RioCan Leads $2.5 Billion Property Bond Push: Canada Credit

RioCan Real Estate Investment Trust led Canadian property companies that issued C$2.53 billion ($2.55 billion) in bonds last week, tapping low interest rates to refinance debt and generate cash for acquisitions.

RioCan, Canada’s largest property investment trust, is counting on the spread between its borrowing costs and property returns to stabilize at about 2 percentage points to fuel the purchase of more shopping centers in the northeastern U.S., said Chief Executive Officer Edward Sonshine.

“I’d be disappointed if we did anything less than $500 to $600 million in property acquisitions in 2011 in the United States,” Sonshine said in a telephone interview from Toronto. Further expansion “could take it up to a couple of billion dollars” in coming years, he said.

Bank of Canada Governor Mark Carney last week left benchmark interest rates unchanged at 1 percent for a fourth month, spurring RioCan and others to refinance existing debt at lower rates and borrow more. First Capital Realty Inc., a Toronto-based retail property owner and developer, issued C$150 million in 5.48 percent 10-year notes to redevelop existing sites and buy new properties. The debt was sold at a spread of 231 basis points over government bonds.

H&R Real Estate Investment Trust, also based in Toronto, sold C$150 million in five-year notes at 4.78 percent for acquisitions. Cadillac Fairview, the real estate unit of the Ontario Teachers’ Pension Plan, sold C$2 billion of five and 10-year notes to refinance existing debt and raise capital.

Bargain Properties

“These companies are building more financial flexibility so when the market rebounds they can react,” said Mark Newman, vice president, consumer, retail, real estate at credit rating company DBRS Ltd. “In Canada, it’s maybe more a case of raising capital for new development, whereas in the U.S., it’s a case of picking up existing bargain property at bargain prices.”

Elsewhere in credit markets, the extra yield, or spread, investors demand to own the debt of Canadian corporations rather than the federal government was unchanged on Jan. 21 at 132 basis points from a day earlier, according to a Bank of America Merrill Lynch index. A basis point is 0.01 percentage point.

The province of Manitoba sold an additional C$250 million in 4.1 percent bonds maturing in March 2041. The bonds were priced to yield 79.5 basis points over comparable federal government bonds. The province of Ontario increased the size of its five-year floating-rate bond by C$50 million to C$966 million. Provincial bond spreads stood at 53 basis points on Jan. 21, from 54 basis points day earlier.

U.S. Investment

The spread on Bank of America Merrill Lynch’s index of BBB rated bonds, which tracks debt including RioCan’s, narrowed to 178 basis points, from 186 on Dec. 31. The yield on Rio-Can’s 5.65 percent note maturing in 2015 fell this month to 4.01 percent from 4.13 percent.

“Starting at the end of 2008, investment in U.S. real estate just stopped,” RioCan’s Sonshine said, recalling the depths of the credit crunch and its impact on the U.S. commercial property market.

The climate is improving after sales at U.S. retailers rose in December for a sixth consecutive month, capping the biggest one-year gain in more than a decade, data from the U.S. Commerce Department show.

“There’s a lot of cash out there, for the right names,” he said.

RioCan last week issued C$225 million in 4.5 percent bonds maturing in January 2016, increasing the size from C$175 million to meet demand. The bonds were sold to yield 192.5 basis points more than government debt. The cash will be used to retire debt on which RioCan paid 8.33 percent. Such savings will contribute “significantly” to earnings growth in 2011, according to Sonshine.

Access to Capital

If RioCan has any advantage over U.S. competitors, it’s the terms on which it can borrow money, said Sonshine.

“Our access to capital is probably better than it’s ever been and Americans’ access to capital is quite constrained,” he said.

The spread between RioCan’s property returns and borrowing rates has narrowed to about 200 basis points from as much as 275 basis points, said Sonshine. He says it will probably stabilize at that level, making buying property appealing.

‘2011 will still be a good time to do acquisitions,” he said.

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