RioCan REIT (REI.UN): $19.08 – After The Storm: Earnings Trough 1 Quarter Later Than Expected As Q4 Misses
Sector Perform, Average Risk, Price Target: $18.50 (prev. $19.75)
Q4/09 FFO/Unit Misses – Q4/09 FFO/unit of $0.28 was -30% from Q4/08’s $0.39 and well short of RBC CM’s $0.32 estimate. The reason for the lower than expected variances are: i) NOI miss of $1.8MM (~$0.01/unit), in part due to $1MM of higher bad debt expense and $0.6MM of provisions for GROC tenants; ii) transactional/fee income missed by $3.7MM (~$0.02/unit), mostly due to the deferral of a milestone/zoning payment to 2010; iii) G&A was $2.7MM (~$0.01/unit) above forecast, in part reflective of non-recurring SIFT/IFRS/severance costs of $1.7MM; and, iv) interest expense exceeded forecast by $1.5MM (~$0.01/unit), in part due to a $0.6MM charge on the early redemption of unsecureds. Thematically, 2009 was also marred by the complete evaporation of transactional income which had totaled $40MM/$45MM in 2008/2007. The 2009 payout ratio is not a pretty picture: Distributions totaled $318MM ($1.38/unit) while AFFO was $250MM ($1.09/unit) for an over-distribution of $68MM (127% payout). RBC CM believes AFFO/unit improvements are just around the corner, but still do not see “core” AFFO covering gross distributions within our 2-year forecast horizon. RioCan is steadfast in its “covenant with unitholders”, stating that market chatter surrounding a cut in dist’ns are “extremely exaggerated”.