\u201cWe view the REIT\u2019s distribution policy to be aggressive relative to similarly rated peers,\u201d said the ratings company.<\/p>\n
S&P added debt service coverage measures weakened in 2009 because of several dilutive capital markets transactions. It noted funds from operation were not sufficient to fully cover unit distributions.<\/p>\n
\u201cOur ratings on Toronto-based RioCan continue to acknowledge the REIT\u2019s leading position in the Canadian retail real estate market, and the stability of its shopping center portfolio relative to those of its U.S. peers,\u201d said James Fielding, a credit analyst. <\/p>\n
\u201cRioCan\u2019s occupancy remains high and the company\u2019s core cash flow has been steady. However, heavy principal amortization related to the REIT\u2019s secured borrowing strategy and temporarily dilutive capital markets transactions weighed on debt service coverage in 2009. Furthermore, we believe the company\u2019s aggressive distribution policy resulted in insufficient coverage of unit distributions.\u201d<\/p>\n
The agency said the negative outlook reflects the \u201cpotential that internal and external growth may not may not be adequate to reverse the recent decline in debt service coverage or to cover the unit distribution shortfall.\u201d<\/p>\n
It threatened to lower its rating one notch if it appears that debt service coverage will not improve to near two times by the fourth quarter of 2010. It will also lower its rating if it does not appear that funds from operations will fully cover unit distributions. <\/p>\n
Ed Sonshone, chief executive of RioCan, vowed at the company\u2019s annual general meeting last year not to cut its distribution despite the softening market conditions.<\/p>\n
Heather Kirk, an analyst with National Bank Financial, said in a note to clients she has wavered on her stance that the distribution will be cut.<\/p>\n
\u201cWe have contended that the REIT would be unlikely to cut its distribution since the shortfall is negligible when backing out the dividend reinvestment plan, which contributed $58 million of capital inflows in 2009. We are now increasingly nervous. S&P indicate in their report that if certain criteria are not met by Q4 2010 they would notch RioCan down on the rating,\u201d said Ms. Kirk.<\/p>\n
She said one notch down on RioCan\u2019s unsecured debentures would take the rating below investment grade, noting they are all investment grade today. <\/p>\n
\u201cWith a non investment grade rating, RioCan\u2019s cost of financing on unsecured debentures and the addressable investor base would be negatively affected,\u201d said Ms. Kirk.<\/p>\n
\u201cS&P has made it very clear that unless the DSC ratio improves and the distribution is covered by FFO, Riocan\u2019s rating is at risk.\u201d<\/p>\n