A N N UA L R E P O R T 2 0 1 8
BUILDING ON
EXPERIENCE,
SHAPING
THE FUTURE
CORPORATE PROFILE
RioCan is one of Canada’s largest real estate investment trusts with a total enterprise
value of approximately $13.2 billion as at December 31, 2018. RioCan owns, manages
and develops retail-focused, increasingly mixed-use properties located in prime,
high-density transit-oriented areas where Canadians want to shop, live and work.
Our portfolio is comprised of 233 properties, including 16 development properties,
with an aggregate net leasable area of approximately 38.7 million square feet.
To learn more about how we deliver real vision on solid ground, visit www.riocan.com.
TABLE OF CONTENTS
IFC Contents & Profile
Strategic Canadian Major Market Positioning
1
CEO’s Letter to Unitholders
2
Yonge Eglinton Centre
6
eCentral
7
Frontier
8
9
Silver City Gloucester
10 Bathurst College Centre
12 RioCan Colossus Centre
13 Property Portfolio
22 Management’s Discussion and Analysis
98 Audited Annual Consolidated Financial Statements
IBC Corporate Information
S t r a t e g i c C a n a d i a n M a j o r M a r k e t P o s i t i o n i n g
VANCOUVER
7 ASSETS
1.8M SF
EDMONTON
12 ASSETS
1.7M SF
CALGARY
14 ASSETS
3.2M SF
MONTREAL
20 ASSETS
3.0M SF
OTTAWA
35 ASSETS
4.8M SF
TORONTO
83 ASSETS2
15.3M SF
K e y M e t r i c s i n C a n a d a ’ s S i x M a j o r M a r k e t s 3
171 ASSETS 1
29.8M SF
85.4% OF
ANNUALIZED
REVENUE
2.6% SPNOI
GROWTH
11M+ SF
ZONED FOR
DEVELOPMENT
97.7%
COMMITTED
OCCUPANCY
1. Excludes 16 active properties under development with 2.2M sf at RioCan’s interest
2. Excludes 12 active properties under development with 1.7M sf at RioCan’s interest
3. As of December 31, 2018
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
1
EDWARD SONSHINE, O.ONT., Q.C.
CHIEF EXECUTIVE OFFICER
Dear Unitholders,
2018 was an extraordinary year for RioCan as we celebrated our 25th Anniversary and continued to execute
on our strategic transformation. The quality of our portfolio and income has never been stronger than it
is now. We expect that prior to the end of 2019 we will reach two of our key strategic targets: specifically,
deriving 90% of our revenue from Canada’s six major markets (Toronto, Ottawa, Montreal, Vancouver,
Edmonton, and Calgary), and 50% of our total revenue from the Greater Toronto Area (GTA), the largest,
most prosperous and fastest growing area in this country.
To continue delivering long-term unitholder value, we remain focused on implementing a strategy
underpinned by four critical pillars:
• Strengthening our leading major market portfolio by concentrating on properties within
fast-growing, highly populated and high-income areas;
• Driving organic growth by evolving our tenant mix to stay ahead of changing consumer
trends and delivering operating efficiencies and ancillary revenue;
• Unlocking intrinsic value by bringing our major market assets to their highest and best use
by intensifying transit-oriented properties with mixed-use residential developments,
generating new sources of cash-flow and Net Asset Value (NAV) growth; and
• Managing risks effectively through diversification, an experienced leadership team, and the
strongest balance sheet in our sector.
As we celebrate our 25th Anniversary, we can look back on a successful and dynamic history, which has
driven RioCan to adapt and thrive in an ever-evolving environment by building upon our competitive
advantages of leadership team experience, leading major market portfolio, robust development pipeline and
a strong balance sheet. I would like to take you briefly through this journey to illustrate how RioCan’s past is
shaping our future.
2 RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
RioCan’s History
1993-1999 – Growth through Acquisition, Scale and Flexibility
We founded RioCan Real Estate Investment Trust (REIT) in 1993 in the wake of one of the worst real estate
recessions of our time. Our intent was to create and build a REIT that would stand the test of time through
fluctuating economic cycles and evolving market landscapes. From the outset, we built a leadership team with
strong skill sets in investments, leasing, and asset management with the aim of delivering long-term tenant
satisfaction and unitholder value.
In 1994, RioCan listed on the Toronto Stock Exchange and raised crucial capital to fuel a strategic
combination of growth from acquisitions, operational scale and financial flexibility, enabling us to focus
exclusively on the retail sector. From 1997, we identified and capitalized on the inherent value in retail
“Power Centres”. We strategically acquired signature properties such as Gloucester Silver City in Ottawa,
Ontario (which later became the site of one of our first residential rental developments) and Colossus Centre
in Vaughan, Ontario (a 60 acre site, rich in intensification opportunities due to its proximity to the recently
opened Vaughan Metropolitan Subway Station).
By the end of 1999, we had acquired RealFund, another of the first three Canadian REITs, which added
5 million square feet of space, nearly doubling our total portfolio size. This decision enabled us to establish
RioCan as Canada’s largest REIT and Power Centre owner with a distinctive foothold in major markets,
ultimately positioning the Trust for the future and creating a baseline for what eventually became a robust
development pipeline.
2000-2004 – Expanding and Adding Value
As we moved into the new millennium, we undertook our first exclusive partnership with Kimco Realty, and
expedited our growth through the joint acquisition of a portfolio with a fair value of approximately $2 billion
that would strengthen our balance sheet and simultaneously mitigate risk.
The Canadian suburbs expanded and RioCan shifted gears, strategically adapting to the evolving population
demographics and retail trends. We diversified our portfolio with developments that enabled us to build
assets from the ground up, which offered retailers greater customization and drove overall cost efficiencies.
To execute this strategy, we continued to acquire in partnership with Kimco, focusing on purchasing sought-
after land where retailers wanted to be, and then building developments to specification. In some cases, we
opportunistically bought troubled assets, turned them around and sold them at a substantial profit.
In parallel, the leadership team developed additional institutional partnerships to mitigate risk and grow. By
2004, our leadership team had expanded to include in-house development and project management capabilities.
2005-2017 – Strengthening our Major Market
Focus, Tenant Mix and Balance Sheet
A foundation of disciplined capital allocation
and astute strategic execution fortified RioCan
to weather the upcoming global financial crisis
and thrive on the valuable opportunities it
would unearth.
From 2005, having long-benefitted from its
robust and sustainable characteristics, RioCan
applied an even greater focus to Canada’s major
markets by strategically pruning our portfolio and
decreasing our exposure in secondary markets.
We also invested in mixed-use, transit-oriented
properties such as the iconic Yonge Eglinton
Centre and Yonge Sheppard Centre in Toronto.
In addition, we began to aggressively pursue
mixed-use zoning for our existing portfolio in
order to unlock its intrinsic value, giving us a ten-
year head start over our peers and translating to a
significant present day competitive advantage.
Rent Breakdown 2018
Entertainment & Hobby
nment & Hobb
3%
MMovie Theatres
5%
Department
Stores & Apparparel
9%
8%
since 2007
Grocery
27%
Personal
Services
21%
3%
since 2007
5%
since 2007
Furniture
& Home
10%
Specialty
Retailers
11%
Value
Retailers
14%
73% OF RENT FROM NECESSITY-BASED
AND SERVICE ORIENTED TENANTS
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
3
Our
Management
Team
Andrew Duncan
Senior Vice President,
Developments
John Ballantyne
Senior Vice President,
Asset Management
Oliver Harrison
Vice President,
National Operations
Jonathan Gitlin
President &
Chief Operating Officer
Qi Tang
Senior Vice President &
Chief Financial Officer
Jennifer Suess
Senior Vice President,
General Counsel &
Corporate Secretary
Edward Sonshine, O. Ont, Q.C.
Chief Executive Officer
Jeff Ross
Senior Vice President,
Leasing & Tenant
Coordination
Total Return to Unitholders
Assuming Distributions are Re-Invested
$1,043
$635
$359
$331
$172
$168
$825
$440
$295
$269
$166
$137
$1,000
$800
$600
$400
$200
$0
$100
$100
$100
FFO per Unit
g r o w t h r a t e :
3 . 6 %
C o m p o u n d a n n u a l
.
1
9
0
$
2
3
1
$
.
8
4
1
$
.
6
5
1
$
.
5
8
1
$
.
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
1998
2003
2008
2013
2018
1998
2003
2008
2013
2018
RioCan
S&P/TSX Capped REIT Index
S&P/TSX Composite Index
4 RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
South of the border, by 2009, the 2007-2008 financial crisis had
driven the U.S. into a recession resulting in a wealth of available,
undervalued assets. The Leadership Team made the strategic decision
to enter the U.S., eventually purchasing 49 retail properties across the
Northeastern States and Texas, prior to divesting all the U.S. assets
for $2 billion at a high point in the market in May 2016 and realizing a
substantial gain on the original investment. This strategic divestment
enabled RioCan to further strengthen our balance sheet and at the
same time focus exclusively on our Canadian assets and development
pipeline, which included buying out Kimco’s interest in our Canadian
major market assets by the end of 2016.
2018 and beyond – Building on our Strength and Vision to
Position RioCan to Thrive
RioCan is stronger than it has ever been, having developed and built
our competitive strengths through 25 years of combined leadership
experience, vision and discipline. A best-in-class balance sheet
enables RioCan to access a lower cost of debt compared to peers.
Strong operation, divestiture and development execution has
enabled us to accelerate our Canadian major market strategy with
the aim of reaching the target of 90% of our rental revenue from
the six major markets by the end of 2019.
Our development and intensification projects are progressing well.
Bathurst College Centre and King Portland Centre in Toronto
reached substantial completion in 2018, and both are fully leased
with high profile tenants. Pre-leasing of the office portion of The
Well, our highly anticipated mixed-use property in the heart of
downtown Toronto, has surpassed 70%, and retail leasing will
commence in 2019.
RioCan has 2,100 residential units currently under construction in
Toronto, Ottawa and Calgary and an additional 2,200 residential
units will be underway by 2021. Rental residential leasing of eCentral
(Toronto) and Frontier (Ottawa) commenced in late 2018, and is
progressing well.
Our current 26.2 million square feet of development pipeline provides
substantial value-add opportunities with approximately 43% of the
pipeline having already received zoning approval, which is particularly
valuable as changes in Ontario’s zoning approval process has led
to longer wait times and more uncertainty. 25 years of experience,
continuous strengthening of our major market portfolio and our
strong balance sheet enables us to continue to drive organic growth,
unlock the value inherent in this development pipeline and drive cash
flow and unitholder value growth.
As we look forward with great excitement to where the next
25 years will take us, RioCan is financially strong, strategically
structured and well positioned to consistently deliver long-term
growth and unitholder returns.
Thank you for your continued support and confidence in RioCan.
Edward Sonshine O.Ont., Q.C.
Chief Executive Officer
RioCan Real Estate Investment Trust
DEVELOPMENT
PIPELINE
26.2M SF
development pipeline
11.2M SF
with zoning approved
100%
located in Canada’s six major
markets
2,100
residential units under
construction with an
additional 2,200 residential
units underway by 2021
DEVELOPMENT
RECENTLY OR
NEARLY COMPLETED
Total project costs:
$574M
Estimated development yield:
5.7%
Estimated value creation:
$231M
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
5
TR ANSF ORMING THE I NTERSE CTIO N
Acquired in 2007, and
subsequently renovated and
strategically remerchandised
with a tenant mix curated
to meet the needs of the
community, Yonge Eglinton
Centre demonstrates RioCan’s
ability to drive organic growth
and unlock intrinsic value within
Canada’s major markets.
Demand in the iconic location
has driven a per square foot rent
increase of nearly 60% for office
space and 55% for retail since
2007. Yonge Eglinton Centre
has delivered approximately
$306M in value creation (a 92%
increase) since acquisition.
Yonge Eglinton Centre
Located at the intersection
of the Yonge subway line and
the future Eglinton Crosstown
LRT, Yonge Eglinton Centre
is one of midtown Toronto’s
busiest shopping centres. With
more than four million visitors
annually, the mixed-use centre
is an integral part of the thriving,
growing community.
6 RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
E g l
W
i n t o n A v e .
E g l
Y
o
n
g
e
S
t
.
L
i
n
e
1
Y
o
n
g
e
/
U
n
i
v
e
r
s
i
t
y
S
u
b
w
a
y
i n t o n C r o s s t o w n L R T
E g l i n t o n S u b w a y
i o n
S t a t
e2 Condos
e8 Condos
& ePlace
Retail
E
i n t o n A v e .
E g l
EGLINTON STATION
N
O F YO N G E A N D E G L I N TO N
eCentral
eCentral is a prototypical
RioCan LivingTM development
with an emphasis on
design, quality, professional
management, retail integration
and access to transit. eCentral
is a 36-storey, 466 unit rental
residential building, adjacent
to eCondo, a newly completed
58-storey, 623 unit, fully sold-
out condominium tower.
Located next to three storeys
of retail in ePlace and across
the street from Yonge Eglinton
Centre, the newly built eCentral
is perfectly situated with direct
underground access to the
Yonge/University subway line and
the future Eglinton Crosstown LRT.
Residential rental leasing
commenced at eCentral late
in 2018 and is progressing well,
demonstrating the effectiveness
of RioCan’s leadership and
development capability.
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
7
U NLO CKING INTRI NSIC VALUE
Frontier
Frontier is a newly constructed,
23-storey, 228-unit rental
residential building located in
Gloucester, Ottawa. Frontier is
a 50% joint venture with Killam
Apartment REIT. With zoning
approved for up to 840 units
on the site, Frontier is the first
residence in a planned four-
phase community. Residential
rental leasing commenced at
the development late in 2018
and is progressing well.
8 RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
Frontier is adjacent to the
new Confederation LRT line
at the Blair station in Ottawa
and represents RioCan’s
development expertise and skill
in unlocking the intrinsic value
of its portfolio. The land was
transitioned from 77,000 square
feet of struggling fashion retail
to a desirable rental residential
development.
IN TH E OTTAWA MARKET
S H O P P I N G, L I V I N G A N D WO R K I N G
SILVER CITY GLOUCESTER
FRONTIER, PHASE 1
SILVER CITY GLOUCESTER
Silver City Gloucester
Frontier is located on a 7.1
acre portion of RioCan’s Silver
City Gloucester shopping
centre property. Retail
integration is central to all
RioCan LivingTM projects
and the shopping centre will
provide Frontier residents
with convenient access to a
compelling and diverse
tenant mix including retail
and services such as Cineplex
theatre, Chapters, GoodLife
Fitness and restaurants.
The newly constructed
Confederation LRT transit
line, combined with the
residents of the four-phase
Frontier community, will
provide additional foot traffic
to the Silver City shopping
centre. This increase in
population density will serve
to drive long-term FFO growth
for the property.
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
9
DELIVERING MIXED-USE
Bathurst College
Centre
Bathurst College Centre is
a newly completed, four-
storey, commercial mixed-
use development located
on Bathurst Street between
Dundas and College in Toronto.
RioCan purchased the land in
2011 and worked closely with
the city and community to
ensure Bathurst College Centre
10 RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
is an integral contributor to the
area in which it operates. The
property is virtually fully leased
to high-profile retail tenants led
by FreshCo. (Sobeys), Winners
and Scotiabank. The nearly
70,000 square feet of office
space is leased to University
Health Network and Uber
Advanced Technologies Group’s
research and development lab.
DEVELOPMENT IN TORONTO
Bathurst College
Centre
RioCan’s ability to deliver and
fully lease this development
to high-calibre retail and
office tenants reflects the
sophistication and expertise of
our Development and Leasing
teams, the value of this urban
mixed-use property, and the
quality of our development
pipeline and overall portfolio.
RioCan is confident the property
will deliver returns in the upper
end of the targeted range we
require for all our developments.
Bathurst College Centre is a
perfect example of RioCan’s
major market strategy coming to
life with the delivery of mixed-
use development that will drive
unitholder value and serve the
needs of the community long
into the future.
RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
11
INCREDIBLE INTRINSIC VALUE IN THE GTA
VAUGHAN METROPLITAN SUBWAY
RioCan COLOSSUS
RIOCAN COLOSSUS CENTRE
Colossus Centre
At the crossroads of Hwy 400/
Hwy 407/Hwy 7 and Weston
Road in Vaughan, Ontario, and
with the newly constructed
TTC subway stop (Vaughan
Metropolitan Station) minutes
away, Colossus Centre is located
in one of the fastest growing
areas in the region. The tenant
mix has been adapted to
shifting population and retail
trends. Powerful draws include
Cineplex Colossus, and leading
retailers such as Costco,
HomeSense, buy buy Baby,
PetSmart and a compelling
range of national restaurants.
Purchased in 1998, the
approximately 60-acre site
has 98% occupancy and
consistently delivers strong
Same Property Net Operating
Income (SPNOI) growth. Its
prime location and proximity
to transit makes Colossus
Centre an excellent example of
the intrinsic value inherent in
RioCan’s portfolio, which can
be strategically unlocked with
mixed-use development.
12 RIOCAN REAL ESTATE
INVESTMENT TRUST
ANNUAL REPORT
2018
PROPERTY PORTFOLIO
CANADA
ALBERTA
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 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
292,455
292,455 Bed Bath & Beyond, Buy Buy Baby, London
Drugs, Safeway, Ashley Home Furniture
East Hills, Calgary, AB
40%
156,075
550,187 Walmart, Cineplex, Sport Chek, Bed Bath &
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
40%
50%
100%
100%
100%
100%
100%
50%
40%
127,518
370,406 Walmart, Golf Town, Totem Building Supplies*
Beyond, Michaels, Marshalls, Costco*
73,030
146,060 Safeway
91,063
146,063 London Drugs, Safeway*
76,651
76,651 Fit For Less
284,731
284,731 Walmart, Shoppers Drug Mart
213,100
213,100 Lowe’s, GoodLife Fitness, Golf Town
50,669
207,487
184,361
50,669 Shoppers Drug Mart
414,973 Winners, Save-On-Foods, JYSK, Value Village
457,019 Safeway (Co-op), Canadian Tire,
GoodLife Fitness, Shoppers Drug Mart
North Edmonton Cineplex Centre
Edmonton, AB
Northgate Village Shopping Centre
Calgary, AB
100%
75,836
75,836 Cineplex
100%
268,914
396,004 Safeway, Gold's Gym, JYSK, Staples,
Home Depot*
RioCan Beacon Hill, Calgary, AB
100%
527,815
787,189 Canadian Tire, Winners, The Brick, Best Buy,
GoodLife Fitness, Sport Chek, PetSmart,
Michaels, Mark’s Work Wearhouse,
Home Depot*, Costco*
RioCan Centre Grande Prairie
Grande Prairie, AB
100%
279,984
379,984 Rona, Cineplex Odeon, London Drugs, Staples,
Michaels, JYSK, Walmart*
RioCan Meadows, Edmonton, AB
100%
323,884
423,884 Home Depot, Staples, Winners, Best Buy,
PetSmart, Loblaws*
RioCan Shawnessy, Calgary, AB
100%
470,460
841,105 Lowe’s, Sport Chek, Winners, Staples, Michaels,
Best Buy, Home Depot*, Walmart*, Co-op*,
Canadian Tire*
RioCan Signal Hill Centre, Calgary, AB
100%
477,125
592,125 Lowe’s, Winners, Indigo, Michaels, Staples,
Riverbend Square Shopping Centre
Edmonton, AB
100%
138,654
138,654 Safeway
Loblaws*
Sage Hill, Calgary, AB
50%
188,019
376,037 Walmart, Loblaws City Market, London Drugs ,
Liquor Depot
13
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
PROPERTY PORTFOLIO
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 Major or Anchor Tenants
Southbank Centre, Calgary, AB
75%
108,910
421,227 Winners, GoodLife Fitness, 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*
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%
83,990
83,990 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
Grandview Corners, Surrey, BC
Impact Plaza, Surrey, BC
Parkwood Place, Prince George, BC
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
529,289
614,289 Walmart, Best Buy, Indigo, The Brick,
134,584
134,584 T&T Supermarket
Home Depot*
370,250
370,250 Save-On–Foods, Hudson’s Bay, London Drugs,
Cineplex, Staples
RioCan Langley Centre, Langley, BC
100%
380,088
380,088 Leon’s, Winners, HomeSense, Chapters,
Michaels, Marshalls, PetSmart,
Mark’s Work Wearhouse
Strawberry Hill Shopping Centre, Surrey, BC
100%
337,846
337,846 Home Depot, Cineplex, Winners, PetSmart,
Tillicum Centre, Victoria, BC
100%
475,821
Sport Chek
475,821 Lowe’s, Cineplex, London Drugs, Winners,
Save-On–Foods, Home Outfitters
MANITOBA
Garden City, Winnipeg, MB
30%
113,923
379,743 Canadian Tire, Winners, Seafood City, Michaels,
100%
179,027
179,027 Safeway, PetSmart
GoodLife Fitness
Kildonan Crossing Shopping Centre
Winnipeg, MB
NEW BRUNSWICK
Corbett Centre, Fredericton, NB
100%
237,287
457,287 Winners, Michaels, Bed Bath & Beyond,
Princess Auto, Home Depot*, Costco*
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
14
PROPERTY PORTFOLIO
NEWFOUNDLAND
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 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%
181,635
181,635 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
491 College Street, Toronto, ON
555-563 College Street, Toronto, ON
642 King Street West, Toronto, ON
649 Queen Street West, Toronto, ON
6666 Lundy’s Lane, Niagara Falls, ON
Ajax Marketplace, Ajax, ON
Albion Centre, Etobicoke, ON
Bathurst College Centre, Toronto, ON
Belleville Stream Centre, Belleville, ON
BMO-1293 Bloor Street West, Toronto, ON
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
50%
50%
100%
100%
100%
100%
100%
100%
100%
BMO-145 Woodbridge Avenue, Vaughan, ON
100%
BMO-1556 Bank Street, Ottawa, ON
BMO-519 Brant Street, Burlington, ON
BMO-945 Smyth Road, Ottawa, ON
Burlington
Centre
, Burlington, ON
100%
100%
100%
50%
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, National Gym Clothing,
Shoppers Drug Mart
12,231
26,960
12,312
14,200
8,434
70,724
24,461
53,920
24,624
14,200 CB2
8,434
70,724 Metro, Pharma Plus
376,279
376,279 Canadian Tire, No Frills
9,092
9,092 Freshco, Winners, UHN, Uber
89,237
89,237 Stream International
5,683
4,973
4,835
5,190
8,532
300,416
5,683
4,973
4,835
5,190
8,532
713,984 Canadian Tire, Winners, HomeSense, Indigo,
Denninger’s, Sport Chek, GoodLife Fitness,
The Bay*
Cambrian Mall, Sault Ste. Marie, ON
100%
134,807
316,638 Winners, Shoppers Drug Mart, Canadian Tire*,
Loblaws*
Chapman Mills Marketplace, Ottawa, ON
100%
451,673
566,673 Walmart, Winners, Staples, Indigo,
Galaxy Cinemas (Cineplex), Loblaws*
15
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
PROPERTY PORTFOLIO
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 Major or Anchor Tenants
Cherry Hill Centre, Fergus, ON
Clarkson Crossing, Mississauga, ON
Clarkson Village Shopping Centre
Mississauga, ON
Colborne Place, Brantford, ON
Coliseum Ottawa, Ottawa, 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%
50%
100%
100%
100%
Fallingbrook Shopping Centre, Orleans, ON
100%
73,886
73,886 Zehrs
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
70,100
97,885
70,100 Staples
97,885 Staples, Bad Boy, Starsky Foods
175,427
175,427 Yummy Market
81,487
162,974 No Frills
146,699
146,699 Loblaws, Pharma Plus
179,439
237,439 Cineplex, Best Buy, Loblaws*
8,322
97,145
8,322
97,145 Metro, Shoppers Drug Mart
Five Points Shopping Centre, Oshawa, ON
Frontenac Mall, Kingston, ON
Galaxy Centre, Owen Sound, ON
Garrard & Taunton, Whitby, ON
Glendale Marketplace, Pickering, ON
Goderich Walmart Centre, Goderich, ON
Grant Crossing, Ottawa, ON
100%
30%
100%
100%
100%
100%
100%
190,286
190,286 A&P, LA Fitness, JYSK, Value Village
84,064
280,214 Food Basics, Value Village, Boys and Girls Club
of Kingston
91,563
91,563 No Frills, Galaxy Cinemas (Cineplex)
146,835
146,835 Lowe's
53,963
94,283
237,405
53,963 Loblaws, Pharma Plus
202,859 Walmart, Canadian Tire*, Zehrs*
365,345 Winners, HomeSense, Michaels, Bed Bath &
Beyond, Value Village, JYSK, Lowe’s*
Green Lane Centre, Newmarket, ON
100%
160,225
417,668 Bed Bath & Beyond, Michaels, PetSmart,
Halton Hills Shopping Plaza
Georgetown, ON
Hamilton Highbury Plaza, London, ON
Hamilton Walmart Centre, Hamilton, 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 (Lowe’s), 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
100%
73,030
73,030 Food Basics
Costco*, Loblaws*
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
5,269
5,269
325,426
123,572
139,939
70,981
67,186
425,426 Walmart, Winners, Staples, Canadian Tire*
123,572 Metro
139,939 Metro, GoodLife Fitness, PetSmart
70,981 LA Fitness (dark)
67,186 Metro
143,815
143,815 Lowe’s
87,969
47,512
87,969 Talize, Shoppers Drug Mart
167,512 PetSmart, Costco*
286,348
386,348 Walmart, Chapters, Loblaws
158,688
195,767
158,688 FreshCo., Value Village, Shoppers Drug Mart
472,534 Metro, The Brick, LA Fitness, Chapters,
Michaels, Ashley Furniture
16
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
PROPERTY PORTFOLIO
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 Major or Anchor Tenants
Keswick Walmart, Keswick, ON
King & Portland, Toronto, ON
75%
50%
120,363
160,484 Walmart
27,364
54,728
Lawrence Square, Toronto, ON
100%
663,345
663,345 Fortino’s, Canadian Tire, Marshalls, HomeSense,
PetSmart, Hudson’s Bay Company (office)
Lincoln Fields Shopping Centre, Ottawa, ON
100%
129,434
129,434 Metro
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
Niagara Falls Plaza, Niagara Falls, ON
Niagara Square, Niagara Falls, ON
Pine Plaza, Sault Ste. Marie, ON
Queensway Cineplex, Toronto, ON
RioCan Centre Barrie, Barrie, ON
RioCan Centre Belcourt, Orleans, ON
RioCan Centre Burloak, Oakville, ON
RioCan Centre Kingston, Kingston, ON
RioCan Centre Merivale, Nepean, ON
RioCan Centre Milton, Milton, ON
100%
100%
100%
75%
50%
100%
100%
30%
100%
50%
100%
100%
100%
100%
100%
100%
173,029
173,029 Metro, GoodLife Fitness, City of Toronto
111,762
145,605
111,762 Sobeys, GoodLife Fitness
589,209 Best Buy, Sport Chek, Michaels, PetSmart,
Costco*, Home Depot*, Sobeys*, Staples*
59,136
78,848 Food Basics, Shoppers Drug Mart
151,994
356,219 A&P, Movati Athletic, Value Village,
Canadian Tire*
175,672
175,672 FreshCo., Talize, LA Fitness
79,562
68,098
42,455
61,488
79,562 LA Fitness, Lee Valley Tools
226,993 Cineplex, Winners, Michaels, JYSK, World Gym,
The Brick
42,455 Food Basics
122,976 Cineplex
244,589
244,589 Loblaws, Lowe’s, Mountain Equipment Co-op
260,615
402,989 Food Basics, Movati Athletic, Landmark
Cinemas, Toys R Us, Lowe’s*
454,623
552,623 Cineplex, Home Outfitters, Longo's, Home Depot*
635,037
756,082 Cineplex, Staples, Winners, HomeSense,
Michaels, Best Buy, The Brick, Home Outfitters,
Bed Bath & Beyond, Old Navy, Home Depot*
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
100%
100%
262,336
262,336 Walmart
Costco*, Home Depot*
239,420
349,420 Cineplex, Giant Tiger, The Brick, PetSmart,
Staples, Costco*
RioCan Colossus Centre, Vaughan, ON
100%
570,574
700,574 Cineplex, Marshalls, Bed Bath & Beyond,
RioCan Durham Centre, Ajax, ON
100%
891,888
HomeSense, Buy Buy Baby, Staples, Golf Town,
Costco*
1,272,888 Walmart, Canadian Tire, Cineplex, Marshalls,
Winners, HomeSense, Sport Chek, Chapters,
Michaels, Value Village, DSW, Home Depot*,
Loblaws*, Costco*
RioCan Elgin Mills Crossing
Richmond Hill, ON
100%
320,325
441,325 Costco, Michaels, PetSmart, Staples,
Home Depot*
17
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
PROPERTY PORTFOLIO
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 Major or Anchor Tenants
RioCan Georgian Mall, Barrie, ON
50%
244,038
604,590 Hudson’s Bay, Sport Chek, HomeSense, H&M,
RioCan Grand Park, Mississauga, ON
RioCan Gravenhurst, Gravenhurst, ON
RioCan Hall, Toronto, 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
F21 Red
100%
100%
100%
100%
67%
100%
50%
100%
100%
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
133,035
133,035 Canadian Tire, PetSmart
114,298
447,429 Winners, Loblaws*, Home Depot*
71,582
170,157 Loblaws, Home Depot*
231,007
462,014 Hudson’s Bay, GoodLife Fitness, Buy Buy Baby,
H&M, PetSmart, Sport Chek,
Shoppers Drug Mart
182,251
297,251 Metro, JYSK, Staples, Home Depot*
57,791
131,791 Giant Tiger, No Frills*
RioCan Scarborough Centre, Scarborough, ON 100%
326,823
326,823 Costco, PetSmart, Staples, LA Fitness,
Al’s Premium Food Market
RioCan St. Laurent, Ottawa, ON
100%
299,463
299,463 Adonis, Decathlon, Giant Tiger, Winners,
Food Basics
RioCan Thickson Ridge, Whitby, ON
100%
472,646
602,646 Winners, Ikea, JYSK, Bed Bath & Beyond,
RioCan Warden, Scarborough, ON
RioCan West Ridge Place, Orillia, ON
100%
100%
230,974
148,761
HomeSense, PetSmart, Best Buy, Michaels,
DSW, Golf Town, Buy Buy Baby, Home Depot*
230,974 Lowe’s, Marshalls, Michaels
319,197 Galaxy Cinemas (Cineplex), Sport Chek,
Value Village, Home Depot*, Food Basics*
RioCan Yonge Eglinton Centre, Toronto, ON
100%
1,058,646
1,058,646 Cineplex, Indigo, Metro, Toys R Us,
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
Winners
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 Metro, Shoppers Drug Mart
140,370
140,370 No Frills, Winners, HomeSense
91,684
91,684 Value Village
Sheppard Centre, Toronto, ON
50%
246,715
493,429 Longo’s, LA Fitness, Winners,
Shoppers Drug Mart, BMO (office)
Sherwood Forest Mall, London, ON
100%
218,758
218,758 Metro, Goodwill, Shoppers Drug Mart,
Shoppers City East, Ottawa, ON
Shoppers World Brampton, Brampton, ON
82.8%
100%
34,368
692,019
GoodLife Fitness
41,507 Shoppers Drug Mart
692,019 Canadian Tire, Winners, Staples, Oceans,
Medix School, JYSK, Bad Boy, Giant Tiger,
GoodLife Fitness, Kitchen Stuff Plus
Shoppers World Danforth, Toronto, ON
Shoppes on Avenue, Toronto, ON
Shoppes on Queen West, Toronto, ON
Silver City Gloucester, Gloucester, ON
100%
100%
100%
100%
326,303
326,303 Lowe’s, Metro, LA Fitness, Staples
20,884
89,419
20,884 Ambrosia
89,419 Loblaws, Winners
145,468
145,468 Cineplex, Chapters, GoodLife Fitness
18
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
PROPERTY PORTFOLIO
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 Major or Anchor Tenants
Silver City Gloucester II (Frontier)
Gloucester, ON
South Cambridge Shopping Centre
Cambridge, ON
South Hamilton Square, Hamilton, ON
Southgate Shopping Centre, Ottawa, ON
Spring Farm Marketplace, Vaughan, ON
Stratford Centre, Stratford, ON
Sunnybrook Plaza, Toronto, ON
Tanger Outlets Cookstown, Cookstown, ON
50%
2,570
5,140
100%
189,739
189,739 Zehrs, Home Hardware
100%
100%
100%
100%
50%
50%
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 Food Basics, Michaels, World Gym, Value Village
21,560
43,120 Pharma Plus
155,181
310,362 H&M, Under Armour, Coach, Tommy Hilfiger,
Nike, Polo
Tanger Outlets Ottawa, Ottawa, ON
50%
170,269
The Stockyards, Toronto, ON
50%
254,920
The Shops of Summerhill, Toronto, ON
Timiskaming Square, New Liskeard, ON
Timmins Square, Timmins, ON
Trafalgar Ridge Shopping Centre
Oakville, ON
75%
50%
30%
100%
23,115
47,697
117,140
131,250
340,537 Polo, Old Navy, Nike, Saks Fifth Avenue,
Under Armour, Coach, Marshalls
509,839 Nations, Winners, Best Buy, Sport Chek,
HomeSense, Michaels, PetSmart
30,820
95,394 Food Basics
390,468 No Frills, Winners, Sport Chek, Urban Planet
131,250 HomeSense, GoodLife Fitness
Trinity Common Brampton, Brampton, ON
100%
615,090
830,090 Cineplex, Metro, Winners, Marshalls,
HomeSense, Staples, Sport Chek, Michaels,
DSW, Canadian Tire*, Home Depot*
371,465 Winners, Michaels, Value Village, Loblaws*
185,792 Canadian Tire, Shoppers Drug Mart
76,698 FreshCo.
191,465
185,792
76,698
127,270
127,270 Metro, Best Buy, HomeSense
69,844
39,768
69,844 FreshCo.
39,768
165,660
165,660 Shoppers Drug Mart
148,766
145,401
6,862
8,352
148,766 Lone Thai Supermarket
145,401 Food Basics, Bad Boy
13,723
16,703
Trinity Crossing, Ottawa, ON
University Plaza, Dundas, ON
Victoria Crossing, Scarborough, ON
Viewmount Centre, Ottawa, ON
Walker Place, Burlington, ON
Walker Towne Centre, Windsor, ON
Westgate Shopping Centre, Ottawa, 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%
50%
50%
PRINCE EDWARD ISLAND
Charlottetown Mall, Charlottetown, PEI
100%
355,091
355,091 Cineplex, Loblaws, Sport Chek, Winners,
West Royalty Fitness, Urban Planet, H&M
19
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
PROPERTY PORTFOLIO
QUEBEC
As at December 31, 2018
Ownership
RioCan’s
Interest Interests
Total Site
Property and Location
(%) NLA (sq. ft.) NLA (sq. ft.)1 Major or Anchor Tenants
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 Pierrefonds
Pierrefonds, 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
Galeries Laurentides, St. Antoine, PQ
Galeries Mille-Iles, Rosemere, PQ
Les Factories Tanger Bromont
Bromont, PQ
Les Factories Tanger St. Sauveur
Prevost, PQ
Les Galeries Lachine, Montreal, PQ
Mega Centre Notre Dame / Desserte Ouest
Sainte Dorothée, 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
Silver City Hull, Hull, PQ
Vaudreuil Shopping Centre
Vaudreuil-Dorion, PQ
100%
100%
2,259
2,584
2,259
2,584
100%
5,015
5,015
100%
100%
50%
50%
100%
100%
100%
50%
100%
100%
100%
50%
208,185
129,472
31,649
37,513
319,445
106,329
104,280
30,389
248,963
131,853
252,450
208,185 Super C, L’Aubainerie
129,472 Super C, Dollarama
63,298 IGA
75,025 IGA
319,445 Cineplex, Winners
106,329 IGA
104,280 IGA
60,778 IGA
248,963 Provigo, Giant Tiger, World Gym
131,853 Hydro Quebec
252,450 Maxi, World Gym, Leon’s, Staples
81,187
162,373 Atmosphere, Reebok
50%
56,996
113,992 Tommy Hilfiger, Atmosphere
100%
100%
167,383
508,630
167,383 Maxi, Rossy, Shoppers Drug Mart
570,528 Winners, L’Aubainerie, Sky Zone, Sports Experts,
Staples, JYSK, Gold’s Gym, Shoppers Drug Mart*,
Super C*
100%
100%
100%
100%
50%
100%
100%
112,404
181,178
300,007
352,297
112,404 Adonis
181,178 Maxi, Winners, Rossy
300,007 Walmart, Canadian Tire, Super C
352,297 Maxi, Winners, Staples, Guzzo Cinemas, JYSK,
Giant Tiger
35,467
70,934 IGA
372,883
372,883 Walmart, Winners, Michaels
84,590
499,775 Cineplex, Rona*, Walmart*, Maxi*,
Super C*, Winners*
100%
117,773
228,273 Staples, Canadian Tire*, Super C*
*Non-owned anchor
1 Total site NLA (net leasable area) includes RioCan’s and partner’s ownership interests and estimates for non-owned anchors.
20
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
REAL ESTATE PORTFOLIO KEY FACTS as at December 31, 2018 (all metrics stated at RioCan's interest)
Net Leasable Area (NLA) (thousands of sq.ft.):
Income Producing Properties (i)
Properties Under Development (ii)
Total NLA
(i)
(ii)
Retail
34,651
765
35,416
Office
Total Commercial Residential Rental (iii)
1,830
709
2,539
36,481
1,474
37,955
—
726
726
Total
36,481
2,200
38,681
Includes NLA which has a rent commencement date on or before December 31, 2018.
Includes the NLA only for active projects with detailed costs estimates, but excludes NLA for air rights sales and condominium/townhouse developments (residential inventory).
Includes completed Properties Under Development NLA that have a rent commencement date after December 31, 2018.
(iii) Residential rental NLA represents RioCan's share of NLA in approximately 2,100 rental units.
Occupancy (commercial only)
Committed Occupancy
In-Place Occupancy
Average Net Rent per Occupied Square Foot
Six Major Markets and Greater Toronto Area (commercial only)
Six Major Markets (i)
Committed Occupancy
In-Place Occupancy
% of total annualized rental revenue
% of total NLA
Greater Toronto Area (ii)
Committed Occupancy
In-Place Occupancy
% of total annualized rental revenue
% of total NLA
Retail
97.2%
96.2%
19.26
$
Office
Total Commercial
94.4%
93.0%
15.25
$
97.1%
96.1%
19.07
$
Retail
98.0%
96.9%
79.7%
77.3%
98.3%
97.3%
41.6%
38.0%
Office
93.9%
92.2%
5.7%
4.4%
94.4%
92.8%
5.2%
3.9%
Total Commercial
97.7%
96.7%
85.4%
81.7%
98.0%
96.9%
46.8%
41.9%
The six Canadian major markets include Calgary, AB; Edmonton, AB; Montreal, QC; Ottawa, ON (includes Gatineau region); Greater Toronto Area (GTA), ON; and Vancouver, BC.
(i)
(ii) GTA extends north to Barrie, ON; west to Hamilton, ON; and east to Oshawa, ON. This definition was extended from Burlington to Hamilton effective January 1, 2018.
Geographic Diversification
Income producing properties
Number of properties
NLA at RioCan's Interest
(thousands of sq.ft.)
Percentage of annualized
rental revenue
Income producing
properties
Properties under
development (i)
Total
Greater Toronto Area
Ottawa
Calgary
Montreal
Vancouver
Edmonton
Total Six Major Markets
Total Secondary Markets
Total Portfolio
(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
46.8%
13.0%
9.5%
5.5%
5.1%
5.5%
85.4%
14.6%
100.0%
15,295
4,820
3,220
2,951
1,791
1,738
29,815
6,666
36,481
83
35
14
20
7
12
171
46
217
12
1
3
—
—
—
16
—
16
95
36
17
20
7
12
187
46
233
section of this MD&A. Therefore, the number of projects should not be viewed as equivalent to number of properties under development.
Top Ten Sources of Revenue by Property Tenant (commercial only)
Rank
Tenant
1
2
3
4
5
6
7
8
9
10
Loblaws/Shoppers Drug Mart (i)
Canadian Tire Corporation (ii)
Cineplex/Galaxy Cinemas
The TJX Companies, Inc. (iii)
Metro/Super C/Loeb/Food Basics
Walmart
Sobeys/Safeway
Recipe Unlimited (iv)
Lowe's
Dollarama
Percentage of
annualized rental revenue
Weighted average remaining
lease term (yrs)
4.5%
4.2%
4.2%
4.1%
2.8%
2.7%
1.7%
1.6%
1.6%
1.5%
28.9%
7.9
6.0
8.0
6.1
7.4
9.3
8.0
7.4
9.9
5.4
7.4
Loblaws/Shoppers Drug Mart includes No Frills, Fortinos, Zehrs Markets, Joe Fresh, Dominion and Maxi.
Canadian Tire Corporation includes Canadian Tire, PartSource, Mark’s, Sport Chek, Sports Experts, National Sports and Atmosphere.
The TJX Companies, Inc. includes Winners, HomeSense and Marshalls.
(i)
(ii)
(iii)
(iv) Formerly Cara Operations Limited.
Property Lease Expiries and Contractual Rent Increases (commercial only)
2023
4,423
NLA (thousands of sq.ft.)
20.13
Average expiring rent per square foot
3,671
Contractual rent increases (in thousands of dollars) (i)
(i) Contractual rent increases are based on existing leases as of December 31, 2018 and are on a year-over-year incremental basis. The contractual rent increases are higher in 2019
as they reflect more market rents as a result of new leasing and renewals completed in 2018. 2020 contractual rent increases are additional increases over 2019 rent increases, etc.
2019
3,038
19.69
8,864
2020
4,071
19.47
5,237
2021
4,548
18.86
4,874
2022
3,614
21.26
4,481
Total
36,481
19.07
$
$
$
$
$
$
$
$
$
$
$
RioCan
FINANCIAL REVIEW
MANAGEMENT’S DISCUSSION
AND ANALYSIS
TABLE OF CONTENTS
Management’s Discussion and Analysis
23
ABOUT THIS MANAGEMENT’S
DISCUSSION AND ANALYSIS
23 FORWARD-LOOKING INFORMATION
24 BUSINESS OVERVIEW, OUTLOOK
AND STRATEGY
30 SUSTAINABILITY
30 PRESENTATION OF FINANCIAL
INFORMATION AND
NON-GAAP MEASURES
35 RESULTS OF OPERATIONS
35
36
37
38
40
40
42
44 Adjusted Cashflow from Operations (ACFO)
46 OPERATIONS
Selected Annual Information
2018 Financial Highlights
Operating Income
Net Operating Income (NOI)
Other Income
Other Expenses
Funds from Operations (FFO)
53 ASSET PROFILE
Investment Property
53
Income Property Acquisitions During 2018
54
Income Property Dispositions During 2018
55
Co-ownership Arrangements
56
Capital Expenditures on Income Properties
59
Properties Under Development
60
Residential Inventory
69
71
Mortgages and Loans Receivable
71 CAPITAL RESOURCES AND LIQUIDITY
Liquidity and Cash Management
71
Capital Management Framework
71
Credit Ratings
72
Capital Structure
72
Debt Metrics
73
Total Debt Profile
76
Debentures Payable
77
Mortgages Payable
77
Lines of Credit and Other Bank Loans
78
Liquidity
78
Guarantees
80
Hedging Activities
81
Trust Units
81
Preferred Units
83
83
Distributions to Unitholders
85 QUARTERLY RESULTS AND
TREND ANALYSIS
89 SIGNIFICANT ACCOUNTING POLICIES
AND ESTIMATES
91 FUTURE CHANGES IN ACCOUNTING
POLICIES
92 DISCLOSURE CONTROLS AND
PROCEDURES AND INTERNAL CONTROLS
OVER FINANCIAL REPORTING
93 RELATED PARTY TRANSACTIONS
93 RISKS AND UNCERTAINTIES
22
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 (Q4 2018 and 2018, respectively). This MD&A is
dated February 11, 2019 and should be read in conjunction with our annual audited consolidated financial statements and related
notes for the year ended December 31, 2018 (2018 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 2018 Financial Highlights, Business
Overview, Outlook, Strategy, Asset Profile, Properties Under Development 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: financial and
liquidity risks; tenant concentrations and related risk of bankruptcy or restructuring (and the terms of any bankruptcy or
restructuring proceeding); occupancy levels and defaults, including the failure to fulfill contractual obligations by the tenant or a
related party thereof; lease renewals and rental increases; the ability to re-lease and find new tenants for vacant space; retailer
competition; access to debt and equity capital; interest rate and financing risk; joint ventures and partnerships; the relative
illiquidity of real property, the timing and ability of RioCan to sell certain properties; the valuations to be realized on property sales
relative to current IFRS values; 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
zoning and other permits approvals, changes to rent control legislation; environmental matters including climate changes;
litigation; reliance on key personnel; unitholder liability; income, sales and land transfer taxes; cyber security 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. 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 historically low interest costs; a continuing
trend toward land use intensification, including residential development in urban markets; access to equity and debt capital
markets to fund, at acceptable costs, future capital requirements and to enable our refinancing of debts as they mature; the
availability of investment opportunities for growth in Canada; and the timing and ability for RioCan to sell certain properties, the
valuations to be realized on property sales relative to current IFRS values, and the Trust's ability to utilize the capital gain refund
mechanism. For a description of additional risks that could cause actual results to materially differ from management’s current
expectations, refer to the Risks and Uncertainties section in this MD&A and the Risks and Uncertainties section 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.
23
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS OVERVIEW, OUTLOOK AND STRATEGY
Business Overview
RioCan is an unincorporated “closed-end” real estate investment trust (REIT) listed on the Toronto Stock Exchange (TSX) under
the symbol REI.UN. We are one of Canada’s largest REITs based on market capitalization with a total enterprise value of
approximately $13.2 billion at December 31, 2018. RioCan is a fully integrated REIT that owns, manages and develops high
quality retail, increasingly mixed-use, transit-oriented properties in Canada's major markets, with ownership interests in 233 retail
and mixed-use properties, including 16 properties under development, containing an aggregate net leasable area (NLA) of
38,681,000 square feet.
RioCan's property portfolio includes grocery anchored, urban retail, mixed-use and non-grocery anchored centres, of which 189
properties are 100% owned (186 income properties and 3 properties under development) and 44 are co-owned and governed by
co-ownership agreements (including 13 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); Boardwalk REIT (Boardwalk); Killam Apartment REIT (Killam); Concert Properties (Concert); and
Woodbourne Canada Partners (Woodbourne). 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 2018 Annual Consolidated Financial Statements.
Operating Results
For the year ended December 31, 2018, RioCan reported net income per unit of $1.68 and FFO per unit of $1.85, with FFO per
unit growth of 3.3% from 2017 despite nearly $1.0 billion secondary market asset dispositions completed in 2018 and $7.5 million
of severance costs incurred during the year. Severance costs were incurred as the Trust further streamlined its organizational
structure during the year to maximize operational efficiency and focus on the major markets, which will further drive same
property NOI and FFO growth. Since September 30, 2017, there has been a net reduction of 69 employees.
Operationally, the Trust reported same property NOI growth of 2.2%. Same property NOI for RioCan's properties in Canada's six
major markets grew by 2.6%, while same property NOI for its secondary markets properties increased by 0.2% compared to
2017. Committed occupancy and in-place occupancy each increased 50 basis points from December 31, 2017 to 97.1% and
96.1%, respectively, as of December 31, 2018. Further, committed occupancy for retail properties increased by 60 basis points to
97.2% over the same period. The Trust's major markets properties' committed occupancy further grew by 10 basis points to
97.7% as of December 31, 2018 over the year.
The Trust's strong same property NOI growth, successful progress on its secondary market asset disposition program, and
799,000 square feet of development completions (at RioCan's interest and all in Canada's six major markets) led to 85.4% of the
Trust's annualized rent revenues from the six major markets as of December 31, 2018, a 930 basis points increase from a year
ago. The Greater Toronto Area (GTA) represents 46.8% of the Trust's annualized rent revenues as of December 31, 2018, a 590
basis point increase from the previous year. For the year ended December 31, 2018, the Trust's maintenance capital
expenditures were $45.6 million, closely in line with the $45.0 million normalized capital expenditure expected for the year.
For the three months ended December 31, 2018, RioCan reported net income per unit of $0.49 and FFO per unit of $0.45,
representing FFO per unit growth of 2.2% from Q4 2017, despite nearly $1.0 billion of secondary market asset dispositions
completed since Q4 2017 and $2.7 million of severance costs incurred during the quarter. Operationally, the Trust reported same
property NOI growth of 2.1% in the quarter over the same period in 2017, with same property NOI growth of 2.2% for RioCan's
properties in the six major markets and same property NOI increase of 1.3% for its secondary markets properties. Committed
occupancy increased 10 basis points from the previous quarter to 97.1%. Further, committed occupancy for retail remained stable
at 97.2% from the previous quarter, while committed occupancy for office increased 60 basis points to 94.4%.
Progress on Acceleration of Canadian Major Market Focus
On October 2, 2017, the Trust announced its plan to accelerate its portfolio focus in Canada’s six major markets through the sale
of approximately 100 properties located primarily in secondary markets across Canada over two to three years. Refer to the
Strategy section of this MD&A for further details.
As of February 11, 2019, the Trust has either completed or entered into firm agreements to sell $1.3 billion of properties in
secondary markets at a weighted average capitalization rate of 6.50% based on in-place net operating income (NOI),
representing approximately 63% of the announced disposition target. The deals, which span a broad geographical range of
secondary markets, consist of the following:
•
•
•
•
Closed or firm deals for 58 properties as of October 30, 2018 as disclosed in the Trust's Q3 2018 MD&A have been
closed as of December 31, 2018 for aggregate sales proceeds of $1.1 billion at a weighted average capitalization rate of
6.47%. Approximately $58.9 million of mortgages were assumed by purchasers on closing.
The sale of a property in Niagara Falls, Ontario, which consisted of land and an income producing property portion, for
sales proceeds of $11.8 million. The income producing portion was sold at a capitalization rate of 6.60%.
The sale of three properties located in Quispamsis, New Brunswick and Ottawa and Orillia, Ontario to three separate
buyers for aggregate sales proceeds of $34.9 million at a weighted average capitalization rate of 7.16%.
The sale of two properties located in Victoria, British Columbia and St. John's, Newfoundland to two separate buyers for
aggregate sales proceeds of $115.8 million at a weighted average capitalization rate of 6.47%.
24
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
•
A firm agreement to sell a property located in Gravenhurst, Ontario for sales proceeds of $29.4 million at a capitalization
rate of 6.89%.
In addition to the above $1.3 billion closed and firm deals, as of February 11, 2019 the Trust has also entered into two conditional
agreements and three letters of intent ("LOIs") to sell seven properties with five separate buyers located in Ontario, Quebec, PEI
and Alberta for aggregate sales proceeds of $190.9 million. Should these firm, conditional and LOI transactions close, the Trust
would have completed the sale of 72 properties for aggregate sales proceeds of $1.5 billion or approximately 73% of our
disposition target by sales proceeds, at a weighted average capitalization rate of 6.68%. The aggregate sales prices of these
properties are materially in line with the Trust's IFRS valuations.
The capitalization rate of a strategic disposition referred to in this MD&A is calculated based on in-place twelve-month-trailing NOI
of a property or a portfolio of properties when the related sale agreement becomes firm.
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.
Additional Capital Recycling
For the three months and year ended December 31, 2018, RioCan sold a portion of its marketable securities and realized a cash
gain on units sold of $9.2 million and $59.2 million (three months and year ended December 31, 2017 - $10.5 million and $46.0
million), respectively.
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 will enable the Trust to deliver strong Net Asset Value (NAV) growth to
its unitholders. The head start that RioCan has in its development program in terms of the extent of zoning approvals achieved
and zoning applications submitted, recent completion or near substantial completion of a number of large mixed-use projects and
the experience and scale of our development team, gives us distinct competitive advantages. During 2018, RioCan continued to
make significant progress in a number of key areas of its development program, notably:
•
•
Launch of residential brand RioCan Living™ - On March 5, 2018, RioCan announced its residential brand, RioCan
Living™, marking RioCan’s official, and permanent, entry into the residential market. RioCan Living™ includes purpose-
built residential rental buildings developed by RioCan along Canada’s most prominent transit corridors. The locations,
designs, amenities, community-focused event programming, and professional services, as well as the population growth
in Canada's major markets, unique to RioCan Living™ are expected to further support demand for our residential rental
projects, particularly as housing affordability becomes more and more of an issue for individuals in the major markets.
Zoning approvals and development pipeline - As of December 31, 2018, the Trust has identified 26.2 million square
feet of development pipeline (at RioCan's interest), of which 11.2 million square feet or 42.9% have zoning approvals
and an additional 5.4 million square feet or 20.5% have zoning applications submitted. The zoned density is particularly
valuable in markets such as Ontario, where changes to the zoning approval process have led to a longer approval
process and more uncertainties. All development projects are in Canada's six major markets. The Trust's development
pipeline includes 18.7 million square feet (at RioCan's interest) of residential projects, representing 71.4% of its total
development pipeline as of December 31, 2018.
• Development completions and progress - For the three months and year ended December 31, 2018, the Trust
completed 298,000 square feet and 799,000 square feet of developments, respectively. Key project completions and
progress during the year are highlighted as follows:
The Well (50/50 co-ownership with Allied for the commercial component and 50/50 with Woodbourne for The
Well Residential Building 6) - This flagship mixed-use development with nearly 3.0 million square feet of net
leasable area (NLA), at 100%, made significant leasing progress during the year with lease commitments from
high caliber office tenants, representing 71% of the office space of the project. Retail leasing is scheduled to
commence in 2019. The office tower is under construction and is now above grade. The remainder of the
project is proceeding well and the 12-million-litre Enwave thermal energy tank has been installed. We are
expecting to reach grade on the retail component by Q2 2019.
Yonge Eglinton Northeast Corner (ePlace, 50/50 co-ownership with Metropia/Bazis) - This condominium
(eCondos) and residential rental (eCentral) project at Toronto's busy mid-town with connections to the Yonge
Subway and Eglinton Crosstown Light Rail Transit (LRT) is near substantial completion. At eCondo,
possession of a number of the condominium units occurred in Q4 2018, resulting in $1.4 million of residential
inventory gains recognized into the Trust's income in Q4 2018. Possession of the remaining condominium
units is scheduled to be taken in an orderly fashion during the first half of 2019. Residential rental leasing at
the 466-unit ePlace has started and is progressing well. First occupancy occurred in January 2019.
Bathurst College Centre (100% owned) - This grocery-anchored retail and office development with 140,000
square feet of NLA was substantially completed in Q3 2018 and is fully leased with several high profile tenants.
All tenants have taken possession and the grocery anchor commenced operations in January 2019.
King Portland Centre (50/50 co-ownership with Allied) - The commercial component of the 421,000 square feet
(100%) mixed-use development in the trendy King West neighborhood of Toronto was substantially completed
in Q3 2018 and fully leased. The 100% pre-sold, 132-unit condominium component of the project (Kingly) is
expected to be substantially complete and turned over for possession in Q3 2019.
25
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Gloucester (Frontier, 50/50 co-ownership with Killam) - The first phase of this project in Ottawa, Ontario
includes 228 residential rental units and is progressing on schedule toward a mid-2019 completion. The
leasing of the rental units commenced in Q4 2018 and is progressing ahead of our expectations.
Windfield Farms Townhouses (50/50 co-ownership with Tribute Communities) - This project to develop a 31-
acre site of residential lands located in Oshawa, Ontario also known as UC Towns 2, includes 538
condominium townhouses to be constructed in four phases and two phases of high rise condominiums, the first
of which consists of a 479-unit high rise condominium. 166 of the 170 units released in phase one and 14 of
the 94 units in phase two for the townhouse developments have been sold. Building construction of the
townhouses commenced in Q2 2018 with first occupancy expected in Q2 2019. Marketing for the first phase of
the high rise condominium project began in Q4 2018 with 202 of the 479 units pre-sold during the quarter.
• Development yield and incremental value creation - For the five projects that are complete or near completion
(ePlace, Bathurst College Centre and King Portland Centre in Toronto, Gloucester Phase I in Ottawa, and Sage Hill in
Calgary), the Trust estimates the average development yield to be 5.7% based on estimated stabilized NOI, which leads
to an estimated $204.5 million incremental value creation for the projects' commercial and residential rental components
plus an additional $26.5 million of residential inventory gains on the sale of condominium units at two projects, bringing
the total incremental value creation to $231.0 million. These yield and value creation estimates take into account the
Trust's purchase of our partner's non-managing 50% interest in Sage Hill subsequent to the year end and the expected
purchase of the remaining 50% interest in the residential rental and retail portions of ePlace in 2019 based on
agreements in place. Refer to the Development Yield and Incremental Value Creation section of this MD&A for details.
Capital Management
During 2018, the Trust continued to exercise sound capital management. 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 (at RioCan's
proportionate share) remained below our 8.0x target at 7.88x as of December 31, 2018, even though the Trust has disposed $1.1
billion of secondary market assets since October 2017. The Trust has a significant unencumbered asset pool of $8.0 billion as of
December 31, 2018 that generates 59.1% of RioCan's annualized NOI as of December 31, 2018. In addition, RioCan's
unencumbered assets to unsecured debt ratio stood at 231%, above its 200% target.
As of December 31, 2018, RioCan's debt to total assets was at 42.1% on a proportionate share basis, in line with its target range.
The Trust is committed to maintaining its leverage in its target range, although the leverage may exceed the upper limit of the
target range modestly from time to time.
NCIB
During the year ended December 31, 2018, the Trust acquired and cancelled 19.0 million units at a weighted average purchase
price of $24.35 per unit, for a total cost of $461.8 million. Since October 20, 2017, RioCan has purchased and cancelled 22.9
million units at a weighted average purchase price of $24.51 per unit, for a total cost of $561.2 million.
In October 2018, RioCan renewed its NCIB. Under the renewed NCIB, RioCan may acquire up to a maximum of 30,579,868 of its
units, or approximately 10% of outstanding units as of September 30, 2018, for cancellation over the next 12 months effective
October 22, 2018. The number of units that can be purchased pursuant to the renewed NCIB is subject to a current daily
maximum of 178,116 units (which is equal to 25% of 712,465, being the average daily trading volume from April 1, 2018 to
September 30, 2018, excluding RioCan's purchases on the TSX under its former NCIB), 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 primarily out of net
proceeds from its asset dispositions, available cash and undrawn credit facilities.
Base Shelf Short Form Prospectus
During Q3 2018, the Trust renewed its Base Shelf Short Form Prospectus which provides for the issuance of up to $3.0 billion in
debt securities, trust units and preferred units up to August 3, 2020.
Senior Unsecured Debentures
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. Prior to maturity, the Series AA debentures can be redeemed in whole or in part at par on or after August 29, 2023.
On March 5, 2018, RioCan redeemed, in full, its $250 million 2.87% Series S senior unsecured debentures in accordance with its
terms.
Non-revolving Unsecured Credit Facilities
On January 12, 2018, the Trust exercised its option to increase its $100 million non-revolving unsecured credit facility by up to
$50 million, with the addition of a lender, and borrowed an additional $50 million from a Schedule III bank under this facility.
On May 4, 2018, the Trust exercised its option to extend the maturity date on its $1 billion revolving unsecured operating credit
facility to May 31, 2023. All other terms and conditions remained the same.
26
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Subsequent to year end, the Trust extended the maturity date of its $150.0 million non-revolving unsecured credit facility from
December 27, 2019 to June 27, 2024 and fixed the annual all-in interest rate at 3.43% through an interest rate swap. The Trust also
fixed the annual all-in interest rate for $125.0 million of its other non-revolving unsecured credit facility maturing on January 31, 2023
at 3.38% through an interest rate swap. Further, the Trust entered into a $350.0 million five-year non-revolving unsecured credit
facility with three financial institutions and has fully drawn on the credit facility to repay certain debt and for general Trust purposes.
This credit facility matures on February 7, 2024 and, through an interest rate swap, bears an all-in fixed interest rate of 3.34% per
annum. These transactions demonstrate the Trust's creditworthiness and further strengthen the Trust's financial flexibility by providing
access to additional sources of capital, further extending the average term to maturity of the Trust's total debt, and reducing its
floating interest rate debt exposure.
Distribution Increase
Effective January 1, 2018, the Trust increased its annual distribution to unitholders by $0.03 per unit or 2.1% to $1.44 per unit.
Outlook
Canada's economy performed well in 2018, although it experienced a slowdown towards the end of the year due to a sharp drop
in oil prices and equity markets given the uncertainties heightened by trade tensions between the U.S. and China, partial
shutdown of the U.S. government and Brexit. These factors dampened expectations for economic growth in Q1 2019. The Bank
of Canada increased its overnight rate three times during 2018 but kept it unchanged at 1.75% at its January 2019 policy
announcement and expressed a more dovish tone in its economic outlook. Despite these factors, it is generally expected that the
economy will strengthen again as early as the second quarter of 2019 buoyed by growth in exports and non-energy investments
and recent recovery in oil prices. As a result, interest rates are generally expected to rise in the second half of 2019, albeit in a
more cautious fashion. The U.S. Federal Reserve increased interest rates four times in 2018 and is generally believed to
continue to raise interest rates in 2019.
RioCan is well-positioned to withstand an increasing interest rate environment through our low leverage, measured variable
interest rate debt exposure, and staggered portfolio of debt maturities. RioCan's supply of zoned development pipeline also
positions it well within the changing regulatory landscape with respect to zoning approvals particularly in Ontario. Overall, our
large size and dominant position in Canada's six major markets from which 85.4% of our portfolio rental revenues are derived,
leaves us well-positioned in the current economic and retail environment. The ongoing 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 and growth profile 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 strengths also include the depth of our
management team, our well diversified portfolio, the portfolio's value creation potential through its development program, solid
and diversified 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 short and long term given our continuous improvement in the overall quality and
diversification of our portfolio as we execute on our major market acceleration strategy and continue with project deliveries from
our development program. For 2019, 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.
Macro Economic and Market Trends
Interest rates
As noted earlier, the Bank of Canada raised its overnight interest rates three times in 2018 to 1.75% but kept it unchanged in its
recent January 2019 policy meeting. The relatively low oil prices despite recent price increases, the U.S.-China trade tension and
its impacts on global growth and commodity demand, the Brexit uncertainty, and the uncertain fate of the USMCA trade
agreement are key factors that put the Bank of Canada in a more dovish tone. While the Bank of Canada is expected to raise
interest rates over time, the pace at of the rate hikes will depend on factors such as oil prices, domestic economic growth and
inflation, the Canadian housing market, and developments with respect to various global geopolitical and trade risks.
Despite the expectations for eventual further 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 optimize financing options and costs.
Canadian dollar
The Canadian dollar has traded lower than at the beginning of 2018. Continued weakness in oil prices despite a recent price rally
is a key factor impacting the Canadian dollar. The U.S. dollar is expected to remain strong despite uncertainties relating to the
recent U.S. government partial shutdown and trade tension between the U.S. and China. A tighter monetary policy position
stance from the Federal Reserve will also assist in maintaining the strength of the U.S. dollar and put more pressure on the Bank
of Canada to raise interest rate in Canada. On the other hand, if the Canadian dollar remains relatively low, 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
The gradual recovery in light oil prices stalled in June 2018, regained strength in the third quarter, and then sharply declined in
Q4 2018 as escalating global trade tensions raised concerns over global growth and oil demand. It has since recovered to some
extent with Brent Crude oil trading above USD $60 per barrel. Alberta heavy crude oil prices experienced a sharp decline in 2018
as a result of growing output and transportation bottlenecks but has since recovered to some extent and narrowed the gap in
27
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
prices to light crude in early 2019. The Alberta provincial government ordered production cut starting in January 2019, which
helped the Canadian heavy oil price recovery among other factors such as Organization of the Petroleum Exporting Countries
(OPEC) production cuts, and the latest political crisis in Venezuela which handicaps Canada's main competitor in the oil markets
in the Americas. The delay and uncertainty surrounding large pipeline developments in Canada, however, will likely continue to
put pressure on Alberta’s oil production and growth.
Notwithstanding the volatility in oil prices, Alberta's labour market continues to improve in 2018 and net inter-provincial
immigration shows that people are returning to the province. 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.
Nonetheless, the regional economy is sensitive to energy prices and further volatility to oil prices will have the potential to impact
retail and residential markets.
E-commerce
We believe that the depth and breadth of our retail portfolio, especially in Canada's six major markets, positions us well to
withstand the effects of e-commerce on the overall retail market.
We have been evolving our tenant mix to increase the number of tenants in those sectors which tend to be less impacted by e-
commerce, such as personal services, food and restaurants, value retailing, as well as lifestyle and fitness offerings. Refer to the
Tenant Profile section of this MD&A for an overview of our tenant mix. Our residential strategy further addresses the e-commerce
effects, in part, as it re-purposes the existing retail portfolio and adds density to existing retail sites, and in doing so, builds in
natural traffic for the retailers. Our residential strategy also embraces the impact of e-commerce by incorporating e-commerce
friendly amenities to our rental buildings such as concierge services and sufficient space for the receipt and storage of packages
and in some cases cold storage.
We believe that shopping centres will continue to have a place for consumers as they remain the most cost-effective way for a
retailer to distribute goods and services and provide a social gathering place for the communities that they serve. Many retailers
effectively execute a combined on-line and brick-and-mortar strategy and 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', this strategy provides
today's consumer with the choice of how they want to shop. In the changing face of retail, national tenants are increasingly
providing this flexibility to their customers and are also adapting their store size, layout and product mix to better meet consumer
demands in urban, more densely populated settings.
Mitigating any potentially disruptive effects of e-commerce are strong population growth in urban centres, which is generally out-
pacing the overall population growth, the relative high cost for the "last-mile" deliveries, higher barriers for e-commerce players to
establish distribution centres in urban settings, and Canada's geographic dispersion.
Canadian retail environment
We expect fundamentals in Canadian retail real estate to remain steady, particularly necessity-based retail, value retail, and
services 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 that
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.
The Target departure, Sears Canada insolvency 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. The general tone towards the Canadian retail market is shifting towards a more neutral or positive
outlook. More investors are becoming aware of the key fundamental differences between the Canadian retail market and the U.S
retail market, such as fundamentally lower retail space per capita in Canada, tighter controlled municipal zoning bylaws which
limit over-supply of retail space, higher distribution costs in Canada given its geographic diversity, and more conservative lending
practices by Canadian financial institutions which limit over-build and over-risk-taking. Overall, we expect that the amount of retail
space per capita in Canada will decline over time as the population grows with limited new retail development as well as some
rationalization of existing retail space into other uses. In addition, Canada’s 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 continue to adapt to the changing
retail environment.
Development environment
With population growth and a limited supply of zoned land available for development, Canada’s six major markets, particularly the
GTA and Vancouver areas, have experienced a significant boom in housing development and construction over the last number
of years. As concerns over the affordability of single detached homes and household debt level grew, governments introduced
foreign buyer taxes and other measures applicable to the GTA and Vancouver areas approximately a year ago. The Office of the
Superintendent of Financial Institutions also introduced a new minimum qualifying rate, or “stress test,” for uninsured mortgages
effective January 1, 2018, which limits mortgage borrowings in general. The growth in single detached home sales volumes and
price increases has currently curbed to an extent but house prices in these areas are still near historical highs. In the meantime,
condominium sales volumes and prices, as well as the demand for residential rental units and rental rates, continue to grow.
The increasing and persistently high development and construction activities over the last few years, as well as the projected
sustaining bullish tone on future development by many industry players, have led to rising construction costs, increasing
development charges by municipalities, and a shortage of experienced labor, which tend to increase development risks. In
Ontario, which has experienced one of the most significant development booms, the previous provincial government introduced
further uncertainties and risks to the sector through the expansion of rent controls to new rental units in 2017 and the
replacement of the Ontario Municipal Board ("OMB") with the Local Planning Appeal Tribunals ("LPAT") whose mandate is still
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unclear at this stage. The new provincial government in Ontario elected in 2018 has since introduced the New Housing Supply
Action Plan in November 2018, which is designed to encourage more rental housing development by exempting new rental units
from rent control while preserving rent control for existing tenants. Although there has been speculation regarding whether the
new Ontario provincial government will address the previous government's replacement of the OMB with the LPAT, there has
been no change in this regard.
RioCan is confident in its development program and the cash flow and NAV growth potential such development will bring to its
unitholders. However, the Trust will remain vigilant in monitoring the market trends and will continue to prudently manage
development risks and adapt its development program to the changing marketing conditions. Refer to the Properties Under
Development section of this MD&A for a discussion of how the Trust prudently manages its development risks.
Strategy
Acceleration of Canadian Major Market Focus
The major market strategy is a key strategy for the Trust. Over the last decade, the Trust has been gradually increasing its 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 two to three
years. The sales proceeds are primarily used to repay debt, to fund the repurchase and cancellation of the Trust’s units through
the Trust’s NCIB program while maintaining its strong credit fundamentals, and to fund developments. As noted under the
Business Overview section of this MD&A, as of February 11, 2019, RioCan has successfully completed or entered into firm,
conditional or LOI agreements to sell $1.5 billion of the secondary market assets, represent approximately 73% of the announced
disposition target.
On completion, RioCan expects to generate in excess of 90% of its annualized rental revenue from Canada’s six major markets
(currently at 85.4%). 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. This portfolio of major market properties with a diversified, strong national tenant base has significant upside
potential for rent growth and is the foundation for significant NAV growth through unlocking of the tremendous intrinsic value of
our major market assets.
Driving Organic Growth
RioCan drives strong organic growth by leveraging its existing strengths, such as its strong relationships with high quality tenants
and partners, its economies of scale, diversity and experience, carefully curating and evolving the tenant mix of its properties, and
improving the operating efficiency and cost structure of its portfolio. In addition, RioCan continually searches for ways to create
new sources of cash flow from ancillary revenues, the generation of fee income from its joint venture arrangements and adding
NLA through new pads and redevelopments.
Unlocking Intrinsic Value through Development
Over the past 25 years, the Trust has 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 where we can
create additional NAV for our unitholders. We are focused on optimizing the value of our existing properties through our
development program, diversifying our portfolio into residential real estate, combining great retail experiences with residential to
create a premium residential tenant experience that will in turn drive traffic to our retail tenants that we believe will ultimately drive
future rent growth and deliver FFO and NAV growth to our unitholders. The Trust will continue to pursue a disciplined approach to
our development program with a focus on major urban markets and to meet the evolving needs of the communities we serve.
Please refer to the Properties under Development section of this MD&A for further details on how the Trust prudently manages
development risks.
Strategic Acquisitions
Given the current competitive nature of the real estate market and limited supply of assets that meet RioCan's criteria in the major
markets, acquisition of income producing properties is not a significant growth driver for RioCan in the near term. However,
RioCan continues to seize opportunities to acquire partners' interests in existing co-owned properties in highly desirable areas
that are unavailable on the open market, such as the 2018 purchases outlined in the Income Property Acquisitions During 2018
section of this MD&A. In addition, the Trust will evaluate and seize opportunities to acquire selective sites suitable for
development, such as its acquisitions of properties in the prestigious Yorkville neighbourhood of Toronto or assembling adjacent
properties surrounding existing development properties.
Strong Balance Sheet
RioCan is committed to prudent management of its balance sheet and capital structure. The Trust maintains low leverage,
staggers its debt maturities and limits its variable rate debt so as to reduce interest rate and refinancing risk, maintains an optimal
mix of unsecured and secured debt that ensures continued financial flexibility and liquidity, balances between line of credit
utilization and unsecured debenture issuance, builds and maintains lender relationships and continues to utilize multiple sources
of capital. It is this disciplined approach that allows RioCan to maintain the strong liquidity and financial strength to drive growth
and thrive in the ever changing market place.
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SUSTAINABILITY
Embedding Sustainability
The Trust targets to be amongst the leaders in embedding sustainability practices in its business model. This 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: people, community and
environmental leadership.
For the past two years, RioCan has been working diligently to formalize the sustainability commitments as set out in its
sustainability policy. A multi-year plan has been developed which includes strategies to put these commitments into action and
focuses on improving sustainability performance year over year. The Global Real Estate Sustainability Benchmark (GRESB) and
standards developed by the Sustainability Accounting Standards Board (SASB) not only provide a framework to benchmark
organization-wide performance, they also ensure transparency and continuous improvement.
While RioCan’s culture has always revolved around strategic decision making, fostering mutually beneficial relationships, and
shaping the future through good community stewardship, it has recently formalized its commitment to integrate sustainability
factors into decision making at every stage and level of its business and to benchmark and report its performance according to
industry standards.
Key sustainability accomplishments in 2018 include:
•
Improved GRESB Survey score by 37% from the previous year.
• Developed a plan to achieve continued sustainability performance improvements in GRESB categories such as Policy and
Disclosure, Building Certifications and Stakeholder Engagement in future years.
•
Implemented a data and utility management system to better measure and manage energy, water and waste consumption at
our properties and improve reporting capabilities. This system facilitated GRESB and EWRB reporting.
• Completed our first tenant engagement survey of our top 20 tenants in major markets. This third party administered survey
allowed us to better understand the drivers of tenant engagement and develop tenant action/improvement plans.
• Recognized as one of Greater Toronto’s top 100 employers.
•
Aligned our Environmental Management System (EMS) to a standard, ISO 14001 and trained relevant internal departments
on our new methods to manage environmental risks and opportunities.
• Continued to integrate sustainability features into many of our development and construction projects through our
Sustainability Guidelines. These guidelines incorporate sustainability into all phases of the development project lifecycle -
from the feasibility study phase to the handover to Operations/ Asset Management. They consider energy codes, standards
such as LEED and WELL, energy and water efficiencies, renewables and community engagement.
•
Installed a high efficiency geothermal HVAC system for Frontier residential rental development in Ottawa and partnered with
Enwave in installing a 12-million-litres thermal energy tank at our flagship development The Well in Toronto.
• Complied with the Ontario Energy and Water Reporting and Benchmarking (EWRB) regulation for RioCan properties with
gross floor area over 250,000 square feet, which equated to submitting 26 compliance reports for RioCan.
• Discussed with a number of investors, tenants, suppliers and partners in our sustainability materiality assessment and are in
the process of setting long term targets for sustainability.
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 website
under Social Responsibility. We plan to publish our inaugural Sustainability Report in 2019.
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 2018 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
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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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
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 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. 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 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. In
February 2019, REALPAC updated the definition of FFO to also include adjustments relating to certain subleases or leases that
are classified as finance leases under IFRS 16 effective January 1, 2019, which RioCan will adopt on effective date.
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.
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.
As noted in the Significant Accounting Policies and Estimates section of this MD&A, the Trust adopted the new accounting
standard IFRS 9 - Financial Instruments (IFRS 9) on the required effective date of January 1, 2018. One impact of adopting IFRS
9 is that the unrealized gains or losses on marketable securities are included in IFRS net income, whereas they were recorded in
other comprehensive income in 2017 and prior years Consolidated Financial Statements. Based on the FFO definition currently
set forth by REALPAC, the unrealized gains or losses on 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 marketable securities in FFO does not
represent the recurring operating performance of the Trust. As a result, effective January 1, 2018 upon adoption of IFRS 9,
RioCan’s method of calculating FFO is in compliance with REALPAC’s definition of FFO except that RioCan excludes these
unrealized gains or losses on marketable securities in its calculation of FFO. For further clarity, RioCan continues to include
realized gains or losses on marketable securities in its calculation of FFO.
RioCan’s method of calculating FFO 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 the Results of Operations section in
this MD&A.
Adjusted Cashflow From Operations (ACFO)
ACFO is a non-GAAP financial measure of sustainable economic cash flow available for distributions based on the definition set
forth by REALPAC. RioCan adopted the REALPAC definition of ACFO effective January 1, 2017 and uses it as an input, together
with FFO, in assessing RioCan's distribution payout ratios. In February 2019, REALPAC updated the definition of ACFO effective
January 1, 2019, which RioCan will adopt on effective date.
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;
includes realized gains or losses on marketable securities;
adds back taxes relating to non-operating activities;
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);
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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•
•
adds back internal leasing costs relating to development projects; and
includes adjustments relating to certain subleases or leases that are classified as finance leases under IFRS 16 effective
January 1, 2019.
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 in the Results of Operations section in this MD&A.
The adoption of the IFRS 9 effective January 1, 2018 did not have an impact on ACFO with respect to unrealized gains or losses
on marketable securities. As a result, The Trust’s calculation of ACFO continues to be in accordance with REALPAC’s ACFO
recommendations with the adoption of IFRS 9 on January 1, 2018.
RioCan does not report on the 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 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.
Prior to 2018, the Trust formulated its normalized capital expenditure estimate based on analyzing historic average spending and
reviewing 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 was done with representation and input from RioCan's cross-functional teams.
Short-term fluctuations in actual capital expenditures were analyzed to remove any expenditures that are determined to not
represent the level of ongoing maintenance capital expenditures, such as increased capital expenditures incurred during adverse
market conditions. 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 expenditure estimate.
Given the Trust's announcement on October 2, 2017 to sell approximately $2.0 billion of income properties over two to three
years with the acceleration of its major market focus strategy, the Trust expects its normalized capital expenditures to decrease
over the next two to three years as the Trust sells most of its secondary market properties. The Trust's 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 a per square foot basis relative to the Trust's secondary markets properties. The Trust also
expects its income producing NLA to decrease as it sells secondary markets properties, as evidenced by the approximately 5.3
million square feet net decrease in income producing NLA from December 31, 2017 to December 31, 2018.
As a result, the Trust determined that it is no longer reasonable to use its historical average approach in estimating its 2018
normalized capital expenditures. Instead, the Trust adopted a more forward looking approach and used its 2018 maintenance
capital expenditure budget as its normalized capital expenditures for 2018, which amounts to $45.0 million, representing an
average of approximately $1.16 per square foot on a projected average income-producing NLA of approximately 38.8 million
square feet for the year. The Trust's actual maintenance capital expenditures amounted to $45.6 million for the year, closely in
line with its normalized maintenance capex estimate for the year.
Using a similar approach, the Trust determined that $40.0 million is a reasonable estimate for its normalized capital expenditures
for 2019 as the Trust expects its income producing NLA to further decrease as it sells more of its secondary market assets. As
the 2019 annual normalized capital expenditures of $40.0 million is based on a projected average income producing NLA for the
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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year, there will be greater quarterly variations between average quarterly normalized capital expenditures of $10.0 million and
actual maintenance capital expenditure during a quarter.
IFRS capital expenditures are further discussed and analyzed in Capital Expenditures on Income Properties section in this
MD&A.
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 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.
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 will consider adjustments to NOI for certain subleases or leases that are
classified as finance leases under IFRS 16 effective January 1, 2019, based on rationales similar to the adjustments in the
REALPAC definitions of FFO and ACFO that were recently released in February 2019.
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. Management will consider adjustments to same property NOI for certain
subleases or leases that are classified as finance leases under IFRS 16 effective January 1, 2019, based on the rationales similar
to the adjustments in the REALPAC definitions of FFO and ACFO that were recently released in February 2019.
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 fair value of debt and market price of
equity instead of IFRS total assets.
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 the 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
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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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 marketable securities (upon adoption of IFRS
9 which was 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 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
upon adoption of IFRS 9, which was effective January 1, 2018. Management will consider adjustments to Adjusted EBITDA for
certain subleases or leases that are classified as finance leases under IFRS 16 effective January 1, 2019, similar to the
adjustments in the REALPAC definitions of FFO and ACFO that were recently released in February 2019.
A reconciliation of Adjusted EBITDA to IFRS net income and the debt metrics that utilize Adjusted EBITDA are presented in the
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.
34
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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% (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)
2018
2017
2016
1,147,842
1,155,219
1,133,332
527,362
528,103
580,223
527,347
314,024
708,265
715,286
584,597
588,462
326,929
683,151
830,838
547,879
484,185
325,665
$
$
$
$
1.68
1.68
1.85
1.44
$
$
$
$
2.16
2.18
1.79
1.41
$
$
$
$
2.06
2.51
1.68
1.41
2.2%
77.9%
85.7%
2.1%
0.5%
78.8%
78.3%
83.6%
94.6%
December 31,
2018
December 31,
2017
December 31,
2016
14,003,765
5,874,033
14,376,578
14,173,760
5,931,965
5,653,592
41.6%
42.1%
3.63
7.88
3.51%
231%
59.1%
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%
(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 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 FFO and ACFO
sections in this MD&A. Excluding a one-time special distribution of $29.2 million received during Q4 2017, the 2017 ACFO payout ratio would
have been 82.4%.
(v) Calculated on a trailing twelve month basis. Refer to the Debt Metrics section of this MD&A for further details.
Overall, despite $1.1 billion secondary market asset dispositions completed by the Trust since October 2017 and the sale of its
$2.0 billion U.S. portfolio in May 2016, the Trust has grown its revenues from 2016 to 2018 and grew its FFO per unit by 9.9%
from 2016 to 2018. FFO and ACFO payout ratios have been reduced over the same period as a result. Year-over-year same
property NOI growth has improved, further supporting the Trust's strategy to dispose its secondary market properties to
accelerate its major markets focus, and continue to optimize its retail tenant mix, drive leasing growth and improve operational
efficiency. In the meantime, the Trust continues to maintain strong balance sheet as reflected in its various debt metrics.
Net income from continuing operations changes from 2016 to 2018 were impacted by the year-over-year change in the fair value
gains on investment properties and changes in unrealized fair value of marketable securities with the implementation of IFRS 9
effective January 1, 2018.
Refer to the remaining sections of this MD&A for more detailed analysis of the Trust's key financial information.
35
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
2018 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. For the fourth quarter 2018 and 2017 consolidated statements of income refer to the
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 Income Attributable to Unitholders
(thousands of dollars, except per unit amounts)
2018
2017
2018
2017
Three months ended
December 31
Year ended
December 31
Net income attributable to unitholders:
Continuing operations
Discontinued operations
Net income attributable to unitholders
Net income per unit attributable to unitholders (basic):
Continuing operations
Discontinued operations
Net income per unit attributable to unitholders (basic)
Net income per unit attributable to unitholders (diluted):
Continuing operations
Discontinued operations
Net income per unit attributable to unitholders (diluted)
$
Continuing Operations
2018
$
149,959
$
209,735
$
527,362
$
$
$
$
(794)
149,165 $
(62)
741
209,673 $
528,103
0.49
$
—
0.49 $
0.49
$
—
0.49 $
0.64
—
0.64
0.64
—
0.64
$
$
$
$
1.68
—
1.68
1.68
—
1.68
$
$
$
$
$
$
708,265
7,021
715,286
2.16
0.02
2.18
2.16
0.02
2.18
Net income from continuing operations attributable to unitholders for the year ended December 31, 2018 is $527.4 million
compared to $708.3 million during the same period in 2017, representing a decrease of $180.9 million. Excluding $118.6 million
lower net fair value gains on investment properties over the comparable period and a $42.8 million change in unrealized fair value
included in net income related to marketable securities, net income from continuing operations attributable to unitholders for the
year ended December 31, 2018 is $551.8 million compared to $571.3 million in 2017, representing a decrease of $19.5 million or
3.4%.
The decrease of $19.5 million is largely the net effect of the following:
•
•
•
•
•
•
•
•
•
$17.1 million in lower operating income primarily due to property dispositions (net of acquisitions) as part of the Trust's
strategic disposition program, net of same property NOI growth, higher fees income, and higher income from development;
$8.2 million in higher transaction costs primarily due to higher dispositions given the Trust's strategic disposition program;
$3.4 million in higher general and administrative expenses primarily due to higher severance costs and mark to market
adjustments for cash settled unit-based compensation net of the impact of the accelerated depreciation of certain
management information systems in 2017;
$4.5 million in lower income from our equity accounted investments;
$5.6 million in lower income earned on marketable securities;
$1.6 million in lower transaction gains and other income; partially offset by,
$13.3 million in higher realized gains on marketable securities sold;
$3.9 million in higher interest revenue due to new advances on mortgages and loans receivable at higher interest rates and
fair value gains on mortgages and loans receivable; and
$3.1 million decrease in interest expense due to higher capitalized interest due to development progress, resulting in higher
development costs on the consolidated balance sheet.
Q4 2018
Net income from continuing operations attributable to unitholders for the three months ended December 31, 2018 is $150.0 million
compared to $209.7 million during the same period in 2017, representing a decrease of $59.8 million. Excluding $41.8 million
lower fair value gains over the comparable period and a $14.0 million change in unrealized fair value included in net income
related to marketable securities, net income from continuing operations attributable to unitholders for the fourth quarter of 2018 is
$134.7 million compared to $138.7 million in 2017, representing a decrease of $4.0 million or 2.9%.
The decrease of $4.0 million is largely the net effect of the following:
•
•
$8.1 million in lower operating income primarily due to property dispositions (net of acquisitions) as part of the Trust's strategic
disposition program, net of same property NOI growth, and higher income from development completions;
$1.3 million in lower realized gains on marketable securities sold;
36
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
•
•
•
•
$1.1 million in lower income earned on marketable securities; partially offset by,
$3.4 million in lower general and administrative expense primarily due to accelerated depreciation of certain management
information systems in 2017 net of higher severance and mark to market for cash settled unit-based compensation in 2018;
$2.1 million in higher income from our equity accounted investments; and
$1.4 million in higher other income.
As noted in the Significant Accounting Policies and Estimates section of this MD&A and as described more fully in notes 19 and 37
to the Annual Consolidated Financial Statements, effective January 1, 2018, the Trust adopted IFRS 9 without restatement of prior
periods. Effective January 1, 2018, cumulative unrealized fair value gains of $68.7 million as of December 31, 2017 that were
previously recognized in other comprehensive income (loss) were reclassified to opening retained earnings and all realized and
unrealized fair value gains (losses) on marketable securities are recognized in net income. During the comparative period in 2017,
unrealized fair values gains (losses) were recorded in other comprehensive income and realized fair value gains (losses) were
recorded to net income upon the sale of the marketable securities. As a result, the $14.0 million and $42.8 million decrease in
unrealized fair value included in net income for three months and year ended December 31, 2018, respectively, relating to
marketable securities were excluded for purpose of the analysis above.
Discontinued Operations
2018
Net income from discontinued operations attributable to unitholders is $0.7 million compared to net income of $7.0 million in 2017,
representing a decrease of $6.3 million. During 2018, bad debt provisions based on receivable collections and general and
administrative expense accruals were adjusted including related foreign exchange translation. The 2017 comparative amount of
$7.0 million includes the impact of a reversal of an accrual related to a better than expected 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-deal-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 2018
Net loss from discontinued operations attributable to unitholders for the three months ended December 31, 2018 is $0.8 million
compared to a net loss of $0.1 million in the same period in 2017, representing higher net loss of $0.7 million. The increase was
primarily related to foreign exchange translation change for current income tax expense accrual.
Operating Income
The IFRS operating income for the three months and year ended December 31, 2018 and 2017 is as follows:
(thousands of dollars)
Revenue
Rental revenue
Property management and other service fees
Residential inventory sales
Operating costs
Rental operating costs
Recoverable under tenant leases
Non-recoverable costs
Residential inventory cost of sales
Operating income
2018
Three months ended
December 31
Year ended
December 31
2018
2017
2018
2017
$
274,775
$
3,967
22,264
289,403 $
3,823
—
1,110,160
$
1,140,665
15,418
22,264
14,554
—
$
301,006
$
293,226 $
1,147,842
$
1,155,219
389,285
$
399,580
$
95,970
$
4,460
20,882
121,312
100,110 $
5,353
—
105,463
17,384
20,882
427,551
$
179,694
$
187,763 $
720,291
$
18,270
—
417,850
737,369
Operating income from continuing operations for the year ended December 31, 2018 is $720.3 million compared to $737.4 million
during the same period in 2017, representing a decrease of $17.1 million or 2.3%. The decrease of $17.1 million is largely the net
effect of the following:
•
•
•
•
•
$36.6 million lower operating income due to property dispositions as part of the Trust's strategic disposition program (net of
acquisitions); partially offset by,
$13.1 million of same property operating income growth;
$1.7 million higher income from development projects completed that are not same property during the comparable periods;
$1.7 million higher lease cancellation fees;
$1.4 million higher income associated with our residential inventory sales;
37
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
•
•
$0.9 million higher property management and other service fee revenue; and
$0.8 million higher straight-line rent.
Q4 2018
Operating income from continuing operations for the three months ended December 31, 2018 is $179.7 million compared to
$187.8 million during the same period in 2017, representing a decrease of $8.1 million or 4.3%. The decrease of $8.1 million is
largely the net effect of the following:
•
•
•
•
•
•
$15.4 million lower operating income due to property dispositions as part of the Trust's strategic disposition program (net of
acquisitions); and
$0.3 million lower lease cancellation fees; partially offset by,
$3.2 million in same property operating income growth;
$2.6 million higher straight-line rent;
$1.4 million higher income associated with our residential inventory sales; and
$0.4 million higher income from development projects completed that are not same property during the comparable periods.
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, 2018 and 2017 is as follows:
(thousands of dollars)
Operating income (i)
Adjusted for the following:
Three months ended
December 31
Year ended
December 31
2018
2017
2018
2017
$
179,694
$
187,763
$
720,291
$
737,369
Property management and other service fees
(3,967)
(3,823)
(15,418)
(14,554)
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)
(22,264)
20,882
—
—
(22,264)
20,882
—
—
$
174,345
$
183,940
$
703,491
$
722,815
63.0%
63.1%
63.1%
63.2%
3,373
3,617
432
(676)
(3)
3,195
3,160
412
(377)
(26)
13,177
14,380
1,780
(2,983)
200
12,903
12,336
1,893
(1,326)
132
NOI - RioCan's proportionate share
$
177,715
$
187,109
$
716,868
$
735,850
(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.
NOI as a percentage of rental revenue (excluding the impact of lease cancellation fees) was relatively stable for the three months
and year ended December 31, 2018 over the comparable period. Refer to the Same Property NOI section of this MD&A below for
more detailed breakdown and analysis of NOI.
38
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Same Property NOI
Same property NOI for the three months and year ended December 31, 2018 and 2017 is as follows:
(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
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
Three months ended
December 31
Year ended
December 31
2018
154,754 $
2017
151,560 $
2018
602,954 $
2017
589,833
5,855
4,233
10,088
3,181
2,983
3,339
174,345 $
4,261
21,272
25,533
2,781
3,330
736
183,940 $
26,384
44,302
70,686
13,356
7,932
8,563
703,491 $
20,752
86,575
107,327
11,624
6,225
7,806
722,815
3,373
3,617
432
(676)
(3)
3,195
3,160
412
(377)
(26)
177,715 $
187,109 $
14,380
1,780
(2,983)
200
716,868 $
12,336
1,893
(1,326)
132
735,850
3,771 $
1,148 $
10,343 $
9,699
$
$
$
$
(i) Represents a non-GAAP measure. Refer to the same property NOI in the Presentation of Financial Information and Non-GAAP Measures section
(ii)
(iii)
of this MD&A.
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.
2018
Same property NOI for the year ended December 31, 2018 increased 2.2% or $13.1 million compared to the same period in
2017. Approximately $6.8 million of the increase is related to higher occupancy, renewal rate growth and contractual rent
increases and $8.3 million is due to Target backfills and other expansion and redevelopment projects completed in 2018 and
2017, which is offset by $2.0 million negative effect as a result of the Sears closures.
As a component of total same property NOI growth, same property NOI from RioCan's properties in Canada's six major markets
increased 2.6% and same property NOI from its secondary markets properties increased 0.2% for the year ended December 31,
2018 when compared to the same period in 2017.
Total NOI for the year decreased $19.3 million primarily due to a $36.6 million decrease as a result of property dispositions (net of
acquisitions), partially offset by the aforementioned $13.1 million same property NOI growth, $1.7 million in increased NOI from
completed developments that are not considered same property for comparable period purposes, $1.7 million in higher lease
cancellation fees and $0.8 million higher straight-line rent.
Q4 2018
Same property NOI for the three months ended December 31, 2018 increased 2.1% or $3.2 million compared to the same period
in 2017. Approximately $1.9 million of the increase related to higher occupancy, renewal rate growth and contractual rent
increases and $1.5 million is due to an increase in NOI from Target backfills and other expansion and re-development projects
completed, which is offset by $0.2 million negative effect as a result of the Sears closures.
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 1.3% compared to the same period in
2017 for the three months ended December 31, 2018.
Total NOI during the quarter decreased by $9.6 million primarily due to a $15.4 million decrease as a result of property
dispositions (net of acquisitions) and a $0.3 million decrease in lease cancellation fees, partially offset by the aforementioned
$3.2 million same property NOI growth, $2.6 million higher straight-line rent, and $0.4 million increased NOI from completed
developments that are not considered same property for comparable period purposes.
39
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Other Income
The components of other income are as follows:
(thousands of dollars)
Interest income
Income from equity-accounted investments
Fair value gains on investment properties, net
Investment and other income (loss)
Other income
Three months ended
December 31
Year ended
December 31
2018
2,861 $
5,848
29,230
(3,020)
34,919 $
2017
1,950 $
3,782
71,013
11,979
88,724 $
2018
11,452 $
11,174
18,304
20,316
61,246 $
2017
7,586
15,719
136,942
57,014
217,261
$
$
Interest income for the three months and year ended December 31, 2018 was higher than the same periods in 2017 primarily due
to new mortgages and loans receivable advanced during fiscal 2018 at higher interest rates. In addition, for the year ended
December 31, 2018, the increase over the prior year was partially attributable to fair value gains on mortgages and loans
receivable that were measured at fair value through profit and loss (FVTPL).
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, 2018, fair value gains on investment properties of $29.2 million were recognized
compared to fair value gains of $71.0 million in the same period last year resulting in $41.8 million lower net income year over
year. For the year ended December 31, 2018, we recognized fair value gains on investment properties of $18.3 million compared
to fair value gains of $136.9 million in the same period last year resulting in $118.6 million lower net income. The changes in fair
value gains were primarily due to revaluation of specific development properties, changes in capitalization rates and NOI
adjustments to certain income producing properties.
Investment and other income (loss) primarily includes realized gains (losses) on the sale of marketable securities as well as
related dividend income, transaction gains (losses) on the sale of investment properties, and effective January 1, 2018 unrealized
fair value gains (losses) on marketable securities pursuant to IFRS 9. As noted in the Significant Accounting Policies and
Estimates section of this MD&A and as described more fully in notes 19 and 37 to the 2018 Annual Consolidated Financial
Statements, the Trust adopted IFRS 9 without restatement of prior periods, effective January 1, 2018. Pursuant to IFRS 9, the
Trust recognizes all realized and unrealized gains (losses) on marketable securities in net income effective January 1, 2018.
During the comparative period in 2017, unrealized fair values gains (losses) were recorded in other comprehensive income while
realized gains (losses) were recorded in net income upon the sale of the marketable securities.
During the three months ended December 31, 2018, the decrease in investment and other income of $15.0 million over the
comparable period in 2017 was primarily due to $1.3 million in lower realized gains on the sale of marketable securities and a
$14.0 million change in unrealized fair value on marketable securities which is recorded in investment and other income upon the
adoption of IFRS 9, and $1.1 million in lower income earned on marketable securities, partially offset by $1.4 million in higher
transaction gains and other income. During the year ended December 31, 2018, the decrease in investment and other income of
$36.7 million over the comparable period in 2017 was primarily due to $13.3 million in higher realized gains on the sale of
marketable securities, offset by $42.8 million change in unrealized fair value on marketable securities which is recorded in
investment and other income upon the adoption of IFRS 9, $5.6 million in lower income earned on marketable securities and $1.6
million in lower transaction gains and other income.
For clarity, during the three months and year ended December 31, 2018, the Trust realized gains on the sale of marketable
securities of $9.2 million and $59.2 million, respectively (three months and year ended December 31, 2017 - $10.5 million and
$46.0 million, respectively).
Other Expenses
Interest Costs
The components of interest costs are as follows:
(thousands of dollars)
Total interest
Interest costs capitalized (i)
Net interest
Percentage capitalized
Three months ended
December 31
2018
2017
Year ended
December 31
2018
$
$
$
$
52,639
(10,198)
42,441
19.4%
50,385
(7,996)
42,389
15.9%
$
$
$
$
206,743
(38,444)
168,299
18.6%
2017
199,817
(28,399)
171,418
14.2%
(i) Includes amounts capitalized to properties under development and residential inventory.
40
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total interest costs increased by $2.3 million and $6.9 million, respectively, for the three months and the year ended
December 31, 2018 compared to the same periods in 2017 primarily due to higher average debt balances and higher average
cost of debt. As at December 31, 2018, the weighted average effective interest rate of our total debt is 3.55% (December 31,
2017 - 3.35%).
Interest capitalized to property under development for the three months and year ended December 31, 2018 increased by $2.2
million and $10.0 million, respectively, compared to the same periods in 2017, due to development progress, resulting in higher
development costs on the consolidated balance sheet. Interest was capitalized to properties under development and residential
inventory at weighted average effective interest rates of 3.52% and 3.46% for the three months and year ended December 31,
2018, respectively (three months and year ended December 31, 2017 – 3.49% and 3.54%, respectively).
As a result of the changes in total interest costs and interest costs capitalized, net interest costs was relatively flat and decreased
by $3.1 million, respectively, for the three months and the year ended December 31, 2018 compared to the same periods in 2017.
General and Administrative ("G&A")
The components of general and administrative expenses are as follows:
(thousands of dollars)
Three months ended
December 31
Year ended
December 31
2018
2017
2018
Non-recoverable salaries and benefits
$
12,573
$
11,023
$
47,766
$
Capitalized to development and residential inventory (i)
Internal leasing salaries and benefits
Non-recoverable salaries and benefits, net
Unit-based compensation expense
Depreciation and amortization
Other general and administrative (ii)
(2,081)
(2,255)
8,237
1,476
1,144
3,826
(2,206)
(2,839)
5,978
1,562
5,712
4,871
(9,202)
(9,352)
29,212
7,070
4,575
15,142
Total general and administrative expense
$
14,683
$
18,123
$
55,999
$
2017
41,095
(8,538)
(9,290)
23,267
3,911
9,865
15,517
52,560
Total general and administrative expense as a percentage
of rental revenue
5.3%
6.3%
5.0%
4.6%
(i) Include salaries and benefits related to properties under development and residential inventory, as well as landlord work.
(ii) Primarily includes information technology costs, public company costs, travel, marketing, legal and professional fees, as well as trustee costs.
2018
For the year ended December 31, 2018, G&A expenses increased $3.4 million or 6.5% primarily due to the net effect of the
following:
•
•
•
•
$5.9 million higher net non-recoverable salaries and benefits primarily due to $7.5 million of severance costs partially offset
by the resulting salaries & benefits costs savings; and
$3.2 million higher unit-based compensation expense primarily due to mark to market adjustment related to employee cash-
settled unit-based compensation costs; partially offset by,
$5.3 million lower depreciation and amortization expense mainly as a result of accelerated depreciation of certain
management information systems in Q4 2017; and
$0.4 million lower other general and administration fees primarily due to lower IT and other consulting fees.
Severance costs were incurred during the year as the Trust further streamlined its organizational structure to maximize
operational efficiency and focus on the major markets, which will further drive same property NOI and FFO growth. Since
September 30, 2017, there has been a net reduction of 69 employees.
Q4 2018
For the three months ended December 31, 2018, G&A expenses decreased $3.4 million or 19.0% primarily due to:
•
•
•
$4.6 million lower depreciation and amortization expense mainly as a result of accelerated depreciation of certain
management information systems in Q4 2017;
$1.0 million lower other general and administration fees primarily due to mark to market adjustment related to trustee cash-
settled unit-based compensation costs and lower professional consulting fees; partially offset by,
$2.3 million higher net non-recoverable salaries and benefits primarily due to severance costs.
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, 2018, leasing costs were relatively flat relative to the prior year same periods.
Transaction and Other Costs
Transaction and other costs increased $0.9 million and $8.2 million for the three months and year ended December 31, 2018,
respectively, over the comparable period. The increase for the year was the net effect of increased disposition activities given the
41
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Trust's strategic disposition program partially offset by $2.6 million of costs associated with transactions the Trust decided not to
pursue further and a $2.6 million fair value market adjustment to a loan receivable, both which occurred in 2017 and did not recur
in 2018.
Funds from Operations (FFO)
RioCan’s method of calculating FFO is in compliance with the REALPAC whitepaper issued in February 2018 except that
effective January 1, 2018 upon the adoption of IFRS 9, RioCan excludes unrealized fair value gains or losses on marketable
securities in its calculation of FFO and continues to include realized gains or losses on marketable securities in FFO. Refer to the
Non-GAAP Measures section of this MD&A for more detailed discussion.
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)
Net income from continuing operations attributable to unitholders
Add back/(Deduct):
Three months ended
December 31
Year ended
December 31
2018
149,959 $
$
2017
209,735 $
2018
527,362 $
2017
708,265
Fair value (gains) losses, net
(29,230)
(71,013)
(18,304)
(136,942)
Fair value (gains) losses included in equity accounted investments
Deferred income tax expense (recovery)
Internal leasing costs
Transaction (gains) losses on investment properties, net (i)
Transaction costs on sale of investment properties
Change in unrealized fair value on marketable securities (ii)
Preferred unit distributions
FFO from continuing operations
Net income 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
Transaction gains 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)
(3,258)
(540)
2,862
54
4,655
13,965
—
2,472
(1,320)
3,265
—
993
—
—
(1,222)
(1,440)
11,294
(78)
17,760
42,767
—
408
(320)
10,882
(1,275)
5,136
—
(3,514)
138,467 $
144,132 $
578,139 $
582,640
(794) $
(62) $
741 $
7,021
14
745
—
(35) $
138,432 $
0.45 $
0.45 $
306,225
306,295
73
75
—
86 $
144,218 $
0.44 $
0.44 $
326,040
326,155
155
1,188
—
2,084 $
580,223 $
1.85 $
1.85 $
313,936
314,024
77.9%
(549)
(2,871)
(1,644)
1,957
584,597
1.79
1.79
326,805
326,929
78.8%
$
$
$
$
$
$
(i) Represents net transaction gains or losses connected to certain investment properties during the period.
(ii) Adjustment is a result of adopting IFRS 9 on January 1, 2018 without prior period restatement. The $4.8 million fair value losses and $16.5 million
fair value gains on marketable securities under IFRS 9 for the three months and year ended December 31, 2018, respectively, include both the
change in unrealized fair value and realized gains on the sale of marketable securities during the current period. Refer to the Adoption of New
Accounting Standards section of this MD&A and notes 19 and 37 of the 2018 Annual Consolidated Financial Statements for a more fulsome
discussion on the impact of IFRS 9 on the 2018 Annual Consolidated Financial Statements. By adding back the change in unrealized fair value on
marketable securities, RioCan effectively continues to include realized gains or losses on the sale of marketable securities in FFO and excludes
unrealized fair value gains or losses on marketable securities from FFO. Refer to the Non-GAAP Measures section of this MD&A for a more
detailed discussion on FFO and IFRS 9's impact on FFO.
Includes transaction costs associated with the disposal of U.S. investment properties.
(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
Non-GAAP Measures section of this MD&A.
FFO Highlights
2018
FFO for the year ended 2018 is $580.2 million compared to $584.6 million in the comparable period in 2017, representing a
decrease of approximately $4.4 million or 0.7%. On diluted per unit basis, FFO is $1.85 compared to $1.79, representing an
increase of $0.06 per unit or 3.3%.
42
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Continuing Operations
FFO from continuing operations decreased from $582.6 million during 2017 to $578.1 million in 2018, representing a decrease of
$4.5 million or 0.8%. The $4.5 million decrease in FFO from continuing operations for the period was primarily due to the net
effect of the following:
•
•
•
•
•
•
•
•
•
$17.1 million in lower operating income primarily due to property dispositions (net of acquisitions) as part of the Trust's
strategic disposition program, net of same property NOI growth, higher fee income and higher income from development;
$6.2 million in lower income from equity-accounted investments, excluding fair value gains (losses), primarily due to higher
interest costs and income timing;
$5.6 million in lower dividend income from marketable securities;
$3.4 million in higher general and administrative expenses primarily due to higher severance costs and mark to market
adjustments associated with cash-settled unit-based compensation net of accelerated depreciation of certain management
information systems in 2017; partially offset by,
$13.3 million increase in realized gains on marketable securities sold;
$4.4 million decrease in transaction and other costs primarily due to a 2017 one-time fair market value adjustment to a loan
receivable and 2017 costs associated with transactions the Trust decided to not to pursue further;
$3.9 million increase in interest revenue primarily due to new mortgages and loans receivable advanced during fiscal 2018 at
higher interest rates;
$3.5 million less Series C preferred unit distributions; and
$3.1 million decrease in interest expense due to higher capitalized interest given development progress.
Discontinued Operations
FFO from discontinued operations of $2.1 million in 2018 was mainly due to the partial reversal of bad debt provisions based on
receivable collections to date and the reversal of general and administrative expense accruals.
Q4 2018
FFO for the fourth quarter of 2018 is $138.4 million compared to $144.2 million in the comparable period in 2017, representing a
decrease of approximately $5.8 million or 4.0%. On a diluted per unit basis, FFO is $0.45 compared to $0.44, representing an
increase of $0.01 per unit or 2.2%.
Continuing Operations
FFO from continuing operations decreased from $144.1 million in the fourth quarter of 2017 to $138.5 million in the comparable
period in 2018, representing a decrease of $5.7 million or 3.9%. The $5.7 million decrease in FFO from continuing operations for
the quarter was primarily due to the net effect of the following:
•
•
•
•
•
•
•
•
$8.1 million in lower operating income mainly as a result of dispositions (net of acquisitions), net of same property NOI
growth and higher income from development;
$3.7 million in lower income from equity-accounted investments, excluding fair value gains (losses), primarily due to income
timing and higher interest costs;
$1.3 million in lower realized gains on marketable securities sold; and
$1.1 million in lower dividend income on marketable securities; largely offset by,
$3.4 million in lower general and administrative expenses primarily due to accelerated depreciation of certain management
information systems in Q4 2017, net of higher severance costs in Q4 2018;
$2.6 million in lower transaction and other costs due to a 2017 one-time fair value adjustment to a loan receivable;
$1.4 million in higher other income; and
$0.9 million in higher interest revenue.
Discontinued Operations
FFO from discontinued operations was nominal during the fourth quarter of 2018 and for the same period in the prior year.
FFO Payout Ratio
For the year ended December 31, 2018, RioCan achieved its FFO payout ratio target of less than 80% and further improved it by
0.9% from 78.8% for 2017 to 77.9% for 2018. This improvement is mainly due to a small decrease in total FFO from 2017 to
2018 for reasons noted above despite substantial strategic dispositions completed and severance costs incurred and the impact
of the 22.9 million units that have been repurchased and cancelled since October 2017 as part of the Trust's NCIB program using
the disposition proceeds.
43
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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 2018. The following
table presents a reconciliation of cash provided by operating activities to ACFO:
(thousands of dollars)
Cash provided by operating activities
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
Realized gain on disposition of marketable securities
Internal leasing costs related to development properties
Taxes related to non-operating activities (iii)
ACFO (iv)
Three months ended
December 31
Year ended
December 31
$
2018
128,325 $
1,065
1,846
4,669
(6,000)
(3,250)
(2,000)
9,161
528
745
135,089 $
$
2017
159,155 $
(6,898)
34,883
1,066
(6,875)
(3,750)
(2,500)
10,504
602
75
186,262 $
2018
404,005 $
78,736
9,180
17,915
(24,000)
(13,000)
(8,000)
59,239
2,084
1,188
527,347 $
2017
354,028
192,813
44,415
4,587
(27,500)
(15,000)
(10,000)
45,981
2,009
(2,871)
588,462
(i)
Includes working capital changes that, in management’s view and based on the REALPAC February 2018 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 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 2018 whitepaper.
(iv) The ACFO definition per the REALPAC 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.
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 2018 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
2018
2017
2018
2017
$
(857) $
(75) $
(136) $
121,773
(1,694)
(31,422)
17,910
17,128
13,617
(34,084)
1,713
11,931
(11,367)
86
77,637
12,516
78,736 $
19,196
5,615
37,519
8,710
192,813
Adjustments to working capital changes for ACFO
$
1,065 $
(6,898) $
Includes income tax payment (accrual) relating to the sale of our U.S. portfolio in May 2016.
(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.
As ACFO starts with cash provided by 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
2018
2017
2018
2017
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
$
$
10,655 $
1,065
11,720 $
27,213 $
(6,898)
20,315 $
(79,468) $
(170,691)
78,736
(732) $
192,813
22,122
44
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
ACFO Highlights
2018
ACFO for the year ended December 31, 2018 is $527.3 million compared to $588.5 million in the same period in 2017
representing a decrease of $61.1 million or approximately 10.4%. Excluding a one-time $29.2 million special distribution from
equity accounting investments in 2017, ACFO decreased by $31.9 million for the year or approximately 5.4%, primarily due to the
following:
•
•
•
•
•
•
•
•
•
•
•
•
$22.9 million in lower net working capital increase relating to property operations;
$17.8 million in lower operating income (net of straight-line rent) mainly as a result of dispositions, net of strong same
property growth, higher fee income and higher income from development;
$6.7 million in higher general and administrative expenses (excluding non-cash depreciation and amortization and non-cash
compensation costs) primarily due to severance costs;
$6.0 million decrease in distributions received from equity accounted investments;
$5.6 million in lower income earned on marketable securities;
$2.2 million in higher income from discontinued operations in the prior year; and
$1.6 million in lower other income; partially offset by,
$13.3 million increase in realized gains related to the sale of marketable securities;
$7.5 million lower normalized capital expenditures;
$3.9 million increase in interest revenue primarily due to new mortgages and loans receivable advanced during fiscal 2018 at
higher interest rates;
$3.1 million lower interest expense due to higher capitalized interest given development activities; and
$2.6 million decrease in transaction and other costs primarily due to 2017 costs associated with transactions the Trust
decided to not to pursue further.
Q4 2018
ACFO for the three months ended December 31, 2018 is $135.1 million compared to $186.3 million in the same period in 2017
representing a decrease of $51.2 million or approximately 27.5%. Excluding a one-time $29.2 million special distribution from
equity accounting investments in 2017, ACFO decreased by $22.0 million for the year or approximately 11.8%, primarily due to
the net effect of the following:
•
•
•
•
•
•
•
•
•
$10.7 million in lower operating income (net of straight-line rent) mainly as a result of dispositions, net of same property
growth and higher income from development;
$8.6 million lower net working capital increase relating to property operations;
$3.8 million decrease in distributions received from equity accounted investments;
$1.3 million lower realized gains related to the sale of marketable securities;
$1.1 million in lower dividend income on marketable securities; and
$1.0 million in higher general and administrative expenses (excluding non-cash depreciation and amortization and non-cash
compensation costs) primarily due to severance costs; partially offset by,
$1.9 million lower normalized capital expenditures;
$1.4 million in higher other income; and
$0.9 million in higher interest revenue.
The following tables present RioCan's ACFO payout ratio for the twelve months ended December 31, 2018 and 2017:
(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, 2018
Q4 2018
Q3 2018
Q2 2018
Q1 2018
527,347 $
135,089 $ 127,988
$ 139,910
$ 124,360
452,170
85.7%
110,366
112,370
114,110
115,324
(732) $
11,720 $
(5,411) $
6,297
$
(13,338)
45
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
(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
115,154
115,363
115,264
115,163
78.3%
22,122 $
20,315
$
13,941
$
(858) $ (11,277)
(i) The ACFO definition per the REALPAC 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, 2017, therefore, did not deduct preferred unitholder
distributions of $3.5 million.
The ACFO payout ratio for the twelve month period ended December 31, 2018 is 85.7%, which is 3.3% higher than the ACFO
payout ratio of 82.4% for the comparable period in 2017 excluding a one-time special distribution of $29.2 million received during
Q4 2017. The timing of working capital change, the $7.5 million of severance costs incurred during the year, and timing of
distributions received from equity accounted investments are key factors contributing to this increase in ACFO payout ratio.
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
Total Portfolio
(thousands of square feet)
Total Portfolio
Net Leasable Area (NLA) - At 100% (i)
Income properties (ii)
Properties under development (iii)
Total NLA
Net Leasable Area (NLA) - at RioCan's Interest (i)
Income properties (ii)
Properties under development (iii)
Total NLA
Occupancy
Committed occupancy
In-place occupancy
Retail
Office
Total
Commercial
Residential
Rental
Total
Portfolio
39,127
1,237
40,364
34,651
765
35,416
2,155
1,361
3,516
1,830
709
2,539
41,282
2,598
43,880
36,481
1,474
37,955
97.2%
96.2%
94.4%
93.0%
97.1%
96.1%
—
1,457
1,457
—
726
726
n/a
n/a
41,282
4,055
45,337
36,481
2,200
38,681
97.1%
96.1%
(i) Excludes non-owned anchors.
(ii)
(iii)
Includes NLA which has a rent commencement date on or before December 31, 2018.
Includes the NLA for Active Projects with Detailed Cost Estimates under the Property Under Development section of this MD&A. Excludes
condominium or townhouse units which are reported separately under Residential Inventory.
Annualized Rental Revenue from Six Major Markets and GTA
As at
Six Major Markets (i)
% of total annualized rental revenue
% of total NLA
GTA (ii)
% of total annualized rental revenue
% of total NLA
December 31, 2018
December 31, 2017
85.4%
81.7%
46.8%
41.9%
76.1%
70.3%
40.9%
34.9%
(i)
The six Canadian major markets include the following: Calgary, AB; Edmonton, AB; Montreal, QC; Ottawa, ON (includes Gatineau region); Toronto
(includes the GTA), ON; and Vancouver, BC.
(ii) The GTA extends north to Barrie, Ontario; west to Hamilton, Ontario; and east to Oshawa, Ontario. The GTA definition has been extended from
Burlington to Hamilton effective January 1, 2018.
46
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
The increases in the percentage of total annualized rental revenue from the six major markets overall and from the GTA in
particular as of December 31, 2018 relative to December 31, 2017 were primarily due to the nearly $1.0 billion secondary market
asset dispositions completed in 2018 and the strong 2.6% same property NOI growth achieved for the Trust's six major market
portfolio, as well as development completions during the year, which are all located in the six major markets. The Trust is
progressing well towards its targets of greater than 90% and 50% of total annualized rental revenue from the six major markets
and the GTA, respectively.
NLA and Occupancy by Markets
The NLA for income producing properties, committed and in-place occupancy rates for our commercial property portfolio at
RioCan’s interest are as follows:
At RioCan’s Interest
As at December 31
Commercial Six Major Markets:
Greater Toronto Area (i)
Ottawa (ii)
Calgary
Montreal
Vancouver (iii)
Edmonton
Total Commercial Six Major Markets
Total Commercial Secondary Markets
Total Commercial
NLA for Income Producing
Properties
(in thousands of sq.ft.)
Committed Occupancy
In-Place Occupancy
2018
2017
2018
2017
2018
2017
15,295
14,597
4,820
3,220
2,951
1,791
1,738
29,815
6,666
36,481
4,889
3,196
3,201
1,790
1,723
29,396
12,411
41,807
98.0%
98.8%
98.8%
92.6%
99.3%
98.0%
97.7%
94.1%
97.1%
97.5%
98.0%
98.6%
95.3%
98.7%
98.4%
97.6%
94.3%
96.6%
96.9%
96.7%
98.3%
92.4%
98.9%
97.0%
96.7%
93.2%
96.1%
96.1%
97.7%
97.6%
93.9%
98.6%
97.3%
96.5%
93.5%
95.6%
(i) Area extends north to Barrie, Ontario; west to Hamilton, Ontario; and east to Oshawa, Ontario.
(ii) Area extends from Nepean and Vanier to Gatineau, Quebec.
(iii) Area extends east to Abbotsford, British Columbia.
As at December 31, 2018, NLA at RioCan's interest was 36,481,000 square feet compared to 41,807,000 square feet as at
December 31, 2017. This decrease of 5,326,000 square feet of NLA in 2018 was primarily due to 6,100,000 square feet of
dispositions in the secondary markets pursuant to the acceleration of the major market focus strategy, partially offset by transfers
and an increase in income producing NLA as a result of 799,000 square feet of development completions during the year.
The table above breaks down our committed occupancy (tenants that have signed leases) and in-place occupancy (tenants that
are in possession of their space) by market. As at December 31, 2018, the gap between committed and in-place occupancies
was 100 basis points, same as at December 31, 2017.
Committed and in-place occupancies showed strong improvements when compared to the prior year end. Both occupancy
metrics for the total portfolio increased by 50 basis points when compared to December 31, 2017, reaching 97.1% and 96.1%
respectively, as of December 31, 2018. Major market assets outperformed secondary market assets in both committed and in-
place occupancies, which further improved by 10 basis points and 20 basis points, respectively, from 2017 to 2018, reaching
97.7% and 96.7% respectively as of December 31, 2018.
47
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Future Lease Commencements
Subsequent to Q4 2018, we expect to generate approximately $10.4 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, 2018. This includes base rent,
operating cost recoveries and straight-line rent, but excludes operating costs capitalized while a property is under redevelopment.
An IFRS rent commencement timeline for the NLA on our properties (at RioCan's interest) that have been leased but are not
currently in possession as at December 31, 2018 is as follows:
3
378
0.8%
100.0%
6
869
0.7%
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 2019
Q2 2019
Q3 2019
Q4 2019+
378
378
179
179
47.4%
47.4%
148
327
39.2%
86.6%
48
375
12.6%
99.2%
Monthly net incremental IFRS rent commencing (ii)
$
10,428 $
Cumulative monthly net incremental IFRS rent commencing $
10,428 $
869 $
869 $
520
520
$
$
258
778
$
$
85
863
$
$
% of net incremental IFRS rent for NLA commencing
Cumulative % total net incremental IFRS rent commencing
59.8%
59.8%
29.7%
89.5%
9.8%
99.3%
Includes NLA expected to be completed from expansion and redevelopment projects.
(i)
(ii) Based on monthly IFRS rental revenue.
Average Net Rent
The portfolio weighted average net rent per occupied square foot for our income producing properties is as follows:
As at
Average net rent per occupied square foot (i)
December 31, 2018
$
19.07
$
December 31, 2017
17.75
(i) Net rent is primarily contractual base rent pursuant to tenant leases.
The 7.4% increase in average net rent per occupied square foot from $17.75 as of December 31, 2017 to $19.07 as of
December 31, 2018 reflects the significant improvement in the quality of the Trust's portfolio as it disposes secondary market
assets, develops new assets and drives for stronger same property NOI growth.
New Leasing Activity
(in thousands, except per sqft amounts)
New Leasing NLA at 100%
Average net rent per square foot (i)
Three months ended December 31
Year ended December 31
2018
359
25.61 $
2017
527
19.16 $
2018
2,243
24.51 $
2017
1,996
19.61
$
(i) Net rent is primarily contractual base rent pursuant to tenant leases. Includes new square footage that has not previously been tenanted and
existing square footage leased to a new tenant.
Average net rent per square foot on new leasing activity increased by $4.90 or 25.0% from 2017 to 2018. The increase was
primarily due to the increase in our major market focus and new leases on our development projects which are all major market
focused. The 2018 new leases include three leases with large office tenants at The Well. The timing and location of new leases
completed during the comparable periods affect the change in the above average net rent per square foot during the comparable
periods.
Renewal Leasing Activity
A summary of our 2018 and 2017 commercial renewal leasing activity is as follows:
Three months ended December 31
Year ended December 31
(in thousands, except percentage and per sqft amounts)
Square feet renewed at market rental rates (at 100%)
Square feet renewed at fixed rental rates (at 100%)
Total square feet renewed (at 100%)
Average net rent per square foot (i)
Renewal leasing spread in average net rent (ii)
Renewal leasing spread percentage (ii) (iii)
Retention ratio
$
$
2018
684
387
1,071
20.66
0.98
5.0%
91.2%
$
$
2017
500
228
728
$
$
20.91
0.89
4.5%
87.5%
2018
3,210
2,256
5,466
18.27
0.47
2.6%
91.2%
$
$
2017
2,656
1,853
4,509
18.99
1.04
5.8%
91.1%
48
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
(i) Net rent is primarily contractual base rent pursuant to tenant leases.
(ii) Represents increase in average net rent per square foot for renewal leasing.
(iii) Represents percentage increase in average net rent per square foot for renewal leasing.
Renewal leasing spread on tenant renewals increased by $0.98 or 5.0% for the three months ended December 31, 2018 over the
prior year comparable period while the retention ratio increased to 91.2%. For the year ended December 31, 2018, the renewal
leasing spread percentage was dampened by eleven leases with an anchor. Excluding these eleven leases, the percentage
increase in average net rent per square foot would have been 4.6% for the year. Most of the eleven lease renewals occurred at
properties located in secondary markets, of which one large property has since been sold subsequent to the year end.
Blended Leasing Spread - New Leasing and Renewal Leasing
As at
Blended leasing spread for both new and renewal leasing (i)
Three months ended December 31
Year ended December 31
2018
10.7%
2017
4.9%
2018
5.0%
2017
5.7%
(i)
The blended leasing spread is the weighted average net rent leasing spread for both renewal leasing as discussed in the previous section of this
MD&A and new leasing.
For new leasing, the spread is calculated based on percentage change in net rent between new leases and the respective previous leases for
units that have been vacant for two years or less as of the respective comparable period end dates. In other words, the new leasing spread
excludes any space that has not previously been tenanted (such as a newly completed development) or has been vacant for longer than two
years. As this is the first year for the Trust to report blended leasing spread, the new leasing spread used in calculating the blended renewal and
new leasing spread for comparable periods in 2017 and 2018 are calculated only for properties that the Trust owns as of December 31, 2018.
Given that nearly $1.0 billion secondary market asset was disposed during 2018, it is not meaningful to calculate the 2017 new leasing spread for
properties the Trust no longer owns as of December 31, 2018. On a going forward basis, however, the quarterly new leasing spread will be
calculated for properties owned by the Trust as of each quarter end date. The annual new leasing spread will be the weighted average of
quarterly new leasing spreads as reported over the four quarters of a year.
Excluding the eleven lease renewals with an anchor tenant as discussed under Renewal Leasing Activity section of this MD&A,
the blended renewal and new leasing spread would have been 6.8% for the year ended December 31, 2018.
For the three months ended December 31, 2018, the increase in the blended renewal and new leasing spread over the prior year
same quarter was primarily due to leasing of the former Sears space, as well as the timing and location of new leases completed
during the quarter.
Sears Space Leasing Update
RioCan is progressing well on the re-leasing of the former Sears premises, with leases completed or in the final stages of
negotiation, which will generate approximately 120% of the lost annual rental revenue while representing 284,000 square feet (at
RioCan’s interest) or 74% of the vacated Sears space. Replacement rent on the entire space is expected to exceed previous rent
from Sears by $4.84 per square foot (55% increase). 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, a number of tenants took possession of their spaces in the second half of 2018 and we anticipate that
the remaining replacement tenants will be in possession of their spaces in the first half of 2019.
Other Store Closures
2018 saw limited store closures, none of which is expected to have a material impact on the Trust's operations.
The Bombay/Bowring/Fluid Brands group submitted a notice of intent in October 2018 to make a proposal under the Bankruptcy
and Insolvency Act with the intention of restructuring its operations. RioCan had 25 locations under lease representing
approximately 128,000 square feet at RioCan’s interest or 0.4% of total NLA as of the year end. All leases were disclaimed in
December 2018 and in January 2019. The Trust expects to lease the units in the normal course, but these disclaimed leases may
have a short term impact on same property NOI growth for part of 2019.
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
Total
IPP NLA
36,481
2019
3,038
8.3%
2020
4,071
11.2%
2021
4,548
12.5%
2022
3,614
9.9%
2023
4,423
12.1%
$ 19.69
$ 19.47
$ 18.86
$ 21.26
$ 20.13
49
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Contractual Rent Increases
Certain of our leases provide periodic increases in rates during the lease terms which contribute to growth in same property NOI.
Contractual rent increases in each year for the next five years for our properties are as follows:
At RioCan's interest (in thousands of dollars)
For the years ending
2019
2020
2021
2022
Contractual rent increases
$
8,864 $
5,237 $
4,874 $
4,481 $
2023
3,671
Above contractual rent increases are based on existing leases as of December 31, 2018 and are on a year-over-year incremental
increase basis. The contractual rent increases are higher in 2019 as they reflect more market rent changes as a result of new
leasing and renewals completed in 2018. Contractual rent increases in 2020 as shown above are additional increases over 2019
contractual rent increases on a year-over-year incremental basis, which tend to be lower than in 2019 as it reflects more of
annual inflationary rent increases. The above schedule is on a cash rent basis and takes into account the timing of contractual
rent increases year over year (in other words, not on an annualized basis but based on a year-over-year cash rent change basis).
50
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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 the fundamentals remain solid. The Trust is adapting to the ever changing retail landscape and incorporates
future trends and growth patterns in its strategy and operation. The Trust has been increasing its major market focus while
evolving its tenant mix to better suit community 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, apparel, entertainment and
hobby retailers, and increasing its tenant mix in the sectors that have demonstrated growth and resilience such as grocery,
pharmacies, restaurants, personal services, specialty retailers and value retailers.
As of December 31, 2018, 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.
51
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Top 30 Tenants
We strive to reduce our exposure to rental revenue risk in our portfolio through geographical diversification, staggered lease
maturities, investment in residential developments, growing major market portfolio, diversification of revenue sources, 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, 2018, RioCan’s 30 largest tenants measured by annualized gross rental revenue have the following profile:
Rank Tenant name
1
2
3
4
5
Loblaws/Shoppers Drug Mart (ii)
Canadian Tire Corporation (iii)
Cineplex/Galaxy Cinemas
The TJX Companies, Inc.(iv)
Metro/Super C/Loeb/Food Basics
6 Walmart
7
8
9
10
11
Sobeys/Safeway
Recipe Unlimited (v)
Lowe's
Dollarama
Staples/Business Depot
12 Michaels
13
PetSmart
14 GoodLife Fitness
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
TD Bank
Bank Of Montreal
Reitmans (vi)
Chapters/Indigo
Best Buy
Leon's/The Brick
The Bay/Home Outfitters (vii)
LA Fitness
DSW/Town Shoes/The Shoe Company
Liquor Control Board of Ontario (LCBO)
Tim Hortons/Burger King/Popeyes
Bed Bath & Beyond
The Bank Of Nova Scotia
Value Village
Jysk Linen
Rexall Pharma Plus
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)
4.5%
4.2%
4.2%
4.1%
2.8%
2.7%
1.7%
1.6%
1.6%
1.5%
1.4%
1.4%
1.3%
1.2%
1.1%
1.1%
0.9%
0.9%
0.9%
0.7%
0.7%
0.7%
0.7%
0.6%
0.6%
0.6%
0.6%
0.6%
0.5%
0.5%
69
66
27
70
37
17
23
84
11
70
29
26
28
25
47
36
51
19
14
12
9
8
29
20
60
10
26
12
13
11
1,783
1,830
1,448
1,881
1,519
2,067
823
417
1,315
636
648
532
460
523
237
247
270
291
296
305
472
306
218
182
154
243
126
286
314
116
4.9%
5.0%
4.0%
5.2%
4.2%
5.7%
2.3%
1.1%
3.6%
1.7%
1.8%
1.5%
1.3%
1.4%
0.6%
0.7%
0.7%
0.8%
0.8%
0.8%
1.3%
0.8%
0.6%
0.5%
0.4%
0.7%
0.3%
0.8%
0.9%
0.3%
45.9%
959
19,945
54.7%
7.9
6.0
8.0
6.1
7.4
9.3
8.0
7.4
9.9
5.4
5.8
6.8
6.0
10.5
5.9
5.4
4.2
9.5
3.6
4.4
10.7
8.9
6.2
10.3
7.1
6.8
4.8
5.8
8.2
8.4
7.2
(i) Weighted average remaining lease term based on annualized gross rental revenue.
(ii) Loblaws/Shoppers Drug Mart includes No Frills, Fortinos, Zehrs Markets, Joe Fresh, Dominion and Maxi.
(iii) Canadian Tire Corporation includes Canadian Tire, PartSource, Mark’s, Sport Chek, Sports Experts, National Sports and Atmosphere.
(iv) The TJX Companies, Inc. includes Winners, HomeSense and Marshalls.
(v) Formerly Cara Operations Limited.
(vi) Reitmans includes Penningtons, Smart Set, Addition Elle and Thyme Maternity.
(vii) Excludes RioCan's proportionate share of the equity-accounted investment in the RioCan-HBC Joint Venture which owns ten HBC wholly-owned
properties and HBC's 50% of the two properties that are 50/50 owned by RioCan and HBC.
52
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
ASSET PROFILE
Investment Property
Refer to note 5 of the 2018 Annual Consolidated Financial Statements for the change in consolidated IFRS carrying values of our
income 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 Chief Operating Officer, the Senior Vice President & 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 2018, the Trust obtained a total of 31 external property appraisals (including appraisals for 7 vacant land parcels), which
supported an IFRS fair value of approximately $2.1 billion or 16% of the Trust's investment property portfolio as of December 31,
2018. 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 (ii)
Weighted average capitalization rate
December 31, 2018
December 31, 2017
5.21%
7.27%
5.49%
5.28%
6.32%
5.56%
Includes properties located in the six major Canadian markets of Calgary, Edmonton, Montreal, Ottawa, Vancouver and the Greater Toronto Area.
(i)
(ii) The change in the total average portfolio capitalization rate reflects the change in the relative weightings of the major markets and secondary
market assets in the total portfolio.
During the year ended December 31, 2018, the overall average portfolio capitalization rates compressed by 7 basis points when
compared to December 31, 2017 and compressed by 2 basis points when compared to September 30, 2018, primarily as a result
of capitalization rate compression in major markets and the sale of secondary market assets which are valued at higher than
average capitalization rates. The fair value gains for Q4 2018 and for the year were primarily driven by these capitalization rate
changes, higher stabilized net operating income on certain income properties and updated valuation estimates on specific
development properties.
The 95 basis points increase in the weighted average capitalization rate of secondary markets when compared to December 31,
2017 and 26 basis points increase when compared to September 30, 2018 resulted from changes in composition of the
secondary market assets as the Trust continues to sell secondary market assets and adjustments to capitalization rates based on
latest market conditions.
53
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Property Acquisitions During 2018
During the year ended December 31, 2018, RioCan completed acquisitions of interests in six income producing properties
aggregating $105.2 million, comprised of approximately 273,000 square feet at RioCan's interests. In connection with these
acquisitions, RioCan assumed mortgages with fair value of $38.6 million, which included a mark to market adjustment of $2.5
million.
•
•
•
•
•
•
In September 2018, acquired the remaining 20% interest in the Silver City property located in Gloucester, Ontario, for
$9.6 million including transaction costs, at a capitalization rate of 6.67% and assumed $6.9 million debt.
In September 2018, acquired the remaining 40% interest in the RioCan Centre Belcourt located in Ottawa, Ontario, for
$26.6 million including transaction costs, at a capitalization rate of 6.42% and assumed $16.8 million debt.
In June 2018, acquired the remaining 25% interest in Herongate Shopping Centre in Ottawa, Ontario, for a purchase
price of $13.4 million including transaction costs and assumed $5.4 million debt.
In June 2018, acquired an additional 20% interest in Shoppers City East in Ottawa, Ontario, for an aggregate purchase
price of $10.9 million including transaction costs, with no debt assumed. In connection with this acquisition, RioCan
increased its ownership interest in this property to 82.8%. The Shoppers City East acquisition included both income
producing property ($5.1 million) and property under development ($5.8 million).
In January 2018, acquired Thickson Centre in Whitby, Ontario for a purchase price of $31.7 million, including transaction
costs at a capitalization rate of 6.16% with no assumption of debt.
In January 2018, acquired the remaining one third interest in Green Lane Centre in Newmarket, Ontario, for a purchase
price of $18.9 million, including transaction costs at a capitalization rate of 5.65% and assumed a mortgage with a fair
value of $9.4 million, which included a mark-to-market adjustment of $2.5 million.
Subsequent to the year end, the Trust acquired one property located in Hamilton, Ontario, for a purchase price of $35.2 million at a
weighted average capitalization rate of 6.21% and assumed a mortgage payable with a fair value of $14.2 million, which included
a mark-to-market adjustment of $0.4 million. In addition, the Trust acquired the remaining 50% interest in one property located in
Calgary, Alberta for a purchase price of $70.4 million at a weighted average capitalization rate of 5.83% and assumed a mortgage
payable for $45.0 million.
54
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Property Dispositions During 2018
During the year ended December 31, 2018, the Trust disposed interests in fifty-six properties for sales proceeds aggregating
$974.9 million. Details are provided in the table below. From October 2017 to December 31, 2018, as part of its acceleration of
major markets focus strategy, the Trust disposed interest in sixty-two properties for sales proceeds aggregating $1.1 billion.
Property name and location
Q4 2018
Capitalization
rate (i)
Sales
proceeds
(thousands of
dollars)
Debt assumed
by purchaser(s)
(thousands) (ii)
GLA disposed of
at RioCan’s interest
(thousands of sqft)
Ownership
interest
disposed of
by RioCan
Churchill Plaza, Sault Ste. Marie, ON
7.49% $
15,550
$
King Plaza, Oshawa, ON
London Plaza, London, ON (iii)
Aberdeen & Cecile, Hawkesbury, ON (iv)
Six properties in PQ and ON (v)
Bellfront Shopping Centre, Belleville, ON
City View Plaza, Ottawa, ON
Quispamsis Town Centre, Quispamsis, NB
RioCan Niagara Falls, Niagara Falls, ON (vi)
4055 Carling, Ottawa, ON
West Ridge Place, Orillia, ON
Total Q4 2018
Q3 2018
Shoppers Drug Mart, Pembroke, ON
Shoppers Drug Mart on Argyle, Caledonia, ON
506 & 510 Hespeler Rd, Cambridge, ON
Mega Centre Rive-Sud, Levis, PQ
735 Queenston Road, Hamilton, ON
Hartsland Market Square, Guelph, ON
Four properties in PQ (vii)
RioCan Centre Victoria, Whitby, ON (viii)
RioCan Centre London North, London, ON
Five properties in London, ON (ix)
Flamborough Power Centre, Hamilton, ON
Total Q3 2018
Q2 2018
Four properties in ON and BC (x)
Six properties in ON (xi)
King George Square, Belleville, ON
Centre Carnaval, Trois Rivieres, PQ
West Side Place, Port Colborne, ON
Northumberland Square, Miramichi, NB
Norwest Plaza, Kingston, ON
Shoppers Drug Mart, Repentigny, PQ
410 King Street North, Waterloo, ON
Total Q2 2018
Q1 2018
Collingwood Centre, Collingwood, ON
GoodLife Plaza, St. Catherines, ON (xii)
Dilworth SC, Kelowna, BC
Vernon Square, Vernon, BC
Gates of Fergus, Fergus, ON (viii)
Total Q1 2018
Total 2018 Dispositions
5.59%
12.87%
n/a
7.37%
7.79%
5.97%
8.21%
6.60%
6.52%
6.60%
14,050
4,000
1,100
107,600
14,735
14,050
12,526
11,800
6,570
15,850
$
217,831
$
6.46% $
11,340
$
5.26%
7.03%
6.06%
5.75%
9.34%
0.48%
6.36%
6.47%
6.82%
7,625
42,304
3,000
38,000
41,100
7,992
42,000
100,564
18,468
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,145
—
—
—
—
—
—
—
143
34
122
17
1,066
110
60
83
132
103
106
1,976
34
13
394
9
109
589
49
105
516
187
$
312,393
$
26,145
2,005
6.08% $
216,214
$
7.12%
7.48%
5.63%
7.24%
6.76%
6.12%
4.96%
13,280
27,400
4,200
5,025
9,300
6,250
1,100
$
282,769
$
5.86% $
64,802
$
—
—
—
—
—
—
—
—
—
—
5.45%
4.49%
84,950
12,150
161,902
974,895
$
$
$
$
32,725
—
32,725
58,870
926
82
185
93
57
40
17
2
1,402
348
294
75
717
6,100
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
(i) Capitalization rate is based on in-place NOI calculated on a trailing 12 month basis when the related sale agreement becomes firm.
(ii) Excludes debt associated with property paid prior to or on closing.
55
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
(iii) This property was negotiated in tandem with the purchase of RioCan Centre London North which closed in Q3 2018. When both properties are
considered together, sales proceeds of $46M are at a weighted average capitalization rate of 6.92%.
(iv) Land parcel disposition.
(v)
Includes six Walmart properties located in New Liskeard, ON; Belleville, ON; Trenton, ON; Leamington, ON; Saint-Hyacinthe, PQ; and Lachute,
PQ.
(vi) The sale of a property in Niagara Falls, Ontario, which consisted of land and an income producing property portion, for sales proceeds of $11.8
million. The income producing portion was sold at a capitalization rate of 6.60%.
(vii) Includes four properties: Centre Carnaval-Montreal, Montreal, PQ; Centre-Granby, Granby, PQ; Galeries Laurentides (retail), St-Antoine, PQ; and
Levis Mall, Levis, PQ.
(viii) The capitalization rate based on in-place NOI was very low on these deals as the sale price had incorporated income from tenants which would
open later in 2018.
(ix) Includes five properties all located in London, ON: Commissioners Court Plaza; Adelaide Centre; Wharncliffe Centre; Oakridge Centre; and
RioCan Centre London South.
(x) Includes four properties: RioCan Fairgrounds I&II in Orangeville, ON; Campus Estates in Guelph, ON; Cowichan Common in Duncan, BC; and
(xi)
Flamborough Walmart in Flamborough, ON.
Includes six properties in Ontario: 2 King Street West, Bowmanville; 297 King Street East, Kingston; 270 Dundas Street East, London; 81 King
Street West, Hamilton; 200 Ouellette Avenue, Windsor; and 79 Durham Street, Sudbury.
(xii) The weighted average capitalization rate for the seven properties under the total portfolio deal with CT REIT is 6.12% based on in-place NOI. The
initial five properties closed in Q4 2017.
Refer to the Business Overview section of this MD&A for information on firm and conditional dispositions under contract as of
February 11, 2019 and note 36 of the 2018 Annual Consolidated Financial Statements for deals closed subsequent to
December 31, 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 $251.2 million as at December 31, 2018 on behalf of co-owners (December 31, 2017 - $348.9 million).
Selected Financial Information of Joint Operations (Proportionate Share)
(thousands of dollars)
As at December 31, 2018
Allied
Allied/Diamond (The Well) (iv)
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%
67% - 75%
50% - 83%
4 $
197,503 $
21,158 $
1
5
1
2
1
3
1
1
2
4
2
17
293,528
100,363
52,580
230,355
83,298
496,449
82,030
276,273
97,605
164,392
107,619
377,437
31,777
49,348
28,940
19,478
45,994
271,947
4,105
179,529
14,582
11,126
37,022
112,996
Three months ended
December 31, 2018
Year ended
December 31, 2018
NOI (iii)
1,721 $
—
1,923
689
2,618
1,022
3,438
145
78
1,261
2,443
1,138
3,022
NOI (iii)
3,936
386
6,815
2,701
8,820
4,059
13,019
583
59
5,247
8,953
7,980
13,136
75,694
44 $ 2,559,432 $
828,002 $
19,498 $
Includes properties under development and is based on the number of proportionately owned properties as at December 31, 2018.
(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.
(iv) The Trust has a 50% interest in the commercial component and a 40% interest in the residential component of The Well project, excluding The
Well Residential Building 6 which the Trust owns 50/50 with another partner, Woodbourne.
56
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Selected Financial Information of Joint Operations and Joint Ventures
Total Assets
(thousands of dollars)
As at December 31, 2018
Proportionately consolidated joint operations
Income
properties
PUD (i)
Residential
development
inventory (iii) Other (ii) Total assets
December 31,
2017
Allied
$
152,850 $
8,517 $
28,291 $
7,845 $
197,503 $
Allied/Diamond (The Well) (v)
—
282,009
Bayfield
CMHC Pension Fund
CPPIB
First Gulf
KingSett
Metropia/CD
Metropia/Bazis
Sun Life
Tanger
Trinity
Other
Total assets of proportionately consolidated
joint operations
Equity accounted joint ventures (iv):
HBC (RioCan-HBC JV)
Marketvest Corporation/Dale-Vest
Corporation (Dawson-Yonge LP)
92,474
52,234
164,236
79,368
438,474
—
81,084
96,654
151,219
62,399
6,231
—
59,999
2,488
49,019
12,206
67,657
—
9,636
—
—
—
—
—
—
—
69,301
86,849
—
—
—
11,519
1,658
346
6,120
1,442
8,956
523
40,683
951
3,537
45,220
17,987
293,528
100,363
52,580
230,355
83,298
496,449
82,030
276,273
97,605
164,392
107,619
377,437
138,488
193,261
105,736
48,874
240,574
82,335
415,864
46,701
209,103
97,735
164,510
322,133
270,471
200,997
136,771
21,682
$ 1,571,989 $ 634,533 $
206,123 $ 146,787 $ 2,559,432 $
2,335,785
$
255,536 $
— $
— $
577 $
9,371
—
169
256,113 $
9,540
243,709
9,068
—
—
Total assets of equity accounted joint ventures
264,907
$ 1,836,896 $ 634,533 $
—
746
206,123 $ 147,533 $ 2,825,085 $
265,653
252,777
2,588,562
(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 Windfield Farms townhouses 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, excluding The
Well Residential Building 6 which the Trust owns 50/50 with another partner, Woodbourne.
57
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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
KingSett
Metropia/CD
Metropia/Bazis
Sun Life
Tanger
Trinity
Other
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
Three months ended
December 31
Year ended
December 31
2018
2017
2018
2017
$
1,721 $
—
1,923
689
2,618
1,022
3,438
145
78
1,261
2,443
1,138
3,022
19,498 $
3,373 $
122
3,495
22,993 $
$
$
$
333 $
34
2,129
608
2,050
1,036
3,034
85
—
1,326
2,387
3,911
3,071
20,004 $
3,195 $
125
3,320
23,324 $
3,936 $
386
6,815
2,701
8,820
4,059
1,341
194
7,042
2,190
6,473
4,147
13,019
11,426
583
59
5,247
8,953
7,980
13,136
75,694 $
230
—
5,223
9,524
16,309
11,491
75,590
13,177 $
12,903
503
13,680
89,374 $
497
13,400
88,990
(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, 2018, the Trust's ownership interest in RioCan-HBC JV was 12.5% (December 31, 2017 - 12.0%). 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 (i)
Non-current liabilities (ii)
Net assets
RioCan's share of net assets in RioCan-HBC JV (iii)
December 31, 2018
December 31, 2017
$
$
$
4,621 $
2,028,739
362,726
418,151
1,252,483 $
158,629 $
10,045
2,003,865
12,747
782,892
1,218,271
147,897
(i) As at December 31, 2018, current liabilities include $365.6 million of mortgages payable and term loans.
(ii)
Includes mortgages payable and lines of credit with maturities beyond twelve months.
(iii) 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
Three months ended December 31
Year ended December 31
$
$
$
2018
35,111 $
5,491
25,086
8,478
46,228 $
5,772 $
2017
32,466 $
2,649
(5,467)
4,163
20,187 $
2,407 $
2018
142,496 $
24,333
5,249
31,101
92,311 $
11,357 $
2017
129,766
11,387
(3,722)
18,386
96,271
11,347
58
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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. These include, but are 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, 2018, the estimated weighted average age of our income property portfolio is
approximately 24 years (December 31, 2017 - approximately 24 years). Maintenance capital expenditures consist primarily of
tenant improvements, third-party leasing commissions 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 market 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)
2018
2017
2018
2017
2018
2019
$
$
$
8,060 $
6,762
2,312
17,134 $
5,655
22,789 $
4,917 $ 30,469 $ 29,089 $
5,122
9,424
10,195
6,372
4,934
16,411 $ 45,598 $ 50,953 $
12,440
24,000 $
13,000
8,000
45,000 $
16,000
18,000
6,000
40,000
3,475
13,975
19,886 $ 59,573 $ 69,183
18,230
(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, 2018, our total capital expenditures on income properties were $22.8 million
compared to $19.9 million for the same period in 2017. The $2.9 million increase was primarily due to $2.2 million in higher
revenue enhancing expenditures and $3.1 million in higher payments for tenant improvements, partially offset by $2.4 million in
lower recoverable and non-recoverable capital expenditures. Quarterly variations were primarily due to timing of expenditures.
For the year ended December 31, 2018, our total capital expenditures on income properties were $59.6 million compared to
$69.2 million for the same period in 2017. The $9.6 million decrease was primarily due to $6.7 million in lower recoverable and
non-recoverable capital expenditures, and $4.3 million in lower revenue enhancing expenditures, partially offset by $1.4 million in
higher payments for tenant improvements,
RioCan's total maintenance capital expenditures for the year ended December 31, 2018 of $45.6 million were closely in line with
59
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
our normalized capital expenditures of $45.0 million for the period. The small difference was primarily due to the timing of
expenditures. Refer to the Non-GAAP Measures section of this MD&A for details on how estimates of normalized capital
expenditures are determined for 2018 and 2019.
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 opportunities also 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 incremental returns and increase the Trust's net asset value.
The overall development environment in Canada is undergoing changes and development risks are becoming more prevalent.
Refer to the Outlook and Risks and Uncertainties sections of this MD&A for discussions about the development environment and
associated risks. Development risk management is essential to the Trust's successful implementation of its strategy. The Trust
strategically and prudently manages its development risks as follows:
• RioCan undertakes developments selectively based on opportunities in its portfolio and within the major markets it
focuses on.
• Development projects must be expected to generate appropriate risk-adjusted returns. The Trust will not commence
construction until it has solid third-party market studies of the rental markets in the development areas and, where a
large portion of the development has commercial space, the requisite leasing commitments pertaining to the commercial
portion of the mixed-use developments are required.
• RioCan’s well established and robust internal control framework ensures proper oversight over development approvals
and construction management.
• RioCan uses a staggered approach in its development program to avoid unnecessary concentration of development
projects in a single period of time to allocate risks and manage the Trust's capital. The staggered development approach
also enables proper allocation of personnel resources and ensures that the Trust’s experienced development team is at
the appropriate scale, resulting in no overhead pressure for RioCan to take on development activities.
• RioCan utilizes strategic alliances to reduce capital requirements and mitigate risks.
• RioCan often already owns the assets under its development program which are income producing. This allows the
Trust to manage the timing of development starts, and if needed, these assets can continue to generate income until the
appropriate time to commence development is reached. This is becoming an increasingly important element of
development risk management as construction costs and overall development costs are increasing.
• RioCan's development team utilizes a variety of cost mitigation strategies, such as working with experienced
construction managers early in the project design stage to ensure a project's constructibility and efficiency is maximized,
ensuring construction drawings are finalized to the furthest extent possible prior to commencing construction, structuring
construction management contracts such that the contracts are converted to fixed price contracts as soon as all the
scope is defined thus limiting costs escalations, and so on.
•
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 provide lower 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 section of this MD&A.
Management's current estimates and assumptions as discussed throughout this Properties Under Development section of this
MD&A are subject to change. Such changes may be material to the Trust. RioCan’s estimated NLA, estimated future
development costs and estimated proceeds from disposition are based on assumptions which 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
60
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
consistent with these projections and may, therefore, materially differ from management's current estimates. In addition, 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, the costs, the phasing of the projects, or the development yields achieved.
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 which funds the 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, 2018, RioCan's investments in greenfield development and residential inventory as a percentage of
consolidated unitholders' equity is 5.3% 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, 2018, the Trust is in compliance with all financial covenants pursuant to the operating
line of credit and credit facility agreements including the one relating to the Trust's development activities. Refer to note 27 of the
2018 Annual Consolidated Financial Statements for further details.
Development Pipeline
RioCan's development pipeline as at December 31, 2018 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 (ix)
1
10
11
16
27
16
43
14
57
291
3,151
3,442
492
3,934
291
2,906
3,197
492
3,689
12,679
11,912
16,613
15,601
9,614
9,614
26,227
25,215
—
245
245
—
245
767
1,012
—
1,012
291
1,275
1,566
364
1,930
3,236
5,166
2,323
7,489
—
597
597
129
726
8,676
9,402
7,291
—
1,033
1,033
—
1,033
—
1,033
—
16,693
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. 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 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.
(v) Urban Intensification projects include approximately 0.1 million square feet that are currently IPP.
(vi) Expansion and Redevelopment projects include approximately 0.3 million square feet of vacant NLA which was primarily former Sears space prior
to its redevelopment, with remaining 0.2 million square feet as incremental NLA.
(vii) Active projects with cost estimates in progress include approximately 2.0 million square feet that are currently IPP.
(viii) Future estimated density includes approximately 1.0 million square feet that are currently IPP.
(ix) 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 of 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.
Approximately 3.5 million square feet of NLA out of the total estimated 26.2 million square feet development pipeline as of
December 31, 2018 is existing NLA which is currently income producing, resulting in net incremental density estimated at 22.7
million square feet as of December 31, 2018. When compared to the Trust's development pipeline as of December 31, 2017, the
development pipeline square footage has not changed much despite the development completions during the year and sale of
one large development project in a secondary market in British Columbia. This was largely because of an increase in our future
estimated density, which reflects the Trust's ability to tap into its existing portfolio to identify intensification opportunities for a
robust development pipeline over time.
61
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
A key milestone of the development process is to obtain the zoning approval. The following table breaks down the Trust's
development pipeline (at RioCan's interest) by zoning status. As of the date of this MD&A, of total estimated NLA in the Trust's
current development pipeline, approximately 42.9% have zoning approvals and an additional 20.5% have zoning applications
submitted.
(thousands of square feet)
Zoning approved
Zoning applications 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)
37
6
14
57
42.9% 11,239
10,438
20.5%
36.6%
5,374
9,614
5,163
9,614
801
211
—
100.0% 26,227
25,215
1,012
4,119
1,047
2,323
7,489
5,286
4,116
7,291
1,033
—
—
16,693
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. 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 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.
Zoned NLA decreased by 0.7 million square feet or 2.2% as compared to Q3 2018 due to 0.3 million square feet of project
completions during Q4 2018 and the exclusion of a large project in British Columbia that was sold subsequent to the year end.
Similarly, when compared to December 31, 2017, the Trust's zoned NLA declined by about 1.0 million square feet, mainly as a
result of 0.8 million square feet of project completions during the year and the aforementioned large project that was sold
subsequent to the year end.
Estimated Project Costs
RioCan's share of estimated development costs as of December 31, 2018 are summarized in the following table, which includes
estimated costs for the 27 active PUD projects with detailed cost estimates (Category A as shown in the Development Pipeline
table earlier), plus the current carrying costs of the development lands and other, net of projected proceeds from dispositions.
Costs relating to condominiums or townhouse developments are excluded in the following table but included in Residential
Inventory in the Annual Consolidated Financial Statements and in this MD&A.
(thousands of dollars or
thousands of square feet)
Greenfield Development
Urban Intensification
Expansion & Redevelopment (iv)
Active projects with detailed cost
estimates
Development Lands and Other (ii)
Projected proceeds from dispositions (iii)
Total
Fair Value to Date
Number of
Projects
Total PUD
NLA (i)
Total
Estimated
Costs
At RioCan's Interest
Costs Incurred to Date
Completed
(IPP)
PUD
Total
Estimated
PUD Costs
to Complete
1
10
11
16
27
291 $
110,896 $
47,083 $
39,248 $
86,331 $
24,565
2,906
3,197
492
1,534,587
1,645,483
241,841
218,315
265,398
—
477,802
517,050
124,956
696,117
782,448
124,956
838,470
863,035
116,885
3,689 $ 1,887,324 $
265,398 $
642,006 $
907,404 $
979,920
—
—
298,431
(153,830)
—
—
298,431
298,431
—
—
—
(153,830)
$ 2,031,925 $
265,398 $
940,437 $ 1,205,835 $
826,090
$
340,225 $ 1,036,495 $ 1,376,720
Total PUD 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.
(iii) Represents conditional land and air right sales that the Trust intends to sell instead of holding for long-term income, which management considers
to be reductions to its overall development costs.
(iv) Expansion and Redevelopment projects tend to be shorter in duration and smaller in size compared to Greenfield and Urban Intensification
projects, and generally pertain to the redevelopment of individual unit(s) at a property. Once the redevelopment of the individual unit(s) has/have
been completed, the NLA and associated costs are transferred to IPP and no longer included in the development pipeline or development costs,
resulting in nil completed IPP in this table.
Total estimated project costs include the current carrying costs of development lands and other, net of estimated proceeds from
land and air rights dispositions. Total estimated project costs include land costs measured at fair value of the land or existing IPP
upon transfer to PUD, soft and hard construction costs, external leasing costs, tenant inducements, construction and
development management fees, and capitalized interest and other carrying costs, as well as capitalized development staff
compensation and other expenses.
62
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
The $101.5 million decrease in total estimated costs for active projects with detailed cost estimates as of December 31, 2018
when compared to the same estimates as of September 30, 2018 was primarily due to the transfer of completed expansion and
redevelopment projects to IPP during the quarter.
The above total estimated development costs as at December 31, 2018 are further broken down by committed and non-
committed spending as follows:
At RioCan's Interest
Costs Incurred to Date
(thousands of dollars)
Committed (i)
Non-committed
Total
Total Estimated
Costs
Completed
(IPP)
PUD
Total
Estimated PUD
Costs to Complete
$
$
1,596,838 $
265,398 $
634,468 $
899,866 $
435,087
—
305,969
305,969
2,031,925 $
265,398 $
940,437 $
1,205,835 $
696,972
129,118
826,090
(i) A project is considered to be committed when all major planning issues have been resolved, anchor tenant(s) for the commercial components 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.
Annual Development Spending
Annual development costs for active PUD projects with detailed cost estimates are estimated in the $300 million to $400 million
range over the next two years given the expected progress of large projects like The Well. Together with an estimated $100
million annual of costs for residential inventory, total annual development expenditures are estimated to be in the $400 million to
$500 million range over the next two years. These annual costs estimates are management’s estimates as of December 31,
2018 and are subject to change due to potential changes in various underlying factors as noted earlier in this MD&A.
Overall, the Trust targets to keep the total IFRS value of PUD and residential inventory on the consolidated balance sheet as a
percentage of consolidated gross book value of assets at no more than 10% (except for short-term fluctuations as large projects
are completed), despite the maximum of 15% permitted under the Trust's revolving unsecured operating line of credit and non-
revolving unsecured credit facilities agreements. As of December 31, 2018, this metric was 8.5%. Refer to note 27 of the 2018
Annual Consolidated Financial Statements.
The Trust has been funding and will continue to fund its development pipeline through its capital recycling program including net
proceeds from its strategic disposition program, sales proceeds from residential inventory developments or air rights sales, the
sale of remaining marketable securities, and strategic development partnerships, as well as excess operating cash flows after
maintenance capital expenditures and distributions have been paid.
Mixed-Use Residential Development
The government of Ontario’s recent amendment to exempt new residential rental units from rent control is expected to encourage
more residential rental supply and RioCan is committed to our residential development program.
RioCan targets to develop approximately 10,000 residential rental units over the next decade. RioCan has currently identified a
number of properties, as summarized in the following table, some of which are actively being developed and others are considers
to be strong possible intensification opportunities. All of the developments are in the six Canadian major markets in which the
Trust operates and are typically located in the vicinity of existing or planned substantive transit infrastructure. This summary does
not include Greenfield and Urban Intensification projects that have commercial components only.
63
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Locations
RioCan Ownership
% (Partner)
Total
NLA at
100%
Total PUD (ii)
Residential
Inventory
(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 (Brio) (iv)
Calgary, AB
50% (Boardwalk)
Dupont Street (Litho) (iv)
Toronto, ON
50% (Woodbourne)
Fifth and Third East Village (iv)
Calgary, AB
100%
Gloucester (Frontier) (iv)
King Portland Centre (iv)
Yonge Eglinton Northeast Corner
(ePlace) (iv) (ix)
The Well (iv)
Gloucester, ON
50% (Killam)
Toronto, ON
50% (Allied)
Toronto, ON
Toronto, ON
50% (Metropia /
Bazis)
50% commercial
( Allied )
40% residential
( Allied / Diamond)
College & Manning (Strada) (iv)
Toronto, ON
50% (Allied)
The Well -Residential Bldg 6 (iv)
Toronto, ON
50% (Woodbourne)
145
180
759
185
421
712
72
90
759
93
210
356
72
90
759
93
164
157
2,580
1,181
1,181
108
391
54
195
54
195
—
—
—
—
46
199
—
—
—
5
16
161
3
164
11
746
30
—
5,481
3,010
2,765
245
1,136
Expansion and Redevelopment
Yonge Sheppard Centre (iv) (v)
Toronto, ON
50% (KingSett)
309
155
155
—
26
5,790
3,165
2,920
245
1,162
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%
Millwoods Town Centre (iv)
Edmonton, AB
40% (Bayfield)
2,010
316
418
668
955
158
418
334
955
804
744
968
158
418
334
955
804
744
968
—
—
—
—
—
—
—
100%
100%
744
968
100% of
commercial, 50% of
residential (Tribute)
1,931
1,375
819
556
100%
100%
977
572
977
572
977
572
—
—
22
35
10
435
300
96
187
819
163
122
Ottawa, ON
Calgary, AB
Oshawa, ON
Toronto, ON
Ottawa, ON
Toronto, ON
50% (Talisker)
Mississauga, ON
Toronto, ON
Toronto, ON
Toronto, ON
Toronto, ON
100%
100%
100%
100%
50% (CD Capital /
Metropia)
9,559
7,305
6,749
556
2,189
4,560
538
318
449
269
318
449
2,760
2,760
1,324
1,324
269
318
449
2,760
1,324
508
254
43
5,897
5,374
5,163
—
—
—
—
—
211
211
70
119
32
600
204
21
199
198
417
2,160
1,120
22
1,047
4,116
15,456 12,679
11,912
767
3,236
8,676
67
75
—
90
—
146
—
—
597
—
—
—
—
436
24
195
597
129
726
136
383
324
520
504
648
781
—
814
450
—
—
1,033
—
1,033
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Westgate (iv)
Southland Crossing (iv)
Windfield Farms (iv)
Markington Square (iv)
Elmvale Acres (iv)
Zoning applications submitted
Queensway
RioCan Grand Park
Dufferin Plaza
RioCan Scarborough Centre
RioCan Leaside Centre
Yorkville project
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 - 14 projects
(viii)
Total mixed-use residential developments
- 40 projects
Mixed-use residential developments as a
percentage of total development pipeline
21,246 15,844
14,832
1,012
4,398
9,402
1,033
9,999
9,614
9,614
—
2,323
7,291
—
31,245 25,458
24,446
1,012
6,721
16,693
1,033
97.1% 96.9%
100.0%
89.7%
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.
64
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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 2.0 million square feet that are currently IPP.
(viii) Future estimated density includes approximately 1.0 million square feet that is currently IPP.
(ix) RioCan will acquire the remaining 50% interest in the residential rental tower for a purchase price estimated in the range of $95 million to $105
million which is expected to occur in the first half of 2019. In addition, RioCan has an agreement to acquire the remaining 50% interest in the retail
component at a purchase price based on a 7% capitalization rate and the stabilized net operating income upon completion in 2019. Upon closing
of each respective transaction, RioCan will own 100% of the respective component of the project.
Mixed-use residential projects account for approximately 97.1% or 25.5 million square feet of NLA of the Trust’s total estimated
development pipeline, of which 10.5 million square feet currently have zoning approvals, 5.4 million square feet currently have zoning
applications submitted and 9.6 million square feet represent sites with future density.
Residential developments including rental, air rights sales, and residential inventory account for 71.4% or 18.7 million square feet
of the Trust's total development pipeline as of December 31, 2018.
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 (gains) / losses
Transfers IPP to PUD
Transfers to residential inventory
Fair value (losses) gains, net
Earn-out consideration
Balance, end of year
Three months ended December 31
Year ended December 31
2018
2017
2018
$
1,177,978
$
1,039,775
$
1,123,184
$
—
(11,600)
131,006
(263,014)
(17,037)
14,900
—
183
4,079
25,425
(52,904)
95,261
(53,730)
5,992
51,424
(3,102)
15,043
—
14,846
(19,448)
410,791
(550,925)
(4,567)
70,935
(5,014)
(7,386)
4,079
2017
915,508
63,933
(88,127)
324,596
(224,311)
4,240
112,473
(16,174)
27,437
3,609
$
1,036,495
$
1,123,184
$
1,036,495
$
1,123,184
Development Property Acquisitions and Dispositions
During the year, the Trust completed $46.3 million development related acquisitions including transaction costs, which were
allocated as $14.8 million for PUD, $26.4 million for residential inventory and $5.1 million for IPP.
•
•
In the second quarter of 2018, the Trust acquired an additional 20% interest in Shoppers City East from one of the
partners which included PUD and IPP related assets for an aggregate purchase price of $10.9 million including
transaction costs which was allocated $5.8 million to PUD and $5.1 million to IPP.
In the first quarter of 2018, the Trust acquired the remaining 18.75% interest in development lands located in Vaughan,
Ontario, at a purchase price of $4.4 million including transaction costs.
• During the first quarter of 2018, the Trust acquired three land parcels pertaining to its Yorkville development, located in
the prestigious Yorkville area of Toronto, Ontario, for the total acquisition price of $31.1 million including transaction
costs (at RioCan's 50% interest), which was allocated $26.4 million to residential development inventory and $4.7 million
to PUD. RioCan and its partners have submitted zoning application for the site, which has the potential for
approximately 0.5 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 6.00%
capitalization rate and has the right of first opportunity to acquire the residential rental replacement units.
During the year, the Trust completed $19.4 million development related dispositions, consisting of the sale of one parcel of
development land located in Calgary, Alberta, for sales proceeds of $11.6 million in the fourth quarter and the sale of one parcel
of excess land in Oshawa, Ontario, for sale proceeds of $7.8 million in the third quarter.
65
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Completed Developments in 2018
During the three months and year ended December 31, 2018, RioCan transferred $263.0 million and $550.9 million, respectively
in costs to income producing properties pertaining to 298,000 and 799,000 square feet of completed development projects in the
respective periods. A summary of RioCan’s NLA completed during the period is as follows:
(thousands of square feet, unless otherwise noted)
2018
NLA at RioCan's Interest
RioCan’s %
ownership
Total
NLA
Q4
Q3
Q2
Q1
Tenants
Property location
Greenfield Developments
East Hills, Calgary, AB
Total Greenfield Developments
Urban Intensification
491 College Street, Toronto, ON
642 King Street West, Toronto, ON
Bathurst College Centre, Toronto, ON
King Portland Centre, Toronto, ON
Yonge Eglinton Northeast Corner
(ePlace), Toronto, ON
Total Urban Intensification
Expansion and Redevelopment
Lawrence Square, Toronto, ON
Brentwood Village, Calgary, AB
Burlington Centre, Burlington, ON
RioCan Centre Victoria, Whitby, ON
Gates of Fergus, Fergus, ON
Empress Walk, Toronto, ON
RioCan Meadows, Edmonton, AB
Place Carnaval, Laval, QC
Yonge Sheppard Centre, Toronto, ON
Kennedy Commons, Toronto, ON
Stockyards Village, Toronto, ON
RioCan Thickson Ridge, Whitby, ON
Northgate Village SC, Calgary, AB
RioCan Centre Kingston, Kingston, ON
RioCan Centre Sudbury, Sudbury, ON
40%
50%
50%
100%
50%
50%
100%
100%
50%
50%
100%
100%
100%
100%
50%
50%
50%
100%
100%
100%
100%
18
18
12
13
128
132
80
2
2
—
—
73
2
2
—
8
—
— 132
80
—
365
153
140
15
50
41
44
21
10
15
4
49
19
6
49
7
43
43
—
21
—
—
—
—
—
—
24
2
3
—
7
43
43
—
23
30
—
—
—
—
—
—
17
3
49
—
—
—
2
2
4
—
55
—
—
59
—
4
—
—
—
10
15
4
25
—
—
—
—
—
—
58
12 Cineplex, Bottle Depot
12
8 LCBO, Arrivals + Departures, Genuine
Health
5 The Parlour Steakhouse, Cava
— FreshCo, Bank Of Nova Scotia,
University Health Network
— Shopify, Indigo
— eCentral Residential Rental Tower (Floors
1-13)
13
15 Structube
2 Ashley Furniture, CANA, 420 Premium
Market, buybuy Baby
11 Winners
44 Reptilia, The Tile House, Flying Squirrel
21 Habitat for Humanity Restore, Pet Valu
— Morals Village
— South St. Burger, Daycare, Firecrust
Pizza
— Jean Coutu Expansion
— LA Fitness, Longo's
— Structube, McDonald's
— Royal LePage, Kids & Company
— Crunch Fitness, Goemans Appliances,
Visions Electronics
— The Canadian Brewhouse
— Winners, HomeSense
— Winners, HomeSense
93
Total Expansion and Redevelopment
416
143
122
Total Development Completion
799
298
264
119
118
66
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Greenfield Development
As at December 31, 2018, RioCan currently has one active greenfield development project with a detailed cost estimate:
At RioCan's Interest
(thousands of dollars or
thousands of square feet)
RioCan's
%
Ownership
Total NLA Upon Project
Completion
Completed
(IPP)
PUD
Total
Total
Estimated
Costs
Costs Incurred to Date
Completed
(IPP)
PUD
Total
Estimated
PUD
Costs to
Complete
%
Commercial
Leased (i)
Anticipated
Date of
Development
Completion
East Hills, Calgary, AB
40%
154
137
291 $ 110,896 $
47,083 $ 39,248 $ 86,331 $
24,565
59%
2021
Fair Value to date
$
49,313 $ 42,922 $ 92,235
(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 11, 2019.
As of the release date of this MD&A, approximately 171,000 square feet of the above greenfield development NLA has committed
leases, which includes tenants that have taken possession of the space, at a weighted average net rent rate of approximately
$19.18 per square foot.
Urban Intensification
A focus within our development growth strategy is urban intensification, which is another name for our residential mixed-use and
commercial development program. The Trust currently has 10 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 10 active urban
intensification projects are expected to generate approximately 1.9 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, 2018 is as follows:
Total PUD NLA Upon Project
Completion
Costs Incurred to Date
At RioCan's Interest
(thousands of dollars
or thousands of square
feet)
RioCan’s
%
Ownership
Completed
(IPP)
PUD
Total
Total
Estimated
Costs
Completed
(IPP)
PUD
Total
Estimated
PUD Costs
to
Complete
%
Commercial
Leased (i)
Anticipated
Date of
Development
Completion
College & Manning
(Strada),Toronto, ON
(v)
Bathurst College
Centre, Toronto, ON (v)
Brentwood Village
(Brio), Calgary, AB (v)
Dupont Street (Litho),
Toronto, ON (v)
Fifth and Third East
Village, Calgary, AB (v)
Gloucester (Frontier),
Ottawa, ON (v)
King Portland Centre,
Toronto, ON (v)
The Well, Toronto, ON
(iv) (v) (vii)
Yonge Eglinton
Northeast Corner
(ePlace), Toronto, ON
(v),(vi)
The Well -Residential
Bldg 6, Toronto, ON (iii)
Total Estimated
Costs (ii)
Fair Value to date
50 %
27
27
54 $
36,207 $
8,985 $
8,521 $ 17,506 $
18,701
91%
2020
100 %
127
13
140
111,311
79,665
28,816
108,481
2,830
100%
2019
50 %
50 %
100 %
50 %
—
—
—
3
72
90
72
90
39,318
— 15,673
15,673
23,645
n/a
2020
78,639
— 21,204
21,204
57,435
74%
2020
759
759
128,189
— 87,180
87,180
41,009
82%
2021
90
93
42,872
226
35,866
36,092
6,780
100%
2019
50 %
164
—
164
86,393
77,143
— 77,143
9,251
100%
2018 /
2019
50% of
commercial
40% of
residential
air rights
— 1,181
1,181
768,717
— 233,765
233,765
534,952
71%
2021
50 %
80
78
158
106,285
52,296
39,239
91,535
14,750
88%
2019
50 %
—
195
195
136,656
—
7,538
7,538
129,118
n/a
2022+
401
2,505
2,906 $ 1,534,587 $ 218,315 $477,802 $696,117 $ 838,470
$ 290,911 $584,001 $874,912
(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 11, 2019.
(ii) Total Estimated Costs exclude fair value gains of $106.2 million.
(iii) This development project has not yet commenced construction, therefore, costs incurred to date have not been substantial.
(iv) The total estimated PUD costs for The Well are net of approximately $61.0 million recoverable costs at RioCan's interest relating to matters such as
parking, parkland dedication, and Enwave thermal energy tank based on the air rights sale agreement and other agreements in place. However, the
estimated PUD costs have not deducted approximately $75.6 million (at RioCan's interest) of estimated proceeds from the sale of residential air rights
67
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
at the project. Net of the estimated proceeds from the sale of residential air rights, the total estimated PUD costs for The Well (at RioCan's interest)
would be $693.1 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.
(vi) RioCan will acquire the remaining 50% interest in the residential rental tower for a purchase price estimated in the range of $95 million to $105 million
which is expected to occur in the first half of 2019. In addition, RioCan has an agreement to acquire the remaining 50% interest in the retail component
at a purchase price based on a 7% capitalization rate and the stabilized net operating income upon completion in 2019. Upon closing of each respective
transaction, RioCan will own 100% of the respective component of the project.
(vii) The 71% leased at The Well is based on committed leases, including extension rights, for office space only. Retail leasing will start in 2019 once
office leasing is well progressed as office tenants determine the types of retail tenants best suited for the flagship development.
During Q3 2018, 642 King Street was substantially completed and transferred to IPP and is therefore no longer included in the
above table. The commercial component of King Portland Centre was also substantially completed and transferred to IPP during
Q3 2018. However, due to remaining costs to complete, this project is still included in the above table.
As of the release date of this MD&A, approximately 811,000 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 $32.26 per square foot.
Expansion & Redevelopment
A summary of RioCan’s expansion and redevelopment projects as at December 31, 2018 is as follows:
(thousands of dollars or thousands of square feet)
1910 Bank Street, Ottawa, ON
Burlington Centre, Burlington, ON
Five Points Mall, Oshawa, ON
RioCan St. Laurent, Ottawa, ON
Sage Hill, Calgary, AB
Tanger Outlets - Kanata, Kanata, ON
Stockyards Village, Toronto, ON
Yonge Sheppard Centre, Toronto, ON
1208 1216 Dundas Street East, Whitby ON
Properties with former Sears units (ii) - 7
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
Costs
Costs
Incurred to
Date
Historical
IPP Costs
(iii)
Estimated PUD
Cost to
Complete
Total
2 $
1,878 $
93 $
126 $
219 $
100%
50%
100%
100%
50%
50%
50%
50%
100%
4
10
96
4
19
4
155
7
191
1,745
4,580
26,446
2,173
11,238
3,305
1,479
—
810
1,357
4,244
611
—
2,680
1,479
2,680
14,900
15,710
328
3,761
2,670
1,684
8,004
3,281
138,681
43,000
16,018
59,018
5,200
258
1,551
1,809
1,659
266
1,900
10,736
489
3,234
24
79,663
3,391
46,595
10,028
21,044
31,072
15,523
492 $
241,841 $
61,880 $
63,077 $ 124,956 $
116,885
$
99,721
(i)
Total estimated PUD costs include carrying amounts transferred from IPP for redevelopment and exclude historical fair value losses of $25.2 million.
Expansion and Redevelopment projects include approximately 0.3 million square feet of vacant NLA which was primarily former Sears space prior
to its redevelopment, with the remaining 0.2 million square feet as incremental NLA.
(ii) RioCan transferred carrying value associated with the spaces formerly occupied by Sears 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.
The 48,000 square feet decrease in NLA during the three months ended December 31, 2018 from the previous quarter was
primarily due to the 143,000 square feet transfer of certain projects from PUD to IPP upon project completions, net of 96,000
square feet transfer from IPP to PUD for RioCan St. Laurent in Ottawa, Ontario.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 (i) property operating income earned during
the relatively short holding period, which will be included in net income, and (ii) sales proceeds.
Transfers into residential inventory are based on a change in use evidenced by 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 and the
inception of an operating lease to another party.
As at December 31, 2018, the costs of residential inventory include the costs incurred on the following four condominium or
townhouse projects:
•
Yonge Eglinton Northeast Corner condominium component (eCondo) - This 623-unit, fully pre-sold condominium
project is co-owned with Metropia and Bazis Inc. ("Metropia"). Purchasers started taking possession of condominium
units in Q4 2018 and will continue to take possession on a phased basis over the first half of 2019. In Q4 2018 the Trust
recognized $1.4 million of income from the condominium sales based on units taken possession of in the quarter.
• King Portland Centre condominium component (Kingly) - This is a 132-unit condominium project at the northwest
corner of King Street West and Portland Street in the trendy King West neighbourhood of Toronto. RioCan and its 50/50
partner Allied have fully pre-sold the condominium units with profitability of the project exceeding initial expectations.
The building is expected to be completed and turned over for possession in Q3 2019.
•
Yorkville - This is a 50/25/25 joint venture project among RioCan, Metropia and Capital Development ("CD") in the
prestigious Toronto neighborhood of Yorkville. The project has the potential for the development of approximately half a
million square feet of luxury condominiums, retail uses and up to 82 residential rental replacement units. During Q1
2018, the partners substantially completed acquisitions of adjacent properties required for the development.
• Windfield Farms Townhouses - This is a 50/50 joint venture project with Tribute Communities to develop a 31-acre
residential component of lands at the Windfield Farms site located in Oshawa, Ontario. Also known as UC Towns 2, it
includes 538 condominium townhouses to be constructed in four phases and two phases of high rise condominiums, the
first of which consists of a 479-unit high rise condominium. 166 of the 170 units released in phase one and 14 of the 94
units in phase two for the townhouse developments have been sold. Building construction of the townhouses
commenced in Q2 2018 with first occupancy expected in Q2 2019. Marketing for the first phase of the high rise
condominium project began in Q4 2018 with 202 of the 479 units sold during the quarter.
Refer to the Mixed-Use Residential Development section of this MD&A for a summary of the Residential Inventory NLA as
currently planned. The following table shows changes in the aggregate carrying value of RioCan's residential inventory:
Three months ended December 31
Year ended December 31
2018
2017
2018
Balance, beginning of year
$
205,675 $
113,681 $
132,003 $
Acquisitions
Dispositions
Development expenditures
Transfers from investment properties (i)
—
(19,828)
20,276
—
—
—
15,220
3,102
26,370
(19,828)
62,564
5,014
2017
48,414
36,870
—
30,545
16,174
Balance, end of year (ii)
$
206,123 $
132,003 $
206,123 $
132,003
(i) During the year ended December 31, 2018, the current fair market value of certain office units located on the 2nd and 3rd floors of the Yonge-Eglinton
Northeast Corner development were transferred from investment property to inventory as they will not be leased to tenants as originally contemplated,
but rather, are being marketed and sold as condominium units.
(ii) Comprised of $86.8 million (December 31, 2017 - $72.5) for eCondo, $28.3 million (December 31, 2017 - $16.1) for Kingly, $69.3 million (December
31, 2017 - $38.1) for Yorkville and $21.7 million (December 31, 2017 - $5.3) for Windfield Farms Townhouses.
As discussed under Annual Development Spending section of this MD&A, annual costs for residential inventory are estimated in
the $100 million range over the next two years. This annual cost estimate is management’s estimate as of December 31, 2018
and is subject to changes due to potential changes in various underlying factors as noted earlier in this MD&A.
Development Yield and Incremental Value Creation
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 net project costs (which are total estimated project costs net of estimated proceeds from dispositions
including land and air right sales and net of applicable interim or fee income during the development period). The annualized
stabilized NOI of a project is an estimate of stabilized NOI following completion of a project on a full year basis.
The Trust also estimates incremental value creation upon project stabilization. This incremental value creation is estimated by
using estimated future stabilized value (estimated stabilized NOI of a project divided by an assumed capitalization rate applicable
to the project upon stabilization under the prevailing market conditions), less total estimated net project costs as defined above.
69
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Development yields and incremental value creations for five urban intensification and greenfield projects are estimated in the
following table. These projects are included here because they are complete or close to completion.
Commercial and/or Residential Rental Components
Residential
Inventory
Total
Project
Ownership
% for Data
in this
Table
Total
Estimated
Net
Project
Costs
Estimated
Stabilized
NOI
Estimated
Yield on
Total
Costs
Estimated
Future
Stabilized
Value
Incremental
Value
Creation
Upon
Stabilization
Estimated
Incremental
Value
Creation %
Estimated
Residential
Inventory
Gains
Total
Estimated
Incremental
Value
Creation
100%
$ 223,200 $ 11,800
5.3% $ 327,300 $
104,100
46.6% $
14,000 $
118,100
50%
50%
100%
100%
86,400
34,100
109,400
120,800
5,500
1,800
5,200
8,500
6.4% 129,900
5.3%
44,800
4.8% 115,400
7.0% 161,000
43,500
10,700
6,000
40,200
50.3%
31.4%
5.5%
33.3%
12,500
n/a
n/a
n/a
56,000
10,700
6,000
40,200
$ 573,900 $ 32,800
5.7% $ 778,400 $
204,500
35.6% $
26,500 $
231,000
(thousands of dollars)
Yonge Eglinton Northeast
Corner (ePlace) (i)
King Portland Centre
Gloucester (Frontier) (ii)
Bathurst College Centre
Sage Hill (iii)
Total
(i) Total estimated net project costs include estimated net project costs for the Trust's current 50% interest plus the cost of acquiring the remaining 50%
interest in the residential rental tower eCentral at costs plus $10.0 million and the remaining 50% interest in the retail component based on stabilized
retail NOI at a 7.0% capitalization rate pursuant to the existing agreements with our project partners.
(ii) Total estimated net project costs include land costs for this Phase I development. Excluding the cost of the Phase I land, which has been owned by
the Trust since 1999 as part of the 7.1 acre shopping centre, the estimated development yield would be 5.8%.
(iii) The estimated yield on the Trust's original 50% interest in this project is 8.4%. In February 2019 the Trust acquired the remaining 50% ownership
interest for $70.4 million, which is higher than the estimated net project costs of the Trust's original 50% interest in the project. The blended yield on
this project is therefore 7.0%.
The Trust expects to achieve a blended development yield of 5.7% upon stabilization of these five projects. The Trust estimates
$204.5 million of incremental value creation for these projects' commercial and/or residential rental components, and an
additional $26.5 million of residential inventory gains on the sale of condominium units at two projects, bringing the total
incremental value creation for these five projects to $231.0 million. Of the $204.5 million estimated incremental value creation for
these projects' commercial and/or residential rental components, approximately $164.0 million of value creation has been
recognized as of the year end December 31, 2018, given that these projects have been complete or near completion. Of the
$26.5 million estimated residential inventory gains, only $1.4 million has been recognized into income as of the year end
December 31, 2018.
•
Yonge Eglinton Northeast Corner (ePlace) - The significant incremental value creation at ePlace includes the financial
benefit of acquiring the remaining 50% interest in the residential rental building eCentral and retail component at ePlace
at attractive pre-determined transaction prices. Both deals are expected to close in 2019. Residential rental leasing at
the 466-unit ePlace has started and is progressing well. At eCondo, $1.4 million of residential inventory gains have
been recognized into the Trust's income in Q4 2018, with the remaining gains to be recognized in the first half of 2019
as possession of the remaining condominium units is scheduled to be taken in an orderly fashion.
• King Portland Centre - The commercial component of the 421,000 square feet (100%) mixed-use development in the
trendy King West neighborhood of Toronto was substantially complete in Q3 2018 and fully leased. Purchasers of the
100% pre-sold, 132 condominium units of the project (Kingly) are expected to take possession in Q3 2019.
• Gloucester (Frontier) - The first phase of the 228-unit residential rental project in Ottawa would be expected to produce
an estimated 5.8% development yield if the $2.9 million land value is excluded in net project costs, given that the Trust
has owned the property since 1999 and this is only a small portion of the 7.1 acre shopping centre the Trust owns. The
construction is progressing on schedule toward a mid-2019 completion. The leasing of the rental units commenced in
Q4 2018 and is progressing ahead of our expectations. The site is zoned for a total of 785 rental units in four phases,
which we expect will lead to greater overall value creation. Planning work relating to Phase II is underway.
• Bathurst College Centre - Delays and costs relating to one tenant move-out reduced the development yield of this
project. However, this grocery-anchored retail and office development in urban Toronto fits well within the Trust's major
market portfolio and is expected to deliver further rent growth. The majority of the project was substantially completed in
Q3 2018 and is fully leased with several high profile tenants. All tenants have taken possession and the grocery anchor
commenced operations in January 2019.
•
Sage Hill - This greenfield retail project in Calgary, Alberta was completed in 2017. The Trust recently acquired the
remaining non-managing 50% interest from its partner in February 2019. The project's strong development yield and
estimated incremental value creation reflects the Trust's capability in project execution and the location and quality of
RioCan's development, even in challenging market conditions in Alberta caused primarily by a decline in oil prices in
recent years.
As more urban intensification and greenfield projects progress near completion, the Trust will disclose the projects' estimated
development yield and value creation.
For 2019, the Trust estimates to complete 439,000 square feet of developments in addition to the development completions in
2019 relating to these five projects, which will lead to $215.6 million cost transfers from PUD to IPP in 2019 and $11.0 million
incremental NOI upon project stabilization.
70
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
For 2020, the Trust estimates to complete 497,000 square feet of developments, which will lead to $330.7 million cost transfers
from PUD to IPP in 2020 and $16.9 million incremental NOI upon project stabilization.
Mortgages and Loans Receivable
Contractual mortgages and loans receivable as at December 31, 2018 and December 31, 2017 are comprised of the following:
(thousands of dollars)
Mezzanine financing to co-owners
Vendor-take-back and other
Total
Contractual rates
Low
—%
5.0%
—%
High
7.95%
5.5%
7.95%
Weighted
Average
Rate December 31, 2018 December 31, 2017
6.5% $
126,868
146,680
5.1%
6.4% $
164,014
145,873
17,334
19,005
$
$
Effective January 1, 2018, the Trust adopted IFRS 9 without restatement of prior periods. Pursuant to the requirements of IFRS 9,
mortgages and loans receivable are classified and measured on the basis of both the business model for managing the assets
and the contractual cash flow characteristics of the asset. The amortized cost method of accounting is permitted where
mortgages and loans receivable are held with the objective of collecting contractual cash flows and those cash flows represent
solely payments of principal and interest (SPPI) otherwise, they are measured at fair value. Of the total $164.0 million of
mortgages and loans receivable as at December 31, 2018, none are carried at fair value.
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, 2018, RioCan was in compliance with these restrictions.
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 27 of RioCan's 2018 Annual Consolidated Financial Statements).
In selecting appropriate funding choices, RioCan’s objective is to manage its capital structure such that it diversifies its funding
sources while minimizing its funding costs and risks. 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 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.
71
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
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).
The following table summarizes RioCan’s credit ratings as at December 31, 2018:
Debt
Senior Unsecured Debentures
Senior Unsecured Debentures
Rating Agency
S&P
DBRS
Long-term credit rating
BBB
BBB (high)
Trend/Outlook
Stable
Stable
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.
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.
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
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, 2018 December 31, 2017 December 31, 2018 December 31, 2017
$
$
$
$
$
2,742,633
$
2,694,619
$
2,742,633
$
2,218,270
913,130
—
5,874,033
7,666,390
13,540,423
14,003,765
74,698
41.6%
15.8%
$
$
$
$
2,300,247
904,429
32,670
5,931,965
8,044,686
13,976,651
14,376,578
70,225
41.0%
16.5%
$
$
$
$
2,286,836
958,187
—
5,987,656
7,666,390
13,654,046
14,117,865
77,188
42.1%
16.4%
$
$
$
$
2,694,619
2,364,415
947,930
32,670
6,039,634
8,044,686
14,084,320
14,492,113
73,423
41.4%
17.1%
The Trust's leverage ratio at RioCan's proportionate share increased modestly from 41.4% at December 31, 2017 to 42.1% as at
December 31, 2018, largely in line with its 38.0% to 42.0% target range. Over the next twelve months, the Trust expects its
leverage to be at the upper end of its target range, although its leverage ratio as of a quarter end may exceed the upper target
range from time to time due to the timing of its dispositions and NCIB program.
As at December 31, 2018, RioCan's ratio of floating rate debt to total debt at RioCan's proportionate share decreased to 16.4%
(December 31, 2017 - 17.1%), primarily as a result of a decrease in unhedged floating rate mortgages partially offset by an
increase in lines of credit. This ratio has also decreased from 19.6% as of September 30, 2018.
Subsequent to the year end, the Trust extended the maturity date of its $150.0 million non-revolving unsecured credit facility from
December 27, 2019 to June 27, 2024 and fixed the annual all-in interest rate at 3.43% through an interest rate swap. The Trust also
fixed the annual all-in interest rate for $125.0 million of its other non-revolving unsecured credit facility maturing on January 31, 2023
at 3.38% through an interest rate swap. Further, the Trust also entered into a $350.0 million five-year non-revolving unsecured credit
facility with three financial institutions (consisting of two Schedule I banks and one Schedule III bank) and has fully drawn on the
credit facility to repay certain debt and for general Trust purposes. This credit facility matures on February 7, 2024 and, through an
interest rate swap, bears an annual all-in fixed interest rate of 3.34%. These transactions further extend the average term to maturity
of the Trust's total debt and reduce the Trust's floating interest rate debt exposure.
72
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
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. 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:
Rolling 12 months ended
IFRS
RioCan's proportionate share
Debt to Adjusted EBITDA (i)
Interest coverage (i)
Debt service coverage (i)
Fixed charge coverage (i)
Unencumbered assets
Unencumbered assets to unsecured debt
NOI generated from unencumbered assets (ii)
Unsecured debt to total debt
Targeted
Ratios
<8.0x
>3.00x
>2.25x
>1.10x
>200%
>50.0%
60%
December 31, December 31, December 31, December 31,
2017
2017
2018
2018
7.76
3.68
3.09
1.16
7.49
3.87
3.08
1.17
7.88
3.63
3.05
1.15
7.57
3.84
3.06
1.17
$ 7,966,491
$ 7,663,381
$ 7,970,296
$ 7,666,992
231%
59.1%
58.7%
226%
56.7%
57.1%
231%
59.1%
57.6%
226%
56.7%
56.1%
(i) Refer to the Non-GAAP Measures section of this MD&A for further details. See tables below for the calculation of Adjusted EBITDA for the
respective periods.
(ii) Ratio is calculated on a continuing operations basis.
As at December 31, 2018, we outperformed our targets for all the debt metrics as summarized above.
Despite nearly $1.0 billion of secondary market asset dispositions completed during the year, the Trust's Debt to Adjusted
EBITDA at RioCan's proportionate share outperformed its target of under 8.0x, albeit with a modest increase from 7.57x for the
rolling twelve months ended December 31, 2017 to 7.88x for the rolling twelve months ended December 31, 2018. Adjusted
EBITDA, which is an input in the calculation of the first four metrics in the table above, declined modestly by $12.6 million or 1.6%
at RioCan's proportionate share despite substantial property dispositions, as the loss of EBITDA from property dispositions was
offset, to quite an extent, by strong same property NOI growth, development completions and higher gains from the sale of
marketable securities.
The interest coverage ratio at RioCan's proportionate share for the rolling twelve months ended December 31, 2018 declined
modestly compared to December 31, 2017, mainly due to a modest decline in Adjusted EBITDA and higher interest costs
resulting from a higher average debt balance and higher effective interest rates over the comparable periods.
Debt service coverage at RioCan's proportionate share for the rolling twelve months ended December 31, 2018 declined slightly
when compared to December 31, 2017 due to the impact of modestly lower Adjusted EBITDA and higher interest costs as noted
above, while being mostly offset by lower scheduled principal amortization.
Similarly, the fixed charge coverage ratio at RioCan's proportionate share for the rolling twelve months ended December 31, 2018
declined marginally compared to December 31, 2017, mainly due to modestly lower Adjusted EBITDA and higher interest costs,
largely offset by lower distributions resulting from the redemption of Series C preferred units in Q2 2017 and unit buybacks since
Q4 2017.
The Trust continued to grow its unencumbered asset pool, increasing it from $7.7 billion as at December 31, 2017 to $8.0 billion
as at December 31, 2018. The percentage of NOI generated from unencumbered assets increased by 240 basis points to 59.1%
as of December 31, 2018 over the comparable period. The unencumbered assets to unsecured debt ratio increased from 226%
to 231% as at December 31, 2018, well above our 200% target.
73
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
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
(thousands of dollars)
2018
2017
Continuing
Operations
Discontinued
Operations
Total
Continuing
Operations
Discontinued
Operations
Total
Net income attributable to unitholders
$
527,362 $
741 $ 528,103 $
708,265 $
7,021 $ 715,286
IFRS
Add (deduct) the following items:
Income tax expenses (recovery):
Current
Deferred
Fair value (gains) on investment properties, net
Change in unrealized fair value on marketable
securities (i)
Internal leasing costs
Non-cash unit based compensation expense
Interest costs
Depreciation and amortization
Transaction gains on the sale of investment
properties, net (ii)
—
1,188
(1,440)
(18,304)
42,767
11,294
6,826
168,299
4,575
(78)
—
—
—
—
—
—
—
—
1,188
(1,440)
—
(320)
(2,871)
—
(2,871)
(320)
(18,304)
(136,942)
— (136,942)
42,767
11,294
6,826
168,299
4,575
—
10,882
4,757
171,418
9,865
—
—
—
—
—
—
10,882
4,757
171,418
9,865
(78)
(1,275)
(1,651)
(2,926)
Transaction costs on investment properties
17,761
153
17,914
5,136
(549)
4,587
Adjusted EBITDA
$
759,062 $
2,082 $ 761,144 $
771,786 $
1,950 $ 773,736
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
$ 5,988,106
(80,999)
$ 5,907,107
7.76
$ 5,848,033
(53,153)
$ 5,794,880
7.49
(i) Adjustment is a result of adopting IFRS 9 on January 1, 2018 without prior period restatement. The $16.5 million fair value gains on marketable
securities under IFRS 9 for the year ended December 31, 2018 include both the change in unrealized fair value and realized gains on sale of
marketable securities during the year ended December 31, 2018. Refer to note 19 of the 2018 Annual Consolidated Financial Statement for this
breakdown. By adding back the change in unrealized fair value on marketable securities, RioCan effectively continues to include realized gains or
losses on the sale of marketable securities in Adjusted EBITDA and excludes unrealized fair value gains (losses) on marketable securities in
Adjusted EBITDA. Refer to the Non-GAAP Measures section of this MD&A for more detailed discussion on Adjusted EBITDA and IFRS 9's impact
on Adjusted EBITDA. Refer to the Adoption of New Accounting Standards section of this MD&A and notes 19 and 37 of the 2018 Annual
Consolidated Financial Statements for a more fulsome discussion on the impact of IFRS 9.
(ii) Includes transaction gains and losses realized on the disposal of Canadian and U.S. investment properties.
74
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Year ended December 31
(thousands of dollars)
RioCan's proportionate share
2018
2017
Continuing
Operations
Discontinued
Operations
Total
Continuing
Operations
Discontinued
Operations
Total
Net income attributable to unitholders
$
527,362 $
741 $ 528,103 $
708,265 $
7,021 $ 715,286
Add (deduct) the following items:
Income tax expense (recovery):
Current
Deferred
Fair value gains on investment property, net
Change in unrealized fair value on marketable
securities (i)
Internal leasing costs
Non-cash unit based compensation expense
Interest costs
Depreciation and amortization
Transaction gains on the sale of investment
properties, net (ii)
—
1,188
(1,440)
(19,526)
42,767
11,294
6,826
172,279
4,575
(78)
—
—
—
—
—
—
—
—
1,188
(1,440)
—
(320)
(2,871)
—
(2,871)
(320)
(19,526)
(136,534)
— (136,534)
42,767
11,294
6,826
172,279
4,575
—
10,882
4,757
173,791
9,865
—
—
—
—
—
—
10,882
4,757
173,791
9,865
(78)
(1,275)
(1,651)
(2,926)
Transaction costs on investment properties
17,762
153
17,915
5,136
(549)
4,587
Adjusted EBITDA
$
761,821 $
2,082 $ 763,903 $
774,567 $
1,950 $ 776,517
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
$ 6,099,892
(84,034)
$ 6,015,858
7.88
$ 5,933,897
(55,498)
$ 5,878,399
7.57
(i) Adjustment is a result of adopting IFRS 9 on January 1, 2018 without prior period restatement. The $16.5 million fair value gains on marketable
securities under IFRS 9 for the year ended December 31, 2018 include both the change in unrealized fair value and realized gains on sale of
marketable securities during the year ended December 31, 2018. Refer to note 19 of the 2018 Annual Consolidated Financial Statement for this
breakdown. By adding back the change in unrealized fair value on marketable securities, RioCan effectively continues to include realized gains or
losses on the sale of marketable securities in Adjusted EBITDA and excludes unrealized fair value gains (losses) on marketable securities in
Adjusted EBITDA. Refer to the Non-GAAP Measures section of this MD&A for more detailed discussion on Adjusted EBITDA and IFRS 9's impact
on Adjusted EBITDA. Refer to the Adoption of New Accounting Standards section of this MD&A and note 19 and 37 of the 2018 Annual
Consolidated Financial Statement for a more fulsome discussion on the impact of IFRS 9.
(ii) Includes transaction gains and losses realized on the disposal of Canadian and U.S. investment properties.
75
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total Debt Profile
RioCan's fixed and floating rate debt as a percentage of total debt and term to maturity are as follows:
As at December 31, 2018
Total debt
Percentage of
total RioCan's
aggregate debt
Weighted average
term to maturity in
years
Weighted average
contractual
Weighted average
effective
Total debt at:
Fixed rate
Floating rate (i)
Total debt
$
$
4,945,718
928,315
5,874,033
84.2%
15.8%
100.0%
3.42
2.64
3.30
3.54%
3.34%
3.51%
3.59%
3.34%
3.55%
(i) Subsequent to the year end, the Trust extended the maturity date of its $150.0 million non-revolving unsecured credit facility from December 27,
2019 to June 27, 2024 and fixed the all-in annual interest rate at 3.43% through an interest rate swap. The Trust also fixed the annual all-in
interest rate for $125.0 million of its other non-revolving unsecured credit facility maturing on January 31, 2023 at 3.38% through an interest rate
swap. These transactions would further extend the average term-to maturity of the Trust's debt and reduce its floating rate debt exposure.
As at December 31, 2017
Total debt
Percentage of
total RioCan's
aggregate debt
Weighted average
term to maturity in
years
Weighted average
contractual
Weighted average
effective
Total debt at:
Fixed rate
Floating rate
Total debt
$
$
4,951,392
980,573
5,931,965
83.5%
16.5%
100.0%
3.37
3.08
3.32
3.55%
2.47%
3.37%
3.52%
2.50%
3.35%
The following table summarizes the activity in debt for the year ended December 31, 2018:
(thousands of dollars)
Year ended December 31, 2018
Debentures
Mortgages
Payable
Lines of Credit and
Other Bank Loans
Contractual obligations, beginning of year
$
2,700,000 $
2,324,252 $
Borrowings
Scheduled amortization
Repayments
Disposed on the sale of properties
Assumed on the acquisition of properties (i)
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
300,000
—
(250,000)
—
—
496,860
(39,295)
(547,210)
(58,870)
36,063
907,978 $
318,768
—
Total
5,932,230
1,115,628
(39,295)
(310,265)
(1,107,475)
—
—
(58,870)
36,063
$
2,750,000 $
2,211,800 $
916,481 $
5,878,281
—
10,115
—
10,115
(7,367)
(3,645)
(3,351)
(14,363)
$
2,742,633 $
2,218,270 $
913,130 $
5,874,033
(i) Excludes a mark-to-market adjustment of $2.5 million on debt relating to one acquisition.
RioCan’s debt maturity profile and future repayments are as outlined below:
(thousands of dollars, except percentage
amounts)
Debentures
payable
Year of debt maturity
Contractual principal maturities and interest rates
Weighted
average
interest
rate
Mortgages
payable
Weighted
average
interest
rate
Lines of
credit
and other
bank loans
Weighted
average
interest
rate
Total
aggregate
debt
Weighted
average
interest
rate
2019
2020
2021
2022
2023
Thereafter
$ 350,000
3.85% $ 310,217
4.21% $ 363,481
3.27% $ 1,023,698
400,000
550,000
550,000
500,000
400,000
2.72%
2.89%
3.25%
3.42%
3.95%
485,731
407,379
158,772
285,628
564,073
3.67%
4.25%
3.25%
3.48%
3.83%
—
—
—
—%
—%
—%
885,731
957,379
708,772
553,000
3.34% 1,338,628
—
—%
964,073
$ 2,750,000
3.31% $ 2,211,800
3.84% $ 916,481
3.32% $ 5,878,281
3.76%
3.24%
3.47%
3.25%
3.40%
3.88%
3.51%
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
10,115
(14,363)
$ 5,874,033
76
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Debentures Payable
The following series of senior unsecured debentures were outstanding as at December 31, 2018 and 2017:
Series
S
Q
U
X
Z
R
V
Y
T
AA
W
I
Contractual obligations
Maturity date
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
September 29, 2023
February 12, 2024
February 6, 2026
Unamortized debt financing costs
Balance - end of year
Coupon rate
2.87%
3.85%
3.62%
2.19%
2.19%
3.72%
3.75%
2.83%
3.73%
3.21%
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
$
2018
— $
350,000
150,000
250,000
300,000
250,000
250,000
300,000
200,000
300,000
300,000
100,000
2017
250,000
350,000
150,000
250,000
300,000
250,000
250,000
300,000
200,000
—
300,000
100,000
$ 2,750,000 $ 2,700,000
(5,381)
$ 2,742,633 $ 2,694,619
(7,367) $
The unsecured debentures have covenants similar to our 60% debt to Aggregate Assets limit 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 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. Prior to maturity, the Series AA debentures can be redeemed in whole or in part at par on or after August 29, 2023.
The 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 (refer to the
prospectus and indenture agreement publicly filed on www.sedar.com). The net proceeds from these issuances were used by
RioCan to fund development and property acquisitions, to repay certain indebtedness and other general trust purposes.
Redemptions
On March 5, 2018, RioCan redeemed, in full, its $250 million 2.87% Series S 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, 2018 December 31, 2017
2,300,247
2,218,270 $
$
$
$
$
—
2,218,270 $
2,128,255 $
90,015
2,218,270 $
32,670
2,332,917
2,181,976
150,941
2,332,917
At the outset of 2018, RioCan had $578.9 million of mortgage principal maturing in 2018 at a weighted average contractual
interest rate of 3.67%. For the year ended December 31, 2018, RioCan completed new term mortgage borrowings of $496.9
million at a weighted average interest rate of 3.68% and a weighted average term of 7 years. For the year ended December 31,
2018, repayments of mortgage balances and scheduled amortization amounted to $586.5 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.
77
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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 (i)
Construction lines and other bank loans
December 31, 2018 December 31, 2017
$
$
350,190 $
349,459
213,481
913,130 $
387,093
299,360
217,976
904,429
(i) Amount outstanding is net of a total of $3.4 million in unamortized financing costs.
Revolving Unsecured Operating Line of Credit
RioCan had drawn balance of $353.0 million and $647.0 million of credit availability to be drawn from this revolving unsecured
operating line of credit at December 31, 2018. The weighted average contractual interest rate on amounts drawn under this
facility was 3.41% (December 31, 2017 - 2.53%).
On May 4, 2018, the Trust exercised its option to extend the maturity date on its operating line of credit to May 31, 2023. All other
terms and conditions remained the same.
Non-revolving Unsecured Credit Facilities
The Trust has 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. Subsequent to year end, the Trust fixed the annual all-in interest rate for $125.0 million of this credit facility at 3.38%
through an interest rate swap. The remaining $75.0 million of this credit facility was previously fixed at 3.125%.
The Trust also has a $150 million non-revolving unsecured credit facility with two financial institutions (consisting of a Schedule I
and a Schedule III bank), maturing December 27, 2019 bearing interest at a rate of Bankers' Acceptances plus 100 basis points
per annum. Subsequent to the year end, the Trust extended the maturity date of this credit facility to June 27, 2024 and fixed the
annual all-in interest rate at 3.43% through an interest rate swap.
As of December 31, 2018, the above two non-revolving unsecured credit facilities in total amount of $350.0 million are fully
drawn. Refer to notes 36 of the 2018 Annual Consolidated Financial Statements for additional subsequent event on financing
activity.
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, 2018, these secured facilities and other bank loans have an aggregate
maximum borrowing capacity of $311.4 million and mature in 2019, of which the Trust had drawn $213.5 million (December 31,
2017 - $218.0 million). The weighted average contractual interest rate on the aggregate amounts outstanding is 3.36%
(December 31, 2017 - 2.28%).
Letter of Credit Facilities
The Trust has aggregate letter of credit facilities with certain Schedule I banks totaling $77.9 million (December 31, 2017 - $79.0
million). As at December 31, 2018, the Trust’s outstanding letters of credit under these facilities was $47.5 million (December 31,
2017 - $37.2 million).
Liquidity
Liquidity refers to the Trust having credit availability under committed credit facilities and/or generating sufficient amounts of cash
and cash 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, debt and equity capital markets, secured financing and the potential sale of assets also provide
the necessary liquidity to fund ongoing and future capital expenditures and obligations.
As at December 31, 2018, RioCan had the following sources of liquidity available:
•
•
•
•
$74.7 million of cash and cash equivalents;
$647.0 million of cash available under its undrawn revolving unsecured operating line of credit;
$97.9 million of cash available under undrawn construction facilities to fund future construction commitments; and
153 unencumbered investment properties with a fair value of $8.0 billion.
78
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018
December 31, 2017
December 31, 2018
December 31, 2017
74,698
$
70,225
$
77,188
$
73,423
647,000
97,923
819,621
2,750,000
2,211,800
916,481
$
$
610,000
169,927
850,152
2,700,000
2,324,252
907,977
$
$
647,000
97,923
822,111
2,750,000
2,280,391
961,548
$
$
5,878,281
$
5,932,229
$
5,991,939
$
13.9%
58.7%
41.3%
14.3%
57.1%
42.9%
13.7%
57.6%
42.4%
610,000
169,927
853,350
2,700,000
2,388,481
951,477
6,039,958
14.1%
56.1%
43.9%
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:
2019
2020
2021
2022
2023
Thereafter
Total
Lines of credit and other bank loans
$
363,481 $
— $
— $
— $
553,000 $
— $
916,481
Mortgages payable
Unsecured debentures
Lease commitments
310,217
350,000
3,841
485,731
400,000
3,551
407,379
550,000
3,272
158,772
550,000
3,219
285,628
500,000
3,080
564,073
2,211,800
400,000
2,750,000
21,288
38,251
Total
$ 1,027,539 $
889,282 $
960,651 $
711,991 $ 1,341,708 $
985,361 $ 5,916,532
Active committed developments (i)
326,330
256,242
114,398
—
—
—
696,972
Total
$ 1,353,869 $ 1,145,524 $ 1,075,049 $
711,991 $ 1,341,708 $
985,361 $ 6,613,504
(i) Represents estimated development costs spending to complete properties under active development only when all major planning issues have
been resolved, anchor tenant(s) for the commercial components has/have been secured, and/or construction is about to commence or has
commenced. The costs of additional projects will be added to this schedule once a project becomes committed.
The Trust's contractual debt obligations and projected development expenditures can be funded by net proceeds from the sale of
non-core and secondary market 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, 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 unencumbered asset pool of $8.0 billion as at
December 31, 2018 can also allow us to support additional financing, if needed.
RioCan, as a mutual fund trust, expects to make monthly distributions to unitholders with the cash generated from ongoing
operating activities. Our unitholder dividend reinvestment plan (“DRIP”) allows us to conserve liquidity by issuing additional units,
as opposed to paying cash distributions. Although RioCan suspended its DRIP effective November 1, 2017, RioCan can elect to
reinstate the DRIP in the future, should we decide that it is beneficial to do so. During the prior year comparative year ended
December 31, 2017, the Trust issued 1.0 million units pursuant to our DRIP resulting in $25.3 million savings in cash outlay,
representing a participation rate of 5.5%. Refer to the Distributions to Unitholders section of this MD&A for further discussion.
Base Shelf Short Form Prospectus
During the third quarter, the Trust renewed its Base Shelf Short Form Prospectus which provides for the issuance of up to $3.0
billion in debt securities, trust units and preferred units up to April 3, 2020.
Unencumbered Assets
The fair value of the unencumbered investment property assets as at December 31, 2018 is estimated at approximately $8.0
billion for 153 properties or 61.2% of the total fair value of investment properties as compared to 187 properties with a fair value
of $7.7 billion as at December 31, 2017. This has resulted in approximately 59.1% of the Trust's annualized NOI being generated
by unencumbered assets (December 31, 2017 - 56.7%), providing RioCan with access to a pool of assets for obtaining additional
secured debt.
79
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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 2019, 2020 and thereafter:
(thousands of dollars)
As at December 31, 2018
Unencumbered assets (i)
Encumbered assets with mortgages maturing in 2019
Encumbered assets with mortgages maturing in 2020
Encumbered assets with mortgages maturing thereafter
Total
Number of
Properties
Investment
Properties
Total contractual mortgages payable
2019
2020
Thereafter
153 $
17
18
45
233 $
7,966,491 $
— $
964,303
1,338,879
2,933,975
13,203,648 $
310,217
—
—
— $
—
485,731
—
—
—
— 1,415,852
310,217 $
485,731 $ 1,415,852
(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, investment
grade credit ratings 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 2019 to meet our
maturing debt obligations in 2019, although we will sell assets as part of our acceleration of major markets focus strategy.
The table below presents RioCan's unencumbered assets and unsecured debt:
(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
Unsecured debt to total debt
Unencumbered assets to unsecured debt
NOI generated from unencumbered assets (i)
IFRS
RioCan's proportionate share
December 31,
December 31,
December 31,
December 31,
2018
7,966,491
2,750,000
$
$
$
$
2017
7,663,381
2,700,000
2018
7,970,296
2,750,000
$
$
2017
7,666,992
2,700,000
$
$
353,000
390,000
353,000
390,000
350,000
300,000
350,000
300,000
$
3,453,000
$
3,390,000
$
3,453,000
$
3,390,000
58.7%
231%
59.1%
57.1%
226%
56.7%
57.6%
231%
59.1%
56.1%
226%
56.7%
(i) Refer to the Non-GAAP Measures section of this MD&A for further details.
Guarantees
As at December 31, 2018, 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 $309.2 million, with expiries between
2019 and 2023 (December 31, 2017 - $385.0 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, 2018, there have been no defaults by the primary obligors for debts on which we
have provided guarantees and no provision for expected losses on these guarantees has been recognized in our 2018 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
December 31, 2018 December 31, 2017
43,523 $
122,467
—
63,230
119,454
10,306
14,678
251,191 $
58,029
309,220 $
60,368
63,230
72,834
22,614
7,410
348,923
36,103
385,026
$
$
$
80
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Hedging Activities
Interest Rate Risk
As at December 31, 2018, the outstanding notional amount of floating-to-fixed interest rate swaps was $764.4 million (December
31, 2017 – $662.1 million) and the term to maturity of these agreements ranges from April 2020 to November 2028. 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, 2018. Refer to notes 26 and 36 of the 2018 Annual Consolidated Financial
Statements for further details and subsequent event on financing activity.
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 4 for details on RioCan's
discontinued U.S. operations. Refer to note 26 of the 2018 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. As at December 31, 2018, the Trust has no
cross currency interest rate swaps outstanding.
Trust Units
As at December 31, 2018, there are 305.1 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, 2018 and 2017, we issued common units as follows:
(number of units in thousands)
Units outstanding, beginning of period (i)
Units issued:
Distribution reinvestment plan
Unit based compensation exercises
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
2018
307,314
2017
327,470
2018
323,734
—
178
6
—
186
—
8
—
—
268
21
31
(2,401)
305,097
(3,930)
323,734
(18,957)
305,097
2017
326,615
1,003
10
36
—
(3,930)
323,734
(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, 2018 – 481,769 LP units,
December 31, 2017 – 1,030,342 LP units). During the year ended December 31, 2018, 30,827 additional exchangeable limited partnership units
were issued pursuant to earn-out provisions of previously completed acquisitions. The Trust also issued 579,400 RioCan units pursuant to the
exercise of exchangeable limited partnership units in connection with previous acquisitions, followed by an equivalent reduction in the number of
outstanding 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.
As of February 11, 2019, there are 304.6 million common units issued and 7.9 million unit options issued and outstanding under
the Trust’s incentive unit option plan.
Distribution Reinvestment Plan ("DRIP")
Effective November 1, 2017 RioCan suspended its DRIP and unitholders that were enrolled in the DRIP receive cash distributions
commencing with any distribution declared in November 2017. During the prior year comparative three months ended December
31, 2017, the Trust issued 0.2 million units resulting in $4.6 million in equity capital, representing a participation rate of 4.0%.
During the prior year comparative year ended December 31, 2017, the Trust issued 1.0 million units pursuant to our DRIP
resulting in $25.3 million in equity capital, representing a participation rate of 5.5%.
Senior Executive Restricted Equity Plan (Senior Executive REU Plan)
As at December 31, 2018, 121,352 Senior Executive REUs are unvested and outstanding (December 31, 2017 - 78,258). The
Senior Executive REU Plan was introduced in 2017 and provides for the allotment of REUs to the Chief Executive Officer (CEO),
Chief Operating Officer & Senior Vice President Investments & Residential, and Senior Vice President & 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.
81
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
On February 26, 2018, the Trust granted 50,694 REUs under its Senior Executive REU Plan. The grant date price was $24.00
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 $1.2 million.
Employee Restricted Equity Plan (Employee REU Plan)
As at December 31, 2018, 189,618 Employee REUs are unvested and outstanding (December 31, 2017 - 141,472). The
Employee REU Plan was introduced in 2017 and 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 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 26, 2018, the Trust granted 86,131 REUs under its Employee REU Plan. The grant date price was $24.00 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 $2.0 million.
Performance Equity Unit Plan (PEU Plan)
As at December 31, 2018, 443,821 PEUs are unvested and outstanding (December 31, 2017 - 404,676). PEUs issued contain a
multiplier factor and the final number of PEUs that will vest will range from 0% to 200% of the initial number awarded based on
certain performance targets of each grant year. The PEUs outstanding will be paid out based on achievement of specific
performance conditions in 2018, 2019 and 2020. Unit distributions paid during the period from grant date until settlement date
will be credited to each PEU participant in the form of additional PEUs.
Effective January 1, 2017, the Trust, after receiving unitholder feedback, implemented several changes to its executive pay
program including a modification made to the comparator group for compensation benchmarking to include only peers that are
domiciled in Canada, and stipulated 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. For 2017, RioCan adopted a
single performance metric for its PEU Plan, which was 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. For
2018, RioCan adopted two performance metrics for its PEU Plan, being FFO per unit achievement and relative TUR against its
peer group, a modification made upon further assessment by the Trust of its PEU Plan and taking into account further unitholder
feedback.
During February 2018, the Trust granted 175,347 PEUs under its PEU Plan at a fair value of $22.68 per unit resulting in an
aggregate fair value of $4.0 million on grant date. PEUs will fully vest in February 2021.
Incentive Unit Option Plan
As part of comprehensive changes to its executive compensation program, the Trust enhanced the design of its long-term
incentive program through its commitment to reduce the frequency of option grants, with no option grants made in 2017 and
replacing that portion of the overall long-term incentive compensation in 2017 with grants of REU Plans and the PEU Plan as
described above. The unit option program was not cancelled altogether to permit the Board to grant options at some future date
as it determines in the best interest of the Trust. During February 2018, the Trust granted 0.7 million unit options to certain
members of senior management (December 31, 2017 - nil).
As at December 31, 2018, 11.8 million unit options remain available for grant under the Plan (December 31, 2017 – 12.1 million
unit options).
Trustee Deferred Unit Plan (DU Plan)
The Deferred Unit Plan was introduced in 2014 for non-employee Trustees of the Trust (Trustees). Trustees may be awarded
deferred units, each of which are economically equivalent to one unit, from time to time at the discretion of the Board of Trustees
upon recommendation from management, subject to a maximum annual grant not to exceed that number of deferred units which
is $150,000 divided by the average market price of a unit on the award date. Trustees may also elect to receive up to 100% of his
or her annual retainer and meeting fees for a calendar year otherwise payable in cash in the form of deferred units. The
maximum number of units reserved for issuance under the Deferred Unit Plan at any time is 750,000.
As at December 31, 2018, there are 272,269 DUs issued and outstanding (December 31, 2017 - 226,714). During the year ended
December 31, 2018, 30,384 units were exercised.
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. On October 16, 2018, RioCan received TSX approval of its notice of intention to renew its
NCIB, to acquire up to a maximum of 30,579,868 of its units, or approximately 10% of its outstanding units as at September 30,
2018, for cancellation over the next 12 months, effective October 22, 2018.
The number of units that can be purchased pursuant to the renewed NCIB is subject to a current daily maximum of 178,116 units
(which is equal to 25% of 712,465, being the average daily trading volume from April 1, 2018 to September 30, 2018, excluding
RioCan's purchases on the TSX under its former NCIB), subject to RioCan’s ability to make one block purchase of units per
82
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
calendar week that exceeds such limits. RioCan intends to fund the purchases primarily out of net proceeds from its asset
dispositions, available cash and undrawn credit facilities.
During the year ended December 31, 2018, the Trust acquired and cancelled 19.0 million units at a weighted average price of
$24.35 per unit, for a total cost of $461.8 million. See note 15 in RioCan's 2018 Annual Consolidated Financial Statements for
further details.
During the three months ended December 31, 2018, the Trust acquired and cancelled 2,401,108 units at a weighted average
price of $24.68 per unit, for a total cost of $59.3 million.
To date, RioCan has purchased and cancelled 22,886,878 units at a weighted average purchase price of $24.51 per unit at a total
cost of $561.2 million since the renewal.
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. The Trust currently has no preferred
units issued and outstanding.
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.
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 ("taxable
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. Any remaining distributions, other
than taxable distributions, would generally continue to be treated as 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.
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. Our monthly distribution during 2018 was $0.12 per unit.
Distributions to unitholders are as follows:
(thousands of dollars, except when otherwise noted)
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
Three months ended
December 31
Year ended
December 31
2018
2017
2018
2017
$
$
$
$
110,100
—
110,100
—%
114,734
$ 450,743
$ 460,627
(4,554)
—
(25,273)
110,180
$ 450,743
$ 435,354
4.0%
—%
5.5%
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.
83
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Difference between cash flows provided by 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)
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
Add: Distributions reinvested through the distribution reinvestment plan
Excess, net of distribution reinvestment plan
Three months ended
December 31
Year ended
December 31
2018
128,325 $
(10,655)
2017
159,155 $
(27,213)
2018
404,005 $
79,468
2017
354,028
170,691
117,670
131,942
483,473
524,719
(110,100)
(114,734)
(450,743)
(460,627)
7,570
—
7,570 $
17,208
4,554
21,762 $
32,730
—
32,730 $
64,092
25,273
89,365
$
$
For year ended December 31, 2018, cash flows provided by operating activities, excluding non-cash working capital items, were
higher than distributions declared to unitholders during the year by $32.7 million. Accordingly, we expect to maintain adequate
cash flows to fund future unitholder distributions.
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
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 marketable securities.
84
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
QUARTERLY RESULTS AND TREND ANALYSIS
(millions of dollars, except per unit amounts)
2018
2017
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)
$
301
149
150
174
138
135
$
279
130
129
177
147
128
$
278
111
111
174
145
140
$
290
137
137
179
149
124
$
293
210
210
184
144
186
$
287
185
180
183
151
149
$
286
156
155
180
147
135
290
165
163
176
143
118
14,004
14,146
14,250
14,433
14,377
14,376
14,275
14,273
5,874
6,019
6,019
6,097
110
—%
112
—%
113
—%
115
—%
5,932
115
4.0%
5,950
115
6.1%
5,904
115
5.6%
5,801
115
6.3%
306,295
311,687
316,329
321,988
326,155
327,438
327,201
326,956
Net income attributable to unitholders from
continuing operations
Net income attributable to unitholders
FFO (v)
Common unitholder distributions
$
$
$
$
0.49
0.49
0.45
0.36
$
$
$
$
0.41
0.41
0.47
0.36
$
$
$
$
0.35
0.35
0.46
0.36
$
$
$
$
0.43
0.43
0.46
0.36
$
$
$
$
0.64
0.64
0.44
0.35
$
$
$
$
0.55
0.56
0.46
0.35
$
$
$
$
0.47
0.47
0.45
0.35
$
$
$
$
0.50
0.50
0.44
0.35
Net book value per unit (iii)
$ 25.13
$ 25.02
$ 24.96
$ 24.94
$ 24.85
$ 24.54
$ 24.35
$ 24.25
Closing market price per common unit
$ 23.80
$ 24.68
$ 24.15
$ 23.64
$ 24.36
$ 23.93
$ 24.07
$ 26.20
Key Performance Indicator Ratios
Same Property NOI growth % (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
2.1%
77.9%
85.7%
41.6%
42.1%
3.63
7.88
3.51%
231%
59.1%
1.6%
78.0%
79.0%
42.0%
42.4%
3.72
7.79
3.46%
217%
56.6%
2.1%
78.0%
76.7%
42.0%
42.4%
3.78
7.74
3.42%
221%
58.3%
2.6%
78.0%
77.5%
42.0%
42.4%
3.85
7.63
3.39%
220%
58.4%
2.9%
78.8%
78.3%
41.0%
41.4%
3.84
7.57
3.37%
226%
56.7%
2.4%
80.5%
87.9%
41.1%
41.5%
3.78
7.63
3.42%
229%
53.4%
1.9%
82.0%
91.1%
41.2%
41.5%
3.74
7.51
3.40%
231%
52.6%
1.5%
83.9%
95.9%
40.5%
40.8%
3.54
7.90
3.44%
236%
52.9%
597
627
637
645
650
666
659
673
67.1%
32.9%
65.7%
34.3%
64.7%
35.3%
68.6%
31.4%
68.6%
31.4%
69.0%
31.0%
69.2%
30.8%
69.9%
30.1%
(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 Presentation of Financial Information and Non-GAAP
Measures section of this MD&A.
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.
85
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
As more fully described in notes 3 and 37 to the 2018 Annual Consolidated Financial Statements, effective January 1, 2018, the
Trust adopted IFRS 9 without restatement of prior periods. As a result, effective January 1, 2018 all realized and unrealized fair
value gains (losses) on marketable securities are recorded in net income whereas previously, unrealized fair value gains (losses)
were recorded in OCI and reclassified to net income only on derecognition or if there was evidence of a permanent decline in fair
value. Net income attributable to unitholders and net income from continuing operations attributable to unitholders are impacted
by the adoption of IFRS 9. FFO and Adjusted EBITDA exclude any impact of adopting IFRS 9 on marketable securities as more
fully described in the Non-GAAP Measures section of this MD&A.
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.
In addition to the impact of IFRS 9 and property dispositions to accelerate the Trust's portfolio focus in Canada's six major
markets, overall quarterly fluctuations in our revenue and operating results are also attributable to occupancy and same property
growth, acquisitions and other dispositions, the sale of marketable securities, Target backfill progress, and so on.
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. Revenue in Q1 2018 declined marginally from Q4 2017 as
properties were sold in Q4 2017 and Q1 2018 pursuant to the strategic disposition program. Revenue declined further from Q1
2018 to Q2 2018 as the Trust executed on its strategic disposition program. Revenue in Q3 2018 increased marginally from Q2
2018 despite the Trusts strategic disposition program due to higher property and asset management fees, higher percentage
rent, straight line rent, and lease termination fees. Revenue in Q4 2018 increased from Q3 2018 primarily from residential
inventory sales revenue. The above factors for quarterly revenue variations also affect the quarterly variations in net income, NOI
and FFO. ACFO, (with the exception of straight line rent) is also impacted by these factors.
The increase in net income from Q2 2017 to Q4 2017 was related to higher fair market value gains on investment properties and
higher gains on the sale of marketable securities. Net income decreased from Q4 2017 to Q1 2018 primarily as a result of lower
fair market gains on investment properties and unrealized items relating to marketable securities upon adoption of IFRS 9,
partially offset by lower general and administrative expenses mainly due to accelerated depreciation and amortization of certain
management information systems in Q4 2017. Net income decreased from Q1 2018 to Q2 2018 as a result of fair market
adjustments on investment properties and lower revenues as noted above. In addition, the Trust incurred higher general and
administration expenses mainly from severance and mark to market adjustment to unit-based compensation expense. Net
income increased from Q2 2018 to Q3 2018 mainly as a result of fair market adjustments on investment properties, higher
operating income and lower severance costs. Net income increased from Q3 2018 to Q4 2018 mainly as a result of fair market
gains on investment properties, partially offset by severance costs and unrealized fair value losses on 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 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 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 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. The increase in Q1 2018 FFO from
Q4 2017 was mainly due to an increase in realized gains in marketable securities, strong same property NOI growth, and much
lower general and administrative expenses due to accelerated depreciation of certain management information systems, donation
and consulting costs timing in Q4 2017, partially offset by lost NOI from property dispositions (net of acquisitions). The decrease
in Q2 2018 FFO from Q1 2018, was primarily due to higher volume of property dispositions as the Trust continued to execute on
acceleration of its major market focus, as well as higher severance costs. The modest increase in Q3 2018 from Q2 2018 was
primarily due to higher operating income and lower severance costs. The decrease in Q4 2018 FFO from Q3 2018, is primarily
due to lower realized gains on the sale of marketable securities, higher severance costs, and continued dispositions of assets.
Quarterly changes in ACFO were driven by similar factors as for FFO, except for the quarterly net working capital changes
included in ACFO. 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. The
decrease in ACFO from Q4 2017 to Q2 2018 was similarly due to a one-time $29.2 million special distribution from equity
accounted investments in Q4 2017 and inclusion of $6.3 million net working capital increase in ACFO in Q2 2018, as opposed to
working capital increase of $20.3 million in Q4 2017. Q3 2018 ACFO decreased when compared to Q2 2018 mainly due to
working capital changes, a $6.3 million increase in Q2 2018 compared to a $5.4 million decrease in Q3 2018. Q4 ACFO
increased when compared to Q3 2018 mainly due to working capital increases of $11.7 million, partially offset by lower gains on
the sale of marketable securities and higher severance costs.
Aggregate debt levels and overall leverage increased by approximately 0.7% in Q2 2017 when compared to Q1 2017 which 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 Q1
2017 to Q4 2017 was primarily due to the interest savings from our mortgage refinancing, higher gains on sale of marketable
securities, and strong property operations. Debt to Adjusted EBITDA increased in Q1 2018 from Q4 2017 as a result of higher
average debt balances partially offset by an increase in Adjusted EBITDA. The increase in Debt to Adjusted EBITDA from Q2
2018 to Q4 2018 was a result of the combination of a decline in the twelve month trending Adjusted EBITDA due to dispositions
and the growth in average debt due to NCIB and disposition timing. Interest coverage declined in Q2 2018 to Q4 2018, primarily
86
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
from lower Adjusted EBITDA as the Trust continued to execute on its strategic disposition program despite strong same property
NOI growth.
Unencumbered assets to unsecured debt ratio declined modestly during Q1 2017 to Q3 2018, but remains well ahead of our
200% target. This was mainly as a result of an increase in our unsecured debt outpacing the increase in our unencumbered
assets on a relative percentage basis. This trend was reversed in Q4 2018 and the ratio was back to Q2 2017 level as the Trust
increased its unencumbered asset pool without increasing its unsecured debt during the quarter.
The FFO and ACFO payout ratio has decreased since Q1 2017 due to growth in FFO and ACFO from same property NOI growth,
development completions and realized gains from the sale of marketable securities despite substantial dispositions completed
over the period, as well as a decrease in total distributions to unitholders as a result of lower number of units outstanding
because of the Trust's NCIB program. 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. The increase in ACFO payout ratio from Q3 2018 to Q4 2018 was mainly because of a one-time
special distribution of $29.2 million received during Q4 2017 was no longer included in the payout ratio calculation for Q4 2018
given that the ratio was calculated on twelve months trailing basis. Excluding the $29.2 million one-time special distribution in Q4
2017, the ACFO payout ratio would have been 83.2% for Q3 2018 and 82.4% for Q4 2017.
87
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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
Residential inventory sales
Property management and other service fees
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 (loss)
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
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
88
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
2018
2017
$
274,775
$
289,403
22,264
3,967
301,006
95,970
4,460
20,882
121,312
179,694
2,861
5,848
29,230
(3,020)
34,919
42,441
14,683
2,862
5,208
65,194
149,419
(540)
—
3,823
293,226
100,110
5,353
—
105,463
187,763
1,950
3,782
71,013
11,979
88,724
42,389
18,123
3,265
4,295
68,072
208,415
(1,320)
$
$
$
$
$
$
$
$
149,959
$
209,735
(794)
149,165 $
(62)
209,673
149,165 $
149,165 $
209,673
209,673
0.49
$
—
0.49 $
0.49
$
—
0.49 $
0.64
—
0.64
0.64
—
0.64
306,225
306,295
326,040
326,155
MANAGEMENT’S DISCUSSION AND ANALYSIS
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in note 3 of RioCan's 2018 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.
Adoption of New Accounting Standards
Effective January 1, 2018, the Trust adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15), IFRS 9, Financial
Instruments (IFRS 9) and IAS 40, Investment Property (IAS 40), IFRS 2, Share-Based Payments (IFRS 2) and IFRIC 23,
Uncertainty over Income Tax Treatment (IFRIC 23) as issued by the International Accounting Standards Board (IASB). As a
result, significant accounting policies, estimates and judgments most affected by the adoption of the new pronouncements have
been updated as indicated in note 3 and 37 of the 2018 Annual Consolidated Financial Statements and further described below.
IFRS 15, Revenue from Contracts with Customers (IFRS 15)
The Trust adopted IFRS 15 on its effective date of January 1, 2018 using the modified retrospective basis. IFRS 15 replaces IAS
18, Revenue and establishes a five-step model to account for 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 standard requires entities to exercise judgment, taking into consideration all of
the relevant facts and circumstances when applying each step of the model to contracts with customers. The standard also
specifies the accounting for the incremental costs obtaining a contract and the costs directly related to fulfilling a contract.
The Trust's assessment included a review of relevant contracts for the following key areas that are in scope of IFRS 15: common
area maintenance recoveries, residential inventory sales, property and asset management fees and parking fees.
The Trust has concluded that there are no significant differences in revenue recognition for these revenue streams between the
point of transfer of risks and rewards under IAS 18 and the point of transfer of control under IFRS 15. No transitional adjustment
has been recorded as at January 1, 2018.
IFRS 9, Financial Instruments (IFRS 9)
Effective January 1, 2018, the Trust adopted IFRS 9 using the modified retrospective basis with no restatement of comparative
periods. IFRS 9 replaces IAS 39, Financial Instruments: Recognition and Measurement (IAS 39) and all previous versions of
IFRS 9. The standard introduces new requirements for: (i) classification and measurement of financial assets and financial
liabilities, (ii) impairment of financial assets and (iii) hedge accounting.
Classification and measurement
Under IFRS 9, financial assets are classified and measured on the basis of both the business model in which the assets are
managed and the contractual cash flow characteristics of the asset. Financial assets after initial recognition are classified and
measured based on three categories: (i) amortized cost, (ii) fair value through other comprehensive income (FVOCI) with fair
value gains or losses recycled to net income on de-recognition for loans and receivables only, or (iii) fair value through profit and
loss (FVTPL). Financial liabilities are classified and measured on two categories: (i) amortized cost or (ii) FVTPL.
On transition, the Trust’s marketable securities, which were previously classified as available for sale (AFS) under IAS 39 were
classified as FVTPL under IFRS 9 as the cash flows do not meet the solely payments of principal and interest (SPPI) test. As a
result, cumulative unrealized fair value gains of $68.7 million previously recorded in accumulated other comprehensive income
(AOCI) were reclassified to opening retained earnings as of December 31, 2017. Effective January 1, 2018 all realized and
unrealized fair value gains (losses) on these marketable securities are recorded in investment and other income within net
income whereas under IAS 39, unrealized fair value gains (losses) were recorded in other comprehensive income (OCI) until the
asset was de-recognized or impaired, at which time the cumulative unrealized gains (losses) were recognized in investment and
other income within net income.
In addition, on transition the Trust’s mortgages and loans receivable were assessed by reference to the underlying cash flows of
the loans. Certain mortgages and loans receivable previously classified and measured at amortized cost were reclassified to
FVTPL as the underlying cash flows did not represent solely payments of principal and interest and an accumulative fair value
loss of $1.3 million was recognized in opening retained earnings as of January 1, 2018. Interest income and fair value gains
(losses) on these mortgages and loans receivable recorded at FVTPL are included in interest income within net income.
The accounting for financial liabilities remained largely the same as under IAS 39.
Impairment of financial assets measured at amortized cost
IFRS 9 introduces a new single expected credit loss (ECL) impairment model for the Trust’s financial assets measured at
amortized cost. The ECL model results in an allowance for credit losses being recorded on financial assets regardless of whether
there has been an actual loss event. ECLs are based on the difference in cash flows the Trust expects to receive and the
contractual cash flows due in accordance with the contract, discounted at the asset’s original effective interest rate, and are
calculated using either a simplified or a general approach.
At each reporting date, each financial asset measured at amortized cost is assessed for impairment under the ECL model.
The adoption of the ECL model did not have a material impact on the Trust’s financial assets carried at amortized cost.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Hedging
IFRS 9 introduces a new hedge accounting model that expands the scope of hedged items and risks eligible for hedge
accounting and aligns hedge accounting more closely with risk management. The new model no longer specifies quantitative
measures for effectiveness testing and does not permit hedge de-designation.
The Trust applied hedge accounting under IFRS 9 prospectively. The Trust uses floating-for-fixed interest rate swaps to manage
interest rate risk. At the date of the initial application, these existing hedging relationships were eligible to be treated as continuing
hedging relationships. As such, the adoption of the hedge accounting requirements of IFRS 9 had no significant impact to the
Trust's Annual Consolidated Financial Statements.
IAS 40, Investment Property (IAS 40)
In December 2016, the IASB issued a clarifying amendment to IAS 40. 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 were applied prospectively
by RioCan on the effective date of January 1, 2018 as there was no change in classification to any of the Trust`s investment
properties upon the adoption of the amendments. This amendment did not impact the Trust's consolidated financial statements
upon adoption.
IFRS 2, Share-Based Payments (IFRS 2)
The IASB issued amendments to IFRS 2 that address three main areas: the effects of vesting conditions on the measurement of
a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement
features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based
payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the
amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and
other criteria are met. The Trust's accounting policy for cash-settled share based payments is consistent with the approach
clarified in the amendments. Therefore, these amendments do not have any impact on the Trust’s consolidated financial
statements.
Significant Accounting Estimates
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 consolidated 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, 2018,
RioCan had 31 properties including 7 land parcels (year ended December 31, 2017 - 35 properties including 11 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, 2018, we recorded unit-based compensation expense of $7.1 million (December
31, 2017 - $3.9 million).
•
IFRS 9 Financial Instruments which was effective January 1, 2018 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
90
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on the
classification of the financial instrument.
•
At least annually, RioCan reports in its Annual Consolidated 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, 2018 is $5.0 billion. The Trust reported a $5.0
billion fair value relating to these mortgages and debentures payable in note 25 to the 2018 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 2018 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
2018 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.
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. When 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 it 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, 2018, 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 16, Leases (IFRS 16)
In January 2016, the IASB issued IFRS 16. For lessees, the new standard brings most leases on-balance sheet 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 will be effective for the Trust's
annual periods beginning on or after January 1, 2019.
The Trust has investment properties located on land which is leased. Under current IAS 17, Leases some of these leases are
accounted for as operating lease and the related lease payments are expensed. It is expected that under the new lease standard,
a right-of-use (ROU) asset and a lease obligation liability will be recorded along with the corresponding financing charges. The
ROU asset will be accounted for as investment property, as these land leases meet the definition of investment property under
IAS 40. Given the low dollar value of land leases, the gross-up on the consolidated balance sheet and impact on consolidated
net income is not expected to be significant.
91
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Trust is the lessee of three land and building leases currently accounted for as investment properties under IAS 40 which it
has subdivided and subleased to retail tenants (see note 5). Under IFRS 16, these are considered sublease arrangements, which
are classified by reference to the ROU asset arising from the head lease, rather than by reference to the underlying asset under
IAS 17. This will result in some tenant subleases to be reclassified to a finance lease on January 1, 2019. For tenant subleases
classified as a finance lease, the subdivided portion of the investment property will be derecognized and a finance receivable
recognized in its place. The lease cash payments will be allocated between interest income and principal reduction of the finance
receivable. IFRS 16 is not expected to have a material impact on total assets, net income or total cash flows as prepared under
IAS 17, however, there will be a reallocation amongst various respective components.
IASB Annual Improvements 2015-2017 Cycle (Issued in December 2017)
In December 2017, the IASB issued amendments to four standards IFRS 3, Business Combinations (IFRS 3), IFRS 11, Joint
Arrangements (IFRS 11), IAS 12, Income Taxes (IAS 12), and IAS 23, Borrowing Costs (IAS 23). These amendments will be
effective for annual periods beginning on or after January 1, 2019. The implementation of these standards is not expected to
have a significant impact on the Trust.
IFRIC 23, Uncertainty over Income Tax Treatment (IFRIC 23)
In June 2017, the IASB issued amendments as a clarification to requirements under IAS 12, Income Taxes. IFRIC 23 clarifies the
application of various recognition and measurement requirements when there is uncertainty over income tax treatments. This
interpretation is effective for annual reporting periods beginning on or after January 1, 2019. The amendments are not expected
to have any impact on 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, 2018, 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, 2018 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, 2018, 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 three and twelve months ended December 31, 2018 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,
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.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
RioCan's related parties include the following persons and/or entities:
(a) associates, joint ventures, or entities which are controlled or significantly influenced by the Trust; and
(b) key management personnel including the Trustees and those persons having the authority and responsibility for planning,
directing and controlling the activities of RioCan, directly or indirectly.
The Trust’s key management personnel include each of the Trustees and the following individuals: Chief Executive Officer,
Edward Sonshine; Chief Operating Officer and Senior Vice President Investments & Residential, Jonathan Gitlin; and Senior Vice
President and Chief Financial Officer, Qi Tang (collectively, the Key Executives).
Remuneration of the Trust’s Trustees and Key Executives during the year ended December 31, 2018 and 2017 is as follows:
Three months ended December 31
Year ended December 31
Trustees
Key Executives
Trustees
Key Executives
Compensation and benefits
Unit-based payments
Post-employment benefit costs
$
$
74 $
(9)
—
65 $
2018
2017
2018
2017
2018
66 $ 1,164 $ 1,299 $
280 $
565
800
985
1,663
2017
2017
2018
261 $ 8,188 $ 5,226
2,214
4,551
1,537
—
36
—
631 $ 1,974 $ 2,292 $ 1,943 $ 1,798 $ 12,780 $ 7,476
41
10
—
8
On June 18, 2018, the Trust announced the resignation of Raghunath Davloor, President and Chief Operating Officer, effective
July 31, 2018. Effective August 1, 2018, Jonathan Gitlin assumed the role of Chief Operating Officer & Senior Vice President,
Investments and Residential.
During February 2016, RioCan's Chief Executive Officer (CEO), Edward Sonshine, agreed to commit to remain CEO of the Trust
until at least 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 32 of our 2018 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 creditworthiness of tenants, and various other factors.
On June 17, 2015, Unitholders authorized and approved amendments made to the Trust’s Declaration of Trust to further align it with
evolving governance best practices. The rights granted in the amended Declaration of Trust are granted as contractual rights afforded
to Unitholders (rather than as statutory rights). Similar to other existing rights contained in the Declaration of Trust (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 CBCA. 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 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
Ownership of Real Estate
Tenant Concentration
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 conduct credit assessments
for new tenants when considered appropriate 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
commercial leases with base terms between five and ten years, and by negotiating longer term commercial 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, 2018, 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 this 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.
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 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, 2018, RioCan had NLA, at its interest, of 36,481,000 square feet and a portfolio economic occupancy rate of
96.1%. Based on our current annualized portfolio weighted average gross rental revenue of approximately $30 per square foot
including CAM and tax recoveries, for every fluctuation in occupancy by a differential of 1%, our operations would be impacted by
approximately $11.1 million annually.
RioCan's aggregate net rent revenue for leases expiring over the next five years is $391 million based on current contractual
rental rates, excluding CAM and tax recoveries. If the leases associated with these expiring net rents are renewed upon maturity
at an aggregate net rental rate differential of 100 basis points, our net income would be impacted by approximately $3.9 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.
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 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Ontario Rent Control Legislation
On November 15, 2018 the Ontario government amended legislation governing rent control rules for newly purpose built rental
developments. The amended legislation provides that rent control exemptions will apply to all units first occupied as a residential
space after November 15, 2018. This is expected to encourage the supply of residential rental units in Ontario. However, there is
no assurance that future governments will not reintroduce rent control measures. Any reintroduction of rent control legislation in the
future 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.
Development Risk
As discussed in the Outlook section of this MD&A under Development Environment, after many years of development and housing
booms in Canada's major markets, there are a number of emerging factors that are affecting development risks that the Trust faces.
Such factors include, but are not limited to, rising construction costs and development charges, shortage of experienced labour in
certain construction related trades, uncertainties associated with Ontario's, and the transition to the LPAT, structure for municipal
zoning approvals due to its unclear mandate at the current stage. The impact of these factors will be further assessed and observed
in terms of broader market reactions. These factors could impact certain of the Trust's certain mixed-use development projects'
future NOI growth potential, and profit margin or development yield potential. As a result, there can be no assurance that all of our
proposed residential projects as described herein will be undertaken, and if so, with what mix of residential and commercial
development, at what costs, and generating what profit margin or development yield. There could also be changes to the mix of
condominium versus residential rental units or air rights sales for certain projects.
Residential Rental Business Risk
RioCan 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, housing supply and housing demand. As a landlord in its properties that include rental apartments, RioCan is subject to the
risks inherent in the multi-unit residential rental business, including, but not limited to, fluctuations in occupancy levels, individual
credit risk, heightened reputation risk, tenant privacy concerns, potential changes to rent control regulations, increases in operating
costs including the costs of utilities and the imposition of new taxes or increased property taxes.
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, 2018, RioCan’s total indebtedness had a 3.30 year weighted average term to maturity bearing interest at a
weighted average contractual interest rate of 3.51% 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 increases in 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, 2018, 16.4% 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, 2018, the carrying value of our floating rate debt, not subject to a hedging strategy, is $0.9 billion. A 50
basis point increase in market interest rates would result in a $4.6 million decrease in our net income.
Credit Ratings Risk
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.
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.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
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.
Uninsured Losses
RioCan carries comprehensive general liability, environmental, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of risks (including,
but not limited to, environmental contamination or catastrophic events such as war or acts of terrorism) which are either uninsurable,
in whole or in part, or not insurable on an economically viable basis. Should an uninsured or underinsured loss occur, the Trust could
lose its investment in, and anticipated profits and cash flows from, one or more of its properties, and the Trust would continue to be
obliged to repay any recourse mortgage indebtedness on such properties.
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 Chief
Operating Officer, Jonathan Gitlin 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
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
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.
Cyber Security Risk
Cyber security has become an increasing area of focus as reliance on digital technologies to conduct business operations has grown
significantly. Cyber attacks can include but are not limited to intrusions into operating systems, theft of personal or other sensitive
data and/or cause disruptions to normal operations. Such cyber attacks could compromise the Trust's confidential information as
well as that of the Trust's employees, tenants and third parties with whom the Trust interacts and may result in negative consequences,
including remediation costs, loss of revenue, additional regulatory scrutiny, litigation and reputational damage.
As a result, the Trust has developed a cyber security risk management program focused across a spectrum of preventative protective
and detective measures. These measures include, but are not limited to, security awareness programs with employees, regular
vulnerability testing performed by both internal and by external parties, establishing and maintaining a robust disaster recovery
program, implementation of a formal incident response program and enhancing email security. The Trust continues to evolve its
security tactics and defenses in response to emerging threats. The Trust also follows certain protocols when it engages software
vendors concerning data security and access control.
Climate Change Risks
RioCan is exposed to climate change risk from natural disasters and severe weather, such as floods, ice storms, and wild fires that
may result in damage to our investment properties. Such damage may result in loss of NOI from an investment property becoming
non-operational, increase in costs to recover/repair properties from a natural disaster and inclement weather, and increase in
insurance costs to insure the property against natural disasters and severe weather events.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
RioCan
AUDITED ANNUAL
CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2018 AND 2017
TABLE OF CONTENTS
Audited Annual
Consolidated Financial Statements
99 Management’s Responsibility for Financial Reporting
100
Independent Auditor’s Report
102 Consolidated Balance Sheets
103 Consolidated Statements of Income
104 Consolidated Statements of Comprehensive Income
105 Consolidated Statements of Changes in Equity
106 Consolidated Statements of Cash Flows
107 Notes to Consolidated Financial Statements
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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 annual
consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).
The annual 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, 2018, 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 auditor before such statements are approved by the Board of Trustees. Other
key responsibilities of the Audit Committee include selecting RioCan’s auditor, approving the consolidated financial statements
and MD&A, and monitoring RioCan’s existing systems of internal controls.
Ernst & Young LLP, the independent auditor appointed by the unitholders of RioCan upon the recommendation of the Board of
Trustees, has examined our 2018 and 2017 annual consolidated financial statements and has expressed their opinion upon the
completion of such examination in the following report to the unitholders. The auditor has full and free access to, and meets at
least quarterly with, the Audit Committee to discuss their audits and related matters.
(signed) Edward Sonshine
Edward Sonshine, O.Ont., Q.C.
Chief Executive Officer
(signed) Qi Tang
Qi Tang
Senior Vice President and Chief Financial Officer
Toronto, Canada
February 11, 2019
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
To the Unitholders of RioCan Real Estate Investment Trust
INDEPENDENT AUDITOR’S REPORT
Opinion
We have audited the consolidated financial statements of RioCan Real Estate Investment Trust and its subsidiaries (the Trust),
which comprise the consolidated balance sheets as at December 31, 2018 and 2017, and the consolidated statements of income,
consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of
cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant
accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Trust as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated
cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of
our report. We are independent of the Trust in accordance with the ethical requirements that are relevant to our audit of the
consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Other Information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read
the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have
performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We
have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will
perform on this other information, we conclude there is a material misstatement of other information, we are required to report
that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
IFRSs, 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.
In preparing the consolidated financial statements, management is responsible for assessing the Trust’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless management either intends to liquidate the Trust or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Trust’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
INDEPENDENT AUDITOR’S REPORT (continued)
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 Trust’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
•
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant
doubt on the Trust’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if
such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Trust to cease to continue as a
going concern
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the
disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
•
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is John Langhorne, CPA, CA.
Toronto, Canada
February 11, 2019
101
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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:
Common
Total equity
Total liabilities and equity
Note
December 31, 2018
December 31, 2017
5
6
7
8
4,5
9
13
12
11
4,12
14
15
$
13,009,421
$
13,160,244
13,339
189,817
164,014
206,123
194,227
152,126
74,698
14,003,765
2,742,633
2,218,270
913,130
—
463,342
$
$
11,929
176,256
145,873
132,003
410,178
269,870
70,225
14,376,578
2,694,619
2,300,247
904,429
32,670
399,927
6,337,375
$
6,331,892
7,666,390
7,666,390
14,003,765
$
8,044,686
8,044,686
14,376,578
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
Approved on behalf of the Board of Trustees
(signed) Siim A. Vanaselja
Siim A. Vanaselja
Chair of Audit Committee
Trustee
(signed) Edward Sonshine
Edward Sonshine, O. Ont., Q.C.
Chief Executive Officer
Trustee
102
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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
Residential inventory sales
Property management and other service fees
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
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
2018
2017
18
$
1,110,160
$
1,140,665
18
20
6
5
19
21
22
23
4
24
24
24
24
24
24
$
$
$
$
$
$
$
$
22,264
15,418
—
14,554
1,147,842
1,155,219
389,285
17,384
20,882
427,551
720,291
11,452
11,174
18,304
20,316
61,246
168,299
55,999
11,294
20,023
255,615
525,922
(1,440)
527,362
741
528,103
528,103
528,103
1.68
—
1.68
1.68
—
1.68
$
$
$
$
$
$
$
$
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
313,936
314,024
326,805
326,929
103
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
RIOCAN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian dollars)
Years ended December 31,
Net income
Other comprehensive (loss) income:
Items that may be reclassified subsequently to income, net of tax:
Interest rate swap agreements:
Unrealized (loss) gain during the year
Reclassified during the year to income
Unrealized (gain) on cross-currency interest rate swap agreements
Marketable securities:
Unrealized gain during the year
Reclassified during the year to income
Other comprehensive (loss) from equity-accounted investments
Item that is not to be reclassified to income, net of tax:
Actuarial gain (loss) on pension plan
Other comprehensive (loss) income, net of tax
Comprehensive income, net of tax
Comprehensive income, net of tax attributable to:
Unitholders
The accompanying notes are an integral part of the consolidated financial statements.
Note
$
2018
528,103 $
2017
715,286
15, 26
26
15
15, 37
15, 37
15
$
$
(7,796)
2,099
—
—
—
(149)
864
(4,982)
523,121 $
12,901
—
(74)
35,698
(45,981)
—
(984)
1,560
716,846
523,121 $
716,846
104
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
RIOCAN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands of Canadian dollars)
Balance, December 31, 2016
$
144,755 $
4,788,520 $
22,619 $
2,986,177 $
67,817 $
8,009,888
Note
Preferred
equity
Common trust
units
Contributed
surplus
Retained
earnings
Accumulated other
comprehensive
income
Total equity
Changes during the year:
Net income
Other comprehensive income
Unit-based compensation exercises
Units issued
Units purchased and cancelled
Unit-based compensation awards
Unit redemptions
Preferred trust unit issue costs
Distributions to unitholders
Balance, December 31, 2017
Balance, December 31, 2017
Adjustment on adoption of IFRS 9
Balance, January 1, 2018
Changes during the year:
Net income
Other comprehensive loss
Unit-based compensation exercises
Units issued
Units purchased and cancelled
Unit-based compensation awards
Distributions to unitholders
Balance, December 31, 2018
15
15
15
15
15
15
17
$
Note
2 $
37
37 $
15
15
15
15
15
17
—
—
—
—
—
—
(149,500)
4,745
—
— $
—
—
250
26,171
(57,870)
—
—
—
—
—
—
(10)
—
—
4,757
—
—
—
715,286
—
—
—
(41,705)
—
—
(4,745)
(464,141)
—
1,560
—
—
—
—
—
—
—
715,286
1,560
240
26,171
(99,575)
4,757
(149,500)
—
(464,141)
4,757,071 $
27,366 $
3,190,872 $
69,377 $
8,044,686
Preferred
equity
Common trust
units
Contributed
surplus
Retained
earnings
Accumulated other
comprehensive
income
Total equity
— $
4,757,071 $
27,366 $
3,190,872 $
69,377 $
8,044,686
—
—
—
67,371
(68,664)
(1,293)
— $
4,757,071 $
27,366 $
3,258,243 $
713 $
8,043,393
—
—
—
—
—
—
—
—
—
5,105
1,245
(278,594)
—
—
—
—
(743)
—
—
6,826
—
528,103
—
—
—
(183,220)
—
(450,743)
—
(4,982)
—
—
—
—
—
528,103
(4,982)
4,362
1,245
(461,814)
6,826
(450,743)
$
— $
4,484,827 $
33,449 $
3,152,383 $
(4,269) $
7,666,390
The accompanying notes are an integral part of the consolidated financial statements.
105
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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 tax recovery
Fair value gains on marketable securities
Fair value loss on loans receivable
Transaction gains, net on disposition of:
Realized gain on marketable securities
Canadian investment properties
Adjustments for changes in other working capital items
Cash provided by operating activities
Investing activities
Acquisitions of investment properties
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
Investment in bonds, net of maturities
Proceeds from sale of marketable 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
Units repurchased under normal course issuer bid
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
2018
2017
$
527,362
$
708,265
741
528,103
4,575
(8,563)
6,826
(11,174)
(18,304)
(1,440)
(16,472)
—
—
(78)
(79,468)
404,005
(63,181)
(362,359)
(25,541)
(34,032)
917,573
(930)
(11,533)
9,180
(45,964)
20,091
(2,880)
142,812
543,236
496,860
(586,511)
371,650
(363,140)
298,323
(250,000)
(452,170)
—
(461,814)
4,034
—
(942,768)
4,473
70,225
$
74,698
$
4
22
18
15
6
5
19, 37
19, 37
31
6
6
19
13
13
30
17
30
7,021
715,286
9,865
(7,806)
4,757
(15,719)
(136,942)
(320)
—
2,550
(45,981)
(971)
(170,691)
354,028
(46,137)
(312,237)
(33,683)
(35,500)
381,579
(1,567)
(18,475)
44,415
(60,396)
14,221
—
153,696
85,916
334,875
(719,719)
563,198
(362,265)
596,948
(150,000)
(435,671)
(3,514)
(99,575)
1,138
(149,500)
(424,085)
15,859
54,366
70,225
The accompanying notes are an integral part of the consolidated financial statements.
106
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 AND 2017
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. Revenue
19. Investment and Other Income
108
108
110
120
121
127
128
128
129
129
130
131
132
133
134
135
138
138
139
20. Interest Income
21. Interest Costs
22. General and Administrative
23. Transaction and Other Costs
24. Net Income per Unit
25. Fair Value Measurement
26. Risk Management
27. Capital Management
28. Operating Leases
29. Subsidiaries
30. Supplemental Cash Flow Information
31. Changes in Other Working Capital Items
32. Related Party Transactions
33. Employee Benefits
34. Segmented Information
35. Contingencies and Other Commitments
36. Events after the Balance Sheet Date
37. Transition to IFRS 15 and 9
139
139
140
140
140
141
142
144
145
146
147
147
147
148
148
148
149
150
107
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
1. GENERAL INFORMATION
RioCan Real Estate Investment Trust and its consolidated subsidiaries (collectively, the Trust or RioCan) own, develop and
operate one of Canada's largest portfolio of retail, 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 symbol REI.UN.
These consolidated financial statements of the Trust for the years ended December 31, 2018 and 2017 were authorized for issue
by the Board of Trustees on February 11, 2019.
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).
All dollar amounts discussed herein are in thousands of Canadian dollars, unless otherwise stated.
(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, except with respect to the adoption of IFRS 15, Revenue from Contracts with
Customers and IFRS 9, Financial Instruments, which have been applied on a modified retrospective basis without restatement of
comparatives. Any IFRS standards issued but not yet effective up to the date of issuance of these consolidated financial
statements are described in note 3(x). 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, of other
comprehensive income (OCI) 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.
108
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
(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.
(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 income 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 income 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, but are not limited to,
capitalization rates, stabilized net operating income, leasing costs, vacancy rates, and costs to complete, if applicable. The Trust
examines the key assumptions at the end of each reporting period and updates these assumptions based on recent leasing
activity and external data available at the time. A change to any of these inputs may significantly alter the fair value of an
investment property.
109
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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.
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.
The accounting policies set out below have been applied consistently in all material respects, except with respect to the adoption
of IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments, which have been applied on a modified
retrospective basis without restatement of comparatives. Refer to note 37 for the transitional impacts and significant accounting
polices which apply to comparative information for 2017. Any IFRS not effective for the current accounting year are described in
note 3(x).
(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
110
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
•
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.
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 and/or building 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. Cost includes all amounts related to the acquisition (excluding transaction
costs related to a business combination as outlined in note 3(a)) and improvements of the properties. All costs associated
with upgrading and extending the economic life of the existing facilities other than ordinary repairs and maintenance are
capitalized to investment property. Subsequent to initial recognition, income properties are recorded at fair value, in
accordance with International Accounting Standard IAS 40, Investment Property (IAS 40). 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. Gains or losses arising from differences between current period fair value and the sum of previously
measured fair value and capitalized costs as described above are recognized in net income in the period in which they arise.
(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 the unit of the property can operate in a manner
intended by management, which may include that 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.
Investment properties are derecognized on disposal or when no future economic benefits are expected from their use or disposal.
(d) Residential inventory
Residential inventory are 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. Net realizable value is
the estimated selling price in the ordinary course of business, less estimated selling costs and estimated 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.
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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, 2018 and 2017
Transfers into residential inventory are based on a change in use evidenced by 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 and the
inception of an operating lease to another party.
(e)
Investment properties classified as held for sale
Investment property is classified as held for sale when it is expected that the carrying amount will be recovered principally
through sale rather than from continuing use. To be classified as held for sale, the property must be available for immediate sale
in its present condition, subject only to terms that are usual and customary for sales of such property, and its sale must be highly
probable, generally within one year. Upon designation as held for sale, the investment property continues to be measured at fair
value and is presented separately on the consolidated balance sheets.
(f) Revenue
The following is a description of the principal activities from which the Trust generates its revenues, including the nature of
revenues, timing of satisfaction of performance obligations and significant payment terms.
The following specific recognition criteria must also be met before revenue is recognized:
(i) Rental revenue
The majority of the Trust's rental revenue is earned from its lease contracts with customers.
Base rent
The Trust classifies leases with its tenants as operating leases when it has not transferred substantially all of the benefits
and risks of ownership of its investment properties. 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 contract
where it is determined that the tenant fixturing has no benefit to RioCan beyond the existing tenancy.
Realty tax and insurance recoveries
Tenant reimbursements for real estate taxes and insurance incurred by the Trust relate specifically to the leased property
and are considered to be unavoidable costs directly related to the leased asset. The Trust recognizes realty tax and
insurance recoveries as they become due.
Straight-line rent
Certain lease contracts 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 contract, 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.
Common area maintenance (CAM) services
The Trust has obligations pursuant to its lease contracts with tenants to provide CAM services in exchange for CAM
recoveries which are considered non-lease components. These CAM services are delivered to tenants during the period
which the tenants occupy the premises and as such, CAM recoveries are recognized in revenue over time. The Trust
receives variable consideration for the CAM recoveries to the extent of costs incurred and revenue is recognized on this
basis as this is the best estimate of amounts earned over the period these services are performed. Revenue is constrained
by actual costs incurred and any restrictions in the lease contracts. The Trust is obligated to continue to provide CAM
services over the remainder of the lease contract term and will recognize revenue based on actual cost incurred to fulfill the
CAM services.
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.
Parking revenue
Parking revenue are fees charged for short-term or transient use of a parking space. Revenue is recognized when the
parking space is used and the fee is collected. Parking revenue pursuant to a lease is included in base rent.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
(ii) Residential inventory
Revenue from contracts with customers for residential land sales, the sale of townhomes and residential condominium units
is recognized at the point in time when control over the property has been transferred, which is generally when possession
passes to the customer (i.e., the purchaser) since the customer then has the ability to direct the use and obtain substantially
all of the benefits of the respective property. Revenue is measured at the transaction price agreed to under the contract.
Funds received from the customer prior to the customer taking possession are recognized as deferred revenue (a contract
liability). Non-refundable sales commissions paid by the Trust prior to the customer taking possession are capitalized as
contract assets and expensed when the residential inventory revenue is recognized.
Directly attributable selling and disposition costs are expensed as incurred.
(iii) Property management and other service fees
RioCan has interests in various investment properties through joint arrangements and investments in associates. The Trust
provides property management services, construction and development services, finance arranging services and leasing
services to co-owners, partners and third parties for which it earns market-based fees.
Fees for property management services, construction and development services are generally recognized as revenue over
the period of performance of those services. Amounts are determined and revenue is recognized based on the agreed
transaction price in each contract.
Finance arranging and leasing service fees are recognized as revenue in the period in which the service is received by the
customer. Amounts are determined and revenue is recognized based on the agreed transaction price in each contract.
(g) Investment and other income and transaction and other costs
Transaction gains included in investment and other income, and transaction losses included in transaction and other costs on the
consolidated statements of income, are recognized on the settlement date or on the settlement of post transaction adjustments
and represent the excess proceeds of disposition relating to subsidiaries, investments or assets over their carrying values in the
case of transaction 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.
(h) 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 the
consolidated statements of income.
(i) Recognition and measurement of financial instruments
Financial assets include RioCan's contractual rents receivable, mortgages and loans receivable, cash and cash equivalents,
funds held in trust, marketable securities and derivative contracts. Financial liabilities include RioCan's operating lines of credit,
mortgages payable, debentures payable and accounts payable and certain other liabilities.
The Trust determines the classification of its financial assets and financial liabilities at initial recognition. The classification of
financial instruments depends on the purpose for which they were acquired or incurred. Financial instruments are initially
recorded at fair value and, in the case of financial assets or financial liabilities carried at amortized cost, adjusted for directly
attributable transaction costs.
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.
Financial assets and financial liabilities are recognized when the Trust becomes party to the contractual provisions of the
instrument. Financial assets are no longer recognized when the rights to receive cash flows from the assets have expired or are
assigned and all the risks and rewards of ownership have been transferred to a third party. Financial liabilities are no longer
recognized when the related obligation expires, or is discharged or cancelled.
The Trust's derivative instruments are recorded on the consolidated balance sheets at fair value. Changes in fair value of the
derivative instruments are recognized in net income, except for derivatives that are designated as effective hedges. Changes in
fair value for the effective portion of such hedging relationships is recognized in OCI. See note 3(l) for further discussion
regarding hedge accounting policies.
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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, 2018 and 2017
Financial Instruments
Financial assets
Cash and cash equivalents
Marketable securities (i)
Receivables and other assets
Mortgages and loans receivable
Interest rate swap assets
Financial liabilities
Debentures payable
Mortgages payable
Lines of credit and other bank loans
Interest rate swap liabilities
Accounts payable and other liabilities
Classification
Amortized cost
FVTPL
Amortized cost
Amortized cost or FVTPL
FVTPL (ii)
Amortized cost
Amortized cost
Amortized cost
FVTPL (ii)
Amortized cost
(i) Included in receivables and other assets on the consolidated balance sheet.
(ii) Interest rate swaps are derivative financial instruments that are recorded at fair value on the consolidated balance sheet. The effective portion of
the fair value gains (losses) are recorded in other comprehensive income as they are designated in an effective cash flow hedging relationship.
Financial assets
The Trust's financial assets are classified and measured on the basis of both the business model in which the assets are
managed and the contractual cash flow characteristics of the asset. Financial assets subsequent to initial recognition are
classified and measured based on three categories: (i) amortized cost, (ii) fair value through other comprehensive income
(FVOCI) with fair value gains or losses recycled to net income on derecognition for loans and receivables only, or (iii) fair value
through profit or loss (FVTPL).
(i) Financial assets at amortized cost
Financial assets are recorded at amortized cost when financial assets are held with the objective of collecting contractual cash
flows and those cash flows represent solely payments of principal and interest (SPPI) and are not designated as FVTPL. These
assets are measured at amortized cost subsequent to initial recognition 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. The amortized cost is reduced by impairment losses, if any. Interest income
and impairment losses are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.
(ii) Financial assets at FVOCI
These financial assets are measured at fair value subsequent to initial recognition.
For debt instruments held with the objective of collecting contractual cash flows and selling financial assets, interest income is
calculated using the effective interest method and impairment are recognized in profit or loss. Other net fair value gains and
losses are recognized in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.
For equity instruments not held for trading and where an election to present changes in the fair value subsequent to initial
recognition of such instruments in other comprehensive income is made, dividends are recognized in profit or loss, unless the
dividend clearly represents a recovery of part of the cost of the investment. Other net fair value gains and losses are recognized
in OCI and are never reclassified to profit or loss. Regular way transactions are recorded on a trade date basis.
The Trust does not have any financial assets classified as FVOCI.
(iii) Financial assets at FVTPL
These financial assets are neither held at amortized cost nor at FVOCI as they are managed and evaluated on a fair value basis.
These financial assets are measured at fair value subsequent to initial recognition. Net gains and losses, including any interest or
dividend income, are recognized in profit or loss unless they are derivative instruments designated in an effective hedging
relationship.
Financial liabilities
Financial liabilities are initially measured at fair value and subsequent to initial recognition are classified and measured based on
two categories: (i) amortized cost or (ii) FVTPL.
(i) Financial liabilities at amortized cost
Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expense is
recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
(ii) Financial liabilities at FVTPL
A financial liability is classified as FVTPL if it is classified as held for trading, it is a derivative or designated as FVTPL on initial
recognition. Financial liabilities at FVTPL are subsequently measured at fair value and net gains and losses, including any
interest expenses, are recognized in profit or loss unless they are derivative instruments designated in an effective hedging
relationship.
(j)
Impairment of financial assets
At each reporting date, each financial asset measured at amortized cost is assessed for impairment under an expected credit
loss (ECL) model. The Trust applies the simplified approach which uses lifetime ECLs for contractual rents receivable and the
general approach for mortgages and loans receivable. Under the general approach, the ECL model requires the recognition of
credit losses based on up to 12 months of expected losses for performing loans (Stage 1) and the recognition of lifetime expected
losses on performing loans that have experienced a significant increase in credit risk since origination (Stage 2). Stage 3
requires the recognition of lifetime losses for all credit impaired assets. Mortgages and loans receivables are classified as
impaired when there is objective evidence that the full carrying amount of the loan or mortgage receivable is not collectible.
The Trust uses an accounts receivable aging provision matrix to measure the ECL for contractual rents receivable and applies
loss factors to aging categories greater than 60 days past due.
ECLs for the mortgages and loans receivable are based on the difference in cash flows the Trust expects to receive and the
contractual cash flows due in accordance with the contract, discounted at the asset’s original effective interest rate, and are
calculated using the general approach. Any changes in impairment are recognized in net income. Once a mortgage or loan
receivable is identified as impaired, the Trust continues to recognize interest income based on the original effective interest rate
on the loan amount net of its related allowance. In the periods following the recognition of impairment, adjustments to the
allowance for these loans reflecting the time value of money are recognized and presented as interest income.
Mortgages and loans receivable and contractual rents 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.
(k) 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. 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, this is generally equal to the guarantee fee
received, 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 less amortization for the passage of time and (ii) the loss allowance
measured using an ECL model.
(l) 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.
(m) Hedges
From time to time, the Trust may enter into interest rate swaps to hedge its interest rate risks. 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 Trust's purposes of hedge accounting, interest rate swap hedges are classified as cash flow hedges.
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, the hedge
ratio 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 cash flows and are assessed on an ongoing basis to determine that there is a continuing economic relationship between the
hedged item and hedging instrument.
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 and accumulated in the cash flow hedge reserve within equity.
The ineffective portion is recognized in net income.
For continuing cash flow hedge arrangements, amounts accumulated in the cash flow hedge reserve are reclassified from the
cash flow hedge reserve as a reclassification adjustment in the same periods during which the hedged future cash flow affects
the consolidated statements of income. Hedge accounting ceases when the hedging instrument expires or is sold, terminated or
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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, 2018 and 2017
exercised without replacement or rollover (as part of the hedging strategy); or when it no longer qualifies for hedge accounting.
Amounts accumulated in the cash flow hedge reserve at that time remain in equity if the forecasted transaction is still expected to
occur and reclassified from OCI and into the consolidated statements of income in the period the forecasted transaction occurs.
When a forecast transaction is no longer expected to occur, the gain or loss accumulated in the cash flow hedge reserve is
immediately reclassified from OCI to the consolidated statements of income.
(n) Comprehensive income
Comprehensive income comprises net income and OCI, which generally would include changes in the fair value of the effective
portion of cash flow hedging instruments, actuarial gains and losses related to RioCan's defined benefit pension plans and other
comprehensive income of equity-accounted investments. The Trust reports consolidated statements of comprehensive income
comprising net income and OCI for the year. Prior to January 1, 2018, OCI also included unrealized gains and losses on
financial assets classified as available for sale; however, upon transition to IFRS 9, the Trust did not have any financial assets
designated as FVOCI.
(o) Income taxes
The Trust qualifies as a mutual fund trust and a “real estate investment trust” (“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. The Trust is therefore considered, in substance, tax
exempt and does not account for income taxes, except for amounts incurred in its incorporated Canadian taxable subsidiaries
that continue to be subject to income taxes. These taxable subsidiaries account for income taxes as follows:
(i) Current income taxes
Using tax rates enacted or substantively enacted at the reporting date, current tax is the expected current income taxes
payable or receivable on the taxable income or loss for the year related to the incorporated Canadian taxable subsidiaries.
(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 for the
incorporated Canadian taxable subsidiaries.
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:
2.
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
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 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.
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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, 2018 and 2017
(p) 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
(q) 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.
(r) 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.
(s) 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.
(t) Foreign currency translation
These consolidated financial statements are presented in Canadian dollars, which is the functional and presentation currency of
the Trust.
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.
(u) 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.
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.
(v) 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. 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.
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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, 2018 and 2017
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.
(w) Changes in accounting policy
IFRS 15, Revenue from Contracts with Customers (IFRS 15)
The Trust adopted IFRS 15 on its effective date of January 1, 2018 using the modified retrospective basis. IFRS 15 replaces IAS
18, Revenue (IAS 18) and establishes a five-step model to account for 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 standard requires entities to exercise judgment, taking into consideration all
of the relevant facts and circumstances when applying each step of the model to contracts with customers. The standard also
specifies the accounting for the incremental costs obtaining a contract and the costs directly related to fulfilling a contract.
The Trust's assessment included a review of relevant contracts for the following key areas that are in scope of IFRS 15: CAM
recoveries, residential inventory sales, property management fees and parking fees.
The Trust has concluded that there are no significant differences in revenue recognition for these revenue streams between the
point of transfer of risks and rewards under IAS 18 and the point of transfer of control under IFRS 15. No transitional adjustment
has been recorded as at January 1, 2018. Additional disclosure on disaggregation of revenue is included in note 18. There were
no differences in the amount of revenue recognized; refer to note 37, Transition to IFRS 15 and 9 for accounting policies under
IAS 18, which were applicable for prior periods.
IFRS 9, Financial Instruments (IFRS 9)
The Trust adopted IFRS 9 on its effective date of January 1, 2018 using the modified retrospective basis with no restatement of
comparative periods. IFRS 9 replaces IAS 39, Financial Instruments: Recognition and Measurement (IAS 39) and all previous
versions of IFRS 9. The standard introduces new requirements for: (i) classification and measurement of financial assets and
financial liabilities, (ii) impairment of financial assets and (iii) hedge accounting. The impact to unitholders` equity as at January
1, 2018 was a decrease of $1,293 related to a change in classification of financial asset and remeasurement to fair value. Prior
periods have not been restated. Refer to note 37, Transition to IFRS 15 and 9, for the impact on the opening consolidated
balance sheet as at January 1, 2018 and for accounting policies under IAS 39, which were applicable in prior periods.
IAS 40, Investment Property (IAS 40)
In December 2016, the IASB issued a clarifying amendment to IAS 40. 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 were applied prospectively
by RioCan on the effective date of January 1, 2018 as there was no change in classification to any of the Trust`s investment
properties upon the adoption of the amendments. This amendment did not impact the Trust's consolidated financial statements
upon adoption.
IFRS 2, Share-Based Payments (IFRS 2)
The IASB issued amendments to IFRS 2 that address three main areas: the effects of vesting conditions on the measurement of
a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement
features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based
payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the
amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and
other criteria are met. The Trust's accounting policy for cash-settled share based payments is consistent with the approach
clarified in the amendments. Therefore, these amendments do not have any impact on the Trust’s consolidated financial
statements.
(x) 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
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.
118
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
IFRS 16, Leases (IFRS 16)
In January 2016, the IASB issued IFRS 16. For lessees, the new standard brings most leases on-balance sheet 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 will be effective for the Trust's
annual periods beginning on or after January 1, 2019.
The Trust has investment properties located on land which is leased. Under current IAS 17, Leases some of these leases are
accounted for as operating lease and the related lease payments are expensed. It is expected that under the new lease standard,
a right-of-use (ROU) asset and a lease obligation liability will be recorded along with the corresponding financing charges. The
ROU asset will be accounted for as investment property, as these land leases meet the definition of investment property under
IAS 40. Given the low dollar value of land leases, the gross-up on the consolidated balance sheet and impact on consolidated
net income is not expected to be significant.
The Trust is the lessee of three land and building leases currently accounted for as investment properties under IAS 40 which it
has subdivided and subleased to retail tenants (see note 5). Under IFRS 16, these are considered sublease arrangements, which
are classified by reference to the ROU asset arising from the head lease, rather than by reference to the underlying asset under
IAS 17. This will result in some tenant subleases to be reclassified to a finance lease on January 1, 2019. For tenant subleases
classified as a finance lease, the subdivided portion of the investment property will be derecognized and a finance receivable
recognized in its place. The lease cash payments will be allocated between interest income and principal reduction of the finance
receivable. IFRS 16 is not expected to have a material impact on total assets, net income or total cash flows as prepared under
IAS 17, however, there will be a reallocation amongst various respective components.
IASB annual improvements 2015-2017 Cycle (Issued in December 2017)
In December 2017, the IASB issued amendments to four standards IFRS 3, Business Combinations (IFRS 3), IFRS 11, Joint
Arrangements (IFRS 11), IAS 12, Income Taxes (IAS 12), and IAS 23, Borrowing Costs (IAS 23). These amendments will be
effective for annual periods beginning on or after January 1, 2019. The implementation of these standards is not expected to
have a significant impact on the Trust.
IFRIC 23, Uncertainty over Income Tax Treatment (IFRIC 23)
In June 2017, the IASB issued amendments as a clarification to requirements under IAS 12, Income Taxes. IFRIC 23 clarifies the
application of various recognition and measurement requirements when there is uncertainty over income tax treatments. This
interpretation is effective for annual reporting periods beginning on or after January 1, 2019. The amendments are not expected
to have any impact on the Trust’s consolidated financial statements.
119
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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:
Years ended December 31,
Operating income
Other income
Other expenses
General and administrative expenses (recoveries)
Transaction costs (recoveries)
Income before income taxes
Income tax expense (recovery)
Current
Net income from discontinued operations
Other income
$
$
2018
— $
2,141
57
155
212
1,929
1,188
741 $
2017
—
2,560
(1,041)
(549)
(1,590)
4,150
(2,871)
7,021
For the year ended December 31, 2018, other income includes a partial reversal of provisions based on receivable collections
related to RioCan's disposed U.S. property portfolio and the reversal of general and administrative expense accruals.
Income taxes
For the year ended December 31, 2018, 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:
Adjustments for net changes in operating assets and liabilities
Net operating cash flow activities
Net investing cash flow activities
Net financing cash flow activities
Net change in cash
Properties held for sale
$
$
2018
741 $
(2,170)
(1,429)
—
—
(1,429) $
2017
7,021
(6,069)
952
—
—
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, 2018
December 31, 2017
$
$
$
$
145,850
48,377
194,227
$
$
—
— $
$
194,227
371,299
38,879
410,178
32,670
32,670
377,508
As at December 31, 2018, 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 three income
properties held for sale, with an aggregate carrying value of $145.9 million.
As at December 31, 2018, RioCan has four development properties held for sale with a carrying value of $48.4 million.
120
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
5. INVESTMENT PROPERTIES
As at
Income properties
Properties under development
Year ended December 31, 2018
Balance, beginning of year
Acquisitions
Dispositions
Development expenditures
Capital expenditures:
Recoverable and non-recoverable expenditures
Leasing commissions and tenant improvements
Transfers, net (i)
Transfers to residential inventory (ii)
Fair value gains (losses), net
Straight-line rent (iii)
Other changes
Earn-out consideration
Balance, end of year
Investment properties
Properties held for sale
December 31, 2018
December 31, 2017
$
$
12,021,303
988,118
13,009,421
Income properties
$
12,447,238
$
Properties under
development
1,123,184
105,223
(974,895)
—
24,905
44,173
484,557
—
25,690
8,563
1,699
—
$
$
$
12,167,153
12,021,303
145,850
12,167,153
$
$
$
14,846
(19,448)
410,791
—
—
(484,557)
(5,014)
(7,386)
—
—
4,079
1,036,495
988,118
48,377
1,036,495
$
$
$
$
$
$
12,075,939
1,084,305
13,160,244
Total
13,570,422
120,069
(994,343)
410,791
24,905
44,173
—
(5,014)
18,304
8,563
1,699
4,079
13,203,648
13,009,421
194,227
13,203,648
(i) During the year ended December 31, 2018, transfers to income properties from properties under development totalled $555.5 million reflecting
completed developments. Transfers from income properties to properties under development totalled $70.9 million reflecting the commencement
of active development on certain income properties during the period.
(ii) During the year ended December 31, 2018, the current fair market value of certain office units located on the 2nd and 3rd floors of the Yonge-
Eglinton Northeast Corner development were transferred from investment property to inventory as they will not be leased to tenants as originally
contemplated, but rather, are being marketed and sold as condominium units.
Included in investment properties is $107.7 million of net rents receivable arising from the recognition of rental revenue on a straight-line basis
over the lease term (December 31, 2017 - $108.2 million).
(iii)
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
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
121
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
(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 Windfield Farms 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.
(iii)
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
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
and Residential inventory
2018
2017
2018
2017
$
105,223 $
—
105,223
—
(36,063)
69,160 $
16,484 $
—
16,484
—
(8,631)
7,853 $
14,846 $
26,370
41,216
—
—
41,216 $
63,933
36,870
100,803
(28,467)
(13,406)
58,930
69,160
—
69,160 $
7,853
—
7,853 $
14,846
26,370
41,216 $
39,280
19,650
58,930
During the three months ended September 30, 2018, RioCan acquired the remaining 20% interest in the Silver City property
located in Gloucester, Ontario, for $9.6 million, including transaction costs, and assumed $6.9 million of associated debt. RioCan
also acquired the remaining 40% interest in the RioCan Centre Belcourt property located in Ottawa, Ontario, for $26.6 million,
including transaction costs, and assumed $16.8 million of associated debt.
During the three months ended June 30, 2018, RioCan acquired the remaining 25% interest in Herongate Mall in Ottawa,
Ontario, for a purchase price of $13.4 million, including transaction costs. In connection with this acquisition, debt of $5.4 million
was assumed. RioCan also acquired a 20% interest in Shoppers City East in Ottawa, Ontario, for a purchase price of
$10.9 million including transaction costs, with no debt assumed. The Shoppers City East acquisition included both income
property ($5.1 million) and property under development ($5.8 million).
During the three months ended March 31, 2018, RioCan acquired Thickson Centre in Whitby, Ontario, for a purchase price of
$31.7 million, including transaction costs at a capitalization rate of 6.16% with no assumption of debt. The Trust also acquired the
remaining one-third interest in Green Lane Centre in Newmarket, Ontario, for a purchase price of $18.9 million, including
transaction costs at a capitalization rate of 5.65%, and assumed a mortgage with a fair value of $9.4 million, which included a
mark-to-market adjustment of $2.5 million.
Properties under development acquisitions
During the three months ended June 30, 2018, RioCan acquired a 20% interest in Shoppers City East in Ottawa, Ontario, which
included property under development valued at $5.8 million.
During the three months ended March 31, 2018, the Trust completed four development property acquisitions aggregating
$35.5 million, including transaction costs at RioCan's interest. Three of these acquisitions represent land parcels pertaining to
RioCan's Yorkville project development site, located in Toronto, Ontario, where the total acquisition price of $31.1 million,
including transaction costs (at RioCan's 50% interest) was allocated $26.4 million to residential development inventory and
$4.7 million to properties under development. Riocan and its 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.
Also during the three months ended March 31, 2018, RioCan acquired the remaining 18.75% equity interest in development
lands located in Vaughan, Ontario, at a purchase price of $4.4 million.
122
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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, currently expected in the first half of 2019, subject to final costs incurred.
Also, the Trust has an agreement to acquire the remaining 50% interest in the retail component of ePlace, from its partners at a
purchase price based on a 7.00% capitalization rate on the stabilized net operating income upon completion estimated in 2019.
The Trust has also agreed to purchase the partners' interest in the retail portion of the Yorkville project upon completion at a
6.00% capitalization rate.
On April 20, 2018, RioCan entered into an agreement to purchase from its partner the remaining one-third interest in RioCan
Marketplace in Toronto, Ontario, for a purchase price of $18.3 million, including a $11.5 million assumption of debt. On December
14, 2018, the agreement was amended to extend the closing date, which is estimated to occur in the first quarter of 2020.
Dispositions
The following table summarizes the Trust's dispositions of investment property:
As at December 31,
Total consideration
Mortgages associated with investment property dispositions
Vendor take-back mortgages receivable on dispositions
Total consideration, net of related debt
Income properties
Properties under development
2018
974,895 $
(58,870)
(9,525)
906,500 $
2017
294,820 $
—
(2,500)
292,320 $
$
$
2018
19,448 $
—
—
19,448 $
2017
88,127
(1,024)
—
87,103
123
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
Income properties dispositions
For the year ended December 31, 2018, the Trust disposed of the following properties:
Property name and location
Churchill Plaza, Sault Ste. Marie, ON
King Plaza, Oshawa, ON
London Plaza, London, ON
Aberdeen & Cecile, Hawkesbury, ON
Six properties in PQ and ON (i)
Bellfront Shopping Centre, Belleville, ON
City View Plaza, Ottawa, ON (ii)
Quispamsis Town Centre, Quispamsis, NB
RioCan Niagara Falls, Niagara Falls, ON
4055 Carling, Ottawa, ON
West Ridge Place, Orillia, ON
RioCan’s
sales
proceeds
(thousands
of dollars)
Debt
assumed by
vendor
(thousands)
Ownership
interest
disposed of
by RioCan
Date disposed
October 4, 2018
$
15,550
$
October 4, 2018
November 15, 2018
November 19, 2018
14,050
4,000
1,100
November 23, 2018
107,600
November 27, 2018
November 28, 2018
December 14, 2018
December 19, 2018
December 20, 2018
December 20, 2018
14,735
14,050
12,526
11,800
6,570
15,850
Total sales proceeds of dispositions for the three months ended December 31, 2018
$ 217,831
Shoppers Drug Mart, Pembroke, ON
Shoppers Drug Mart on Argyle, Caledonia, ON
506 & 510 Hespeler Rd, Cambridge, ON
Mega Centre Rive-Sud, Levis, PQ
735 Queenston Road, Hamilton, ON
Hartsland Market Square, Guelph, ON
Four properties in PQ (iii)
RioCan Centre Victoria, Whitby, ON
RioCan Centre London North, London, ON
Five properties in London, ON (iv)
Flamborough Power Centre, Hamilton, ON
July 25, 2018
$
11,340
July 30, 2018
July 31, 2018
August 2, 2018
August 27, 2018
August 29, 2018
September 20, 2018
September 27, 2018
September 28, 2018
September 28, 2018
7,625
42,304
3,000
38,000
41,100
7,992
42,000
100,564
18,468
Total sales proceeds of dispositions for the three months ended September 30, 2018
$ 312,393
Four properties in ON and BC (v)
Six properties in ON (vi)
King George Square, Belleville, ON
Centre Carnaval, Trois Rivieres, PQ
West Side Place, Port Colborne, ON
Northumberland Square, Miramichi, NB
Norwest Plaza, Kingston, ON
Shoppers Drug Mart, Repentigny, PQ
410 King Street North, Waterloo, ON
April 3 & 23, 2018
April 16, 2018
$ 216,214
13,280
May 8, 2018
27,400
May 23, 2018
May 31, 2018
June 5, 2018
June 21, 2018
June 29, 2018
4,200
5,025
9,300
6,250
1,100
Total sales proceeds of dispositions for the three months ended June 30, 2018
$ 282,769
Collingwood Centre, Collingwood, ON
GoodLife Plaza, St. Catharines, ON
Dilworth SC, Kelowna, BC (vii)
Vernon Square, Vernon, BC
Gates of Fergus, Fergus, ON
Total sales proceeds of dispositions for the three months ended March 31, 2018
Total sales proceeds of dispositions for the year ended December 31,2018
February 21, 2018
$
64,802
February 19, 2018
March 26, 2018
84,950
12,150
$ 161,902
$ 974,895
(i)
Includes six Walmart properties located in New Liskeard, ON; Belleville, ON; Trenton, ON; Leamington, ON; Saint-Hyacinthe, PQ; and Lachute,
PQ.
(ii) RioCan provided a vendor take-back mortgage of $2.0 million related to this transaction.
124
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,145
—
—
—
—
—
—
—
26,145
—
—
—
—
—
—
—
—
—
—
32,725
—
32,725
58,870
$
$
$
$
$
$
$
$
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, 2018 and 2017
(iii)
(iv)
(v)
(vi)
Includes four properties: Centre Carnaval-Montreal, Montreal, PQ; Centre-Granby, Granby, PQ; Galeries Laurentides (retail), St-Antoine, PQ; and
Levis Mall, Levis, PQ.
Includes five properties all located in London, ON: Commissioners Court Plaza; Adelaide Centre; Wharncliffe Centre; Oakridge Centre; and
RioCan Centre London South.
Includes four properties: RioCan Fairgrounds I&II in Orangeville, ON; Campus Estates in Guelph, ON; Cowichan Common in Duncan, BC; and
Flamborough Walmart in Flamborough, ON.
Includes six properties in Ontario: 2 King Street West, Bowmanville; 297 King Street East, Kingston; 270 Dundas Street East, London; 81 King
Street West, Hamilton; 200 Ouellette Avenue, Windsor; and 79 Durham Street, Sudbury.
(vii) RioCan provided a vendor take-back mortgage of $7.5 million related to this transaction.
Properties under development dispositions
During the three months ended December 31, 2018, the Trust sold one parcel of development land located in Calgary, Alberta, for
sales proceeds of $11.6 million.
During the three months ended September 30, 2018, the Trust sold a parcel of excess land in Oshawa, Ontario, for sales
proceeds of $7.8 million.
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 has renewal terms.
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 $259.7 million (December 31, 2017 - $273.8 million) and the
corresponding finance lease obligation is $20.1 million (December 31, 2017 - $21.5 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, 2018
December 31, 2017
$
$
$
2,532 $
9,007
15,309
26,848 $
6,784
20,064 $
2,532
9,342
17,506
29,380
7,855
21,525
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
25 for further details.
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 Chief Operating Officer & Senior Vice President, Investments & Residential; the
Senior Vice President & Chief Financial Officer; and other executive members.
125
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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.
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.
During the year, the Trust obtained a total of 31 external property appraisals (including 7 vacant land parcels), which supported
an IFRS fair value of approximately $2.1 billion or 16% of the Trust's investment property portfolio as at December 31, 2018. In
2019, 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, including leasing 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.
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 and meet certain thresholds, the direct capitalization
method is applied to capitalize the pro forma net operating income (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 capitalization rate - is based on the location and quality of the properties and takes into account market data at the
valuation date.
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.
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
Income producing properties /
Properties under development
Direct capitalization
income approach
Key
unobservable
input
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, 2018, the weighted average capitalization rate for the Trust's investment properties and properties held for
sale is 5.49% (December 31, 2017 - 5.56%).
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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, 2018 and 2017
Sensitivity analysis of changes in capitalization rates
The following table is a sensitivity analysis 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%)
December 31, 2018
0.25%
0.50%
0.75%
1.00%
4.49%
4.74%
4.99%
5.24%
5.49% $
5.74%
5.99%
6.24%
6.49%
15,574,967
14,753,502
14,014,349
13,345,725
12,737,990 $
12,183,206
11,674,725
11,206,987
10,775,285
2,836,977
2,015,512
1,276,359
607,735
—
(554,784)
(1,063,265)
22.27 %
15.82 %
10.02 %
4.77 %
— %
(4.36)%
(8.35)%
(1,531,003)
(12.02)%
(1,962,705)
(15.41)%
Ratio of total debt to
total assets
(net of cash and
cash equivalents)
34.6%
36.4%
38.1%
39.9%
41.6%
43.4%
45.1%
46.8%
48.5%
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 $127.4 million. A 1% decrease in SNOI would
result in a lower portfolio fair value of $127.4 million. A 1% increase in SNOI coupled with a 0.25% decrease in capitalization rates
would result in a higher portfolio fair value of $741.2 million. A 1% decrease in SNOI coupled with a 0.25% increase in
capitalization rates would result in a lower portfolio fair value of $676.6 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:
Equity Investee
Dawson-Yonge LP
RioCan-HBC JV
Principal activity
December 31, 2018
December 31, 2017
Owns and operates an income property
Owns and operates income properties
WhiteCastle New Urban Fund, LP (WNUF 1)
WhiteCastle New Urban Fund 2, LP (WNUF 2)
WhiteCastle New Urban Fund 3, LP (WNUF 3)
Development and sale of
residential inventory
WhiteCastle New Urban Fund 4, LP (WNUF 4)
40.0%
12.5%
14.2%
19.3%
20.0%
18.4%
40.0%
12.0%
14.2%
19.3%
20.0%
18.4%
The following table shows the changes in the aggregate carrying value of RioCan's investment in associates and joint ventures
for the year ended December 31, 2018:
Years ended December 31,
Balance, beginning of year
Contributions
Share of net income
Distributions
Other
Balance, end of year
$
$
2018
176,256 $
11,533
11,174
(9,180)
34
189,817 $
2017
185,278
18,475
15,719
(44,415)
1,199
176,256
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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,
2018
2017
Current assets
Non-current assets
Current liabilities (i)
Non-current liabilities (ii)
Net assets
Equity-accounted investments
RioCan-HBC JV
Other
Total
RioCan-HBC JV
Other
Total
$
$
$
4,621 $
221,388 $
226,009
$
10,045 $
215,272 $
225,317
2,028,739
362,726
418,151
23,427
20,163
72,884
2,052,166
2,003,865
382,889
491,035
12,747
782,892
22,530
14,434
58,419
2,026,395
27,181
841,311
1,252,483 $
151,768 $
1,404,251
158,629 $
31,188 $
189,817
$
$
1,218,271 $
164,949 $
1,383,220
147,897 $
28,359 $
176,256
Years ended December 31,
2018
2017
Revenue
Operating expenses
Fair value gains (losses)
Interest expense
Net income (loss)
Income (loss) from equity-accounted investments
RioCan-HBC JV
Other
Total
RioCan-HBC JV
Other
Total
$
$
$
142,496 $
3,424 $
145,920
$
129,766 $
47,293 $
177,059
24,333
5,249
31,101
8,033
1,267
436
92,311 $
11,357 $
(3,778) $
(183) $
32,366
6,516
31,537
88,533
11,174
11,387
(3,722)
18,386
6,906
403
459
18,293
(3,319)
18,845
$
$
96,271 $
40,331 $
136,602
11,347 $
4,372 $
15,719
(i) As at December 31, 2018, total current liabilities includes $365.6 million of mortgages payable and term loans.
(ii)
Includes mortgages payable and lines of credit with maturities beyond twelve months.
7. MORTGAGES AND LOANS RECEIVABLE
As at December 31,
Current
Non-current
Mortgages and loans receivable measured at amortized cost
$
$
2018
7,418 $
156,596
164,014 $
2017
33,214
112,659
145,873
As at December 31, 2018, mortgages and loans receivable bear interest at a weighted average effective and contractual rate of
6.4% per annum (December 31, 2017 - 5.4%) and mature between 2019 and 2023.
Future repayments of mortgages and loans receivables by year of maturity are as follows:
2019
2020
2021
2022
2023
$
$
8. RESIDENTIAL INVENTORY
Residential inventory consists of assets that are developed by RioCan for sale in the ordinary course of business.
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)
Dispositions
Development expenditures
Transfers from investment properties (ii)
Balance, end of year
$
$
2018
132,003 $
26,370
(19,828)
62,564
5,014
206,123 $
7,418
45,663
84,559
7,525
18,849
164,014
2017
48,414
36,870
—
30,545
16,174
132,003
(i) Represents the cost of properties acquired and located in the Yorkville area in 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, 2018, the current fair market value of certain office units located on the 2nd and 3rd floors of the Yonge-
Eglinton Northeast Corner development were transferred from investment property to inventory as they will not be leased to tenants as originally
contemplated, but rather, are being marketed and sold as condominium units.
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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, 2018 and 2017
9. RECEIVABLES AND OTHER ASSETS
The following table details the Trust's receivables and other assets as at December 31, 2018 and December 31, 2017:
As at December 31,
2018
Non-
current
Current
Total
Current
2017
Non-
current
Total
Prepaid expenses and other assets
$
85,336 $
7,278 $
92,614 $
205,835 $
14,975 $
220,810
Net contractual rents receivable (i)
Amounts due on condominium final closings
Funds held in trust
Management information system
Interest rate swaps agreements
17,043
17,863
7,642
—
—
—
—
1,660
11,016
4,288
$
127,884 $
24,242 $
17,043
17,863
9,302
11,016
4,288
152,126 $
18,569
—
—
—
—
—
—
11,858
13,532
5,101
18,569
—
11,858
13,532
5,101
224,404 $
45,466 $
269,870
(i)
Includes common area maintenance, realty tax, and insurance recoveries.
Prepaid expenses and other assets
Prepaid expenses and other assets primarily include marketable 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, 2018, included in other assets are $4.2 million of non-refundable sales commissions the Trust has paid with
respect to the sale of these condominium units (December 31, 2017 - $3.8 million), where it is probable that future economic
benefits will flow to the Trust. No amount will be amortized and charged to net income until the revenue associated with the sale
is recognized.
Selling commissions (Contract Costs)
The following table shows the change in selling commissions:
Years ended December 31,
Balance, beginning of year
Additions
Selling commissions expensed during the year
Balance, end of year
$
$
2018
3,806
989
(579)
4,216
During the year ended December 31, 2018, $1.0 million of additions in selling commissions related to condominium sales and
$0.6 million of selling commissions were expensed as buyers took possession of their respective residential inventory units.
Contractual rents receivable
Contractual rents receivable are presented net of an allowance for doubtful accounts of $1.1 million as at December 31, 2018
(December 31, 2017 - $1.7 million). RioCan determines its allowance for doubtful accounts using the simplified lifetime ECL
model for contractual rents receivable. The Trust uses an accounts receivable aging provision matrix to assess the ECL and
applies loss factors to aging buckets greater than 60 days past due.
Funds held in trust
Funds held in trust include property-specific deposits held by the Trust's solicitors in the name of the Trust. These funds will be
released upon funding the construction of the residential inventory projects or upon closing of such projects. Funds held in trust
may also relate to certain funds held in escrow pursuant to agreements of purchase and sale, which are to be used for the
acquisition of investment properties.
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 taxes
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.
129
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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, 2018 and 2017
As at December 31, 2018, the Trust's Canadian corporate subsidiaries have recognized deferred income tax assets totalling
$13.3 million (December 31, 2017 - $11.9 million) on deductible temporary differences related to intangible assets, deferred
pension, deferred compensation and loss carryforwards that expire over the next 18 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
Current
Non-current
$
$
$
$
2018
350,190 $
349,459
213,481
913,130 $
363,394 $
549,736
913,130 $
2017
387,093
299,360
217,976
904,429
127,523
776,906
904,429
Revolving unsecured operating line of credit
As at December 31, 2018, RioCan had cash advances outstanding of $353.0 million and $647.0 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 3.41% (December 31, 2017 - 2.53%).
On May 4, 2018, the Trust exercised its option to extend the maturity date on its operating line of credit to May 31, 2023. All other
terms and conditions remained the same.
Non-revolving unsecured credit facilities
The Trust has a $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 credit facility bears interest at a rate of Bankers' Acceptances
plus 110 basis points per annum and is fully drawn as at December 31, 2018.
The Trust has a $150 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 December 27, 2019. The credit facility bears interest at a rate of Bankers' Acceptances
plus 100 basis points per annum and is fully drawn as at December 31, 2018.
The non-revolving unsecured credit facility agreements 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 27 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. As at December 31, 2018, these secured facilities and other bank loans have an aggregate
maximum borrowing capacity of $311.4 million and mature in 2019, of which the Trust had drawn $213.5 million (December 31,
2017 - $218.0 million). The weighted average contractual interest rate on amounts outstanding is 3.36% (December 31, 2017 -
2.28%).
130
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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
Future repayments of mortgages payable by year of maturity are as follows:
$
$
$
$
2018
2,218,270 $
—
2,218,270 $
310,217 $
1,908,053
2,218,270 $
2017
2,300,247
32,670
2,332,917
578,851
1,754,066
2,332,917
Year
2019
2020
2021
2022
2023
Thereafter
Weighted average
contractual
interest rate
Scheduled
principal
amortization
Principal
maturities
Total
repayments
4.21% $
39,635 $
270,582 $
310,217
3.67%
4.25%
3.25%
3.48%
3.83%
26,645
17,293
13,971
11,591
11,989
459,087
390,085
144,801
274,037
552,084
485,732
407,378
158,772
285,628
564,073
3.84% $
121,124 $ 2,090,676 $ 2,211,800
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
10,115
(3,645)
$ 2,218,270
During the year ended December 31, 2018, RioCan completed new term mortgage borrowings of $496.9 million at a weighted
average interest rate of 3.68% and a weighted average term of 7 years. During the year ended December 31, 2018, repayments
of mortgage balances and scheduled amortization amounted to $586.5 million.
Pledged properties
As at December 31, 2018, $5.4 billion of the aggregate carrying value of investment properties, properties held for sale,
residential inventory and certain other assets serves as security for RioCan's mortgages payable (December 31, 2017 - $6.0
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 2019 and 2034.
2018 (i)
3.83%
3.84%
2017
3.80%
3.81%
131
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
13. DEBENTURES PAYABLE
As at December 31,
Current
Non-current
$
$
2018
350,000 $
2,392,633
2,742,633 $
2017
250,000
2,444,619
2,694,619
As at December 31, 2018, total debentures payable bear interest at weighted average contractual rates of 3.31% and weighted
average effective rates of 3.40% (December 31, 2017 - 3.28% and 3.34%, respectively).
Issuance and redemption activity
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. Prior to maturity, the Series AA debentures can be redeemed in whole or in part at par on or after August 29, 2023.
On March 5, 2018, RioCan redeemed, in full, its $250 million 2.87% Series S senior unsecured debentures in accordance with its
terms.
The Trust has the following series of senior unsecured debentures outstanding as at December 31 :
Series
S
Q
U
X
Z
R
V
Y
T
AA
W
I
Contractual obligations
Maturity date
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
September 29, 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
2.87%
3.85%
3.62%
2.19%
2.19%
3.72%
3.75%
2.83%
3.73%
3.21%
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
2018
— $
350,000
150,000
250,000
300,000
250,000
250,000
300,000
200,000
300,000
300,000
100,000
2,750,000 $
$
$
2019
2020
2021
2022
2023
Thereafter
Weighted average
contractual interest rate
3.85% $
2.72%
2.89%
3.25%
3.42%
3.95%
$
2017
250,000
350,000
150,000
250,000
300,000
250,000
250,000
300,000
200,000
—
300,000
100,000
2,700,000
Principal
maturities
350,000
400,000
550,000
550,000
500,000
400,000
2,750,000
(7,367)
2,742,633
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, 2018, the Trust was in compliance with its covenants pursuant to the Trust's Declaration and debenture
indentures.
132
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
14. ACCOUNTS PAYABLE AND OTHER LIABILITIES
As at December 31,
2018
Non-
current
Current
Total
Current
2017
Non-
current
Total
Property operating costs (i)
$
56,171 $
27,054 $
83,225 $
54,689 $
24,239 $
78,928
Capital expenditures and leasing commissions:
Properties under development
Income properties
Deferred revenue
Unitholder distributions payable
Interest payable
Finance lease obligations
Income taxes payable
Unfunded employee future benefits
Unit-based plans payable
Contingent consideration
Interest rate swap agreements
Other trade payables and accruals
166,497
144,325
18,400
64,533
36,612
23,187
1,534
14,532
—
4,917
5,151
25
18,674
—
—
—
1,578
—
—
18,530
—
13,879
6,461
—
7,779
—
$
388,061 $
75,281 $
166,497
144,325
18,400
66,111
36,612
23,187
20,064
14,532
13,879
11,378
5,151
7,804
18,674
463,342 $
111,334
85,144
20,625
20,527
38,039
27,435
1,461
14,396
—
5,889
2,718
765
18,330
—
—
—
43,775
—
—
20,064
—
14,156
5,521
—
2,154
—
111,334
85,144
20,625
64,302
38,039
27,435
21,525
14,396
14,156
11,410
2,718
2,919
18,330
290,018 $
109,909 $
399,927
(i)
Includes amounts billed in advance for common area maintenance, realty taxes and insurance recoveries.
Deferred revenue
Deferred revenue consists of the following:
As at
Deposits received from customers on condominium sales (contract liabilities)
Other deferred revenue (i)
(i)
Includes prepaid rental income from tenants to be recognized over time.
Deposits received from customers on condominium sales (contract liabilities)
The following table shows the change in deposits received from customers (contract liabilities):
Year ended
Balance, beginning of year
Amounts deferred from new contracts with customers during the year
Recognized as revenue during the year
Balance, end of year
December 31, 2018
39,780
26,331
66,111
December 31, 2018
41,926
3,445
(5,591)
39,780
$
$
$
$
During the year ended December 31, 2018, $5.6 million of deposits received from customers on condominium sales (contract
liabilities) were recognized in revenue upon the tenants taking possession of condominium units.
Income taxes payable
Income taxes payable relates primarily to the realized gain on sale of the Trust's U.S. income property portfolio during May 2016.
133
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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-based compensation exercises
Direct purchase plan
Exchangeable limited partnership units
Common trust units repurchased and cancelled
Balance, end of year
2018
Units
$
323,734
4,757,071
2017
Units
326,615
$
4,788,520
—
268
21
31
—
5,105
515
730
1,003
25,273
10
36
—
250
898
—
(18,957)
305,097
(278,594)
4,484,827
(3,930)
323,734
(57,870)
4,757,071
Included in units outstanding as at December 31, 2018 are exchangeable limited partnership units totalling 0.5 million units
(December 31, 2017 - 1.0 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.
Effective November 1, 2017, RioCan suspended its DRIP and unitholders that were enrolled in the DRIP receive cash
distributions 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. RioCan’s NCIB was made in accordance with the requirements of the TSX. Under the NCIB, RioCan
could 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 12 months effective October 20, 2017.
The number of units that could be purchased pursuant to the bid was 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 funded the purchases
out of its available cash and undrawn credit facilities.
On October 16, 2018, RioCan received TSX approval of its notice of intention to renew its NCIB, to acquire up to a maximum of
30,579,868 of its units, or approximately 10% of its outstanding units as at September 30, 2018, for cancellation over the next 12
months, effective October 22, 2018.
The number of units that can be purchased pursuant to the renewed NCIB is subject to a current daily maximum of 178,116 units
(which is equal to 25% of 712,465, being the average daily trading volume from April 1, 2018 to September 30, 2018, excluding
RioCan's purchases on the TSX under its former NCIB), 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 primarily out of net proceeds from its asset
dispositions, available cash and undrawn credit facilities.
During the year ended December 31, 2018, the Trust acquired and cancelled 19.0 million units at a weighted average purchase
price of $24.35 per unit, for a total cost of $461.8 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 $183.2 million.
Preferred trust 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 restricted equity plans (REU Plans) and performance equity plan (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 values of these equity-settled awards are
134
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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, 2018, RioCan recorded $6.8 million in unit-based compensation costs (December 31, 2017 -
$4.8 million).
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) as at and for the year ended December 31, 2018 consists of the following
amounts:
As at December 31, 2017
Adjustment on adoption of IFRS 9
As at January 1, 2018
Other comprehensive income
As at December 31, 2018
Available-for-sale
investments
Actuarial loss on
pension plan (i)
Interest rate
swap agreements
(hedge reserve)
$
$
68,664 $
(68,664)
—
—
— $
(1,981) $
2,694 $
—
(1,981)
864
—
2,694
(5,846)
(1,117) $
(3,152) $
Total
69,377
(68,664)
713
(4,982)
(4,269)
(i) Amounts presented are net of deferred taxes of $0.4 million (December 31, 2017- $0.4 million).
Upon adoption of IFRS 9 on January 1, 2018, equity instruments previously classified as AFS financial assets with unrealized
gains and losses recorded in OCI are now measured at FVTPL. The cumulative unrealized gain of $68.7 million has been
reclassified to retained earnings upon adoption of IFRS 9. Refer to note 37 for further details.
16. UNIT-BASED COMPENSATION PLANS
REU Plans
Senior Executive REU Plan
As at December 31, 2018, 121,352 Senior Executive REUs are unvested and outstanding (December 31, 2017 - 78,258). The
Senior Executive REU Plan was introduced in 2017 and provides for the allotment of REUs to the Chief Executive Officer (CEO),
Chief Operating Officer & Senior Vice President Investments & Residential, and Senior Vice President & 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 26, 2018, the Trust granted 50,694 REUs under its Senior Executive REU Plan. The grant date price was $24.00
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 $1.2 million.
Employee REU Plan
As at December 31, 2018, 189,618 Employee REUs are unvested and outstanding (December 31, 2017 - 141,472). The
Employee REU Plan was introduced in 2017 and 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.
On February 26, 2018, the Trust granted 86,131 REUs under its Employee REU Plan. The grant date price was $24.00 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 $2.0 million.
135
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
Performance Equity Unit Plan (PEU Plan)
As at December 31, 2018, 443,821 PEUs are unvested and outstanding (December 31, 2017 - 404,676). PEUs issued contain a
multiplier factor and the final number of PEUs that will vest will range from 0% to 200% of the initial number awarded based on
certain performance targets of each grant year. The PEUs outstanding will be paid out based on achievement of specific
performance conditions in 2018, 2019 and 2020. Unit distributions paid during the period from grant date until settlement date
will be credited to each PEU participant in the form of additional PEUs.
Effective January 1, 2017, the Trust, after receiving unitholder feedback, implemented several changes to its executive pay
program including a modification made to the comparator group for compensation benchmarking to include only peers that are
domiciled in Canada, and stipulated 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. For 2017, RioCan adopted a
single performance metric for its PEU Plan, which was 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. For
2018, RioCan adopted two performance metrics for its PEU Plan, being FFO per unit achievement and relative TUR against its
peer group, a modification made upon further assessment by the Trust of its PEU Plan and taking into account further unitholder
feedback.
During February 2018, the Trust granted 175,347 PEUs under its PEU Plan at a fair value of $4.0 million. The grant date fair
value assumptions using the Monte-Carlo valuation model are as follows:
For the years ended
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)
December 31, 2018
December 31, 2017
$
$
$
$
3,969
175
22.68
1.9 %
14.8 %
(4.4)%
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 are subject to certain internal and external measures of performance. The PEUs will vest based on the following performance metrics: half
are subjected to an internal cumulative FFO growth performance hurdle and half are subjected 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 entity in the comparator group over the period from January 1, 2018 to
February 26, 2018.
Incentive unit option plan
The Trust provides long-term incentives to certain employees by granting options through the incentive unit option plan (Plan).
RioCan is authorized to issue up to a maximum of 22 million common unit options under the Plan. As at December 31, 2018,
11.8 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 10 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.
As part of comprehensive changes to its executive compensation program, the Trust enhanced the design of its long-term
incentive program through its commitment to reduce the frequency of option grants, with no option grants made in 2017 and
replacing that portion of the overall long-term incentive compensation in 2017 with grants of REU Plans and the PEU Plan as
described above. The unit option program was not cancelled altogether to permit the Board to grant options at some future
date as it determines in the best interest of the Trust. During February 2018, the Trust granted 0.7 million unit options to certain
members of senior management (December 31, 2017 - nil).
136
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
The weighted average assumptions used in the calculation of the units granted for the years ended December 31, 2018 and 2017
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)
$
$
$
$
2018
657
650
24.00
2.1%
6.1%
14.6%
5.6
2017 (v)
—
—
—
—%
—%
—%
—
(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.
(v) No units were granted during the year ended December 31, 2017.
Unvested unit options granted prior to January 1, 2018, 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:
Options
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
2018
2017
Units
(in thousands)
Weighted
average
exercise price
Units
(in thousands)
Weighted
average
exercise price
7,775 $
650
(238)
—
(277)
7,910 $
6,251 $
$
26.47
24.00
17.94
—
26.27
26.53
26.75
1.01
8,408 $
—
(10)
(410)
(213)
7,775 $
5,553 $
$
26.52
—
25.78
27.44
26.71
26.47
26.31
—
The following table summarizes our 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
2018
945
2,136
1,140
1,339
1,304
1,046
7,910
2017
582
2,248
1,150
1,393
1,329
1,073
7,775
2018
2017
2018
2017
$23.07
$20.02
25.58
26.54
27.28
27.58
29.31
25.59
26.54
27.28
27.57
29.31
$26.53
$26.47
6.5
5.3
3.8
3.7
4.5
5.1
4.8
2.3
7.1
5.1
5.1
6.0
7.2
5.9
2018
345
1,361
1,140
1,316
1,304
785
6,251
2017
582
948
1,031
1,341
1,114
537
5,553
2018
2017
$21.46
$20.02
25.47
26.54
27.28
27.58
29.31
25.33
26.54
27.28
27.59
29.31
$26.75
$26.31
Trustee Unit Plans
Deferred Unit Plan
The Deferred Unit Plan was introduced in 2014 for non-employee Trustees of the Trust (Trustees). Trustees may be awarded
deferred units, each of which are economically equivalent to one unit, from time to time at the discretion of the Board of Trustees
upon recommendation from management, subject to a maximum annual grant not to exceed that number of deferred units which
is $150,000 divided by the average market price of a unit on the award date. Trustees may also elect to receive up to 100% of his
or her annual retainer and meeting fees for a calendar year otherwise payable in cash in the form of deferred units. The
maximum number of units reserved for issuance under the Deferred Unit Plan at any time is 750,000.
As at December 31, 2018, there are 272,269 deferred units issued and outstanding (December 31, 2017 - 226,714). During the
year ended December 31, 2018, 30,384 units were exercised.
137
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
17. DISTRIBUTIONS TO UNITHOLDERS
Total distributions declared to unitholders are as follows:
Years ended December 31,
2018
2017
Common Unitholders
Preferred Unitholders – Series C
Total distributions Distributions per unit
Total distributions Distributions per unit
$
$
450,743 $
—
450,743
1.4400 $
460,627 $
—
$
3,514
464,141
1.4100
0.5876
On January 15, 2019, RioCan declared a distribution payable of 12.00 cents per unit for the month of January 2019, which was
paid on February 7, 2019 to common trust unitholders of record as at January 31, 2019.
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.
18. REVENUE
Rental revenue
Years ended December 31,
Base rent
Realty tax and insurance recoveries
Common area maintenance recoveries
Percentage rent
Straight-line rent
Lease cancellation fees
Parking revenue
Rental revenue
$
$
2018
695,187 $
227,772
158,361
8,853
8,563
7,932
3,492
1,110,160 $
2017 (i)
729,723
226,939
159,486
10,486
7,806
6,225
—
1,140,665
(i)
2017 is not restated for IFRS 15 changes in presentation.
As result of adopting IFRS 15, Revenue from contracts with customers, the following tables provide additional disclosure of the
Trust`s various revenue streams.
Revenue from contracts with customers
Revenue from contracts with customers include common area maintenance recoveries and parking revenue that are included in
rental revenue:
Year ended December 31,
Residential inventory sales
Common area maintenance recoveries
Property management and other service fees
Parking revenue
Revenue from contracts with customers
Property management and other service fees
$
$
2018
22,264
158,361
15,418
3,492
199,535
Property management and other service fees include the following fees which are recognized either at a point in time or over time
as indicated in the following table:
Year ended December 31, 2018
Property management fees
Construction and development fees
Leasing fees
Financing arrangement fees
Other
Property management and other service fees
Timing of recognition
Total
At a point in time
Over time
4,383 $
5,392
1,007
1,195
3,441
— $
—
1,007
1,195
2,753
4,383
5,392
—
—
688
15,418 $
4,955 $
10,463
$
$
138
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
Residential inventory sales
The following table identifies estimated revenue from residential inventory sales to be recognized in future periods at the point in
time when purchasers take possession of their respective residential units based on condominium and townhouse pre-sold as of
December 31, 2018:
As at
Within one year
More than one year
Total
19. INVESTMENT AND OTHER INCOME
Years ended December 31,
Income earned on marketable securities
Fair value gains on marketable securities
Transaction gains and other income
$
$
2018
2,998 $
16,472
846
20,316 $
December 31, 2018
199,894
5,226
205,120
2017
8,574
—
48,440
57,014
$
$
Under IFRS 9, which was adopted on January 1, 2018 without restatement of prior periods, marketable securities that were
previously categorized as AFS are now classified and measured at FVTPL.
Effective January 1, 2018, cumulative unrealized fair value gains of $68.7 million as of December 31, 2017 that were previously
recognized in other comprehensive income (loss) were reclassified to opening retained earnings. During the year ended
December 31, 2018, the Trust realized $59.2 million of cumulative unrealized gains on the sale of marketable securities.
During the year ended December 31, 2018, the Trust had fair value gain on its marketable securities portfolio of $16.5 million.
The following table breaks down the fair value gains on marketable securities for the year ended December 31, 2018:
Year ended December 31,
Realized gains on sale of marketable securities during the year
Change in unrealized fair value on marketable securities during the year
Fair value gains on marketable securities during the year
$
$
2018
59,239
(42,767)
16,472
For the year ended December 31, 2017, $46.0 million of realized gain on the sale of marketable securities was included in
transaction gains and other income.
20. INTEREST INCOME
Years ended December 31,
Interest income measured at amortized cost
Interest income measured at fair value through profit or loss (i)
Other interest income
$
$
2018
9,624 $
1,315
513
11,452 $
2017
6,786
—
800
7,586
(i) During the year ended December 31, 2018, includes $0.6 million of fair value gains on mortgages and loans receivable measured at fair value
through profit or loss.
21. INTEREST COSTS
Years ended December 31,
Total interest
Less: Interest capitalized
$
$
2018
206,743 $
38,444
168,299 $
2017
199,817
28,399
171,418
For the year ended December 31, 2018, interest was capitalized to properties under development and residential inventory at a
weighted average effective interest rate of 3.46% (December 31, 2017 - 3.54%).
139
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
22. GENERAL AND ADMINISTRATIVE
Years ended December 31,
Salaries and benefits
Unit-based compensation expense
Depreciation and amortization
Other general and administrative
$
$
2018
29,212 $
7,070
4,575
15,142
55,999 $
2017
23,267
3,911
9,865
15,517
52,560
Other general and administrative costs include information technology costs, public company costs, professional fees, travel
expenses, occupancy costs, donations, advertising, promotion and marketing costs.
23. TRANSACTION AND OTHER COSTS
For the year ended December 31, 2018, transaction and other costs primarily include property acquisition and disposition costs
totalling $20.0 million (December 31, 2017 - $11.8 million).
24. 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: 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
$
$
$
$
$
$
$
2018
528,103 $
741
527,362 $
—
527,362 $
313,936
88
314,024
1.68 $
—
1.68 $
1.68 $
—
1.68 $
2017
715,286
7,021
708,265
3,514
704,751
326,805
124
326,929
2.16
0.02
2.18
2.16
0.02
2.18
(i) The calculation of diluted weighted average units outstanding excludes 7.6 million unit options for the year ended December 31, 2018
(December 31, 2017 - 6.7 million units), as the exercise price of these unit options was greater than the average market price of RioCan's common
trust units.
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RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
25. 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:
Marketable securities
Investment properties:
Income properties
Properties under development
Properties held for sale
Interest rate swaps
Total assets measured at fair value
Liabilities measured at fair value:
Interest rate swaps
Total liabilities measured at fair value
$
$
December 31, 2018
December 31, 2017
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$
54,092 $
5,555 $
1,835 $
180,432 $
5,541 $
1,516
—
—
—
—
54,092 $
— 12,021,303
—
—
988,118
194,227
4,288
9,843 $ 13,205,483 $
—
—
—
—
—
— 12,075,939
— 1,084,305
—
410,178
5,101
—
180,432 $
10,642 $ 13,571,938
—
— $
7,804
7,804 $
—
— $
—
— $
2,919
2,919 $
—
—
For assets and liabilities measured at fair value as at December 31, 2018, 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.
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
Marketable securities
Receivables and other assets (i)
Mortgages and loans receivable
Interest rate swap assets
Financial liabilities:
Mortgages payable (ii)
Debentures payable
Lines of credit and other bank loans
Interest rate swap liabilities
Accounts payable and other liabilities (iii)
December 31, 2018
December 31, 2017
Carrying value
Fair value
Carrying value
Fair value
$
74,698 $
74,698 $
70,225 $
61,482
44,208
164,014
4,288
2,218,270
2,742,633
913,130
7,804
344,488
61,482
44,208
163,488
4,288
2,241,987
2,744,140
913,130
7,804
344,488
187,489
30,427
145,873
5,101
2,332,917
2,694,619
904,429
2,919
292,943
70,225
187,489
30,427
144,855
5,101
2,365,243
2,738,790
904,429
2,919
292,943
Includes net contractual rents receivable and funds held in trust.
Includes liabilities held for sale.
(i)
(ii)
(iii) Excludes other liabilities that are not financial liabilities (deferred revenue, income taxes payable, employee future benefits, unit-based plans
payable, interest rate swap liabilities and contingent consideration).
The fair values of the Trust's financial instruments were determined as follows:
Cash and cash equivalents, receivables and other assets, and accounts payable and other liabilities
These instruments' carrying amounts approximate fair values due to their short-term nature.
Mortgages and loans receivable
The fair value of mortgages and loans receivable is determined by the discounted cash flow method using applicable inputs such
as prevailing interest rates, contractual rates and discounts and considers the fair value of the underlying collateral. 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 and other bank loans, 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.
141
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
Interest rate swaps
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.
26. RISK MANAGEMENT
The main risks arising from the Trust's financial instruments are interest rate risk, liquidity risk, credit risk and foreign exchange
risk. 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, 2018, approximately 15.8% of
the Trust's debt is financed at variable rates (including mortgage debt related to properties held for sale), exposing the Trust to
interest rate risk (December 31, 2017 - 16.5%).
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. Hedge effectiveness is determined at the inception of the hedge relationship, and through quarterly effectiveness
assessments to ensure that an economic relationship exists between hedged item and hedging instrument. The hedge ratio is set
at a ratio of 1:1 for the specific portions of floating rate debt that have been designated as the hedged item.The Trust enters into
hedge relationships where the critical terms of the hedging instrument match with the terms of the hedged item, as a result the
Trust does not expect any sources of hedge ineffectiveness, except from changes in credit risk of the Trust and the counterparty.
The Trust has applied hedge accounting and recorded the changes in fair value for the effective portion of these derivatives in
OCI accumulated in the cash flow hedge reserve in equity from the date of hedge designation. Accumulated amounts are
reclassified from OCI to net income in the periods where the forecasted cash flows impact net income. 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 net
income.
As at December 31, 2018, the outstanding notional amount of the floating-for-fixed interest rate swaps is $764.4 million
(December 31, 2017 - $662.1 million) and the term to maturity of these agreements ranges from April 2020 to November 2028.
The outstanding interest rate swaps by year of maturity are as follows:
Maturity
2019
2020
2021
2022
2023
Thereafter
Notional original principal amount Weighted average effective fixed interest rate
$
$
72,528
123,272
112,178
60,305
271,139
125,004
764,426
2.50%
2.81%
3.06%
2.89%
3.18%
3.76%
The Trust assessed the effectiveness of its hedging relationships and determined all such designated hedging relationships were
effective as at December 31, 2018. As at December 31, 2018, the fair value of the interest rate swaps is, in aggregate, a net
financial liability of approximately $3.5 million (December 31, 2017 - net financial asset of approximately $2.2 million).
As at December 31, 2018, the carrying value of the Trust's floating rate debt that is not subject to a hedging strategy is $0.9 billion
and a 50 basis point increase in market interest rates would result in an annualized decrease of $4.6 million in the Trust's net
income.
The amounts relating to items designated as hedging instruments and hedge ineffectiveness were as follows:
Nominal
amount of
hedging
instrument
Carry amount of the hedging
instrument
Assets
Liabilities
Line item in the
statement of
financial
position
Changes in
value
recognized
in OCI
Hedge
ineffectiveness
recognized in
profit or loss
Amounts
reclassified from
the hedge
reserve to
profit or loss
Line item in
profit or loss
affected by
reclassification
2018
Interest
rate risk
$764,426
$4,288
$7,804
Receivables
and other
assets (assets),
Accounts
payable and
other liabilities
(liabilities)
$(7,796)
—
$2,099
Interest costs
142
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
The amounts at the reporting date relating to items designated as hedged items were as follows:
2018
Changes in fair
value used for
calculating hedge
ineffectiveness
Balance in cash
flow hedge reserve
for continuing
hedges
Balances in cash
flow hedge reserve
for discontinued
hedges
Interest rate risk
Variable rate mortgages and lines of credit and the bank loans
$
(7,796) $
(3,152) $
—
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 operating 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 current repayments of debentures, refer to note 13 for details.
The Trust expects to continue financing future acquisitions, development and debt obligations through existing cash balances,
internally generated cash flows, mortgages, credit facilities, issuance of unsecured debentures, the sale of non-core assets and
the issuance of equity.
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, typically through co-ownership arrangements, default on the repayment of their mortgages to the Trust.
• Third-party defaults on the repayment of debt whereby RioCan has provided guarantees, including guarantees by RioCan on
behalf of its co-owners and on behalf of purchasers who assumed mortgages on property dispositions.
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, ensuring a considerable portion of the Trust’s revenue is earned
from national and anchor tenants and conducting credit assessments for new tenants.
Credit risk relating to mortgages receivable and third-party guarantees is mitigated through recourse against such parties and/or
the underlying real estate. These financial instruments are considered to have low credit risk. The Trust monitors the debt
service ability of the properties underlying the mortgage receivables and third-party guarantees to assess for changes in credit
risk.
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 and loans receivable.
The maximum exposure to credit risk on financial assets on the consolidated balance sheet are the carrying values in note 25.
For the maximum exposure to credit risk on third-party guarantees refer to note 35.
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, RioCan has significantly reduced its foreign exchange risk. Refer to note 4 for details on RioCan's
discontinued U.S. operations.
143
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
27. 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
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, 2018. 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
2018
$
2,742,633
$
2,218,270
913,130
—
5,874,033
7,666,390
2017
2,694,619
2,300,247
904,429
32,670
5,931,965
8,044,686
$
13,540,423
$
13,976,651
41.6%
5.3%
2018
3.68
41.0%
3.3%
2017
3.87
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 unsecured operating credit
facilities, which are calculated on a rolling twelve-month basis. As at and for the year ended December 31, 2018, the Trust is in
compliance with all applicable financial covenants.
144
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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, 2018
< 60%
< 40%
> 1.5x
> $5,000
> 1.5x
< 15%
44.8%
18.1%
2.8x
$7,666
2.0x
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 coverage 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, contingent liabilities 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 assets to
unsecured indebtedness ratio is calculated as unencumbered assets divided by unsecured indebtedness.
(vi) These ratios include inputs from proportionately consolidated equity accounted investments.
28. 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
$
$
2018
667,554
1,926,223
1,390,139
3,983,916
Contingent rent recognized in the consolidated statements of income for the year ended December 31, 2018 is $9.5 million
(December 31, 2017 - $12.0 million).
145
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
29. 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
RioCan Realty Investments Partnership Seventeen LP
RioCan Realty Investments Partnership Eighteen LP
RioCan Realty Investments Partnership Twenty LP
RioCan Realty Investments Partnership Twenty-One LP
RioCan Realty Investments Partnership Twenty-Two LP
RC Preferred Interest Trust
RC NA Property 4 LP
RC NA Property 5 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
Canada
Canada
Canada
Canada
Canada
The Trust has investments in certain joint ventures that are structured using entities that separate the investor and the investee.
As a result, the Trust only has rights to and is liable for the net assets of the investee for these joint ventures.
Refer to note 6 for the financial information of RioCan-HBC JV, Dawson-Yonge LP, 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), which are the Trust's six associates and joint ventures that are accounted for using the equity method as at
December 31, 2018.
146
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
30. SUPPLEMENTAL CASH FLOW INFORMATION
Years ended December 31,
Interest received
Interest paid
Distributions paid:
Distributions declared during the year
Distributions declared in the prior year paid in the current year
Distributions declared in current year 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
The following provides a reconciliation of liabilities arising from financing activities:
$
$
$
$
2018
3,096 $
210,991
(450,743) $
(38,039)
36,612
(452,170) $
—
(452,170) $
2017
5,724
199,224
(460,627)
(38,356)
38,039
(460,944)
25,273
(435,671)
Year ended December 31, 2018
Balance, beginning of year
Cash flows
Non-cash changes:
Deferred financing costs
Assumed (disposed) on acquisition/disposition, net
Mortgages payable
Lines of credit and
other bank loans
$
2,332,917 $
904,429 $
(89,651)
8,510
Debentures
2,694,619
48,323
(2,189)
(22,807)
191
—
(309)
—
Balance, end of year
$
2,218,270 $
913,130 $
2,742,633
31. CHANGES IN OTHER WORKING CAPITAL ITEMS
Years ended December 31,
Receivable and other assets
Mortgage receivable interest
Residential inventory
Accounts payable and other liabilities
Other
Net change in other working capital items
$
$
2018
(15,491) $
(6,894)
(69,106)
14,399
(2,376)
(79,468) $
2017
(304)
(4,199)
(50,195)
(109,510)
(6,483)
(170,691)
32. RELATED PARTY TRANSACTIONS
RioCan's related parties include the following persons and/or entities:
(a) associates, joint ventures, or entities which are controlled or significantly influenced by the Trust; and
(b) key management personnel including the Trustees and those persons having the authority and responsibility for planning,
directing and controlling the activities of RioCan.
Activity and transactions with associates and joint ventures are disclosed in note 6.
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; Chief Operating Officer and Senior Vice President Investments & Residential, Jonathan Gitlin; and Senior Vice
President and Chief Financial Officer, Qi Tang (collectively, the Key Executives).
Remuneration of the Trust’s Trustees and Key Executives during the years ended December 31, 2018 and 2017 is as follows:
Years ended December 31,
Compensation and benefits
Unit-based payments
Post-employment benefit costs
Trustees
Key Executives
2018
280 $
1,663
—
1,943 $
2017
261 $
1,537
—
1,798 $
2018
8,188 $
4,551
41
12,780 $
2017
5,226
2,214
36
7,476
$
$
147
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
On June 18, 2018, the Trust announced the resignation of Raghunath Davloor, President and Chief Operating Officer, effective
July 31, 2018. Effective August 1, 2018, Jonathan Gitlin assumed the role of Chief Operating Officer & Senior Vice President,
Investments and Residential.
33. EMPLOYEE BENEFITS
Plan characteristics
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, 2018, RioCan's
contributions to the defined contribution plan was $2.7 million (December 31, 2017 - $2.6 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.
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, 2018 is $3.4 million (December 31, 2017 - $3.4 million). The
recognized pension obligation (net of plan assets) as at December 31, 2018 is $13.9 million (December 31, 2017 - $14.2 million).
Pension costs, net of recoveries, of $0.5 million were recorded in net income for the year ended December 31, 2018 (pension
costs for the year ended December 31, 2017 - $0.4 million).
The discount rate used was 3.6% (December 31, 2017 - 3.4%), the compensation growth rate was 4.0% (December 31, 2017 -
4.0%) and the expected long-term rate of return on assets was 3.6% (December 31, 2017 - 3.4%).
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.
34. 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.
35. 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, 2018, the maximum exposure to credit loss as a result of debt guaranteed by RioCan is $309.2 million, which
expires between 2019 and 2023, which includes guarantees of $251.2 million on behalf of co-owners (December 31, 2017 -
$348.9 million). $58.0 million of debt guaranteed by RioCan relates to the assumption of mortgages on property dispositions
(December 31, 2017 - $36.1 million). There have been no defaults by the primary obligors for debts on which the Trust has
provided its guarantees and no provision for expected losses on these guarantees has been recognized in the Consolidated
Financial Statements.
148
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
Expiry of guarantees by year are as follows:
2019
2020
2021
2022
2023
Total
Letters of credit
$
$
133,594
59,913
69,387
43,616
2,710
309,220
The Trust has aggregate letter of credit facilities with certain Schedule I banks totalling $77.9 million (December 31, 2017 -
$79.0 million). As at December 31, 2018, the Trust’s outstanding letters of credit under these facilities were $47.5 million
(December 31, 2017 - $37.2 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 twelve months
Two to five years
Over five years
Total
Investment commitments
RioCan-HBC Joint Venture
December 31, 2018
Land
Leases
Operating
Leases
Total
Commitments
$
$
1,044 $
3,452
5,966
10,462 $
265 $
663
13
941 $
1,309
4,115
5,979
11,403
As at December 31, 2018, RioCan has approximately $142.7 million of remaining unfunded investment commitments related to
the RioCan-HBC JV (December 31, 2017 - $150.0 million). The remaining contribution commitments are expected be completed
by November 25, 2020.
WhiteCastle New Urban Funds (WNUF)
As at December 31, 2018, the Trust has total unfunded investment commitments of $79.6 million relating to WNUF 1, WNUF 2,
WNUF 3 and WNUF 4 (December 31, 2017 - $83.9 million). Amounts to be funded are callable by the general partner at any
point prior to the expiration of the limited partnership agreements, subject to certain extension term provisions, which are
June 17, 2019 for WNUF 1; February 28, 2022 for WNUF 2; May 1, 2025 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.
36. EVENTS AFTER THE BALANCE SHEET DATE
Acquisitions and Dispositions
On January 10, 2019, the Trust sold one property located in St. John's, Newfoundland, for sales proceeds of $5.8 million.
On January 29, 2019, the Trust acquired one property located in Hamilton, Ontario, for a purchase price of $35.2 million at a
weighted average capitalization rate of 6.21% and assumed a mortgage payable with a fair value of $14.2 million, which included
a mark-to-market adjustment of $0.4 million.
On January 31, 2019, the Trust sold one property located in Victoria, British Columbia, for sales proceeds of $110.0 million.
On January 31, 2019, the Trust sold one property located in Ottawa, Ontario, for sales proceeds of $23.0 million.
On February 5, 2019, the Trust acquired the remaining 50% interest in one property located in Calgary, Alberta for a purchase
price of $70.4 million at a weighted average capitalization rate of 5.83% and assumed a mortgage payable for $45.0 million.
Financing Activities
Subsequent to the year end, the Trust extended the maturity date of its $150.0 million non-revolving unsecured credit facility from
December 27, 2019 to June 27, 2024 and fixed the all-in annual interest rate at 3.43% through an interest rate swap. The Trust also
fixed the annual all-in interest rate for $125.0 million of its other non-revolving unsecured credit facility maturing on January 31, 2023
at 3.38% through an interest rate swap.
149
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
Subsequent to the year end, the Trust also entered into a $350.0 million five-year non-revolving unsecured credit facility with
three financial institutions (consisting of two Schedule I banks and one Schedule III bank) and has fully drawn on the credit facility
to repay certain debt and for general Trust purposes. This credit facility matures on February 7, 2024 and, through an interest
rate swap, bears an annual all-in fixed interest rate of 3.34%. This credit facility requires the Trust to maintain certain financial
covenants similar to those of the Trust's revolving unsecured operating line of credit and other non-revolving unsecured credit
facilities.
37. TRANSITION TO IFRS 15 AND 9
IFRS 15, Revenue from Contracts with Customers (IFRS 15)
Upon adoption of IFRS 15, the Trust has concluded that there are no significant differences in revenue recognition for these
revenue streams between the point of transfer of risks and rewards under IAS 18 and the point of transfer of control under IFRS
15. No transitional adjustment has been recorded as at January 1, 2018.
Accounting Policies for Revenue under IAS 18, Revenue Recognition
The following accounting policies apply to comparative information for 2017 in our consolidated financial statements as we did not
restate prior periods on adoption of IFRS 15.
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:
(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.
150
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
(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.
IFRS 9, Financial Instruments (IFRS 9)
Effective January 1, 2018, the Trust adopted IFRS 9 using the modified retrospective basis with no restatement of comparative
periods. IFRS 9 replaces IAS 39, Financial Instruments: Recognition and Measurement (IAS 39) and all previous versions of
IFRS 9. The standard introduces new requirements for: (i) classification and measurement of financial assets and financial
liabilities, (ii) impairment of financial assets and (iii) hedge accounting.
Classification and measurement
Under IFRS 9, financial assets are classified and measured on the basis of both the business model in which the assets are
managed and the contractual cash flow characteristics of the asset. Financial assets after initial recognition are classified and
measured based on three categories: (i) amortized cost, (ii) fair value through other comprehensive income (FVOCI) with fair
value gains or losses recycled to net income on de-recognition for loans and receivables only, or (iii) fair value through profit and
loss (FVTPL). Financial liabilities are classified and measured on two categories: (i) amortized cost or (ii) FVTPL.
151
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
The following table shows the pre-transition IAS 39 and corresponding IFRS 9 classification and measurement categories, and
reconciles the IAS 39 and IFRS 9 carrying amounts for loans, securities and other financial assets as at January 1, 2018 as a
result of adopting IFRS 9. There were no changes to the measurement basis of other financial asset categories or any financial
liabilities.
Financial assets
Cash and cash equivalents
Marketable securities (i)
Receivables and other assets
Mortgages and loans receivable
Interest rate swap assets
Financial liabilities
Debentures payable
Mortgages payable
Classification Category
Changes due to:
IAS 39 (iii)
IFRS 9
IAS 39
Reclassification Remeasurement
IFRS 9
Held for
Trading Amortized cost $
70,225 $
— $
— $
70,225
Available For
Sale
—
187,489
—
FVTPL
—
Loans and
receivables Amortized cost
Loans and
receivables Amortized cost
—
FVTPL
30,427
145,873
—
(187,489)
187,489
—
(23,445)
23,445
—
—
—
—
(1,293)
—
187,489
30,427
122,428
22,152
Held for
Trading
FVTPL (ii)
5,101
—
—
5,101
Other liabilities Amortized cost $ 2,694,619 $
— $
— $ 2,694,619
Other liabilities Amortized cost
2,300,247
Lines of credit and other bank loans Other liabilities Amortized cost
904,429
Interest rate swap liabilities
Accounts payable and other
liabilities
Held for
Trading
FVTPL (ii)
2,919
Other liabilities Amortized cost
292,943
—
—
—
—
—
—
—
—
2,300,247
904,429
2,919
292,943
Included in receivables and other assets on the consolidated balance sheet.
(i)
(ii) Interest rate swaps are derivative financial instruments that are recorded at fair value on the consolidated balance sheet. The effective portion of
the fair value gains (losses) are recorded in other comprehensive income as they are designated in an effective cash flow hedging relationship.
(iii) For the measurement basis that corresponds to the classification basis under IAS 39, refer to this note (see below).
On transition, the Trust’s marketable securities, which were previously classified as available-for-sale (AFS) under IAS 39, were
classified as FVTPL under IFRS 9 as the cash flows do not meet the SPPI test. As a result, cumulative unrealized fair value gains
of $68.7 million previously recorded in accumulated other comprehensive income were reclassified to opening retained earnings
as of December 31, 2017. Effective January 1, 2018 all realized and unrealized fair value gains (losses) on these marketable
securities are recorded in investment and other income within net income whereas under IAS 39, unrealized fair value gains
(losses) were recorded in other comprehensive income until the asset was derecognized or impaired, at which time the
cumulative unrealized gains (losses) were recognized in investment and other income within net income.
In addition, on transition the Trust’s mortgages and loans receivable were assessed by reference to the underlying cash flows of
the loans. Certain mortgages and loans receivable previously classified and measured at amortized cost were reclassified to
FVTPL as the underlying cash flows did not represent SPPI and an accumulative fair value loss of $1.3 million was recognized in
opening retained earnings as of January 1, 2018. Interest income and fair value gains (losses) on these mortgages and loans
receivable recorded at FVTPL are included in interest income within net income.
The accounting for financial liabilities remained largely the same as under IAS 39.
Impairment of financial assets measured at amortized cost
IFRS 9 introduces a new single expected credit loss (ECL) impairment model for the Trust’s financial assets measured at
amortized cost. The ECL model results in an allowance for credit losses being recorded on financial assets regardless of whether
there has been an actual loss event. ECLs are based on the difference in cash flows the Trust expects to receive and the
contractual cash flows due in accordance with the contract, discounted at the asset’s original effective interest rate, and are
calculated using either a simplified or a general approach.
The adoption of the ECL model did not have a material impact on the Trust’s financial assets carried at amortized cost.
Hedging
IFRS 9 introduces a new hedge accounting model that expands the scope of hedged items and risks eligible for hedge
accounting and aligns hedge accounting more closely with risk management. The new model no longer specifies quantitative
measures for effectiveness testing and does not permit hedge de-designation.
The Trust applied hedge accounting under IFRS 9 prospectively. The Trust uses floating-for-fixed interest rate swaps to manage
interest rate risk. At the date of the initial application, these existing hedging relationships were eligible to be treated as continuing
152
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
hedging relationships. As such, the adoption of the hedge accounting requirements of IFRS 9 had no significant impact to the
Trust's Consolidated Financial Statements.
Accounting Policies for Financial Instruments under IAS 39, Financial Instruments: Recognition and Measurement
The following accounting policies apply to comparative information for 2017 in our consolidated financial statements as we did not
restate prior periods on adoption of IFRS 9.
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.
(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.
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
153
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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, 2018 and 2017
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.
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.
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.
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
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.
154
RIOCAN REAL ESTATE INVESTMENT TRUST ANNUAL REPORT 2018
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
Fax: 1 (800) 249-6189 or (514) 985-8843
Website: www.astfinancial.com
Email: inquiries@astfinancial.com
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Trading Symbols:
Common Units – REI.UN
ANNUAL MEETING
The 2019 Annual Meeting of RioCan REIT will be
held on May 28, 2019 at 10:00 a.m. at Cineplex
Cinemas Yonge-Eglinton and VIP 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
CORPORATE INFORMATION
SENIOR MANAGEMENT
Edward Sonshine, O.Ont., Q.C.
Chief Executive Officer
Jonathan Gitlin *
President & Chief Operating Officer
BOARD OF TRUSTEES
Paul Godfrey, C.M., O.Ont. 1,2,3,4
(Chairman of Board of Trustees)
Executive Chairman
Postmedia Network Canada Corp.
Qi Tang
Senior Vice President & Chief Financial Officer
Bonnie R. Brooks, C.M. 3,4
Corporate Director
Richard Dansereau 1,2
Corporate Director, Stonehenge Partners
Dale H. Lastman, C.M.
Chair and Partner, Goodmans LLP
Jane Marshall 2,3,4*
President and CEO of Goodleaf Farms Limited,
Former COO Choice Properties REIT
Sharon Sallows 1,2*,4
Trustee, Chartwell Retirement Residences REIT
Director, Home Capital Group Inc.
Edward Sonshine, O.Ont., Q.C.
Chief Executive Officer
RioCan Real Estate Investment Trust
Charles M. Winograd 3*,4
President, Winograd Capital Inc.
Siim A. Vanaselja 1*,2
Chair of the Audit Committee,
RioCan Real Estate Investment Trust
Director and Chair of the Board
of TransCanada Corporation
Director, Great-West Lifeco Inc.
Board Member, Power Financial Corporation
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
* Committee Chair
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
Terri Andrianopoulos
Vice President, Marketing & Communications
Tel: (416) 864-8138
Email: tandrianop@riocan.com
John Ballantyne
Senior Vice President, Asset Management
Andrew Duncan
Senior Vice President, Developments
Jeff Ross
Senior Vice President,
Leasing & Tenant Coordination
Jennifer Suess
Senior Vice President,
General Counsel & Corporate Secretary
Oliver Harrison
Vice President, National Operations
Terri Andrianopoulos
Vice President, Marketing & Communications
David Bain
Vice President, Tenant Construction
Moshe Batalion
Vice President, Leasing
Stuart Craig
Vice President, Developments
Roberto DeBarros
Vice President, Construction
Ryan Donkers
Vice President, Investments
Anushka Grant
Vice President, Sustainability and Asset Efficiency
Sandra Levy
Vice President, Human Resources
Pradeepa Nadarajah
Vice President, Property Accounting
Paran Namasivayam
Vice President, Recovery Accounting
Stephen Roberts
Vice President, Analytics
Tim Roos
Vice President, Operations - Eastern Canada
Renee Simms
Vice President, Insurance
Franca Smith
Vice President, Finance
Jonathan Sonshine
Vice President, Asset Management
Jeffrey Stephenson
Vice President, Operations - GTA & Central Canada
Naftali Sturm
Vice President, Real Estate Finance
Kimberly Valliere
Vice President, Development Construction
Renato Vanin
Vice President, Information Technology
Kim Wingerak
Vice President, Operations - Western Canada
Jason Wong
Vice President, Corporate Tax
* Mr. Gitlin was promoted to President & Chief Operating Officer on
March 22, 2019.
A N N U A L R E P O R T 2 0 1 8
RIOCAN YONGE EGLINTON CENTRE
2300 Yonge Street
Suite 500
P.O. Box 2386
Toronto, Ontario
M4P IE4