A piece of financial history will be made the following month when RioCan Investment Trust redeems a problem of cumulative rate reset preferred trust units.
When occurring C and holders get the return of the original $125 million investment plus the payment of the quarterly distribution C there will be another REIT with preferred trust units as part of its capital structure. Artis REIT raised $75 million in September 2012 and $100 million 6 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 a minimum of three years of labor was required to get RioCan to the stage where it might issue such securities. Those steps included: Canadianizing the notion that had been very popular among Australian REITs; getting approval from RioCan’s unitholders to issue this type of security (an issue looked after 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 at the end of January 2011, RioCan launched its breakthrough deal. RioCan liked the security enough that later in 2011 it did a second issue. It raised $149.50 million at 4.70 per cent along with a spread of 318 basis points.
RioCan’s decision to redeem C and never give holders a choice of converting their stake to either another fixed rate preferred unit or perhaps a floating rate preferred unit C surprised some market participants. Those participants argued for RioCan to consider advantage of the reduced spread (262 basis points) and also the low 5 year Canada bond yield (about 50 basis points) to garner $125 million of inexpensive capital.
But those 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 choosing to redeem:
- Preferred units inside a REIT are now treated as 100 per cent debt by the rating agencies. This means that RioCan doesn’t get any equity credit on its balance sheet for having issued preferred units. “They view it as more of an obligation akin to debt,” said Devine who noted the rating agencies possess a different view when it comes to corporations. And assigning a 100 percent debt to the securities seems not the same as what prevailed 5 years back. When Artis completed its deal in 2012, it said rate resets were an alternative to debentures “with the overriding feature there will be equity on our balance sheet.”The refinancing rate of 262 basis points is not that attractive. “Both of these spreads [on the brand new fixed and floating rate preferreds] are greater than spreads we can borrow at,” she said. Aside from its operating lines [which are priced at “125 basis points over” the U.S. or Canadian prime rate] RioCan can borrow five-year money on a basis about 50 basis points less than the 262 basis points it might be necessary to pay if it extended the maturing preferreds.In December, RioCan announced the sale of their U.S. assets. “We have a lot of proceeds and that we make it clear that certain from the primary uses would be to reduce debt. This really is easy to execute because it’s coming due in March,” she said.
bcritchley@postmedia.com
