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CANADIAN Real estate investment TRUSTS. Vincent Lo Sneha Naik Yi Ding Kitty Liu . Agenda. REITs Overview RioCan REITs Boardwalk REITs H&R REITs. What is a REIT?.
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CANADIAN Real estate investment TRUSTS Vincent Lo Sneha Naik Yi Ding Kitty Liu
Agenda • REITs Overview • RioCan REITs • Boardwalk REITs • H&R REITs
What is a REIT? • REIT is a real estate investment trust that originated in the United States in the 1960’s and was introduced in Canada in 1993 as publicly traded securities • Pools capital into real estate that is structured to generate regular distributions of cash • Investors are not directly investing in real estate property, they are investing in REIT units that are publicly traded • REITs are 100% eligible as Canadian content for registered portfolios
Characteristics of REITs • REITs are income stocks because: • Canadian REITs must pay 85% its net income to shareholders • They pay dividends monthly • REIT regulations restrict or discourage “merchant building” • Most REITs have limited development rights
Characteristics of REITs • Dual market situation where two parallel markets exist for trading real estate • Stock market valuation of property (indirect market), and the private market valuation (direct market) are not always the same • Indirect market (REIT market) tends to lead the private market • When two markets disagree REITs can undertake positive NPV investments either by buying or selling in the private market • When the stock market values property more highly than private property market, REITs can grow merely by buying properties, and thus becoming growth stocks, at least temporarily
Market Size • U.S. • 136 equity REITs listed on major exchanges • Market capitalization of US $191 billion • Canada • 25 REITs listed on TSX • Market capitalization of $21.2 billion
Benefits of REITs • Pre-tax income flows through to investors • Investors get favorable tax treatment on the income • A component of the tax obligation is deferred until the units are sold • Offer diversification and a level of stability, without sacrificing growth potential • Provide exposure to real estate – real assets with tangible value and reliable income streams – in a highly liquid, marketable security
Benefits of REITS • Distinct in their combination of relatively steady income, capital gains potential, tax benefits and professional, active management • As a trust, REITs are subject to more stringent regulations in areas such as leverage and financial reporting, providing investors with an added layer of security
Substitutes • Mutual funds • Stocks • Bonds • But because real estate has limited correlation to most other stocks and bonds, REITs provide one more layer of diversification
Types of REITs • Equity REITsEquity REITS invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents • Mortgage REITsMortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans • Hybrid REITsHybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs by investing in both properties and mortgages
Legality • Minimum of 150 unit holders, and are listed on a recognized Canadian Exchange • No more than 50% of the shares can be held by five or fewer individuals • At least 95% of its income must be derived from the disposition of or income earned from qualifying investments • At least 80% of its property must be held in any combination of real property in Canada and other qualifying investments • No more than 10% of its property (on a non-consolidated basis) should consist of bonds, securities or shares in the capital stock of any one corporation or debtor • Income is not taxed within the trust as long it is distributed to unit holders
Tax Fairness Plan • Applicable to all Canadian trusts companies that begin trading after Oct. 31, 2006, except qualified REITs 1) At no time in the year hold any non-portfolio property other than real properties situated in Canada 2) Must have at least 95% of its income for the year from properties 3) Have more than 75% of its income to be directly or indirectly attributable to rents from, mortgages on, or gains from the disposition of real properties situated in Canada 4) Hold throughout the year real properties situated in Canada, cash, and debt or other obligations of governments in Canada with a total fair market value that is not less than 75% of its equity value. • Four year transition period for existing trusts (2011)
Value Drivers • Rise in Interest Rates – Interest expense increases • Fall in Interest Rates – Interest expense reduces
Factors to Consider • Management Expertise • Net Asset Value per Share • Portfolio Diversification • Strong Growth Prospects • Access to funding • Low Leverage • Interest Coverage Ratio • %Long term debt to Capitalization • Earnings available for distribution • FFO, AFFO (or FAD) instead of Net Income • Cash Distribution to Unitholders • FFO or AFFO Payout Ratio
Measuring Performance • Net income (NI) or GAAP Earnings – not the best measure largely due to depreciation allowance • Funds from operations (FFO) – closer to economic truth but ignores capital improvements • Funds available for distribution (FAD) – cash flow available to share holders if there is no change in working capital or no new debt • Free cash flow (FCF) – this is REIT’s true operating cash flow
Net Income Real estate revenue - Real estate expense - Depreciation & amortization of real estate = Income from real estate + Other Income - General and administrative expense = Net Income per GAAP
Funds From Operation Net income per GAAP - Gains from sale of real estate = Adjusted net income + Depreciation and amortization of real estate = Funds From Operation
Funds Available for Distribution Funds from operation + Rent adjustments - Capital improvements = Funds Available for Distribution
Free Cash Flow Funds available for distribution - Real estate acquisitions (new investments) - Changes in working capital - Principal payments + New debt issue + Gain on sale of real estate + New equity issue = Free Cash Flow to Equity
Adjusted Funds From Operations • AFFO per unit is calculated by adjusting FFO from straight line and market rent adjustments, non-cash compensation expenses, actual costs incurred for capital expenditures and leasing costs for maintaining shopping centre infrastructure and current lease revenues
Stock Market Overview • Ticker: REI.UN • Industry: Real Estate Investment Trust • Exchange: Toronto Stock Exchange • Market Capitalization: $4,570.16 million
RIOCAN and REIT Market • RIOCAN OVERVIEW: • 12/18: Announced completion of acquisition of four retail properties in Canada • 12/01: Announced completion of $100.9 million public offering of trust units and over-allotment option • 11/18: Announced firm contracts on retail properties in Canada • 11/03: Closed $150 million of unsecured debenture issue • 10/30: Formed a joint venture to acquire retail real estate in the U.S owned 80% by RioCan and 20% by Cedar Shopping Centers, Inc. • 10/26: Announced agreements with Cedar Shopping Centers Inc.
RioCan Real Estate Investment Trust is an unincorporated “closed-end” trust governed by the laws of the Province of Ontario RioCan is publicly traded and is listed on the Toronto Stock Exchange RioCan is Canada’s largest real estate investment trust with a total market capitalization of approximately $4.57 million Ownership interest in a portfolio of 258 retail properties, including 12 under development across Canada comprising of over 60 million square feet Over $2.3 billion distributed to unit holders since the IPO and $3.5 billion of debt under management Revenue of $187 million in Q2 of 2009 and a diversified tenant base with total tenancies of 5,600
Management Team • Edward Sonshine – President & CEO, RioCan REIT • CEO of RioCan REIT since late 1993 and has overseen its growth from an asset base of under $100 million to its current enterprise value of $7 billion • Previously practiced law for 15 years and was awarded his Queen’s Counsel in 1983 • Member of the board of directors of RBC, Chair of Chesswood Income Fund, and Chair of Mount Sinai Hospital Foundation
Management Team • Frederic A. Waks – Senior Vice President & COO, RioCan REIT • COO of RioCan since 1995 • Started real estate carrier in 1981 with Royal LePage and earned the honourable designation of Rookie of the Year in the Commercial Division and President’s Round Table • In 1984, joined First Plazas as Vice President of Leasing/Marketing and then moved to Dominion Trust in 1988 under the position of Senior Vice President. From 1993 to 1995, acted as Vice President of Retail Leasing for Confederation Life
Management Team • Raghunath Davloor – Senior Vice President & CFO, RioCan REIT • CFO of RioCan since 2008 • Over 25 years of real estate, management, finance, accounting, and tax experience • Started with Arthur Anderson & Co where he spent 8 years in audit, tax and advisory roles, followed by over 10 years at O&Y Properties and O&Y REIT ultimately becoming CFO. Prior to coming to RioCan, worked as Vice President and Director in corporate finance for 2 years at TD Securities where he focused on real estate industry coverage
Asset Profile • As of December 31, 2009, RioCan has ownership interests in a portfolio of 246 shopping centres comprising of 54.5 million sq. ft. compared to 50.6 million sq. ft. in 2008 • RioCan has ownership interests in 12 Greenfield Development projects as of December 31, 2009 • Upon completion this comprises of approximately 8.5 million sq. ft. of which RioCan’s ownership interest is approximately 3 million sq. ft.
Acquisition • On October 30, 2009, RioCan formed a joint venture to acquire retail real estate in the U.S owned 80% by RioCan and 20% by Cedar Shopping Centers, Inc. [NYSE:CDR, “Cedar”] • Properties are 7 grocery-anchored shopping centres in Massachusetts, Pennsylvania, and Connecticut owned by Cedar • Total consideration paid by RioCan in this initial investment is approximately US$181 million resulting in a net equity investment of US$106 million • Provides RioCan with a platform for growth opportunities in the U.S
Acquisition • During 2009, RioCan completed total acquisitions of $348 million that comprised of approximately 1.8 million sq. ft. • Three month period ended December 31, 2009, and RioCan completed total acquisitions of $257.1 million that comprised of approximately 1.2 million sq. ft. • In March 2009, RioCan acquired interest in 6 grocery anchored retail properties in Greater Montreal Area totaling 454,000 sq. ft. for a total purchase price of $67.5 million • RioCan holds 100% interest in two of the properties and 50% interest in these four properties • Annualized net operating income expected to be generated from this portfolio is approximately $6.1 million 1) Concord Centre, Laval 4) Sicard Centre, Ste-Therese 2) La Prairie Centre, La Prairie 5) St. Jean, St-Jean-sur-Richelieu 3) Rene-A.-Robert Centre 6) Ste-Therese Ste Julie, Ste Julie
Distribution History YearDistribution YearDistribution • YTD 2010 $0.23 • 2009 $1.38 • 2008 $1.36 • 2007 $1.3275 • 2006 $1.2975 • 2005 $1.2725 • 2004 $1.2275 • 2003 $1.14 • 2002 $1.105 • 2001 $1.075 • 2000 $1.07125 • 1999 $1.04 • 1998 $0.95 • 1997 $1.55 • 1996 $1.30 • 1995 $1.15
Debt Profile • Debt-to-Gross Book Value of 55.8% as of June 30, 2009 • Total operating lines of $293.5 million with approximately $193 million available • Cash on hand as at June 30, 2009 was approximately $300 million • In 2009, S&P affirmed RioCan’s issuer credit rating of BBB
Market Position • Geographic Diversification • As of June 30, 2009, approximately 85% of RioCan’s annualized rental revenue was derived from national and anchor tenants • Approximately two-thirds of RioCan’s revenue came from properties within the below stated six high growth major Canadian markets