market rents for similar properties, adjusted to incorporate allowances for estimated
vacancy rates, management fees and structural reserves for capital expenditures based on current and expected future
market conditions after expiry of any current lease and expected maintenance costs. The resulting capitalized value is then
adjusted for non-recoverable capital expenditures as well as other costs inherent in achieving and maintaining SNOI.
The capitalization rate - is based on the location and quality of the properties and takes into account market data at the
valuation date.
Generally, a change in the assumption made for the estimated rental value is accompanied by a directionally similar change in
the rent growth per annum and an opposite change in the long-term vacancy rate. Each of these inputs when increased or
decreased, in isolation, would not result in a material change in the fair value of the Trust's investment properties. As a result,
management does not consider these variables as key inputs in estimating the fair value of income property.
Properties under development
Management uses an internal valuation process to estimate the fair value of properties under development that consist of
undeveloped land on a land value per acre basis using the particular attributes of the project with respect to zoning and pre-
development work performed on the site. Where a site is partially developed, the direct capitalization method is applied to
capitalize the pro forma NOI, stabilized with market allowances, from which the costs to complete the development are deducted.
The significant unobservable inputs are based on:
•
Pro forma SNOI - is based on the location, type and quality of the properties and supported by the terms of actual or
anticipated future leases, other contracts or external evidence such as current market rents for similar properties, adjusted
for estimated vacancy rates based on expected future market conditions and estimated maintenance costs, which are
consistent with internal budgets, based on management's experience and knowledge of the market conditions.
• Costs to complete - are derived from internal budgets based on management's experience and knowledge of the market
conditions.
The primary method of valuation for land acquired for development is the comparable sales approach, which considers recent
sales activity for similar land parcels in the same or similar markets. Land values are estimated using either a per acre or per
buildable square foot basis based on highest and best use. Such values are applied to RioCan's properties after adjusting for
factors specific to the site, including its location, intended use, zoning, servicing and configuration.
125
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
The table below summarizes the classification, valuation approach and inter-relationship between the Level 3 key unobservable
inputs and fair value measurements for the Trust's investment properties:
Classification
Valuation
approach
Key
unobservable
input
Income producing properties /
Properties under development
Direct capitalization
income approach
Capitalization rate
Relationship between key unobservable inputs
and fair value measurement
There is an inverse relationship between the
capitalization rate and the fair value; in other words,
the higher the capitalization rate, the lower the
estimated value.
SNOI
Generally, an increase in SNOI will result in an
increase in the estimated fair value of the properties.
Properties under development -
undeveloped land
Comparable sales
approach
Market
comparison
Land value is in line with market trends.
As at December 31, 2017, the weighted average capitalization rate for the Trust's investment properties and properties held for
sale is 5.56% (December 31, 2016 - 5.64%).
Sensitivity analysis of changes in capitalization rates
The following table is a sensitivity applied to the portion of the Trust's investment properties and properties held for sale carrying
value that is measured using the direct capitalization approach and, therefore, is sensitive to changes in capitalization rates:
Capitalization rate sensitivity
increase (decrease)
Weighted average
capitalization rate
Fair value
of properties Fair value variance % change
(1.00%)
(0.75%)
(0.50%)
(0.25%)
4.56%
4.81%
5.06%
5.31%
16,137,281
15,298,545
14,542,688
13,858,004
December 31, 2017
5.56% $
13,234,891 $
0.25%
0.50%
0.75%
1.00%
5.81%
6.06%
6.31%
6.56%
12,665,404
12,142,904
11,661,807
11,217,378
2,902,390
2,063,654
1,307,797
623,113
—
(569,487)
(1,091,987)
21.93 %
15.59 %
9.88 %
4.71 %
— %
(4.30)%
(8.25)%
(1,573,084)
(11.89)%
(2,017,513)
(15.24)%
Ratio of total debt to
total assets
(net of cash and
cash equivalents)
34.1%
35.8%
37.5%
39.3%
41.0%
42.7%
44.4%
46.0%
47.7%
Sensitivity analysis of changes in stabilized net operating income (SNOI) and capitalization rates
In addition, a 1% increase in SNOI would result in a higher portfolio fair value of $132.4 million. A 1% decrease in SNOI would
result in a lower portfolio fair value of $132.4 million. A 1% increase in SNOI coupled with a 0.25% decrease in capitalization rates
would result in a higher portfolio fair value of $761.7 million. A 1% decrease in SNOI coupled with a 0.25% increase in
capitalization rates would result in a lower portfolio fair value of $696.1 million.
6. EQUITY ACCOUNTED INVESTMENTS
The Trust has certain equity method accounted investments in associates and joint ventures. The following table details the
Trust's ownership interest in each equity investee:
As at December 31,
Equity Investee
Dawson-Yonge LP
RioCan-HBC JV
WhiteCastle New Urban Fund, LP (WNUF 1)
WhiteCastle New Urban Fund 2, LP (WNUF 2)
WhiteCastle New Urban Fund 3, LP (WNUF 3)
WhiteCastle New Urban Fund 4, LP (WNUF 4)
WNUF 4
Principal activity
Owns and operates an income property
Owns and operates income properties
Development and sale of residential
inventory
2017
40.0%
12.0%
14.2%
19.3%
20.0%
18.3%
2016
40.0%
11.6%
14.2%
19.3%
20.0%
—%
On September 8, 2017, RioCan committed up to $42 million in capital contributions in consideration for an approximate 18.3%
limited partner interest in WNUF 4. Amounts to be funded are callable by the general partner at any point prior to the expiration
of the investment period on September 15, 2027. As at December 31, 2017, RioCan has contributed cash of $0.4 million to the
fund.
126
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
The following table shows the changes in the aggregate carrying value of RioCan's investment in associates and joint ventures:
Years ended December 31,
Balance, beginning of year
Contributions
Share of net income
Distributions
Other
Balance, end of year
$
$
2017
185,278 $
18,475
15,719
(44,415)
1,199
176,256 $
2016
158,994
26,750
9,972
(11,196)
758
185,278
Financial results of equity accounted investees
The following tables present the financial results of RioCan's equity accounted investees on a 100% basis:
As at December 31,
2017
2016
Current assets
Non-current assets
Current liabilities
Non-current liabilities (i)
Net assets
Equity accounted investments
RioCan-HBC JV
Other
Total
RioCan-HBC JV
Other
Total
$
$
$
10,045 $
215,272 $
225,317
$
9,067 $
105,298
$
114,365
2,003,865
12,747
782,892
22,530
14,434
58,419
2,026,395
1,980,330
27,181
841,311
10,675
546,114
22,100
4,586
52,291
2,002,430
15,261
598,405
1,218,271 $
164,949 $
1,383,220
147,897 $
28,359 $
176,256
$
$
1,432,608 $
70,521
167,581 $
17,697
$
$
1,503,129
185,278
Year ended December 31,
RioCan-HBC JV
Other
Total
RioCan-HBC JV
Other
Total
2017
2016
Revenue
Operating expenses
Fair value gains (losses)
Interest expense
Net income
Income (loss) from equity accounted investments
$
$
$
129,766 $
47,293 $
177,059
$
131,653 $
12,637
$
144,290
11,387
(3,722)
18,386
6,906
403
459
18,293
(3,319)
18,845
10,643
(11,825)
15,999
5,657
907
455
16,300
(10,918)
16,454
96,271 $
40,331 $
136,602
11,347 $
4,372 $
15,719
$
$
93,186 $
7,432
$
100,618
10,391 $
(419)(ii) $
9,972
Includes mortgages payable and lines of credit.
(i)
(ii) 2016 amount reflects a $1.5 million priority profit allocation to the general partner of the investees.
7. MORTGAGES AND LOANS RECEIVABLE
As at December 31,
Current
Non-current
$
$
2017
33,214 $
112,659
145,873 $
2016
28,263
89,754
118,017
As at December 31, 2017, mortgages and loans receivable bear interest at a weighted average effective and contractual rate of
5.4% per annum (December 31, 2016 - 5.0%) and mature between 2018 and 2023.
Future repayments for the years ending December 31 are as follows:
Due on demand
2018
2019
2020
2021
2022
Thereafter
$
$
7,077
26,137
11,395
40,651
49,232
—
11,381
145,873
127
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
8. RESIDENTIAL INVENTORY
The following table shows the changes in the aggregate carrying value of RioCan's residential inventory:
Years ended December 31,
Balance, beginning of year
Acquisitions (i)
Development expenditures
Transfers from investment properties (ii)
Balance, end of year
2017
48,414 $
36,870
30,545
16,174
132,003 $
$
$
2016
45,276
—
3,138
—
48,414
(i) Represents the carrying value of properties acquired and located in the Yorkville area of Toronto, Ontario, with the intention of rezoning and
developing a high-rise residential condominium building. Refer to note 5 for further details.
(ii) During the year ended December 31, 2017, RioCan announced changing the residential rental component of the King Portland Centre to
condominium units. In addition, the costs associated with the Windfields Farm residential development were transferred to residential inventory
upon formation of the joint venture with Tribute to develop townhomes. Refer to note 5 for further details.
9. RECEIVABLES AND OTHER ASSETS
The following table details the Trust's receivables and other assets as at December 31, 2017 and December 31, 2016:
As at December 31,
2017
Non-
current
Current
Total
Current
2016
Non-
current
Total
Prepaid expenses and other assets
$
205,835 $
14,975 $
220,810 $
332,387 $
10,376 $
342,763
Net contractual rents receivable
18,569
Management information system
Interest rate swaps agreements
Funds held in trust
Cross currency interest rate swaps
—
—
—
—
—
13,532
5,101
11,858
—
18,569
13,532
5,101
11,858
—
40,754
—
—
—
1,416
—
21,737
—
1,838
—
40,754
21,737
—
1,838
1,416
$
224,404 $
45,466 $
269,870 $
374,557 $
33,951 $
408,508
Prepaid expenses and other assets
Prepaid expenses and other assets primarily include available-for-sale securities, prepaid property taxes and office furniture and
equipment.
RioCan pays certain upfront non-refundable selling commissions with respect to the sale of residential condominium units. As at
December 31, 2017 included in other assets are $4.3 million of non-refundable sales commissions the Trust has paid with respect
to the sale of these condominium units (December 31, 2016 - $3.4 million), where it is probable that future economic benefits will
flow to the Trust. No amortization prior to the recognition of revenue is recognized but, rather, a charge to net income occurs
when the revenue associated with the sale is recognized.
Contractual rents receivable
Contractual rents receivable are presented net of an allowance for doubtful accounts of $1.7 million as at December 31, 2017
(December 31, 2016 - $1.8 million). RioCan determines its allowance for doubtful accounts on an individual tenant basis and
reduces the carrying value of the receivable to the expected recoverable amount giving consideration to the tenant's payment
history, credit worthiness, lease term, account status and other factors. Any subsequent recoveries of rent receivables previously
recorded as doubtful accounts are recognized in the consolidated statements of income during the period of settlement.
Funds held in trust
Funds held in trust are property specific segregated funds that are contractually required by certain mortgage lenders. To support
mortgage financing, lenders will sometimes require that certain property expenses be funded by monthly property cash flows. The
reserves accumulate over time and, in some cases, are used by the lender to fund certain property expenses, such as realty
taxes, insurance premiums, leasing commissions, repairs and maintenance, tenant construction allowances and landlord
construction costs.
Cross currency interest rate swaps
During the year ended December 31, 2017, the Trust entered into cross currency interest rate swaps as part of its strategy to
hedge any U.S. dollar denominated borrowings from the Trust's unsecured operating credit facility. These have the economic
effect of converting floating rate U.S. dollar borrowings to floating rate Canadian dollar borrowings. These cash flow hedges are
short-term in nature and qualify for hedge accounting. These hedges are expected to be highly effective since all critical terms of
the hedged item and hedging instrument match. All such designated hedging relationships were effective during the year ended
December 31, 2017.
128
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
10. INCOME TAXES
The Trust qualifies for the REIT Exemption for Canadian income tax purposes; therefore, it will be entitled to deduct distributions
for income tax purposes. The Trust expects to distribute its taxable income to unitholders such that it will not be subject to tax.
From time to time, RioCan may retain some taxable income and net capital gains in order to utilize the capital gains refund
available to mutual fund trusts without incurring any income taxes. Accordingly, no provision for Canadian current income tax
payable is required, except for amounts incurred in its incorporated Canadian subsidiaries.
Where an entity does not qualify for the REIT Exemption for Canadian income tax purposes, certain distributions will not be
deductible by that entity in computing its income for Canadian tax purposes. As a result, the entity will be subject to tax at a rate
substantially equivalent to the general corporate income tax rate on distributed taxable income. Distributions paid in excess of
taxable income will continue to be treated as a return of capital to unitholders. Undistributed taxable income is generally subject
to the top marginal personal tax rate. The Trust consolidates certain wholly owned incorporated entities that remain subject to tax.
The tax disclosures and expense relate only to these entities.
As at December 31, 2017, the Trust's Canadian corporate subsidiaries have recognized deferred income tax assets totalling
$11.9 million (December 31, 2016 - $11.6 million) on deductible temporary differences related to intangible assets, deferred
pension, deferred compensation and loss carryforwards that expire over the next 19 years. These deferred tax assets have been
recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and there is
sufficient taxable income available against which the temporary differences can be utilized.
11. LINES OF CREDIT AND OTHER BANK LOANS
The Trust's revolving unsecured operating line of credit and secured construction lines and other bank loans, net of deferred
financing costs, are as follows:
As at December 31,
Revolving unsecured operating line of credit
Non-revolving unsecured credit facilities
Construction lines and other bank loans
Revolving unsecured operating line of credit
$
$
2017
387,093 $
299,360
217,976
904,429 $
2016
502,359
—
203,274
705,633
As at December 31, 2017, RioCan had cash advances outstanding of $390.0 million and $610.0 million in cash available to be
drawn from this revolving operating credit facility. The weighted average contractual interest rate on amounts drawn under this
facility was 2.53% (December 31, 2016 - 1.92%).
On April 25, 2017, the Trust exercised its option to extend the maturity date on its operating line of credit to May 31, 2022.
Non-revolving unsecured credit facilities
On October 31, 2017, the Trust entered into a new $200 million non-revolving unsecured credit facility with two financial
institutions (consisting of a Schedule I and a Schedule III bank), with a maturity date of January 31, 2023. The new credit facility
bears interest at a rate of Bankers' Acceptances plus 110 basis points per annum and is fully drawn as at December 31, 2017.
On December 27, 2017, the Trust entered into a $100 million non-revolving unsecured credit facility with a Schedule I bank with a
maturity date of December 27, 2019. The new credit facility bears interest at a rate of Bankers' Acceptances plus 100 basis points
per annum and $100 million is fully drawn as at December 31, 2017. The aforementioned facility provided the Trust with an option
to increase the facility by up to $50 million with the addition of a lender. Subsequent to year end, the Trust exercised this option
and borrowed an additional $50 million from a Schedule III bank under this facility.
The non-revolving unsecured credit facility agreements requires the Trust to maintain certain financial covenant's similar to those
of RioCan's $1 billion revolving unsecured operating line of credit. Refer to note 26 for additional details.
Construction lines and other bank loans
In addition to the revolving unsecured operating line of credit and non-revolving unsecured credit facilities, the Trust has secured
credit facilities and other bank loans, which include variable rate non-revolving secured construction facilities for the funding of
certain development properties. At December 31, 2017, these secured facilities and other bank loans have an aggregate
maximum borrowing capacity of $387.9 million and mature between 2018 and 2019, of which the Trust had drawn $218.0 million
(December 31, 2016 - $203.3 million). The weighted average contractual interest rate on amounts outstanding is 2.28%
(December 31, 2016 - 1.42%).
129
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
12. MORTGAGES PAYABLE
Mortgages payable, net of deferred financing costs, consist of the following:
As at December 31,
Mortgages payable
Mortgages on properties held for sale
Current
Non-current
$
$
$
$
2017
2,300,247 $
32,670
2,332,917 $
578,851 $
1,754,066
2,332,917 $
2016
2,699,935
—
2,699,935
766,831
1,933,104
2,699,935
Future repayments of mortgages payable by year of maturity are as follows:
Year
2018
2019
2020
2021
2022
Thereafter
Weighted average
contractual
interest rate
Scheduled
principal
amortization
Principal
maturities
Total
repayments
3.67% $
48,129 $
530,722 $
578,851
4.01%
3.65%
4.40%
3.15%
3.70%
36,853
22,689
12,004
7,924
8,011
348,697
450,478
348,782
124,544
385,419
385,550
473,167
360,786
132,468
393,430
3.81% $
135,610 $ 2,188,642 $ 2,324,252
Unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition of properties
12,005
Unamortized debt financing costs, net of premiums and discounts
(3,340)
$ 2,332,917
Pledged properties
As at December 31, 2017, $6.0 billion of the aggregate carrying value of investment properties, properties held for sale and
residential inventory serves as security for RioCan's mortgages payable (December 31, 2016 - $6.8 billion).
Weighted average effective and contractual interest rates
The following table summarizes the details of the Trust's weighted average effective and contractual interest rates on mortgages
payable:
As at December 31,
Weighted average interest rates:
Effective
Contractual
(i) Mortgages maturing between 2018 and 2034.
13. DEBENTURES PAYABLE
Debentures payable consist of the following:
As at December 31,
Current
Non-current
2017 (i)
3.80%
3.81%
2016
3.99%
4.02%
$
$
2017
250,000 $
2,444,619
2,694,619 $
2016
150,000
2,098,024
2,248,024
As at December 31, 2017, total debentures payable bear interest at weighted average effective and contractual rates of 3.34%
and 3.28% (December 31, 2016 - 3.52% and 3.52%), respectively.
Issuance
On January 16, 2017, the Trust issued $300 million principal amount of Series Y senior unsecured debentures, which mature on
October 3, 2022 and carry a coupon rate of 2.83%. The interest on these debentures is payable semi-annually commencing
April 3, 2017. These debentures were sold at a price of $999.97 per $1,000 principal amount with an effective yield of 2.831% if
held to maturity.
130
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
On March 1, 2017, RioCan redeemed, in full, its $150 million 3.80% Series P senior unsecured debentures in accordance with its
terms.
On April 10, 2017, the Trust issued $300 million principal amount of Series Z senior unsecured debentures at par, which mature
on April 9, 2021 and carry a coupon rate of 2.194%. The interest on these debentures is payable semi-annually commencing
October 9, 2017.
The Trust has the following series of senior unsecured debentures outstanding as at December 31 :
Series
P
S
Q
U
X
Z
R
V
Y
T
W
I
Contractual obligations
Maturity date
March 1, 2017
March 5, 2018
June 28, 2019
June 1, 2020
August 26, 2020
April 9, 2021
December 13, 2021
May 30, 2022
October 3, 2022
April 18, 2023
February 12, 2024
February 6, 2026
Future repayments are as follows:
Years ending December 31:
Contractual obligations
Unamortized debt financing costs
Covenant compliance
Coupon rate
3.80%
2.87%
3.85%
3.62%
2.19%
2.19%
3.72%
3.75%
2.83%
3.73%
3.29%
5.95%
Interest payment frequency
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
Semi-annual
$
2017
— $
2016
150,000
250,000
350,000
150,000
250,000
—
250,000
250,000
—
200,000
300,000
100,000
$ 2,700,000 $ 2,250,000
250,000
350,000
150,000
250,000
300,000
250,000
250,000
300,000
200,000
300,000
100,000
2018
2019
2020
2021
2022
Thereafter
Weighted average
contractual interest rate
2.87% $
3.85%
2.72%
2.89%
3.25%
3.88%
$
Principal
maturities
250,000
350,000
400,000
550,000
550,000
600,000
2,700,000
(5,381)
2,694,619
The debentures have covenants relating to RioCan’s leverage limit of up to 60% of aggregate assets as set out in the Trust’s
Declaration, the maintenance of a $1.0 billion Adjusted Book Equity (as defined in the debenture), and maintenance of an interest
coverage ratio of 1.65 times or greater. There are no requirements under the unsecured debenture covenants for RioCan to
maintain unencumbered assets. RioCan has the right, at any time, to convert the Series I debentures to mortgage debt, subject to
the acceptability of the security given to the debenture holders. In such an event, the covenants relating to the 60% leverage limit,
minimum book equity and interest coverage ratio would be eliminated for those debentures. As at and during the year ended
December 31, 2017, the Trust was in compliance with these covenants pursuant to the Trust's Declaration and debenture
indentures.
131
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
14. ACCOUNTS PAYABLE AND OTHER LIABILITIES
As at December 31,
2017
Non-
current
Current
Total
Current
2016
Non-
current
Total
Property operating costs
$
54,689 $
24,239 $
78,928 $
59,491 $
20,686 $
80,177
Capital expenditures and leasing commissions:
111,334
Properties under development
Income producing properties
Deferred revenue
Unitholder distributions payable
Interest payable
Finance lease obligations
Income taxes payable
Unfunded employee future benefits
Contingent consideration
Interest rate swap agreements
Other trade payables and accruals
Income taxes payable
85,144
20,625
20,527
38,039
27,435
1,461
14,396
—
2,718
765
24,219
—
—
—
43,775
—
—
20,064
—
14,156
—
2,154
5,521
111,334
112,302
85,144
20,625
64,302
38,039
27,435
21,525
14,396
14,156
2,718
2,919
29,740
77,240
32,564
22,071
38,356
26,841
2,573
136,169
—
325
843
24,407
—
—
—
26,249
—
—
16,080
—
12,751
—
9,398
4,236
112,302
77,240
32,564
48,320
38,356
26,841
18,653
136,169
12,751
325
10,241
28,643
$
290,018 $
109,909 $
399,927 $
420,880 $
89,400 $
510,280
Income taxes payable relates primarily to the realized gain on sale of the Trust's U.S. income property portfolio during May 2016.
15. UNITHOLDERS' EQUITY
Common trust units
The Trust is authorized to issue an unlimited number of common units. The common units are entitled to distributions, as and
when declared by the Board (and upon liquidation), and to a pro rata share of the residual net assets remaining after the
preferential claims, thereon, of debt holders and preferred unitholders. As the Trust is a closed-end trust, the units are not
puttable. The units issued and outstanding are as follows:
As at December 31,
Balance, beginning of year
Units issued:
Distribution reinvestment plan
Unit option exercises
Costs associated with unit option plan
Direct purchase plan
Exchangeable limited partnership units
Common trust units repurchased and cancelled
Unit issue costs
Balance, end of year
2017
Units
$
326,615
4,788,520
2016
Units
322,483
$
4,684,194
1,003
25,273
10
—
36
—
258
10
898
—
(3,930)
—
(57,870)
(18)
2,399
1,671
—
36
26
—
—
60,782
38,242
3,992
959
358
—
(7)
323,734
4,757,071
326,615
4,788,520
Included in units outstanding as at December 31, 2017, are exchangeable limited partnership units totalling 1.0 million units
(December 31, 2016 - 1.2 million units) of three limited partnerships that are subsidiaries of the Trust (the LP units), which were
issued to vendors as partial consideration for income properties acquired by RioCan. RioCan is the general partner of the limited
partnerships. The LP units are entitled to distributions equivalent to distributions on RioCan units and are exchangeable for
RioCan units on a one-for-one basis at any time at the option of the holder.
On October 2, 2017, RioCan announced it will be suspending its DRIP effective November 1, 2017. Unitholders that are enrolled
in the DRIP will receive the future distributions in cash commencing with any distribution declared in November 2017. If RioCan
elects to reinstate the DRIP in the future, unitholders that were enrolled in the DRIP at the time of its suspension and remain
enrolled at the time of its reinstatement will automatically resume participation in the DRIP.
Normal course issuer bid
On October 10, 2017, RioCan announced the TSX approval of its notice of intention to make a normal course issuer bid (NCIB)
for a portion of its units as appropriate opportunities arise from time to time. RioCan’s NCIB will be made in accordance with the
requirements of the TSX. Under the NCIB, RioCan may acquire up to a maximum of 32,520,207 of its units, or approximately
10% of its 325,202,070 outstanding units as of October 6, 2017, for cancellation over the next 12 months effective October 20,
2017.
132
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
The number of units that can be purchased pursuant to the bid is subject to a current daily maximum of 127,617 units (which is
equal to 25% of 510,471, being the average daily trading volume from April 1, 2017 through to September 30, 2017), subject to
RioCan’s ability to make one block purchase of units per calendar week that exceeds such limits. RioCan intends to fund the
purchases out of its available cash and undrawn credit facilities.
During the year ended December 31, 2017, the Trust acquired and cancelled 3,930,174 units at a weighted average price of
$25.30 per unit, for a total cost of $99.6 million. The excess of the purchase price over the carrying amount of the units
purchased, representing the unit price increases over the weighted average historical unit issuance price, was recorded as a
reduction to retained earnings amounting to $41.7 million.
Preferred trust units
The Trust is authorized to issue 50 million preferred units.
Series C
On June 30, 2017, the Trust exercised its option to redeem all 5.98 million outstanding Series C preferred trust units at the cash
redemption price of $25.00 per Series C unit, for a total redemption price of $149.5 million paid on June 30, 2017. Unit issue
costs totalling $4.7 million were recorded as a charge to retained earnings upon redemption.
Contributed surplus
RioCan and its consolidated subsidiaries introduced new restricted equity plans (New REU Plans) and new performance equity
plan (New PEU Plan) in 2017 as described in note 16. The awards issued under this new plan are settled by the delivery of
common trust units purchased on the secondary market, net of applicable withholdings. The fair value of these equity-settled
awards are recognized as an expense over the vesting period with a corresponding increase to contributed surplus, which is
presented as a separate component of total unitholders' equity.
For the year ended December 31, 2017, RioCan recorded $4.8 million in unit-based compensation costs (December 31, 2016 -
$1.6 million).
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) as at and for the year ended December 31, 2017 consists of the following
amounts:
Available-for-sale
investments
Actuarial loss
on pension plan
Interest rate
swap agreements
Cross currency
interest rate swap
agreements
Total
As at December 31, 2016
Other comprehensive income (loss)
As at December 31, 2017
$
$
78,947 $
(10,283)
68,664 $
(997) $
(984)
(1,981) $
(10,207) $
12,901
2,694 $
74 $
67,817
(74)
1,560
— $
69,377
16. UNIT-BASED COMPENSATION PLANS
New REU Plans
Senior Executive REU Plan
The Senior Executive REU Plan, as referenced above, is a new plan introduced in 2017 that provides for the allotment of REUs
to the Chief Executive Officer (CEO), President & Chief Operating Officer and Chief Financial Officer of the Trust, and such other
officers or executive employees of the Trust that are determined by the CEO and approved by RioCan's Human Resources and
Compensation Committee. Each REU notionally represents the value of one unit of the Trust on the date of grant. Unit
distributions paid during the period from grant date until settlement date will be credited to each REU participant in the form of
additional REUs.
The number of REUs granted shall vest one-third on each of the first, second and third anniversary of the grant date, provided
however that all vested REUs are only eligible for settlement upon the third anniversary of the grant date (the Settlement Date).
Settlement of vested REUs is generally made within 30 days after the Settlement Date by the delivery of an equivalent number of
common trust units purchased on the secondary market, net of applicable withholding taxes.
On February 28, 2017, the Trust granted 78,969 REUs under its New Senior Executive REU Plan. The grant date price was
$26.68 per unit based on the five-day volume weighted average market price of RioCan's common trust units traded on the TSX
prior to the grant date, resulting in an aggregate fair value of $2.1 million.
Employee REU Plan
The Employee REU Plan is a new plan introduced in 2017 that provides for the allotment of REUs to certain senior level
employees of the Trust that do not participate in the Senior Executive REU Plan. Each REU notionally represents the value of
one unit of the Trust on the date of grant. Unit distributions paid during the period from grant date until settlement date will be
credited to each REU participant in the form of additional REUs.
The number of REUs granted shall vest fully on the third anniversary of the grant date (the Settlement Date), including distribution
equivalents that have accumulated during the vesting period. Settlement of vested REUs is generally made within 30 days after
the Settlement Date.
133
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
On February 28, 2017, the Trust granted 67,063 REUs under its Employee REU Plan. The grant date price was $26.68 per unit
based on the five-day volume weighted average market price of RioCan's common trust units traded on the TSX prior the grant
date, resulting in an aggregate fair value of $1.8 million.
New Performance Equity Unit Plan (New PEU Plan)
Effective January 1, 2017, the Trust implemented several changes to its executive pay program which takes into account
unitholder feedback received during 2016. Included in these changes was a modification made to the comparator group for
compensation benchmarking to include only peers that are domiciled in Canada. Specifically, RioCan adopted a single
performance metric for its New PEU Plan, which is relative total unitholder return (TUR) against a peer group of S&P/TSX
Capped REIT companies with a market capitalization above $1.0 billion (excluding RioCan), plus First Capital Realty Inc. The
second main change to this plan is that settlement on the vesting date will be effected via the delivery of an equivalent number of
common trust units purchased on the secondary market, net of applicable withholding taxes.
During February 2017, the Trust granted 157,939 PEUs under its New PEU Plan at a fair value of $4.3 million. The grant date fair
value assumptions using the Monte-Carlo valuation model are as follows:
Fair value of PEUs granted
PEUs granted (in thousands)
Grant date fair value per unit
Expected risk-free interest rate (i)
Expected unit price volatility (ii)
Initial total unitholder return (iii)
$
$
4,299
158
27.21
0.8%
15.0%
1.1%
(i) Derived using the yield on Government of Canada benchmark bonds with an average term similar to the PEU vesting period.
(ii) Expected unit price volatility is calculated based on the average of the actual daily closing price of RioCan's trust units measured over a three-year
historical period up to the grant date.
(iii) PEUs granted under the New PEU Plan are subject to a relative TUR performance hurdle where vesting is dependent upon RioCan's TUR
performance relative to a comparative group of peer companies. The initial TUR performance has incorporated actual historical TUR performance
for RioCan and each company in the comparator group over the period from January 1, 2017 to March 31, 2017.
Incentive unit option plan
The Trust provides long-term incentives to certain employees by granting options through the incentive unit option plan (the plan).
Riocan is authorized to issue up to a maximum of 22 million common unit options under the plan. As at December 31, 2017, 12.1
million common unit options remain available to be granted under the plan.
The exercise price for each option is equal to the volume weighted average trading price of the units on the TSX for the five
trading days immediately preceding the dates of grant except for those options granted prior to May 27, 2009, which have an
exercise price equal to the closing price of the units on the date prior to the day the option was granted. An option’s maximum
term is ten years. All options granted vest at 25% per annum commencing on the first anniversary of the grant date, and become
fully vested after four years.
The Trust accounts for this plan by estimating the fair value of each tranche of an award at the grant date and subsequently
recognizing the compensation expense over the vesting period.
The weighted average assumptions utilized in the calculation of units granted for the years ended December 31, 2017 and 2016
using the Black-Scholes option valuation model are as follows:
Years ended December 31,
Fair value of unit options granted
Unit options granted (in thousands)
Unit option exercise price
Expected risk free interest rate (i)
Expected distribution yield (ii)
Expected unit price volatility (iii)
Expected option life (years) (iv)
$
$
2017
— $
—
— $
—%
—%
—%
—
2016
2,194
2,159
25.79
0.5%
5.5%
14.9%
4.5
(i) Determined using the yield on Government of Canada benchmark bonds with an average maturity period similar to the expected option life.
(ii) Based on the annual distribution yield on the date of grant.
(iii) Estimated by considering historic average unit price volatility for a period consistent with the expected option life.
(iv) Represents the expected option life based on the actual holding period of all transacted option awards between grant date and the date of activity.
134
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Unvested unit options granted prior to January 1, 2017, which remain outstanding under the existing plan, will continue to be
expensed over the vesting period over which all specified vesting conditions are satisfied. The following summarizes the
changes in unit options outstanding during the period:
Outstanding, beginning of year
Granted
Exercised
Expired
Forfeited
Outstanding, end of year
Options exercisable at end of year
Average fair value per unit of options granted during the
year
2017
2016
Units
(in thousands)
8,408 $
—
(10)
(410)
(213)
7,775 $
5,553 $
$
Weighted
average
exercise price
26.52
—
25.78
27.44
26.71
26.47
26.31
—
Units
(in thousands)
9,027 $
2,159
(1,671)
(332)
(775)
8,408 $
4,511 $
$
Weighted
average
exercise price
26.12
25.79
22.89
27.17
27.35
26.52
26.11
1.02
As part of comprehensive changes to its executive compensation program, the Trust has enhanced the design of its long-term
incentive program to reduce the frequency of option grants while replacing that portion of the overall long-term incentive
compensation in 2017 with grants of New REU Plans and New PEU Plan as described above. As a result, RioCan did not grant
any unit options during the year ended 2017.
The following table summarizes the outstanding options and related exercise price ranges of units granted under the plan:
Exercise Price
Range ($/unit)
As at December 31,
12.15 to 24.93
24.94 to 26.53
26.54
26.55 to 27.50
27.51 to 27.69
27.70 to 30.00
Outstanding Options
Vested Options
Number of Common
Units Issuable
(in thousands)
Weighted Average
Exercise Price per
Common Unit
Weighted Average
Remaining Life
(years)
Number of Common
Units Issuable
(in thousands)
Weighted Average
Exercise Price per
Common Unit
2017
582
2,248
1,150
1,393
1,329
1,073
7,775
2016
582
2,494
1,181
1,476
1,479
1,196
8,408
2017
2016
2017
2016
$20.02
$20.02
25.59
26.54
27.28
27.57
29.31
25.62
26.54
27.28
27.57
29.31
$26.47
$26.52
2.3
7.1
5.1
5.1
6.0
7.2
5.9
3.3
8.0
6.1
6.2
7.0
8.2
6.9
2017
582
948
1,031
1,341
1,114
537
5,553
2016
2017
2016
582
575
944
1,188
898
324
$20.02
$20.02
25.33
26.54
27.28
27.59
29.31
25.10
26.54
27.27
27.58
29.31
4,511
$26.31
$26.11
17. DISTRIBUTIONS TO UNITHOLDERS
Total distributions declared to unitholders are as follows:
2017
2016
Years ended December 31,
Total Distributions Distributions per unit
Total Distributions Distributions per unit
Common Unitholders
Preferred Unitholders – Series A
Preferred Unitholders – Series C
$
$
460,627 $
1.4100 $
458,388 $
—
3,514
464,141
—
0.5876
1,640
7,027
$
467,055
1.4100
0.3281
1.1750
On June 30, 2017, the Trust exercised its option to redeem all outstanding Series C preferred trust units. Refer to note 15 for
further details.
On January 15, 2018, RioCan declared a distribution payable of 12.00 cents per unit for the month of January 2018, which will be
paid on February 7, 2018 to common trust unitholders of record as at January 31, 2018.
135
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
18. RENTAL REVENUE
Years ended December 31,
Base rent
Realty tax recoveries
Common area maintenance recoveries
Percentage rent
Straight-line rent
Lease cancellation fees
19. INVESTMENT AND OTHER INCOME
Years ended December 31,
Income earned on available-for-sale securities
Transaction gains and other income
2017
$
729,723 $
226,939
159,486
10,486
7,806
6,225
2016
706,407
219,685
157,936
9,541
7,263
3,052
$
1,140,665 $
1,103,884
$
$
2017
8,574 $
48,440
57,014 $
2016
13,173
20,095
33,268
Net transaction gains primarily include realized gains on the disposition of the Trust's available-for-sale securities.
20. INTEREST COSTS
Years ended December 31,
Total interest
Less: Interest capitalized to properties under development
2017
199,817 $
28,399
171,418 $
2016
206,989
27,462
179,527
$
$
For the year ended December 31, 2017, interest was capitalized to properties under development at a weighted average effective
interest rate of 3.54% (December 31, 2016 - 3.94%).
21. GENERAL AND ADMINISTRATIVE
Years ended December 31,
Salaries and benefits
Unit-based compensation expense
Depreciation and amortization
Other general and administrative
$
$
2017
23,267 $
3,911
9,865
15,517
52,560 $
2016
23,568
6,745
4,386
17,521
52,220
Other general and administrative costs include information technology costs, public company costs, professional fees, travel
expenses, occupancy costs, donations, advertising, promotion and marketing costs.
22. TRANSACTION AND OTHER COSTS
For the year ended December 31, 2017, transaction and other costs primarily include property acquisition and disposition costs,
and other costs associated with transactions that the Trust decided not to pursue further totalling $11.8 million, (December 31,
2016 - $9.6 million).
136
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
23. NET INCOME PER UNIT
Net income per basic and diluted unit is calculated based on net income available to common unitholders divided by the weighted
average number of common trust units outstanding taking into account the dilution effect of unit options.
Years ended December 31,
Net income attributable to unitholders
Less: Net income from discontinued operations
Net income attributable to unitholders from continuing operations
Less: Preferred unit redemption (ii)
Distributions to preferred unitholders
Net income attributable to common unitholders from continuing operations
Weighted average common units outstanding (in thousands):
Basic
Dilutive effect of common unit options (i)
Diluted
Net income per unit (basic):
Continuing operations
Discontinued operations
Net income per unit (diluted):
Continuing operations
Discontinued operations
2017
715,286 $
7,021
708,265 $
—
3,514
2016
830,747
147,687
683,060
4,304
8,667
704,751 $
670,089
326,805
124
326,929
325,386
279
325,665
2.16 $
0.02
2.18 $
2.16 $
0.02
2.18 $
2.06
0.45
2.51
2.06
0.45
2.51
$
$
$
$
$
$
$
(i) The calculation of diluted weighted average units outstanding excludes 6.7 million unit options for the year ended December 31, 2017
(December 31, 2016 - 4.4 million units), as the exercise price of these unit options was greater than the average market price of RioCan's common
trust units.
(ii) Represents the excess of par redemption value over the carrying value of the Trust's Series A preferred trust units redeemed on March 31, 2016.
24. FAIR VALUE MEASUREMENT
The fair value hierarchy of assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets is
as follows:
As at
Assets measured at fair value:
Cash and cash equivalents
Available-for-sale securities
Investment properties:
Income properties
Properties under development
Properties held for sale
Cross currency interest rate swaps
Interest rate swaps
December 31, 2017
December 31, 2016
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$
70,225 $
— $
— $
54,366 $
— $
180,432
5,541
1,516
299,987
5,665
—
—
—
—
—
—
—
— 12,075,939
— 1,084,305
—
—
5,101
410,178
—
—
—
—
—
—
—
— 12,406,719
—
—
1,416
—
880,319
60,530
—
—
Total assets measured at fair value
$
250,657 $
10,642 $13,571,938 $
354,353 $
7,081 $13,347,568
Liabilities measured at fair value:
Interest rate swaps
Total liabilities measured at fair value
$
—
— $
2,919
2,919 $
—
— $
—
10,241
— $
10,241 $
—
—
For assets and liabilities measured at fair value as at December 31, 2017, there were no transfers between Level 1, Level 2 and
Level 3 during the period. For changes in fair value measurements of investment properties and properties held for sale included
in Level 3 of the fair value hierarchy, refer to note 5 for details on the changes in beginning and ending balances.
137
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
Fair value of financial instruments
The Trust's financial instruments carrying values and fair values on the consolidated balance sheets are as follows:
As at
Financial assets:
Cash and cash equivalents
Available-for-sale securities
Receivables and other assets
Mortgages and loans receivable
Interest rate swap assets
Cross currency interest rate swaps
Financial liabilities:
Mortgages payable
Debentures payable
Unsecured operating line of credit
Construction lines and other bank loans
Interest rate swap liabilities
Accounts payable and other liabilities
December 31, 2017
December 31, 2016
Carrying value
Fair value Carrying value
Fair value
$
70,225 $
70,225 $
54,366 $
187,489
30,427
145,873
5,101
—
2,300,247
2,694,619
387,093
517,336
2,919
382,878
187,489
30,427
144,855
5,101
—
2,205,417
2,738,790
387,093
517,336
2,919
382,878
305,652
42,427
118,017
—
1,416
2,699,935
2,248,024
502,359
203,274
10,241
489,613
54,366
305,652
42,427
115,416
—
1,416
2,717,006
2,371,060
502,359
203,274
10,241
489,613
The fair values of the Trust's financial instruments were determined as follows:
Receivables, other assets, accounts payable and other liabilities
These instruments' carrying amounts approximate fair values due to their short-term nature.
Mortgages and other loans receivable
The fair value of mortgages and other loans receivable is determined by the discounted cash flow method using applicable inputs
such as prevailing interest rates, contractual rates and discounts. Fair value measurements of these instruments were estimated
using Level 3 inputs. The carrying values of short-term and variable rate loans generally approximate their fair values.
Mortgages payable, lines of credit, mortgages on properties held for sale and debentures payable
The fair values of these instruments are estimates made at a specific point in time, based on relevant market information. These
estimates are based on quoted market prices for the same or similar issues or on the current rates offered to the Trust for similar
financial instruments subject to similar risk and maturities. Fair value measurements of these instruments were estimated using
Level 2 inputs. The carrying values of short-term and variable rate debt generally approximate their fair values.
Cross currency interest rate swap
The fair values of the cross currency interest rate swaps reported in other liabilities represent estimates at a specific point in time
using financial models, based on both foreign exchange and interest rates that reflect current market conditions, the credit quality
of counterparties and interest rate curves.
Interest rate swap
The fair values of the interest rate swaps reported in other receivables and other liabilities represent estimates at a specific point
in time using financial models, based on interest rates that reflect current market conditions, the credit quality of counterparties
and interest rate curves.
25. RISK MANAGEMENT
The main risks arising from the Trust's financial instruments are interest rate, liquidity, credit and foreign exchange risks.
The Trust's approach to managing these risks is summarized below:
Interest rate risk
The Trust is exposed to interest rate risk on its borrowings and could be adversely affected if it were unable to obtain cost-
effective financing. The majority of the Trust's debt is financed at fixed rates with maturities staggered over a number of years,
thereby mitigating its exposure to changes in interest rates and financing risks. As at December 31, 2017, approximately 16.5%
(December 31, 2016 - 13.8%) of the Trust's debt (including mortgages held for sale) is financed at variable rates, exposing the
Trust to changes in interest rate risk.
From time to time, the Trust may enter into floating-for-fixed interest rate swaps as part of its strategy for managing interest rate
risk. The Trust has applied hedge accounting and recorded the changes in fair value for the effective portion of these derivatives
in Other comprehensive income (loss) (OCI) from the date of hedge designation. For any interest rate swaps for which the Trust
does not apply hedge accounting, the change in fair value of the swap contracts is recognized in the consolidated statements of
income.
138
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
As at December 31, 2017, the outstanding notional amount of the floating-to-fixed interest rate swaps was $682.5 million
(December 31, 2016 - $682.6 million) and the term to maturity of these agreements ranges from May 2018 to April 2024.
The outstanding interest rate swaps by year of maturity are as follows:
Maturity
2018
2019
2020
2021
2022
Thereafter
Original principal amount Weighted average effective fixed interest rate
$
$
208,938
126,020
119,025
55,000
57,600
115,900
682,483
3.60%
2.31%
2.88%
4.12%
2.86%
2.34%
The Trust assesses the effectiveness of the hedging relationship on a quarterly basis and has determined there is no
ineffectiveness in the hedging of its interest rate exposure. As an effective hedge, unrealized gains or losses on the interest rate
swap agreements are recognized in OCI. As at December 31, 2017, the fair value of the interest rate swaps are, in aggregate, a
net financial asset of $2.2 million (December 31, 2016 - a net financial liability of $10.2 million ).
As at December 31, 2017, the carrying value of the Trust's floating rate debt, not subject to a hedging strategy, is $1.0 billion. As
at December 31, 2017, a 50 basis point increase in market interest rates would result in a $4.9 million decrease in the Trust's net
income.
Liquidity risk
Liquidity risk is the risk that the Trust will not meet its financial obligations as they become due. The Trust mitigates its liquidity
risk by staggering the maturity dates of its long-term debt, limiting the use of floating rate debt, actively renewing expiring credit
arrangements, utilizing undrawn lines of credit, and issuing equity when considered appropriate.
• For the schedule of future repayments of mortgages, floating rate debt and funds drawn against the Trust's operating line of
credit, refer to notes 11 and 12 for details.
• For the schedule of future repayments of debentures, see note 13 for further details.
The Trust expects to continue financing future acquisitions, development and debt obligations through existing cash balances,
internally generated cash flows, mortgages, operating facilities, issuance of equity, unsecured debentures, and the sale of non-
core assets.
Credit risk
Credit risk arises from the possibility that:
• Tenants experience financial difficulty and are unable to fulfil their lease commitments or tenants fail to occupy and pay rent in
accordance with existing lease agreements, some of which are conditional.
• Borrowers default on the repayment of their mortgages to the Trust.
• Third-party defaults on the repayment of debt whereby RioCan has provided lender guarantees.
RioCan’s Declaration of Trust contains provisions that have the effect of limiting the amount of space that can be leased to one
tenant and its investment in mortgages receivable.
Additionally, the Trust mitigates tenant credit risk through geographical diversification, staggered lease maturities, diversification
of revenue sources resulting from a large tenant base, avoiding dependence on any single tenant by ensuring no individual
tenant contributes a significant percentage of the Trust’s gross revenue and ensuring a considerable portion of the Trust’s
revenue is earned from national and anchor tenants and conducting credit assessments for new tenants.
Foreign exchange risk
Foreign exchange risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in
foreign exchange rates. As a result of the Trust's disposal of its U.S. property portfolio in 2016 and the associated repayment of
U.S. denominated debt, discussed further in note 4, RioCan has significantly reduced its foreign exchange risk.
26. CAPITAL MANAGEMENT
The Trust defines capital as the aggregate of unitholders’ equity and debt. The Trust’s capital management framework is
designed to maintain a level of capital that complies with investment and debt restrictions pursuant to RioCan’s Declaration,
complies with existing debt covenants, enables the Trust to achieve target credit ratings, implements its business strategies and
builds long-term unitholder value. The key elements of RioCan’s capital management framework are approved by its unitholders
via the Trust’s Declaration of Trust and by its Board through their annual review of the Trust’s strategic plan and budget,
supplemented by periodic Board and Board Committee meetings. Capital adequacy is monitored by the Trust by assessing
performance against the approved annual plan throughout the year, which is updated accordingly, and by monitoring adherence
139
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
to investment and debt restrictions contained in the Declaration and debt covenants.
RioCan’s Declaration provides for maximum total debt levels up to 60% of Aggregate Assets (as defined in the Declaration). The
Trust is in compliance with this restriction.
Additionally, RioCan’s Declaration contains provisions that have the effect of limiting capital expended by the Trust for, among
other items, the following:
• direct and indirect investments (net of related mortgages payable) in non-income producing properties (including greenfield
developments and mortgages receivable to fund the Trust’s co-owners’ share of such developments) to no more than 15% of
the Adjusted Unitholders’ Equity of the Trust (herein referred to as the “Basket Ratio” with Adjusted Unitholders’ Equity as
defined in the Declaration);
• total investment by the Trust in mortgages receivable, other than mortgages taken back by the Trust on the sale of its
properties, to no more than 30% of the Adjusted Unitholders’ Equity of the Trust;
• any property acquired by the Trust, directly or indirectly, if the cost to the Trust of such acquisition (net of the amount of
mortgages payable assumed) exceeds 10% of the Adjusted Unitholders’ Equity of the Trust;
• subject to the Basket Ratio, securities of an entity, other than to the extent that such securities would, for the purpose of the
Declaration, constitute an investment in real estate; and
• the amount of space that can be leased or subleased to any tenant, with certain exceptions, to a maximum space having an
aggregate gross leasable area of 20% of the aggregate gross leasable area of all real estate investments held by the Trust.
The Trust is in compliance with each of the above noted restrictions as at and for the year ended December 31, 2017. The Trust
intends, but is not contractually obligated, to distribute to its unitholders in each year an amount not less than the Trust’s income
for the year, as calculated in accordance with the Income Tax Act (Canada) (the Tax Act) after all permitted deductions under the
Tax Act have been taken. RioCan’s Trustees rely upon forward-looking cash flow information, including forecasts and budgets
and the future business prospects of RioCan, to establish the level of cash distributions.
The Trust’s debentures payable have covenants that are consistent with the Debt to Aggregate Assets ratio as discussed above,
maintenance of at least $1 billion of Adjusted Book Equity (defined in the indenture), and maintenance of at least an interest
coverage ratio (defined in the indenture) of 1.65 for a rolling twelve-month period.
The following table highlights RioCan's Ratio of Debt to Total Assets (net of cash), Basket Ratio and Interest coverage ratio in
accordance with the Declaration:
As at December 31,
Debentures payable
Mortgages payable
Lines of credit and other bank loans
Liabilities associated with assets held for sale
Total Debt
Unitholders’ equity
Total capital
Ratio of debt, net of cash, to total assets, net of cash
Basket Ratio
Year ended December 31,
Interest coverage ratio
Note
13
12
11
4
2017
2,694,619
2,300,247
904,429
32,670
5,931,965
8,044,686
2016
2,248,024
2,699,935
705,633
—
5,653,592
8,009,888
$
13,976,651
$
13,663,480
41.0%
3.3%
2017
3.87
39.7%
2.6%
2016
3.38
Revolving unsecured operating line of credit and non-revolving unsecured credit facilities
The Trust is subject to certain key financial covenants pursuant to the agreement governing its revolving unsecured operating line
of credit and non-revolving unsecured credit facilities, which are calculated on a rolling twelve-month basis. As at and for the year
ended December 31, 2017, the Trust is in compliance with all applicable financial covenants.
140
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
The following table summarizes the Trust's performance relative to these key financial covenants:
Total indebtedness (i) (vi)
Secured indebtedness (ii) (vi)
Debt service coverage (iii) (vi)
Minimum unitholders' equity (in millions)
Ratio of unencumbered property assets to unsecured indebtedness (iv) (v) (vi)
Properties held for development as a percentage of consolidated gross book value of assets
Key covenant
December 31, 2017
< 60%
< 40%
> 1.5x
> $5,000
> 1.5x
< 15%
44.5%
18.4%
2.8 x
$8,045
2.0 x
8.5%
(i)
Total indebtedness consists of the contractual amounts outstanding on mortgages payable, lines of credit and other bank loans, debentures
payable, capital lease obligations, contingent liabilities and the maximum exposure to loss for all third-party debt where RioCan has provided a
financial guarantee.
(ii) Secured indebtedness includes mortgages payable, secured construction lines and other bank loans and capital lease obligations, which are
secured against investment properties.
(iii) Debt service includes regular mortgage principal and interest payments, including interest capitalized on properties under development.
(iv) Unsecured indebtedness includes the contractual amounts outstanding of the revolving unsecured operating line of credit, non-revolving
unsecured credit facilities, debentures and any third-party debt amounts guaranteed by RioCan.
(v) Unencumbered property assets consist of properties that have not been pledged as security for debt. The unencumbered property asset to
unsecured indebtedness ratio is calculated as unencumbered assets divided by unsecured indebtedness.
(vi) These ratios include inputs from proportionately consolidated equity accounted investments.
27. OPERATING LEASES
Lease commitments – Trust as lessor
The Trust as lessor has entered into leases on its property portfolio. The leases typically have lease terms between five and
twenty years and include clauses to enable periodic upward revision of the rental charge according to prevailing market
conditions. Some leases contain options to terminate before the end of the lease term.
Future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periods
are as follows:
As at December 31,
Within twelve months
Two to five years
Over five years
Total
$
$
2017
704,213
1,975,293
1,450,758
4,130,264
Contingent rent recognized in the consolidated statements of income for the year ended December 31, 2017 is $12.0 million
(December 31, 2016 - $12.2 million).
141
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
28. SUBSIDIARIES
The subsidiaries listed below are wholly owned and reflect significant entities of the Trust:
Name
RioCan Management (BC) Inc.
RioCan Management Inc.
RioCan (KS) Management LP
RioCan Management Beneficiary Trust
RioCan Yonge Eglinton LP
RioCan (Festival Hall) Trust
Timmins Square Limited Partnership
Shoppers World Brampton Investment Trust
RioCan Realty Investments Partnership Four LP
RioCan Realty Investments Partnership Seven LP
RioCan Realty Investments Partnership Nine LP
RioCan Realty Investments Partnership Ten LP
RioCan Realty Investments Partnership Eleven LP
RioCan Realty Investments Partnership Twelve LP
RioCan Realty Investments Partnership Thirteen LP
RioCan Realty Investments Partnership Fourteen LP
RioCan Realty Investments Partnership Fifteen LP
RioCan Realty Investments Partnership Sixteen LP
RioCan (GH) Limited Partnership
RioCan Property Services Trust
RioCan White Shield Limited Partnership
RioCan (GTA Marketplace) LP
RioCan East Village LP
RC REIT Limited Partner Trust
RC NA Property 1 LP
RC NA Property 2 LP
RC NA Property 3 LP
Country
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
U.S.
29. SUPPLEMENTAL CASH FLOW INFORMATION
Years ended December 31,
Interest received
Interest paid
Distributions paid:
Distributions declared during the year
Distributions declared in the prior period paid in the current year
Distributions declared in current period paid in the next year
Distributions paid before the undernoted
Proceeds from units issued under the distribution reinvestment plan
Distributions paid, including proceeds reinvested under distribution reinvestment plan
2017
5,724 $
199,224
2016
776
229,159
(460,627) $
(38,356)
38,039
(460,944) $
25,273
(435,671) $
(458,388)
(37,893)
38,356
(457,925)
60,782
(397,143)
$
$
$
$
142
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
The following provides a reconciliation of liabilities arising from financing activities:
Year ended December 31, 2017
Balance, beginning of year
Cash flows
Non-cash changes:
Deferred financing costs
Cross currency swaps
Assumed (disposed) on acquisition/disposition
Balance, end of year
Liabilities on properties held for sale
Mortgages Payable
Lines of Credit
Debentures
$
2,699,935 $
(384,844)
705,633 $
200,933
2,248,024
446,948
(4,211)
—
22,037
(721)
(1,416)
—
(353)
—
—
$
$
2,332,917 $
904,429 $
2,694,619
32,670
—
—
2,300,247 $
904,429 $
2,694,619
30. CHANGES IN OTHER WORKING CAPITAL ITEMS
Years ended December 31,
Receivable and other assets
Mortgage receivable interest
Residential development inventory
Accounts payable and other liabilities
Foreign exchange and other
Net change in other working capital items
31. RELATED PARTY TRANSACTIONS
$
2017
(304) $
(1,649)
(50,195)
(109,510)
(6,483)
2016
96,709
(4,914)
(3,138)
94,492
(57,408)
$
(168,141) $
125,741
Key management personnel are defined by the Trust as those individuals that have the authority and responsibility for planning,
directing and controlling the Trust's activities, directly or indirectly.
The Trust’s key management personnel include each of the Trustees and the following individuals: Chief Executive Officer,
Edward Sonshine; President and Chief Operating Officer, Raghunath Davloor; and Senior Vice President and Chief Financial
Officer, Qi Tang, effective June 8, 2017 (collectively, the Key Executives).
On March 1, 2017, RioCan announced the resignation of Cynthia Devine as Executive Vice President, Chief Financial Officer &
Corporate Secretary of the Trust, effective as of March 31, 2017.
On June 8, 2017, RioCan announced the appointment of Qi Tang, Senior Vice President and Acting Chief Financial Officer, as the
Senior Vice President and Chief Financial Officer of the Trust, effective June 8, 2017.
Remuneration of the Trust’s Trustees and Key Executives during the year ended December 31, 2017 and 2016 is as follows:
Years ended December 31,
Compensation and benefits
Unit-based payments
Post-employment benefit costs
32. EMPLOYEE BENEFITS
Plan characteristics
Trustees
Key Executives
2017
2016
2017
261 $
301 $
5,226 $
1,537
—
2,253
—
2,214
36
2016
5,756
5,341
57
1,798 $
2,554 $
7,476 $
11,154
$
$
RioCan sponsors a defined contribution plan and three defined benefit plans that provide pension and certain post-employment
benefits to eligible employees. Plan members are not required, nor are they permitted, to contribute to these plans. The defined
benefit plans are closed to new members and any new employees are generally eligible to join the defined contribution pension
plan. All plans are administered by separate funds that are legally segregated from RioCan.
Defined contribution plan
The Trust's defined contribution pension plans provide pension benefits based on accumulated RioCan contributions. RioCan's
contributions are based on a percentage of an employee’s annual earnings. For the year ended December 31, 2017, RioCan's
contributions to the defined contribution plan was $1.0 million (December 31, 2016 - $1.0 million).
Defined benefit plans
RioCan's defined benefit pension plans, one of which is a registered plan and two of which are supplemental unregistered plans,
provide pension benefits mostly based on years of credited service, the average of the highest five years of earnings and the age
of the member at retirement.
143
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
The Trust measures its benefit obligations and pension assets as at December 31 each year. All plans are valued using the
projected unit-credit method. The Trust funds its registered defined benefit pension plans in accordance with actuarially
determined amounts required to satisfy employee benefit obligations under current pension regulations. The most recent funding
actuarial valuation for the Trust's defined benefit plans was completed as at January 1, 2016, and the next valuation is scheduled
for January 1, 2019.
The fair value of the registered plan assets as at December 31, 2017 is $3.4 million (December 31, 2016 - $2.8 million). The
recognized pension obligation (net of plan assets) as at December 31, 2017 is $14.2 million (December 31, 2016 - $12.8 million).
Pension costs, net of recoveries, of $0.4 million were recorded in net income for the year ended December 31, 2017 (pension
costs for the year ended December 31, 2016 - $0.5 million).
The discount rate used was 3.4% (December 31, 2016 - 3.8%), the compensation growth rate was 4.0% (December 31, 2016 -
4.0%) and the expected long-term rate of return on assets was 3.4% (December 31, 2016 - 3.8%).
Actuarial gains and losses for the defined benefit plans are recognized in full in the period in which they occur in OCI. Such
actuarial gains and losses are also immediately recognized in retained earnings and are not reclassified to income in subsequent
periods.
33. SEGMENTED INFORMATION
RioCan primarily owns, develops, manages and operates grocery-anchored retail centres and mixed-use developments located
in Canada. In measuring the performance of its retail centres, the Trust does not distinguish or group its operations on a
geographical or any other basis and, accordingly, has a single reportable segment. Management has applied judgment by
aggregating its operating segments into one reportable segment for disclosure purposes. Such judgment considers the nature of
property operations, tenant mix and an expectation that operating segments within a reportable segment have similar long-term
economic characteristics.
The Trust's Chief Executive Officer is the chief operating decision maker and regularly reviews RioCan's operations and
performance on an individual property basis. RioCan does not have any single major tenant or a significant group of tenants.
34. CONTINGENCIES AND OTHER COMMITMENTS
Third-party guarantees
The maximum exposure to credit risk relating to a guarantee is the maximum risk of loss if there was a total default by the co-
owner, without consideration of recoveries under recourse provisions against such co-owner's equity in the property or other
assets of the co-owner.
As at December 31, 2017, the maximum exposure to credit loss as a result of debt guaranteed by RioCan is $385.0 million, which
expires between 2018 and 2034, which includes guarantees of $348.9 million on behalf of co-owners (December 31, 2016 -
$340.9 million). $36.1 million of debt guaranteed by RioCan relates to the assumption of mortgages on property dispositions
(December 31, 2016 - $86.8 million). There have been no defaults by the primary obligors for debts on which the Trust has
provided its guarantees, and as a result, no provision for these guarantees has been recognized in the Consolidated Financial
Statements.
Letters of credit
The Trust has aggregate letter of credit facilities with certain Schedule I banks totalling $79.0 million (December 31, 2016 -
$80.5 million). As at December 31, 2017, the Trust’s outstanding letters of credit under these facilities was $37.2 million
(December 31, 2016 - $28.9 million).
Lease commitments – Trust as lessee
The Trust as lessee is committed under long-term operating leases with various expiry dates to 2088. Future minimum lease
payments are as follows:
Within 12 months
2 to 5 years
Over 5 years
Total
Investment commitments
RioCan HBC Joint Venture
December 31, 2017
Land
Leases
Operating
Leases
Total
Commitments
898 $
3,214
6,554
322 $
723
4
1,220
3,937
6,558
10,666 $
1,049 $
11,715
$
$
As at December 31, 2017, RioCan has approximately $150.0 million of remaining unfunded investment commitments related to
the RioCan-HBC JV (December 31, 2016 - $157.0 million). The remaining contribution commitments will be completed by the
third anniversary of the effective date of November 25, 2015.
144
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
RIOCAN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
WhiteCastle New Urban Funds (WNUF)
As at December 31, 2017, the Trust has total unfunded investment commitments of $83.9 million relating to WNUF 1, WNUF 2,
WNUF 3 and WNUF 4 (December 31, 2016 - $53.0 million). Amounts to be funded are callable by the general partner at any
point prior to the expiration of the investment period, which is February 28, 2018 for WNUF 1 and WNUF 2; May 1, 2020 for
WNUF 3; and September 15, 2027 for WNUF 4.
Litigation
The Trust is involved with litigation and claims that arise from time to time in the normal course of business. In the opinion of
management, any liability that may arise from such contingencies will not have a significant adverse effect on the Trust’s
Consolidated Financial Statements.
35. EVENTS AFTER THE BALANCE SHEET DATE
Debenture Issuance
On January 31, 2018, the Trust issued $300 million of Series AA senior unsecured debentures, which mature on September 29,
2023 and carry a coupon rate of 3.209%. The interest on these debentures is payable semi-annually commencing September 29,
2018. The debentures were sold at a price of $999.95 per $1,000 principal amount with an effective yield of 3.209% if held to
maturity. The Series AA debentures can be redeemed in whole or in part at par on or after August 29, 2023 prior to maturity.
Acquisitions and Dispositions
On January 9, 2018, the Trust acquired an income property in Whitby, Ontario for a purchase price of $31.1 million at a
capitalization rate of 6.16% with no assumption of debt.
On January 12, 2018, the Trust acquired the remaining one third interest in an existing income property in Ontario for a purchase
price of $18.5 million at a capitalization rate of 5.65% and assumed a mortgage with a fair value of $9.4 million.
On January 18 and 23, 2018, the Trust acquired three properties in Toronto for its Yorkville development project for a total
purchase price, including transaction costs, of $31.1 million with no assumption of debt.
On January 9, 2018, RioCan entered into a firm agreement to sell two income properties at a sale price of $85.0 million at a
weighted average capitalization rate of 5.45%, based on in-place net operating income, subject to customary closing conditions.
On the expected closing date, the buyer will assume the mortgage payable of $32.7 million and RioCan will provide a vendor
take-back mortgage of $7.5 million.
Subsequent to December 31, 2017, RioCan entered into a firm agreement to sell four income properties at a sale price of $216.9
million at a weighted average capitalization rate of 6.06%, subject to customary closing conditions. Mortgages payable of $67.5
million will be repaid upon expected deal closing in April 2018.
145
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2017
PAGE INTENTIONALLY BLANK
AUDITORS
Ernst & Young LLP
TRANSFER AGENT AND REGISTRAR
AST Trust Company (Canada)
P.O. Box Station B,
Montreal, Quebec H3B 3K3
Answerline: 1 (800) 387-0825 or
(416) 643-5500
Fax: 1 (800) 249-6189 or (514) 985-8843
Website: www.canstockta.com
Email: inquiries@canstockta.com
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Trading Symbols:
Common Units – REI.UN
ANNUAL MEETING
The 2018 Annual Meeting of RioCan REIT will be
held on May 29, 2018 at 10:00 a.m. at SilverCity
Theatres located at RioCan Yonge Eglinton
Centre, 2300 Yonge Street, Toronto, Ontario. All
unitholders are invited and encouraged to attend
in person or via webcast at www.riocan.com.
On peut obtenir une version française du présent
rapport annuel sur le site web de RioCan :
www.riocan.com.
A French language version of this annual report is
available on RioCan’s website:
www.riocan.com
BOARD OF TRUSTEES
1,2,3,4
Paul Godfrey, C.M., O.Ont.
(Chairman of Board of Trustees)
President and Chief Executive Officer
Postmedia Network Canada Corp.
3,4
Bonnie R. Brooks, C.M.
Chair, Liquor Control Board of Ontario
1,2
Clare R. Copeland
Vice-Chair, Falls Management Company
Dale H. Lastman
Chair and Partner, Goodmans LLP
2,3,4
Jane Marshall
Former Chief Operating Officer of
Choice Properties REIT
Sharon Sallows
Trustee, Chartwell Retirement Residences REIT
1,2,4
Edward Sonshine, O.Ont., Q.C.
Chief Executive Officer
RioCan Real Estate Investment Trust
3,4
Charles M. Winograd
President, Winograd Capital Inc.
1
Siim Vaneselja
Chair of the Audit Committee,
RioCan Real Estate Investment Trust
1 member of the Audit Committee
2 member of the Human Resources & Compensation
Committee
3 member of the Nominating & Governance Committee
4 member of the Investment Committee
UNITHOLDER INFORMATION
Head Office
RioCan Real Estate Investment Trust
RioCan Yonge Eglinton Centre,
2300 Yonge Street, Suite 500
P.O. Box 2386, Toronto, Ontario M4P 1E4
Tel: (416) 866-3033 or 1 (800) 465-2733
Fax: (416) 866-3020
Website: www.riocan.com
Email: inquiries@riocan.com
UNITHOLDER AND INVESTOR CONTACT
Christian Green
Assistant Vice President, Investor Relations &
Compliance
Tel: (416) 864-6483
Email: cgreen@riocan.com
CORPORATE INFORMATION
SENIOR MANAGEMENT
Edward Sonshine, O.Ont., Q.C.
Chief Executive Officer
Raghunath Davloor
President and Chief Operating Officer
Qi Tang
Senior Vice President and CFO
Jeff Ross
Senior Vice President, Leasing & Tenant Coordination
Danny Kissoon
Senior Vice President, Operations
Andrew Duncan
Senior Vice President, Developments
John Ballantyne
Senior Vice President, Asset Management
Jennifer Suess
Senior Vice President, General Counsel and
Corporate Secretary
Jonathan Gitlin
Senior Vice President, Investments & Residential
Terri Andrianopoulos
Vice President, Marketing & Communications
Moshe Batalion
Vice President, Leasing – Ontario
Stuart Baum
Vice President, Human Resources
Stuart Craig
Vice President, Planning & Development
Roberto DeBarros
Vice President, Construction
Anuska Grant
Vice President, Sustainability & Asset Efficiency
Oliver Harrison
Vice President, Asset Management
Frank Keller
Vice President, Leasing
Kevin Miller
Regional Vice President,
Operations – Western Canada
Pradeepa Nadarajah
Vice President, Property Accounting
Paran Namasivayam
Vice President, Recovery Accounting
Stephen Roberts
Vice President, Analytics
Tim Roos
Vice President, Operations
Franca Smith
Vice President, Finance
Jonathan Sonshine
Vice President, Asset Management
Jeffrey Stephenson
Vice President, Operations
Naftali Sturm
Vice President, Real Estate Finance
Kimberly Valliere
Vice President, Development Construction
Renato Vanin
Vice President, Information Technology
Jason Wong
Vice President, Corporate Tax
RIOCAN YONGE EGLINTON CENTRE
2300 Yonge Street
Suite 500
P.O. Box 2386
Toronto, Ontario
M4P IE4
T
TF
F
W
416 866 3033
1 800 465 2733
416 866 3020
www.riocan.com