RioCan to redeem

REIT clears obligation and pays down debt

Apiece of f i nancial history will be made next month when RioCan Real Estate Investment Trust redeems an issue of cumulative rate reset preferred trust units.

When that occurs — and holders receive the return of their original $ 125- mill i on i nvestment plus the payment of the quarterly distribution — there will be one other REIT with preferred trust units as part of its capital structure. Artis REIT raised $ 75 million in September 2012 and $ 100 million six months later.

But RioCan was the first: In January 2011 it raised $ 125 million at 5.25 per cent at a spread of 262 basis points above five- year Canada bonds.

But at least three years of work was required to get RioCan to the stage where it could issue such securities. Those steps included: Canadianizing the concept that had been very popu- lar among Australian REITs; getting approval from RioCan’s unitholders to issue such a security ( a matter taken care of at its June 2010 annual meeting); obtaining an advanced tax ruling from Revenue Canada ( received in October 2010); and working with the rating agencies ( DBRS assigned a Pfd- 3 high rating for the units.)

So in late January 2011, RioCan launched its breakthrough deal. RioCan liked the security enough that later in 2011 it did a second issue. It raised $ 149.5 million at 4.70 per cent and a spread of 318 basis points.

RioCan’s decision to redeem — and not give holders the option of converting their stake to either another fixed- rate preferred unit or a floating- rate preferred unit — surprised some market participants. Those participants argued for RioCan to take advantage of the low spread ( 262 basis points) and the low five- year Canada bond yield ( about 50 basis points) to garner $ 125 million of low- cost capital.

But t hose arguments didn’t cut the mustard with Cynthia Devine, RioCan’s chief financial officer.

In an interview, Devine, who has heard from some holders, listed three reasons for deciding to redeem: ❚ Preferred units inside a REIT are now treated as 100- per- cent debt by the rating agencies. That means t hat RioCan doesn’ t receive any equity credit on its balance sheet for having issued preferred units. “They see it as more of an obligation akin to debt,” said Devine who noted the rating agencies have a different view when it comes to corporations. And assigning a 100- per- cent debt to the securities seems different from what prevailed five years back. When Artis completed its deal in 2012, it said rate resets were an alternative to debentures “with the overriding feature that there will be equity on our balance sheet.” ❚ The refinancing rate of 262 basis points is not that attractive. “Both of those spreads RioCan can borrow five- year money on an unsecured basis about 50 basis points lower than the 262 basis points it would be required to pay if it extended the maturing preferreds. ❚ In December, RioCan announced the sale of its U. S., assets. “We will have a lot of proceeds and we have made it clear that one of the primary uses is to pay down debt. This is easy to execute because it’s coming due in March,” she said.

ONE OF THE PRIMARY USES IS TO PAY DOWN DEBT.