FIRST 20 QUARTER 21 ALWAYS ADAPTING ALWAYS LOOKING AHEAD LOOKING Shoppes on Queen Toronto
ABOUT RIOCAN
RioCan is one of Canada’s largest real estate investment trusts. RioCan owns, manages and develops retail focused, increasingly mixed-use properties located in prime, high-density transit-oriented areas where Canadians want to shop, live and work.
To learn more about us, please visit www.riocan.com.
Q1 2021 HIGHLIGHTS
$0.36 $8.7B 93.9% FUNDS FROM Q1 RENT UNENCUMBERED OPERATIONS COLLECTION ASSETS PER UNIT1 as of May 3, 2021
$1.3B 95.8% $176.6M IN AVAILABLE COMMITTED DISPOSITIONS LIQUIDITY OCCUPANCY COMPLETED
1) Excludes debenture prepayment costs
1,092,000 SQ. FT. OF LEASES EXECUTED
18.6% New Leasing Blended Leasing 14.2% Spread (%) Spread (%) 9.8% 8.1% 6.5% 8.2% 5.6% 6.7%
Major Market Overall Portfolio Major Market Overall Portfolio
Q1 2020 Q1 2021 Q1 2020 Q1 2021
. Strong Tenants RENT COLLECTION National office and essential / necessity / value and specialty retail by Tenant Type* tenants with strong rent paying ability, and includes residential tenants
. Stable Tenants Tenants with strong or medium consumer offering combined with 61.2% 17.6% 21.2% good or strong rent paying ability, respectively . Potentially Vulnerable Tenants Tenants significantly impacted by the pandemic and uses 78.8% STRONG & STABLE TENANTS or tenants that were of concern prior to the pandemic
97.6% 81.4% * Based on percentage of annualized net rent 1 1 1. Includes tenant direct cash collection as of May 3, 2021 relating to Q1 2021 billed Q1 cash rent collection Q1 cash rent collection gross rents. The CECRA program ended in September 2020 therefore there was no CECRA government funding during the first quarter. i RioCan First Quarter 2021 end. occupancy committed spread leasing blended our leases, renewal and new of feet square we Importantly, CERS from federal program. the funds receive tenants eligible as improve to continue will number This team. oriented the collection rent Our our portfolio. of resilience the demonstrated solid Our our talent. of depth and experience the and position liquidity strong our of our on the quality based tenants, post elements elements by one- was impacted quarter the for FFO/Unit Our 2021. into carried has 2020 defined that volatility and uncertainty The - long RioCan’s in confidence steadfast and optimism our and share on our business pandemic the of impact the discuss to opportunity am I privilege. tremendous and a is circumstances a challenge both in CEO, and President RioCan’s as Unitholders, Writing Dear Unitholders, well COVID of impacts continued the and lockdowns future of depth and breadth the predict to difficult is it While portfolio. market major positioned well our of strengths true the of reflective not but pandemic, aglobal of context the in Q1 within was on par with expectations our business of performance the limitations, and many more periods had occupancy certain for closed were tenants our of nearly which in an environment Given quarter. previous the to level relatively was our result items, these for not If costs. expensing the accelerating as such matters recurring non- and rates better at debt refinance positioning of our of positioning - - equipped to navigate the current and current the navigate to equipped COVID landscape. Our confidence is is Our confidence COVID landscape. Letter from my first letter to our valued valued our to letter first my the midst of an unrelenting set of set anunrelenting of midst the Q1 operational metrics metrics operational Q1 including prepayment prepayment including of unit of
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RioCan First Quarter Quarter First RioCan a culture of of a culture we we 3099. continued to take take to continued - value 2021 2021 ii rich rich - STRONG, STABLE PORTFOLIO
Strategic Canadian MAJOR MARKET POSITIONING
Within 5 km of RioCan Centres:
90.4% 201,326 Average Population1
$117,918 Average Household Income1
1) Source: DemoStats – 2020 – Trends © 2020 Environics Analytics
Immigration Drives Real Estate MONTREAL Demand EDMONTON 19 assets1 12 assets1 2.4M SF 2.2M SF 4.1%* 1.2M+ 6.6%* immigrants expected OTTAWA to come to Canada 2 35 assets1 over next three years CALGARY 4.8M SF 16 assets1 3.6M SF 12.9%* 10.9%* GREATER ~30% TORONTO AREA VANCOUVER of Canada’s immigrants 91 assets1 estimated to make 7 assets1 17.0M SF 1.8M SF Toronto home * 4.9%* 51.0% 2) Source: Government of Canada * Percentage of annualized rental revenue 1) Income producing properties at RioCan’s interest
Tenant Mix by Revenue
17.0% 13.8% Grocery/Pharmacy/ Value Liquor Retailers . Retail (91.4%) +1.3% vs Q1 2020 Property . Type Office (7.6%) 12.0% 11.5% . Residential Rental (1.0%) Essential Personal Specialty Services Retailers
10.2% 8.9% Other Personal Furniture Services & Home . Q1 2021 7.0% 6.7% Property Mix by Revenue . Q1 2020 Quick Service Apparel Restaurants -1.4% vs Q1 2020 GROCERY ANCHORED CENTRE (42.5%) +0.8% 5.8% OPEN AIR CENTRE (27.2%) -0.3% 4.0% Sit-down Movie MIXED-USE / URBAN1 (21.1%) -0.3% Restaurants Theatres -0.3% vs Q1 2020 ENCLOSED CENTRE (9.2%) -0.2% 2.9% 0.2% Entertainment/Hobby Department /Electronics/Books Stores1 Percentage of annualized rental revenue Percentage of annualized rental revenue 1) Mixed-Use /Urban includes approximately 0.6 million square feet of residential rental NLA and the 1) Excludes Home Outfitters (included in Home and Furniture), Saks Off 5th (included in Value corresponding annualized residential rental revenue Retailers) and Lawrence Allen Centres’ HBC Office iii RioCan First Quarter 2021 ROBUST DEVELOPMENT PIPELINE
TOTAL PIPELINE by Zoning Status ~100% located in Canada’s six major markets TOTAL ZONING ENTITLEMENT ~73% located in the GTA 21.8M SF 7.7M SF (18.4%) ~83% new residential development 7 Projects 14.1M SF (33.9%) 38 Projects ACTIVE DEVELOPMENT 41.8M PROJECTS SF Mixed-use residential: 2.8M Sq. Ft. Greenfield development: 431K Sq. Ft. Expansion & redevelopment: 286K Sq. Ft 20.0M SF (47.7%) at RioCan’s interest 15 Projects
COMPLETED / IN DEVELOPMENT BY 20231
. Zoning Approved ~3,685 Residential Rental Units . Zoning Application Submitted ~6,348 Condo/Townhouse Units . Future Estimated Density
% = Percentage of square footage 1) Number of units are based on 100% ownership SF = Estimated density (NLA) at RioCan’s interest
DEVELOPMENT IN ACTION Select 2021 Development Completions
TM TM LATITUDETM LITHO 50% Partner STRADA 50% Partner 50% Partner Toronto, Ontario Woodbourne Toronto, Ontario Allied Properties REIT Ottawa, Ontario Killam Apartment REIT
210 UNITS 61 UNITS 209 UNITS 9-storey building 8-storey building 20-storey building
Q3 2021 Q3 2021 Q4 2021 Anticipated completion Anticipated completion Anticipated completion
~28K SQ. FT. ~6K SQ. FT. OVER 610 REGISTRANTS of ground level retail space, of ground level retail space as of May 3, 2021, including desirable grocery market Farm Boy despite leasing targeted to commence Q4 2021
RioCan First Quarter 2021 iv LEADING THE WAY WITH ENVIRONMENTAL, SOCIAL AND GOVERNANCE BEST PRACTICES
Enwave at The Well ™ Toronto ENVIRONMENT
We recognize the important role we have as a Canadian real estate developer, manager and owner to minimize the environmental impacts of our developments, assets and procurement by protecting the natural environment; reducing resource consumption and pollution; and increasing waste diversion and renewable energy use.
Key Objectives
Reduce greenhouse gas emissions (“GHG”), energy and water consumption in our new and existing buildings. Establish a series of interim emission and energy reduction goals to achieve carbon neutrality. Improve waste diversion at all sites. Continue to develop and acquire sites in transit- oriented neighbourhoods. Expand assessment of physical and transitional climate risks, opportunities and impacts for all assets in-line with the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations.
Climate Change
We understand the need to reduce our climate-related risks and continually assess and identify real estate relevant sustainability issues and opportunities. RioCan is utilizing the TCFD recommendations to guide our strategy, plan and manage risk.
Governance Strategy
. Dedicated sustainability team . Identify and assess climate change and resilience related risks, impacts and opportunities . Sustainability Council made up of cross-functional executive and leadership team members . Develop and execute action plan based on assessment results . Ultimate oversight – RioCan Board of Trustees
Risk Management Metrics and Targets
. Leverage RioCan’s Enterprise Risk . Measure and disclose: Scope 1, Scope 2 and Management framework select Scope 3 GHG emissions and properties in 100-year floodplain zones . Conduct environmental and resilience surveys . Set long-term reduction goals addressing key . Respond, resolve and communicate climate- industry specific sustainability issues and related events opportunities
v RioCan First Quarter 2021 PLACEHOLDER IMAGE SOCIAL
Our commitment to the community and our people – tenants, partners, employees and investors – is based on our history of investing, operating and developing within each of our communities.
Key Objectives
Establish programs to actively develop new pools of talent, increase retention, and integrate diversity in recruitment.
Provide employees with regular ESG training, organize mentorship programs, and conduct gender pay gap assessments.
Continue to support our tenants and visitors by designing inclusive places that contribute to a pleasant experience at our centres.
Contribute to our communities through investment in education, job creation and economic and social growth initiatives.
Continue to organize community events that promote the well-being of our tenants and communities in which we operate.
GOVERNANCE Supporting Our Communities Strong oversight and accountability underpin our Along with our partner, Context, and in collaboration with commitment to ESG excellence. Our governance the City of Toronto and Toronto Community Housing framework is established based on our people, Corporation (TCHC) at the Queen & Coxwell master plan defined policies and disciplined practices. community development in Toronto, Ontario, which offers much needed housing and retail amenities for all income levels, RioCan is proud to contribute to the City’s Community and Economic Development Initiative.
Key Objectives
Enhance ESG and climate change-related $100,000 disclosures in alignment with leading disclosure SCHOLARSHIP FUND standards. For TCHC tenants
Maintain open dialogue and feedback loop through Board investor outreach program. $250,000 Strive for best management practices through ECONOMIC & SOCIAL certifications and awards. DEVELOPMENT FUND
Execute green bond initiatives and related green bond reports. $500,000 + JOB CREATION Embed ESG considerations within RioCan’s OPPORTUNITIES purchasing, contracting and procurement processes.
RioCan First Quarter 2021 vi
TABLE OF CONTENTS
Key Performance Indicators 2 Joint Arrangements 34
Financial Performance 5 Development Program 37
Management's Discussion and Analysis 7 Properties Under Development 37
Introduction 7 Residential Inventory 47
About this Management's Discussion and Analysis 7 Mortgages and Loans Receivable 48
Forward-Looking Information 7 Capital Resources and Liquidity 49
Business Overview and Strategy 8 Capital Management Framework 49
Business Environment and Outlook 10 Total Capital 49
COVID-19 Pandemic 10 Debt Metrics 50
Market Trends 11 Credit Ratings 51
Outlook 13 Total Debt Profile 52
Environmental, Social and Governance (ESG) 13 Debentures Payable 52 Priorities and Progress Property Portfolio Overview 14 Mortgages Payable 53
Property Operations - Total Portfolio 14 Lines of Credit and Other Bank Loans 53
Property Operations - Commercial 16 Liquidity 54
Property Operations - Residential Rental 21 Unencumbered Assets 56
Capital Expenditures on Income Properties 21 Guarantees 57
Results of Operations 23 Hedging Activities 57
Summary of Selected Financial Information 23 Equity 57
Rental Revenue 24 Trust Units 57
Net Operating Income (NOI) 24 Distributions to Unitholders 59
Operating Income 26 Related Party Transactions 60
Other Income (Loss) 26 Selected Quarterly Results and Trend Analysis 61
Other Expenses 27 Non-GAAP Measures 62
Net Income Attributable to Unitholders 28 Accounting Policies and Estimates 66
Funds from Operations (FFO) 29 Adoption of New Accounting Standards 66
Adjusted Cashflow from Operations (ACFO) 30 Future Changes in Accounting Policies 66
Property Valuations 32 Disclosure Controls and Procedures and Internal 67 Controls Over Financial Reporting Acquisitions and Dispositions 33 Risks and Uncertainties 67
1 RioCan First Quarter 2021 KEY PERFORMANCE INDICATORS (Numbers are in thousands of dollars, except where otherwise noted)
FINANCIAL Rental Revenue Q1 2021 Rental revenue decreased primarily due to the pandemic's effect on property operations such as occupancy which in turn impacted base rents, recovery revenues, percentage rents and parking revenues, as well as the impact of operating costs savings achieved $273,624 including wage subsidy benefits transferred to tenants which led to lower recovery Q1 2020 $283,445 -3.5% revenues.
Operating Income Q1 2021 The decrease in operating income for the quarter was primarily due to a $6.4 million provision for rent abatements and bad debts ("pandemic-related provision") as a result of the COVID-19 pandemic and lower residential rental NOI resulting from the sale of a 50% $167,102 non-managing interest in eCentralTM and from lease-up loss at PivotTM. The pandemic- related provision represented 2.4% of the gross billed rents for the quarter, lower than the Q1 2020 $175,318 -4.7% $9.0 million provision or 3.4% of billed gross rents for Q4 2020.
Same Property NOI (i) Q1 2021 Same Property NOI (SPNOI) decreased primarily due to the pandemic, particularly the resulting pandemic-related provision. Excluding the pandemic-related provision, SPNOI decreased by 1.1% for the quarter. The latter metric, however, still incorporates certain $156,252 other effects of the pandemic on RioCan's operations such as on occupancy. Q1 2020 $163,796 -4.6%
FFO Per Unit - Diluted (excluding debenture prepayment costs) (i) Q1 2021 Relative to the pre-pandemic Q1 2020, FFO per unit (excluding debenture prepayment costs) was $0.10 lower. The decrease was primarily due to $11.1 million gains on the sale of marketable securities, $4.0 million other income relating to e2 investment and a $3.4 million mark-to-market adjustment for cash-settled unit-based trustee costs due to unit $0.36 price decline as a result of the pandemic, all of which were recognized in Q1 2020 with no corresponding amounts in Q1 2021. In addition, the $6.4 million pandemic-related provision and one-time $5.8 million general and administrative (G&A) costs relating primarily to the accelerated expensing of unit-based compensation in Q1 2021 Q1 2020 $0.46 -21.7% contributed to the decline.
FFO Payout Ratio (excluding debenture prepayment costs) (i) Q1 2021 The FFO payout ratio, which is calculated on a twelve-month rolling basis, is expected to gradually fall during 2021 given the one-third reduction in distributions effective January 2021 and from an expected overall lower pandemic-related provision for 2021 despite the recent tightened restrictive measures in Ontario and certain other provinces. The FFO payout ratio increased by 13.4% from Q1 2020 which included a twelve-month pre- pandemic FFO from April 1, 2019 to March 31, 2020. Units outstanding also increased 90.8% over the twelve-month period ended March 31, 2021 resulting from equity issues in the second half of 2019 which reduced the benefit of the one-third distribution reduction.
Based on distributions declared during the quarter and quarterly FFO, instead of on a twelve-month rolling basis, the FFO payout ratio (excluding debenture prepayment costs) Q1 2020 77.4% +13.4% for the quarter was 67.5%.
ACFO Payout Ratio (excluding debenture prepayment costs) (i) Q1 2021 The ACFO payout ratio is also calculated on a rolling twelve-month basis and increased by 6.5% from Q1 2020 for similar reasons described above for the FFO payout ratio except that this ratio for the current quarter benefited from higher distributions from the RioCan-HBC JV. Relative to Q4 2020, the ACFO payout ratio decreased 7.4% primarily due to the aforementioned higher distributions from the RioCan-HBC JV in the current quarter and the one-third distribution reduction effective the January 2021 payment. The 91.5% ACFO payout ratio is expected to fall gradually in 2021 for the same reasons described above for the FFO payout ratio.
Based on distributions declared during the quarter and quarterly ACFO, instead of on a twelve-month rolling basis, the ACFO payout ratio (excluding debenture prepayment Q1 2020 85.0% +6.5% costs) for the quarter was 64.7%.
RioCan First Quarter 2021 2 KEY PERFORMANCE INDICATORS (Numbers are in thousands of dollars, except where otherwise noted)
Liquidity (ii) Q1 2021 RioCan continues to maintain ample liquidity. The decrease in liquidity over the prior year end was due to the timing of the $500 million green bond issue in December 2020 before the early redemption of the Series R unsecured debentures in full, at a total redemption $1,282,539 price of $256.8 million plus accrued interest, on January 15, 2021. Subsequent to the quarter end, on April, 9, 2021, RioCan also redeemed, in full, its $300.0 million Series Z Q4 2020 $1,576,689 -18.7% unsecured debentures upon maturity. Unencumbered Assets (i)(ii)(iv) Q1 2021 RioCan's large unencumbered asset pool of $8.7 billion represented 59.6% of its investment properties as of March 31, 2021, generated 59.5% of its NOI and provided 2.21x coverage over unsecured debt. These unencumbered assets give RioCan the $8,718,757 potential to obtain additional mortgages to bolster liquidity, if needed, and preserve credit availability under its revolving unsecured line of credit, while maintaining compliance with debt covenants under various credit facilities. Over the long-term, the Trust targets to Q4 2020 $8,727,354 -0.1% change its unsecured/secured debt composition to 70/30 (56/44 as of March 31, 2021). Debt to Total Assets (i)(ii)(iv) Q1 2021 Debt to total assets increased marginally from Q4 2020 primarily due to higher debt levels (net of cash and cash equivalents) resulting from the timing of development completions relative to development spend. The ratio is expected to increase marginally in the near- 45.3% term given the pandemic. However, the Trust remains committed to a strong balance sheet and maintains its long-term goal to lower this metric to its target range of between Q4 2020 45.0% +0.3% 38% to 42%.
Debt to Adjusted EBITDA (i)(ii) Q1 2021 The increase in debt to Adjusted EBITDA relative to the 2020 year end was primarily because this is a twelve-month trailing metric and thus the ratio for the current quarter included four quarters affected by the pandemic while the year end ratio included only 10.02x three such quarters. The Trust's long-term goal remains to lower this metric to its target range of below 8.0x. It expects a marginal increase in this ratio in the near-term during the pandemic, but disposition sale proceeds and continuous operational improvements Q4 2020 9.47x +5.8% will improve the metric in the medium-term.
DEVELOPMENT Development Spending (iii) Development spending for the quarter was lower than the same quarter last year due to Q1 2021 timing of development spend. The overall pace of RioCan's mixed-use development projects was not significantly impacted by the pandemic. Development spend for 2021 is $87,500 estimated to be in the range of $500 million, net of expected cost recoveries and air rights sales, although future years' annual spend is targeted to be lower. Q1 2020 $103,000 -15.0%
Development NLA Completions (sq ft) Q1 2021 The decrease in development NLA completions was primarily due to the timing of project completions. Development completions for the quarter included 22,000 square feet from the first phase of the 100% owned RioCan Windfields Farm commercial development which is mostly leased to grocery and necessity-based retailers. It serves a new 30,000 Windfields Farm community comprised of 1,900 units of townhouses and condominiums that RioCan and its partner Tribute Communities are developing in Oshawa, Ontario. Nearly 50% of the units have been completed, or pre-sold and under construction with a second condominium tower to start pre-sale soon. Total development NLA completion is Q1 2020 133,000 -77.4% estimated at 711,500 square feet for the year including a significant portion of The WellTM. Zoning Entitlements (sq ft) Q1 2021 The Trust's pipeline of zoning entitlements, which includes approved zoning and zoning submissions, is one of the largest in the industry. The increase from Q1 2020 resulted from increased estimated density at certain properties and additional projects added. The 21,872,000 marginal increase in zoning entitlements from Q4 2020 resulted from the addition of projects offset by the removal of projects completed in Q4 2020 and the sale of a 50% Q1 2020 21,160,000 +3.4% non-managing interest in Rhythm in Q1 2021.
3 RioCan First Quarter 2021 KEY PERFORMANCE INDICATORS (Numbers are in thousands of dollars, except where otherwise noted)
Total Development as % of Total Gross Book Value (iv) Q1 2021 Total development accounted for 10.7% of RioCan's total gross book value of assets, well under the 15% limit permitted under various credit facilities. The increase in this ratio from Q1 2020 was driven mainly by the timing of development spend and completions and net 10.7% fair value write-downs of $493.7 million over the trailing twelve-month period. The Trust's long-term goal is to keep this ratio at 10% or lower and to reduce the annual development Q1 2020 9.4% +1.3% spend in 2022 and beyond lower than the 2021 annual spend target of $500 million. LEASING - COMMERCIAL Committed Occupancy (iv) Q1 2021 Committed Occupancy remained strong despite mandated store closures and other restrictive measures. The decline relative to Q1 2020 was because of the pandemic. 95.8% Relative to Q4 2020, it increased by 10 basis points to 95.8% for the overall portfolio while retail committed occupancy was steady at 96.1% . New office leases increase d Q1 2020 96.8% -1.0% office committed occupancy by 30 basis points to 91.4%.
In-Place Occupancy (iv) Q1 2021 Similarly, in-place occupancy declined relative to the same quarter last year mainly as a result of the pandemic. Relative to Q4 2020, however, total commercial portfolio in-place 95.1% occupancy increased by 20 basis points to 95.1% while retail in-place occupancy increased by 30 basis points to 95.4%. Q1 2020 96.3% -1.2%
New Leasing NLA at 100% (sq ft) Q1 2021 New leasing volume in the quarter exceeded that of Q1 2020 due to both office and retail new leases. The ability of the Trust to maintain its strong leasing activity in the midst of 435,000 the pandemic is attributable to the Trust's well-positioned portfolio and strategic leasing initiatives. Q1 2020 372,000 +16.9%
Renewal Leasing NLA at 100% (sq ft) Q1 2021 The Trust renewed a substantial amount of space in the quarter, despite the challenges presented by the pandemic. The retention ratio of 72.6% for the quarter included the departure of a large tenant who was paying below average rent per occupied square foot. 657,000 Excluding this vacancy, the retention ratio for the overall portfolio would be 84.2% , exceeding the prior year same quarter. A significant portion of this vacated space has Q1 2020 702,000 -6.4% already been re-leased to new tenants at much improved rents. New Leasing Spread Q1 2021 The 14.2% new leasing spread for the overall portfolio in the quarter was driven by new leasing spread of 18.6% for the major market portfolio. Both spreads more than doubled 14.2% the new leasing spreads in the pre-pandemic Q1 2020. The Trust achieved new leases at $23.19 net rent per square feet in the quarter, well above the portfolio average net rent Q1 2020 6.7% +7.5% of $19.87 per square foot. Renewal Leasing Spread Q1 2021 The renewal leasing spread for the overall portfolio was driven by the major markets renewal spread of 5.6% for the quarter, both improved from the prior quarter and largely 5.0% back to pre-pandemic Q1 2020 levels. The renewal leasing spread in a given period is partly determined by the characteristics (such as location, type, size) of the space Q1 2020 5.3% -0.3% available for renewal. Blended Leasing Spread Q1 2021 The blended leasing spread of 8.1% for the overall portfolio and 9.8% for the major market portfolio both exceeded the pre-pandemic Q1 2020 results. Relative to Q4 2020, 8.1% they both more than doubled as a result of double digit new leasing spread and stronger renewal spread. This illustrated the strength of the Trust's portfolio despite being in the Q1 2020 5.6% +2.5% midst of the pandemic.
(i) These represent non-GAAP measures. RioCan's method of calculating non-GAAP measures may differ from other reporting issuers' methods and accordingly may not be comparable. For definitions and the basis of presentation of RioCan's non-GAAP measures, refer to the Non-GAAP Measures section in this MD&A. (ii) At RioCan's proportionate share. (iii) Includes costs incurred for various properties under development and for residential inventory in respective reporting periods. (iv) Information presented as at the respective period end.
RioCan First Quarter 2021 4 FINANCIAL PERFORMANCE
Operating Q1 2021 • FFO per unit (excluding debenture prepayment costs) was $0.36, $0.03 per unit lower than Q4 2020. One-time $5.8 million general and administrative expenses including the accelerated expensing of certain unit-based compensation accounted for a decline of $0.02 in the FFO per unit. The remaining change resulted primarily from decreases in residential inventory gains and lease cancellation fees, partially offset by a lower pandemic-related provision. • Net income of $106.7 million increased by $41.1 million from Q4 2020, mainly from a $51.2 million change in fair value of investment properties, partially offset by $7.0 million prepayment costs on the early redemption of the Series R debentures, and $5.8 million higher general and administration costs as described above. • The Trust collected 93.9% of this quarter's billed gross rents in cash as of May 3, 2021. RioCan's cash collection results are expected to improve as its tenants receive CERS funding in arrears for prior months. While the number of tenants opened or closed varied throughout the quarter in accordance with changing government requirements, approximately 9% of the Trust's tenants were closed as of March 31, 2021. As of May 3, 2021, nearly 20% of the Trust's tenants are closed, given the more extensive and restrictive closures mandated in certain provinces post the quarter end. • Based on annualized net rent, as of March 31, 2021, approximately 78.8% of the Trust's tenants are classified as "strong" or "stable", and 97.6% of this quarter's gross rents billed to these tenants have been collected in cash. • While the length and extent of mandated closures are difficult to predict, the strength of the Trust's tenant base offers significant downside protection. The Trust continues to work with tenants who have been affected by the pandemic and accrued a $6.4 million pandemic-related provision in the quarter. • Same property NOI for the overall commercial portfolio decreased by 4.6% compared to Q1 2020, mainly due to the pandemic-related provision and by 1.1% excluding the pandemic-related provision. • Committed and in-place occupancy at RioCan commercial properties increased by 10 basis points and 20 basis points over the prior quarter end to 95.8% and 95.1%, respectively despite the fluctuations in the mandated store closures. Retail committed occupancy held steady at 96.1% from prior quarter end while office committed occupancy increased by 30 basis points to 91.4%. Retail in-place occupancy increased by 30 basis points to 95.4% from the prior quarter end. • Committed and in-place occupancy further improved from Q1 2021 by 20 basis points to 96.0% and 95.3%, respectively, as of May 3, 2021. • The Trust completed 1.1 million (at 100%) square feet of new and renewed leases during the quarter. It achieved new leasing spreads of 14.2% for the overall portfolio and 18.6% for major market properties, both more than doubled the pre-pandemic Q1 2020 results. Combined with a renewal leasing spread of 5.0%, the blended leasing spread was 8.1% for the overall portfolio and 9.8% for the major market portfolio. Both exceeded the pre-pandemic Q1 2020 results. • RioCan continues to evolve its property mix as it anticipates, and adapts to, the ever-changing retail landscape. As of the quarter end, 90.8% of RioCan's annualized rental revenue was from Grocery Anchored, Mixed-Use / Urban and Open Air Centres. The Grocery Anchored Centre proportion increased by 50 basis points from the previous quarter to 42.5%, while the Enclosed Centres proportion further decreased by 30 basis points to 9.2% with 88.6% cash collection for the quarter, reflecting the quality of its Enclosed Centres even under such unprecedented circumstances. • Similarly, RioCan continues to shift its tenant mix towards essential goods and services, increasing its grocery/ pharmacy/liquor tenant mix by 10 basis points to 17.0% while decreasing its exposure to apparel by 20 basis points to 6.7%, when compared to Q4 2020. • The Trust's growing purpose-built RioCan LivingTM residential rental portfolio currently includes 1,218 residential rental units (at 100%) across four buildings - eCentralTM and PivotTM in Toronto, FrontierTM in Ottawa, and BrioTM in Calgary. Frontier has achieved stabilized occupancy while the three remaining rental towers are in various phases of lease-up. Residential cash collection was 98.2% for the quarter. • As of May 3, 2021, Frontier was 98.7% leased and eCentral was 84.5% leased. Despite being launched in the midst of the COVID-19 pandemic, as of May 3, 2021, Brio was 74.1% leased, up 14.8% from the previous quarter report, while Pivot was 20.8% leased since its initial launch in December 2020, up 10.0% from the previous quarter report. Residential rents were in line with expectations. • While the significant slowdown in immigration and wider spread of household consolidation during the pandemic have impacted current residential leasing, RioCan's well-located and professionally managed RioCan Living residential rental assets will benefit from the reversal of these short-term trends post the pandemic. RioCan remains confident in the long- term strategic importance and net asset value growth prospect of its residential business. This is further supported by the successful Q1 2021 closing of the sale of a 50% non-managing interest in eCentral and the ePlace commercial component at attractive 3.6% and 4.6% capitalization rates, respectively, based on stabilized NOI. Investing • The Trust's capital recycling program provides one of the most efficient and effective sources of capital to fund value creation initiatives such developments and strengthening its balance sheet. During the quarter, the Trust completed $176.6 million of dispositions including $155.6 million of income producing assets at a weighted average capitalization
5 RioCan First Quarter 2021 FINANCIAL PERFORMANCE
rate of 4.19% based on in-place NOI and $21.0 million of development properties with no in-place NOI. As of May 3, 2021, the Trust further closed or entered into firm or conditional agreements to dispose 100% or partial interests in a number of properties for total sales proceeds of $366.5 million. • In aggregate, closed or firm or conditional deals since the beginning of 2021 totaled $543.1 million as of May 3, 2021, consisting of $421.2 million of income producing properties at a weighted average capitalization rate of 5.15% based on in-place NOI and $121.8 million of development properties with no in-place NOI. • The Trust currently has 10,000 residential rental and condominium / townhouse units that have been completed, under construction or expected to be in different phases of development by 2023, consisting of approximately 3,700 rental units and 6,300 condominium / townhouse units. Its entire development pipeline includes more residential developments beyond the 10,000 units, illustrating the Trust's capacity to diversify its income streams and intensify its existing properties in order to drive FFO and net asset growth. Included in the aforementioned 10,000 units are 1,242 condominium or townhouse units currently under construction which are on average 99.3% pre-sold as of May 3, 2021 and expected to generate inventory gains of between $92.5 million and $98.0 million in aggregate between late 2021 and 2025. Furthermore, the 10,000 units include eight other active condominium or townhouse projects with 4,181 units in various stages of development by 2023 and scheduled to be completed in phases between 2023 and 2027. • Construction of the 36 -storey office tower at The Well, which is 85% pre-leased to strong covenant tenants such as Shopify, remains on track for initial tenant possession in 2021 with top off underway and exterior cladding installed up to the 29th floor. More than a third of the 340,000 square foot of retail space has been leased to forward thinking tenants characteristic of the vibrant nature of the King West neighbourhood. The distinctive curving steel canopy has been installed over the multi-level retail galleria. • The tower concrete structure has reached level 11 for the 592-unit residential rental building at FourFifty The WellTM. On April 7, 2021, the air rights transaction for this building was completed, resulting in Woodbourne Canada Partners and RioCan each owning 50% of the development. Air rights sales for three of the six residential buildings are now complete with conveyance of the air rights of the three remaining buildings on track to be completed in 2021. • Development spending was $87.5 million for the quarter. As of March 31, 2021, properties under development and residential inventory accounted for 10.7% of the Trust's consolidated gross book value of assets, well under the 15% limit permitted under its unsecured operating line of credit and other credit facility agreements. The Trust's long-term goal is to keep this ratio at 10% or lower. With the completion of a significant portion of The Well in 2021, as well as staggered development starts, and sharing of development costs and risks with existing and future strategic partners, the Trust expects future annual development spending to be lower than its 2021 spend target of $500 million. The majority of RioCan's development projects were not materially impacted by the pandemic during Q1 2021. Financing • RioCan continued to maintain ample liquidity. As of March 31, 2021, liquidity stood at $1.3 billion in the form of cash and cash equivalents and undrawn lines of credit on a proportionate share basis. RioCan had a large unencumbered asset pool of $8.7 billion as of the quarter end on a proportionate share basis, which generated 59.5% of RioCan's annualized NOI and provided 2.21x coverage over its unsecured debt. • On April 23, 2021, the Trust exercised its option to extend the maturity on its operating line of credit by two years to May 31, 2026. All other terms and conditions remained the same. • Out of the Trust's $380.0 million in mortgage maturities in 2021, only $102.1 million have yet to be refinanced or do not have refinancing commitments in place as of May 3, 2021. They will mature in the remainder of the year and are expected to be refinanced in due course. • The Trust reduced its distribution to Unitholders by a one-third from $1.44 to $0.96 on an annual basis effective as of the January 2021 distribution which is expected to provide $152.0 million of additional cash flow per year. Payout ratios, which are calculated on a twelve-month trailing basis, are expected to decline throughout the year given the decrease in distributions. • Debt to Adjusted EBITDA was at 10.02x and debt to total assets was at 45.3% as of March 31, 2021, both on a proportionate share basis.The increase in debt to Adjusted EBITDA relative to 2020 year end was primarily because this is a twelve-month trailing metric and thus the ratio for the current quarter included four quarters under the pandemic while the year-end ratio included only three such quarters. The change in debt to total assets was marginal. • The Trust's long-term goal remains to lower the two debt metrics to its target ranges of 8.0x or lower and 38%-42%, respectively. These metrics are expected to marginally increase in the near-term due to pandemic, but disposition proceeds and continuous operation improvements will bring them down in the medium-term. • Over the long-term, RioCan targets to change its unsecured/secured debt split to 70/30 (56/44 as of March 31, 2021 on a proportionate share basis). • On January 15, 2021, RioCan redeemed, in full, its $250.0 million, 3.716% Series R unsecured debentures due December 13, 2021, incurring a total prepayment costs of $7.0 million. • On April, 9, 2021, RioCan redeemed, in full, its $300.0 million, 2.194% Series Z unsecured debentures upon maturity.
RioCan First Quarter 2021 6 MANAGEMENT’S DISCUSSION AND ANALYSIS
INTRODUCTION About this Management's Discussion and Analysis This Management’s Discussion and Analysis (MD&A) is provided to enable a reader to assess our results of operations and financial condition for the three months ended March 31, 2021 ("Q1 2021"). This MD&A is dated May 3, 2021 and should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes for the three months ended March 31, 2021 (Condensed Consolidated Financial Statements) and our 2020 Annual Report. Unless the context indicates otherwise, references to "RioCan", "the Trust", "we", "us" and "our" in this MD&A refer to RioCan Real Estate Investment Trust and its consolidated operations. Unless otherwise specified, all amounts are based on financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These documents, as well as additional information relating to RioCan, including our most recently filed Annual Information Form (AIF), have been filed electronically with Canadian securities regulators through the System for Electronic Document Analysis and Retrieval (SEDAR) and may be accessed through the SEDAR website at www.sedar.com or RioCan's website at www.riocan.com. In addition to reported IFRS measures, industry practice is to evaluate real estate entities giving consideration, in part, to certain non-IFRS performance measures, such as Funds from Operations, Funds from Operations (excluding debenture prepayment costs), Net Operating Income, Same Property Net Operating Income Growth, and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization. Management believes that these measures are helpful to investors because they are widely recognized measures of a REIT's performance and provide a relevant basis for comparison among real estate entities. In addition to the IFRS results, we also use these measures internally to measure the operating performance of our investment property portfolio. These measures are not in accordance with IFRS generally accepted accounting principles (GAAP) and have no standardized definition prescribed by IFRS and, as such, our computation of these non-GAAP performance measures might not be comparable to similar measures reported by other issuers. Non-GAAP measures and related per-unit amounts should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of RioCan’s performance, liquidity, cash flows and profitability. We supplement our IFRS measures with these non-GAAP measures to provide useful information to both management and investors in measuring the financial performance and financial condition of the Trust. Refer to the Non-GAAP Measures section of this MD&A for reasons and definitions of various non-GAAP measures presented or referred to in this MD&A. Unless otherwise specified, amounts are in thousands of Canadian dollars, and percentage changes are calculated using whole numbers. Forward-Looking Information Certain information included in this MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. This information includes, but is not limited to, statements made in the Key Performance Indicators, Financial Performance, Business Overview and Strategy, Business Environment and Outlook, Property Portfolio Overview, Results of Operations, Property Valuations, Acquisitions and Dispositions, Development Program, Capital Resources and Liquidity and the Equity sections, and other statements concerning RioCan’s objectives, its strategies to achieve those objectives, as well as statements with respect to management’s beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking information generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”, “would”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plan”, “continue”, or similar expressions suggesting future outcomes or events. Such forward-looking information reflects management’s current beliefs and is based on information currently available to management. All forward-looking information in this MD&A is qualified by the following cautionary statements. Forward-looking information is not a guarantee of future events or performance and, by its nature, is based on RioCan’s current estimates and assumptions, which are subject to numerous risks and uncertainties, including those described under the Risks and Uncertainties section in this MD&A, which could cause actual events or results to differ materially from the forward-looking information contained in this MD&A. Those risks and uncertainties include, but are not limited to, those related to: financial and liquidity risks; tenant concentrations and related risk of bankruptcy or restructuring (and the terms of any bankruptcy or restructuring proceeding); occupancy levels and defaults, including the failure to fulfill contractual obligations by the tenant or a related party thereof; lease renewals and rental increases; the ability to re-lease and find new tenants for vacant space; retailer competition; the relative illiquidity of real property; regulatory risk including changes to rent control legislation; development risk associated with construction commitments, project costs and timing, related zoning and other permit approvals and pace of lease- up or pre-sale; risks related to the residential rental business; access to debt and equity capital; interest rate and financing risk; credit ratings; joint ventures and partnerships; the timing and ability of RioCan to sell certain properties; the valuations to be realized on property sales relative to current IFRS values; the Trust's ability to utilize the capital gain refund mechanism; unexpected costs or liabilities related to acquisitions and dispositions; environmental matters; climate change; litigation; uninsured losses; reliance on key personnel; Unitholder liability; income, sales and land transfer taxes; and cyber security. Given the current level of uncertainty arising from the COVID-19 pandemic, there can be no assurance regarding the impact of COVID-19 on the business, operations, and financial performance of RioCan and its tenants, as well as on consumer behaviors and the economy in general. General risks and uncertainties related to the COVID-19 pandemic also include, but are not limited
7 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS to, the length, spread and severity of the pandemic; the timing of the roll out and efficacy of the vaccines, the nature and length of the restrictive measures, implemented or to be implemented by the various levels of government in Canada; RioCan's tenants' ability to pay rents as required under their leases; the availability of various support programs that are or may be offered by the various levels of government in Canada; the introduction or extension of temporary or permanent rent control or other form of regulation or legislation that may limit the Trust's ability or its extent to raise rents based on market conditions upon lease renewals or restrict existing landlord rights or landlord's ability to reinforce such rights; domestic and global supply chains; timelines and costs related to the Trust’s development projects; the pace of property lease-up and rents and yields achieved upon development completion; potential changes in leasing activities, market rents and property valuations; the capitalization rates that arm's length buyers and sellers are willing to transact on properties; the availability and extent of rent deferrals offered or to be offered by the Trust; domestic and global credit and capital markets, and the Trust's ability to access capital on favourable terms or at all and its ability to maintain its credit ratings; the total return and dividend yield of RioCan's Units; and the health and safety of our employees, tenants and people in the communities that our properties serve. For further details on the risks related to COVID-19 and its potential impact on the Trust, refer to the Risks and Uncertainties - COVID-19 Health Crisis section of this MD&A. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information may include, but are not limited to: a gradual recovery and growth of the retail environment and the general economy over 2021; relatively historically low interest costs; a continuing trend toward land use intensification at reasonable costs and development yields, including residential development in urban markets; access to equity and debt capital markets to fund, at acceptable costs, future capital requirements and to enable our refinancing of debts as they mature; the availability of investment opportunities for growth in Canada; the timing and ability of RioCan to sell certain properties; the valuations to be realized on property sales relative to current IFRS values; and the Trust's ability to utilize the capital gain refund mechanism. For a description of additional risks that could cause actual results to materially differ from management’s current expectations, refer to the Risks and Uncertainties section in this MD&A and the Risks and Uncertainties section in RioCan’s AIF. Although the forward-looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with this forward-looking information. Certain statements included in this MD&A may be considered “financial outlook” for the purposes of applicable Canadian securities laws, and as such the financial outlook may not be appropriate for purposes other than this MD&A. The forward-looking information contained in this MD&A is made as of the date of this MD&A, and should not be relied upon as representing RioCan’s views as of any date subsequent to the date of this MD&A. Management undertakes no obligation, except as required by applicable law, to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise. BUSINESS OVERVIEW AND STRATEGY Business Overview RioCan is an unincorporated “closed-end” trust governed by the laws of the Province of Ontario constituted pursuant to the Declaration of Trust. RioCan's trust units (Units) are listed on the Toronto Stock Exchange (TSX) under the symbol REI.UN. RioCan is one of Canada’s largest real estate investment trusts, with a total enterprise value of approximately $13.2 billion as at March 31, 2021, consisting of $7.0 billion total debt on a proportionate share basis plus $6.2 billion market capitalization based on a market price of $19.46 per Unit. The increase in the Trust's enterprise value since the beginning of the year was primarily due to higher unit price for the Trust driven by the capital markets' reactions to events relating to the pandemic as well as RioCan's operations. RioCan owns, manages and develops retail-focused, increasingly mixed-use properties located in prime, high-density transit- oriented areas where Canadians want to shop, live and work. RioCan's portfolio is comprised of 223 retail and mixed-use properties with an aggregate net leasable area (NLA) of 37,976,000 square feet, including office, residential rental and 15 properties under development as at March 31, 2021 (at RioCan's interest). As of March 31, 2021, retail accounts for 91.4% of the Trust's annualized rental revenues, followed by office at 7.6% and residential at 1.0%. The lower residential proportion relative to the 2020 year end was primarily due to the sale of 50% non-managing interest in eCentral in Toronto during the quarter. As more RioCan Living residential rental buildings currently underway are completed and stabilized, the residential proportion of the Trust's portfolio will grow over time, resulting in an increasingly mixed-use portfolio. RioCan's property portfolio includes Mixed-Use / Urban, Grocery Anchored centres, Open Air centres and Enclosed centres, which are defined under the Property Portfolio Overview section of this MD&A. As of the quarter end, the portfolio was comprised of 178 properties which are 100% owned (176 income properties and 2 properties under development) and 45 properties which are co-owned and governed by co-ownership agreements (including 13 properties under development). RioCan’s primary co- ownership arrangements are with Allied Properties REIT (Allied); Boardwalk REIT (Boardwalk); Broccolini Real Estate Group (Broccolini); Canada Pension Plan Investment Board (CPPIB); Concert Properties (Concert); Killam Apartment REIT (Killam); KingSett Capital (KingSett); Tanger Factory Outlet Centres, Inc. (Tanger); and Woodbourne Canada Partners (Woodbourne). In addition, the Trust also owns partial interests in 14 properties through joint ventures with Hudson's Bay Company (HBC) and Marketvest Corporation/Dale-Vest Corporation and Fieldgate Urban (Fieldgate) which are included in our equity-accounted investments in the Condensed Consolidated Financial Statements.
RioCan First Quarter 2021 8 MANAGEMENT’S DISCUSSION AND ANALYSIS
Strategy Despite the current pandemic environment, the Trust remains focused on its longer-term growth strategy while continuing to adapt and evolve in response to the ever-changing economic and business environment. Canadian Major Market Focus RioCan's major market strategy is a key initiative that has strengthened and will further enhance the quality, growth profile and resilience of the Trust's portfolio. The Trust embarked on this strategy over a decade ago and has evolved the Trust's assets into a more urban and mixed-use portfolio of properties located in prime, high-density, transit-oriented areas where Canadians want to shop, live and work. Its tenant base has also been adapted to become more diversified, and necessity, value and service- oriented. While the ongoing pandemic further validates the relevance of this strategy as reflected in the strength of the Trust's cash rent collection, operational and financial results, management will proactively adapt its strategy to address the various impacts of this health crisis as businesses reassess and adjust their business models post the pandemic. Driving Organic Growth RioCan drives strong organic growth by strategically curating and evolving the tenant mix of its properties and improving the operating efficiency and cost structure of its portfolio as well as leveraging its existing strengths, such as its strong relationships with high quality tenants and partners, economies of scale and experience. In addition, RioCan continually searches for ways to create new sources of income from ancillary revenues, fee income from joint venture arrangements and incremental growth through new pads and redevelopments. At the same time, to better serve changing consumer habits and spending patterns, the Trust consistently looks to innovate and actively explores opportunities to improve its properties for better and more efficient uses TM including greater participation in the logistics of retailers' E-commerce channels and offering RioCan Curbside Collect . RioCan aims to be amongst the leaders in embedding sustainability practices in every aspect of its business to improve business value. It aligns with the Trust's business strategy to own and operate attractive assets in major markets, helps it build properties in line with future market expectations, regulatory requirements and technology opportunities, and it benefits its communities. Unlocking Intrinsic Value through Development Over the past 27 years, the Trust has accumulated a robust portfolio of income producing properties with significant redevelopment potential that are strategically situated on or near existing or government approved transit line expansions. Despite the pandemic, the Trust remains focused on optimizing the value of its existing properties through its mixed-use development program. The program allows the Trust to diversify its portfolio with residential real estate including both rental and inventory (condominium / townhouse) projects. The Trust's RioCan LivingTM residential rental program combines great retail experiences with residential and creates a premium residential tenant experience that will in turn drive traffic for retail tenants. The Trust's residential inventory projects serve specific market demand for housing ownership as opposed to rental and enable the Trust to accelerate capital recycling to further fuel its development program. RioCan benefits from the ability to marry strong retail with strong residential, serving as an exceptional amenity and adding value to the residential offering. The Trust believes mixed-use developments will ultimately drive future revenue growth and deliver FFO and NAV growth to its Unitholders. The Trust will continue to pursue a disciplined approach to its development program in major markets with a strong focus on the Greater Toronto Area (GTA) and to meet the evolving needs of the communities it serves. RioCan's development program represents a distinct competitive advantage given its head-start with zoning approvals achieved and zoning applications submitted and recent or near substantial completions of a number of large mixed-use projects as well as the experience and scale of its development team. Strategic Acquisitions Given the competitive nature of the real estate market prior to the pandemic, limited market transactions during the pandemic, and limited supply of assets that meet RioCan's criteria in the major markets, acquisition of income producing properties is not a significant growth driver for RioCan in the near-term. In addition, the Trust will continue to evaluate and pursue opportunities to acquire selective sites suitable for development such as property acquisitions completed for the Yorkville condominium project, or to assemble adjacent properties surrounding existing development properties such as its property assembly along the Yonge Street corridor close to the Trust's flagship Yonge Eglinton Centre and eCentral and the Bloor Street acquisition adjacent to an existing property. Strong Balance Sheet RioCan maintains ample liquidity and prudently manages its balance sheet and capital structure. The Trust targets to maintain low leverage, staggers its debt maturities and limits its variable rate debt to reduce interest rate and refinancing risk, maintains an optimal mix of unsecured and secured debt to provide continued financial flexibility and liquidity, balances between line of credit utilization and unsecured debenture issuance, builds on established lender relationships and continues to utilize multiple sources of capital. Even though the ongoing pandemic has increased RioCan's leverage and debt to adjusted EBITDA to an extent in the short-term, this disciplined approach allows RioCan to maintain the strong liquidity and financial strength needed to drive growth and thrive in the ever-changing marketplace including the current pandemic environment.
9 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS ENVIRONMENT AND OUTLOOK COVID-19 Pandemic March 11, 2021 marked the one year anniversary of the World Health Organization declaring COVID-19 a world-wide pandemic. The global community continues to respond to this health crisis by ramping up vaccine campaigns, bringing renewed hope of a return to more familiar times. Progress is being made in battling the virus. However, the situation remains fluid and the Trust continues to adapt to the changing circumstances while following health and safety protocols to ensure the safety of its employees, tenants, and customers. As certain restrictive measures imposed in late 2020 began to ease in February 2021, concern of a third wave fueled by more contagious variants grew as the number of resurgent cases started to outpace vaccine campaigns. As a result, provincial governments ramped up vaccination programs to the extent permitted by the supply, and reintroduced or added stricter restrictive or lockdown measures in certain regions in late March 2021 in an attempt to break the chain of the virus transmission. The Trust’s tenants were impacted to varying degrees by these changing restrictions, with some tenants being required to close or remained closed while others operated at limited capacities. As of March 31, 2021, approximately 9% of the Trust's tenants were closed. With further enhanced restrictive measures introduced post the quarter end in mid-April 2021 in Ontario and certain other provinces, nearly 20% of the tenants were closed as of May 3, 2021, the effective date of this MD&A. Despite the challenges presented by the changing restrictive measures as a result of the pandemic, as of May 3, 2021, the Trust collected 93.9% of its Q1 2021 billed gross rents in cash. Since its introduction in October 2020 following the Canadian Emergency Commercial Rent Assistance (CECRA) program, the Canadian Emergency Rent Support (CERS) program continues to be a key federal government support program to eligible businesses and is currently in effect until June 2021. Subject to legislative approvals, the recently announced federal budget extends the CERS program to September 25, 2021 with certain changes to the qualification requirements and maximum basic subsidy rates. As the CERS program has to be applied for directly by the eligible tenants themselves and government funding is directly provided to eligible tenants, RioCan does not have sufficient or complete information on the extent of CERS participation among its tenant base. However, given the CERS administrative processes and the ensuing lag in funding, we expect that as tenants receive funding in arrears for prior months, our cash rent collection results will improve further. For example, Q4 2020 cash rent collection was 94.2% when first reported as of February 10, 2021 and improved to 95.1% as of May 3, 2021. The Trust's collection of billed gross rents as of May 3, 2021 are summarized as follows for the four quarters impacted by the pandemic: Q1 2021 Q4 2020 Q3 2020 Q2 2020 Tenant direct cash collection (i) 93.9 % 95.1 % 90.8 % 82.9 % CECRA government funding (ii) — % — % 3.7 % 6.7 % Total cash collected 93.9 % 95.1 % 94.5 % 89.6 % Deferred rents with definitive payment schedule 0.5 % 0.7 % 0.2 % 2.9 % Provision for rent abatements and bad debts 2.4 % 3.4 % 5.3 % 6.8 % Remaining rent to be collected 3.2 % 0.8 % — % 0.7 % Total 100.0 % 100.0 % 100.0 % 100.0 % (i) Includes $2.9 million of security deposits applied in Q3 2020, representing approximately 1.1% of billed gross rents for that quarter. (ii) The changes in percentages of CECRA government funding for Q3 2020 relative to the prior quarter report were due to adjustments based on actual and final CECRA applications. Most tenants with deferred rents have been paying based on definitive payment schedules. RioCan is confident in the collectability of its deferred rents and the remaining rents to be collected post its estimated provision for rent abatements and bad debts. For the first quarter of 2021, the Trust accrued a $6.4 million such provision. The Trust has categorized its tenants according to management's assessment of strength of tenant use and tenant rent paying ability in today's environment. Based on annualized net rent as of March 31, 2021, approximately 78.8% of the Trust's tenants are classified as "strong" or "stable" as reflected in the combined average cash rent collection of 97.6% for Q1 2021. Cash rent collected from the remaining "potentially vulnerable" tenants was 81.4% as they are more impacted by the pandemic. However, the Trust's rent collection results are expected to improve as its tenants receive CERS funding in arrears for prior months. % of Annualized Q1 2021 Cash Rent Tenant Composition Net Rent Collection % Strong (i) 61.2 % 99.1 % Stable (ii) 17.6 % 92.7 % Subtotal 78.8 % 97.6 % Potentially Vulnerable (iii) 21.2 % 81.4 % Total 100.0 % 93.9 % (i) Strong is represented by, or includes, national office tenants and essential / necessity / value / and specialty retail tenants that have strong rent paying ability in today's environment. It includes residential tenants as well.
RioCan First Quarter 2021 10 MANAGEMENT’S DISCUSSION AND ANALYSIS
(ii) Stable is represented by, or includes, tenants with reasonably strong uses and good rent paying ability or tenants with medium uses in today's environment but strong rent paying ability. (iii) Potentially Vulnerable under COVID-19 includes tenants with uses that are being significantly impacted by the pandemic (such as movie theatres, gyms, sit-down restaurants) as well as uses that were of concern prior to the pandemic (such as apparel) or tenants whom the Trust has concerns over the tenant's rent paying ability under the COVID-19 circumstances. As of May 3, 2021, the Trust has collected 93.6% of its billed April 2021 gross rents in cash despite that nearly 20% of the Trust's tenants are currently closed with extensive and more restrictive closures mandated in certain provinces post the quarter end. RioCan is strategically managing its rent collection process during the pandemic and tailors its approach in recognition of the challenges that some of its tenants face as restrictions remain in flux. On a case-by-case basis, the Trust has been working with its tenants to find sensible solutions to support their businesses while protecting its own rights and financial position. In limited circumstances where abatements are provided in favor of a tenant, RioCan typically receives concessions of value in exchange, such as development rights, lease term extensions or the waiver of exclusivity provisions. While the length and extent of such mandated closures are difficult to predict, the strength of the Trust's tenant base offers significant downside protection. Furthermore, RioCan holds approximately $29.6 million of security deposits and approximately $4.6 million in letters of credit from a number of tenants which could be used to offset rents owed on a tenant-by-tenant basis in the event of unresolved tenant defaults. Efficient Operations - Containing Costs and Enhancing Liquidity RioCan continues to identify areas of operations to reduce costs and manage the cash flow impacts of the pandemic. Expense management and operational efficiency improvements identified and implemented include, but are not limited to the following: energy reductions, staffing level adjustments, hiring freezes, further streamlining of national procurement, operating costs management and a more robust property tax appeal effort. The Trust achieved $7.8 million in recoverable operating costs savings for the three months ended March 31, 2021 when compared to the same period in the prior year. Market Trends Canadian Retail Environment and E-Commerce The ongoing pandemic and the resulting government mandated restrictions have undoubtedly impacted the economy, the retail environment, and consumer habits in Canada and around the world. The pandemic, however, has also underscored the human desire for personal interactions and the need for bricks and mortar real estate as meeting and market places, as evidenced by the surge in retail traffic and the Trust's strong rent collections during the periods of the year when restrictions were eased. While there is undoubtedly an increased reliance on on-line shopping, this health crisis has also reinforced the critical nature of the retail outlet in the consumer ecosystem. The Trust has seen retailers, necessity-based or otherwise, alter their infrastructure to accommodate a variety of delivery models including click-and-collect, curbside pick-up and buy-online-pickup-in-store. It has also seen increased in-person visits to necessity-based retailers such as grocery stores and pharmacies demonstrating that in any circumstances, these outlets prove critical to the communities they serve. Even during this crisis, with mobility restricted, e- commerce has not fully accommodated providing goods and services to Canadian consumers, validating the importance of an integrated and robust omni-channel model. RioCan believes that many retailers recognize the vital necessity of offering customers increased flexibility in their shopping choices while also adapting store sizes, layout and product mixes to better meet consumer demands in various settings. Responsible and forward thinking commercial landlords, like RioCan, will continue to seek ways to help retailers adapt their stores to provide their customers with this type of flexibility and through this process, will continue to provide relevant and resilient shopping environments. RioCan is of the view that in the medium and long-term, shopping centres will continue to provide retailers with a cost-effective way of distributing goods and services given Canada’s geographic dispersion, the high cost of “last mile” deliveries and high barriers to establishing distribution centres in urban settings. One such program is RioCan Curbside Collect, a permanent initiative that offers designated areas for customers to access their pre-ordered items making it easier for RioCan tenants to coordinate transactions with their customers, mitigate the cost of delivery, and drive consumer traffic and repeat visits. While this unprecedented health crisis has undoubtedly caused significant temporary disruption to the retail landscape, RioCan’s management does not believe these current conditions to be entirely indicative of the retail landscape to come. There has been some fallout and vacancy, but these conditions are by no means terminal in nature. The attributes attached to the Canadian retail environment will, in RioCan's view, allow these conditions to be rather short lived. Relative to other countries, Canada benefits from low retail space per capita, a limited number of retailers within each retail category and tight building zoning controls that keep supply in check. In spite of the current slowdown in travel and immigration, Canada's population in the long-term is expected to continue to increase particularly in its six major markets. In the pre-pandemic world, Canada had one of the highest population growth rates among the Organization for Economic Co-operation and Development (OECD) countries, fueled by immigration. In late October 2020 amidst the pandemic, the federal government announced that it will aim to welcome over 400,000 new permanent residents per annum from 2021 to 2023, the highest level of immigration in the country's history. Even though the 2021 immigration numbers would be dampened to some extent by the ongoing heightened restrictions on travel during the pandemic, the medium and long-term trend in immigration post the pandemic is clear in the Canadian government's immigration targets. Based on past immigration history, most immigrants land in or migrate to the six major markets, especially the GTA. In
11 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS addition, the vaccine rollout will undoubtedly help to shape the 2021 retail landscape. There is general expectation that as the vaccine deployment accelerates, there will be an easing and ultimate lifting of the restrictive measures and a resurgence in consumer activity will follow which will fuel growth in the retail sector. All of the above factors contribute to a resilient base of strong retail centres. Consequently, upon the resumption of regular commercial activity in the Canadian markets, RioCan believes that there will be demand for well-positioned retail space. It believes that it is too simplistic to view the current extraordinary and temporary state of commercial activities as the normal course. Strong, well-positioned retail assets, such as those owned by RioCan, have proven and will continue to prove resilient both during this pandemic and certainly, once the pandemic subsides. The attributes that RioCan's portfolio possesses, such as proximity to transit, high demographic profile and high visibility will not lose their prominence. Over its 27-year history, RioCan's experienced management team, recognized for its visionary leadership and adaptability within an ever-changing real estate environment, has successfully managed through various economic cycles and challenging circumstances. RioCan's management team continually assesses and adapts its strategies to address market dynamics and even more so through the extremely fluid COVID-19 pandemic. The Trust maintains its strategy to expand and enhance the mixed-use characteristics of its portfolio to address trends. It will continue to adapt and re-purpose its existing retail portfolio and grow its residential portfolio, which is designed with forward-looking amenities. Development Environment and Residential Real Estate Market Prior to the pandemic, with population growth and a limited supply of land available for development, Canada’s six major markets, particularly the GTA and Vancouver areas, had experienced a significant boom in housing development and construction. The increasing and persistently high level of development and construction activities over the last few years, as well as the projected sustained bullish tone on future development by many industry players, have led to rising construction costs, increasing development charges by municipalities, and a shortage of experienced labor, which tend to increase development risks. Over the course of the pandemic mixed-use residential development projects, which are typically considered essential projects under the government guidelines, have continued to progress. As an example, Ontario recently declared the third province wide state of emergency including a stay at home order but allows construction activities on mixed-use projects, that include a residential component and have permits in place, to continue while requiring non-essential commercial construction projects to be on hold. Social distancing and other measures, as well as increasing COVID-19 cases under the third wave of the pandemic, may have resulted in a somewhat slower pace of development progress in general, although they have had no material impact on RioCan's projects. The lockdown measures recently introduced by the Ontario government for commercial developments relating to non-essential uses could, on the other hand, potentially increase trade labor availability. This may lead to a positive effect on the pace and cost of RioCan projects given that most of its projects are not impacted by the lockdown measures. The net effect of the pandemic on development is difficult to predict, and is dependent on the length, severity and any subsequent resurgence of the pandemic, as well as the speed and extent of the vaccine rollout. Recently there have been some media headlines indicating that the pandemic has caused a flight to suburban locations and has put increasing pressures on the urban rental market in both the short-term and long-term, particularly in Toronto and Vancouver. RioCan also saw a temporary dip in occupancy and average rent per square foot in recent quarters at eCentral and slower lease- up at Pivot, both in Toronto. However, RioCan is confident in its mixed-use residential development strategy in major markets and long-term NAV growth potential that such development will bring to its Unitholders. RioCan has a diverse range of residential offerings, some of which are urban such as eCentral and Pivot in Toronto and some of which are suburban such as Windfields Farm in Oshawa, a suburb of Toronto. We are confident that in the long-term, all will be in high demand given their locational attributes, but during the pandemic the balance of its residential offerings has served RioCan well. The Trust believes what will drive residential real estate growth in the medium and long-term, and the growth of the Canadian economy and real estate market in general, will be the increasing immigration in accordance with the aforementioned targets announced by the Canadian government once it resumes post the pandemic. The return of an estimated 600,000 to 750,000 international students who will require housing once in-class sessions begin again will also contribute to the growth. Population growth, together with the prevailing low interest rate environment, will fuel demand for residential real estate in major markets in terms of both ownership and rental over the medium to long-term, which will in turn drive up residential real estate occupancy, rent, and valuation or sale price. The social aspect of human nature will also persist and translate into continuing growth of the major markets and urban markets in the post COVID-19 world. Even under the pandemic, the pace of condominium and townhouse unit pre-sales among RioCan's developments has remained robust after an initial slow down, as evidenced by the average 99.3% pre-sale level and up-to-date pre-sale deposits at its three condominium and townhouse projects currently under construction and the 88.6% pre- sale at the condominium component of its new Queen & Coxwell master plan community, all in the GTA. The Trust's 21.9 million square feet of zoning entitlements (zoned density and zoning applications submitted), which is primarily located in the GTA, remains a significant competitive advantage for RioCan. However, the Trust will remain vigilant in monitoring the market trends and will continue to prudently manage development risks and adapt its development program to the changing market conditions including the challenges imposed by the current pandemic. Refer to the Development Program section of this MD&A for a further discussion on how the Trust prudently manages its development risks.
RioCan First Quarter 2021 12 MANAGEMENT’S DISCUSSION AND ANALYSIS
Alberta Economy After dealing with the dual impact of COVID-19 and the collapse in oil prices in 2020, Alberta's economy is expected to improve in 2021 from the combination of an increase in the demand for energy and ongoing limits on the amount of supply. As many countries reopen their economies after a series of lockdowns and as the vaccination programs are rolled out, global demand for oil has picked up resulting in improved benchmark oil prices. However, the regional economy is sensitive to potential further volatility in oil prices, the uncertainties surrounding the timing of the economic recovery from the pandemic, high unemployment rate and the lack of capital investment over the past several years which may have dampened the economic upswing. Even throughout the recent challenging circumstances, the committed occupancy rate in the Trust's Alberta portfolio remained reasonably strong and achieved 94.6% as of March 31, 2021. RioCan's first residential building, Brio in Calgary, is leasing well notwithstanding having been launched right at the outset of the pandemic and is 74.1% leased as of May 3, 2021, up 14.8% from the previous quarter report. Outlook The distribution of vaccines has brought optimism for economic recovery. A number of other indicators also point to an improved economic outlook for Canada in 2021. Canadian households who saved at unprecedented rates during 2020 are expected to resume spending once they gain more confidence in the ability to overcome the pandemic. The $1.9 trillion stimulus package passed by the U.S.government, Canada's largest trading partner, should increase demand for Canadian exports. Similarly, the global economic recovery post the pandemic is also expected to result in increased demand for Canadian commodities and higher commodity prices. At its most recent interest rate announcement, the Bank of Canada held the overnight interest rate steady at 0.25% and indicated that it will continue to deploy its quantitative easing program, albeit at a slightly lower level as economic recovery progresses, to ensure financial market liquidity and lower borrowing costs. In addition to monetary stimulus by the central bank, the federal government in Canada continues to provide a variety of programs as indicated in its latest 2021 federal budget proposal, to support businesses and individuals, with some additional programs from the provincial governments. GDP growth in the first quarter of 2021 was better than initially forecasted and the Bank of Canada will continue to monitor inflation closely with a view to achieving a sustainable 2% inflation target. The deployment of massive household savings, low interest rates and pent-up demand are expected to result in strong growth in consumer spending post the pandemic. Government aid programs are expected to shift more from providing direct support to individuals to policy driven spend initiatives such as infrastructure projects. Notwithstanding these positive factors, the economic recovery is expected to be uneven and uncertain in 2021. It will vary with the pace and extent of vaccination, the length and severity of the pandemic and resulting restrictive measures imposed by different levels of government, and the nature and extent of the government support programs, among many other factors. Given these uncertainties, the impacts of the pandemic on RioCan operations and financial performance are difficult to predict. RioCan therefore does not provide 2021 FFO per unit or same property NOI growth guidance at the current stage. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) PRIORITIES AND PROGRESS RioCan embeds ESG into every aspect of its business including developments, operations, investment activities and corporate functions. For performance tracking and reporting, the GRESB Real Estate Assessment provides the Trust with a framework to benchmark organization-wide performance and ensure transparency and continuous improvement. Specific to climate-related metrics, on an annual basis, RioCan measures and discloses greenhouse gas emissions and area of properties located in 100-year floodplain zones. For RioCan's sustainability policy and fulsome disclosures about its ESG strategy and programs, refer to the Trust's 2020 Annual Report and RioCan's website at www.riocan.com under Sustainability. Key initiatives during the quarter included, but were not limited to, the following: • Published its first Green Bond Report that fully allocated the use of net proceeds of $348.4 million for its inaugural green bond Series AC unsecured debentures issued on March 10, 2020. Sustainalytics, a leading third party ESG research, ratings and data firm, provided the verification of the use of the net proceeds in compliance with RioCan's Green Bond Framework. Both the Reports are available on the Trust's website; • Completed its key Diversity, Equity and Inclusion (DEI) initiatives such as development of the DEI Charter, completion of the governing document outlining its DEI Council’s goals and missions, finalization of the DEI strategy, conducting of its first ever DEI survey to form a baseline and determine focus areas for continuous improvement, launch of the DEI homepage on the RioCan intranet site, and creation of the DEI mailbox to encourage communications and ongoing dialogues; • Partnered with Context in developing a new mixed-use master plan community at Queen & Coxwell in Toronto, Ontario, and in collaboration with the City of Toronto and Toronto Community Housing Corporation (“TCHC”). The project will contribute to the revitalization of the neighbourhood, provide much-needed housing for all income levels and introduce vital retail amenities to serve this growing neighbourhood. Further, the project will invest in the community it serves and make contributions to the City's Community Economic Development Initiatives including a $100,000 scholarship fund for TCHC tenants, a $250,000 economic and social development fund and a minimum of $500,000 in value for job opportunities;
13 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
• Celebrated International Women’s Day with a virtual panel event organized by RioCan's Women Initiative Network on the theme of Choose to Challenge; • Maintained open communication channels and feedback loops with investors through its Board outreach program; and • In April 2021, RioCan was recognized as one of Canada's Greenest Employers 2021, a designation awarded to employers that lead the nation in creating a culture of environmental awareness as part of the annual Canada's Top 100 Employers project. PROPERTY PORTFOLIO OVERVIEW Property Operations - Total Portfolio Net Leasable Area (NLA) and Property Count RioCan's portfolio of net leasable area and properties consisted of the following as at March 31, 2021:
NLA at RioCan's Interest Total Portfolio (thousands of sq. ft., except where Total Residential otherwise noted) Retail Office Commercial Rental (iii) NLA Property Count Income properties (i) 33,432 2,316 35,748 616 36,364 208 Properties under development (ii) 557 520 1,077 535 1,612 15 Total NLA 33,989 2,836 36,825 1,151 37,976 223
(i) Includes NLA which has a rent commencement date on or before March 31, 2021. (ii) Includes NLA for Active Projects with Detailed Cost Estimates under the Development Program section of this MD&A. Excludes air rights sales and condominium or townhouse units which are reported separately under Residential Inventory. Includes completed Properties Under Development NLA that have a rent commencement date after March 31, 2021. (iii) See the Property Operations - Residential Rental section of this MD&A for further details. The decrease in residential rental NLA over the prior quarter was primarily due to the sale of 50% non-managing interest in eCentral in Toronto during the first quarter of 2021. Property Mix The Trust operates a variety of income producing property formats or classes to best serve the communities in which they operate. The Trust has identified the following four major categories of property classes:
Category Description Assets with more than one type of use (retail, office, residential mixed-use assets) located in major Mixed-Use / Urban markets and non mixed-use assets located in high-density urban areas. Examples of these properties include: King Portland Centre and Yonge Sheppard Centre. Assets with a grocery anchor tenant or sites adjacent to shadow grocery anchors (i). Examples of these Grocery Anchored Centre properties include: Sage Hills Crossing and RioCan Scarborough Centre.
Open Air Centre Assets with little or no enclosed component and which do not have a grocery store anchor. Examples of these properties include: Grandview Corners and RioCan Colossus Centre. Assets with large enclosed shopping and common areas. Examples of these properties include: Enclosed Burlington Centre and Oakville Place.
(i) A shadow anchor is a retail store that generates a great deal of traffic and attracts business to a property of the Trust but the underlying property / land for this retail store is not owned by the Trust. RioCan's portfolio of properties consisted of the following:
As at March 31 2021 2020 At RioCan's Interest Number of (thousands of sq. ft., except where income producing Income producing % of annualized % of annualized otherwise noted) properties properties NLA % of NLA rental revenue rental revenue Mixed-Use / Urban (i) 34 5,559 15.3 % 21.1 % 21.4 % Grocery Anchored Centre 95 16,834 46.3 % 42.5 % 41.7 % Open Air Centre 68 10,652 29.3 % 27.2 % 27.5 % Enclosed 11 3,319 9.1 % 9.2 % 9.4 % Total Portfolio (i) 208 36,364 100.0 % 100.0 % 100.0 %
(i) Mixed-Use / Urban includes approximately 0.6 million square feet of residential rental NLA and the corresponding annualized residential rental revenue.
RioCan First Quarter 2021 14 MANAGEMENT’S DISCUSSION AND ANALYSIS
As of March 31, 2021, 90.8% of RioCan's annualized rental revenue is from Grocery Anchored, Mixed-Use / Urban and Open Air Centres while Enclosed centres represent 9.2% of its total portfolio. The Trust's property mix exposure to Grocery Anchored Centres increased by 0.8% from Q1 2020 to Q1 2021 while its exposure to Enclosed centres decreased by 0.2% over the same period, strengthening the quality of the portfolio. Enclosed centres are undoubtedly more disproportionately impacted by the mandated or self-imposed restrictions under the global pandemic. The Trust's Enclosed centres still reported cash rent collections of approximately 88.6% for the quarter, reflecting the quality of its Enclosed centres even under such unprecedented circumstances. Overall, the majority of the Trust's portfolio is comprised of formats that are attractive from a tenanting perspective, more resilient to changes in economic cycles and evolving retail trends. The shift in the Trust's portfolio to become more urban, mixed-use, and necessity-based with fewer enclosed centres forms a solid foundation for organic growth post the pandemic. Six Major Markets and GTA Focused
At RioCan’s Interest % of NLA % of annualized rental revenue As at March 31 2021 2020 2021 2020 Greater Toronto Area (i) 46.7 % 46.1 % 51.0 % 51.0 % Ottawa (ii) 13.2 % 13.1 % 12.9 % 12.4 % Calgary 10.0 % 9.5 % 10.9 % 10.2 % Montreal 6.6 % 7.2 % 4.1 % 4.5 % Edmonton 6.1 % 6.2 % 6.6 % 7.2 % Vancouver (iii) 4.9 % 5.0 % 4.9 % 4.9 % Total Six Major Markets 87.5 % 87.1 % 90.4 % 90.2 % Total Secondary Markets 12.5 % 12.9 % 9.6 % 9.8 % Total Portfolio 100.0 % 100.0 % 100.0 % 100.0 % (i) Area extends north to Barrie, Ontario; west to Hamilton, Ontario; and east to Oshawa, Ontario. (ii) Area extends from Nepean and Vanier to Gatineau, Quebec. (iii) Area extends east to Abbotsford, British Columbia. The Trust exceeded its strategic milestones of greater than 90% and 50% of total annualized rental revenue from the six major markets and the GTA, respectively. The 30 basis point decrease in the GTA presence from the prior quarter is mainly the result of the sale of a 50% non-managing interest in ePlace during the quarter. The modest increase in Calgary over the prior quarter end was due to fluctuations in annualized rental revenue.
15 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Property Operations - Commercial Retail Tenant Profile The Trust has been adapting to the ever-changing retail landscape and incorporating future trends and growth patterns in its strategy and operations. The Trust has been increasing its major market focus while evolving its tenant mix to better suit community needs, make its tenant mix more resilient to the impact of E-commerce and increase the growth profile of its portfolio. It has been reducing its tenant mix in department stores, apparel, entertainment and hobby retailers, and increasing its tenant mix in the sectors that have demonstrated growth and resilience such as grocery, pharmacy, personal services, specialty retailers and value retailers. During the current quarter alone, it increased its tenant mix in grocery/pharmacy/liquor retailers by 10 basis points and decreased its apparel exposure by 20 basis points. RioCan will continue evaluating and adapting its tenant mix to the evolving consumer trends during and post the pandemic, while continuing to increase its necessity-based retail and diversify more into residential and office real estate. As of March 31, 2021, the Trust's annualized net rental revenue was derived from the following retailer categories:
(i) Excludes Home Outfitters (included in Home and Furniture), Saks Off 5th (included in Value Retailers) and Lawrence Allen Centre's HBC office. (ii) All trademarks and registered trademarks in the chart above are the property of their respective owners.
RioCan First Quarter 2021 16 MANAGEMENT’S DISCUSSION AND ANALYSIS
Top 30 Commercial Tenants We strive to reduce our exposure to rental revenue risk in our portfolio through geographical diversification, staggered lease maturities, growing our major market portfolio, diversifying revenue sources, avoiding dependence on any single tenant by ensuring no individual tenant contributes a significant percentage of our gross revenue and ensuring a considerable portion of rental revenue is earned from national and anchor tenants, as well as investments in residential developments. At March 31, 2021, RioCan’s 30 largest tenants measured by annualized gross rental revenue are as follows:
Percentage of Weighted annualized Number NLA Percentage average total rental of (thousands of of total remaining lease Rank Tenant name revenue locations sq. ft.) IPP NLA term (years) (i) 1 Canadian Tire Corporation (ii) 5.0 % 73 2,060 5.8 % 6.7 2 Loblaws/Shoppers Drug Mart (iii) 4.9 % 68 1,823 5.1 % 8.4 3 The TJX Companies, Inc. (iv) 4.6 % 70 1,988 5.6 % 5.6 4 Cineplex (v) 3.4 % 22 1,171 3.3 % 6.5 5 Metro/Jean Coutu (vi) 2.7 % 37 1,419 4.0 % 8.0 6 Walmart 2.7 % 16 2,069 5.8 % 7.8 7 Dollarama 1.8 % 69 655 1.8 % 7.4 8 Sobeys/Safeway 1.7 % 21 758 2.1 % 9.4 9 Recipe Unlimited (vii) 1.6 % 82 389 1.1 % 6.2 10 Michaels 1.4 % 24 519 1.5 % 5.6 11 GoodLife Fitness 1.4 % 26 565 1.6 % 10.0 12 Staples/Business Depot 1.3 % 27 571 1.6 % 5.8 13 Lowe's 1.3 % 8 1,030 2.9 % 8.4 14 PetSmart 1.2 % 25 399 1.1 % 5.0 15 TD Bank 1.2 % 47 244 0.7 % 7.1 16 Bank Of Montreal 1.1 % 34 245 0.7 % 4.7 17 Chapters/Indigo 0.9 % 16 285 0.8 % 8.4 18 Value Village 0.8 % 12 323 0.9 % 8.4 19 LA Fitness 0.8 % 8 318 0.9 % 12.2 20 Bed Bath & Beyond 0.8 % 13 301 0.8 % 6.3 21 Best Buy 0.7 % 11 261 0.7 % 3.1 22 The Bank Of Nova Scotia 0.7 % 27 136 0.4 % 5.5 23 Leon's/The Brick 0.7 % 11 269 0.8 % 4.8 24 Tim Hortons/Burger King/Popeyes 0.7 % 59 141 0.4 % 8.0 25 DSW/The Shoe Company 0.7 % 28 219 0.6 % 4.9 26 Liquor Control Board of Ontario (LCBO) 0.6 % 18 171 0.5 % 9.5 27 Old Navy 0.6 % 21 203 0.6 % 4.9 28 The Bay/Home Outfitters (viii) 0.5 % 7 409 1.1 % 10.7 29 Canadian Imperial Bank of Commerce 0.5 % 19 108 0.3 % 4.8 30 MTY Food Group 0.5 % 63 88 0.2 % 6.4 46.8 % 962 19,137 53.7 % 7.1 (i) Weighted average remaining lease term based on annualized gross rental revenue. (ii) Canadian Tire Corporation includes Canadian Tire, PartSource, Mark’s, Sport Chek, Sports Experts, National Sports, Atmosphere and Party City. (iii) Loblaws/Shoppers Drug Mart includes No Frills, Fortinos, Zehrs Markets, Joe Fresh, Dominion and Maxi. (iv) The TJX Companies, Inc. includes Winners, HomeSense and Marshalls. (v) Cineplex includes Galaxy Cinemas. (vi) Metro/Jean Coutu includes Super C, Loeb, and Food Basics. (vii) Recipe Unlimited (formerly Cara Operations Limited) includes Montana's, Harvey's, Swiss Chalet, Kelseys, The Keg, Milestones, East Side Mario's among others. (viii) Excludes RioCan's proportionate share of the equity-accounted investment in the RioCan-HBC Joint Venture which owns ten HBC wholly-owned properties and HBC's 50% interest in the two properties that are 50/50 owned by RioCan and HBC. Includes Home Outfitters, Saks Off 5th and Lawrence Allen Centre's HBC office.
17 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Occupancy by Markets and Usages The committed (tenants that have signed leases) and in-place (tenants that are in possession of their space) occupancy rates for our commercial property portfolio at RioCan’s interest are as follows:
At RioCan’s Interest Committed Occupancy In-Place Occupancy As at March 31 2021 2020 2021 2020 Commercial Six Major Markets: Greater Toronto Area (i) 96.3 % 97.8 % 95.7 % 97.2 % Ottawa (ii) 97.4 % 98.1 % 97.4 % 97.9 % Calgary 94.7 % 96.9 % 92.5 % 96.5 % Montreal 93.4 % 92.0 % 92.6 % 92.0 % Edmonton 94.8 % 96.8 % 94.4 % 96.6 % Vancouver (iii) 98.9 % 99.6 % 98.9 % 99.5 % Total Commercial Six Major Markets 96.1 % 97.3 % 95.4 % 96.9 % Total Commercial Secondary Markets 93.4 % 93.2 % 92.6 % 92.4 % Total Commercial 95.8 % 96.8 % 95.1 % 96.3 % (i) Area extends north to Barrie, Ontario; west to Hamilton, Ontario; and east to Oshawa, Ontario. (ii) Area extends from Nepean and Vanier to Gatineau, Quebec. (iii) Area extends east to Abbotsford, British Columbia. The following table summarizes the Trust's committed and in-place occupancy rates by retail and office as at March 31, 2021.
Retail Office Total Commercial Committed Occupancy 96.1 % 91.4 % 95.8 % Total Portfolio In-Place Occupancy 95.4 % 90.2 % 95.1 % Committed Occupancy 96.5 % 90.5 % 96.1 % Six Major Markets In-Place Occupancy 95.9 % 89.2 % 95.4 % Committed Occupancy 97.0 % 90.7 % 96.3 % Greater Toronto Area In-Place Occupancy 96.5 % 89.2 % 95.7 % Despite the extent of mandated store closures to curtail the spread of the third wave of the pandemic, occupancy remained strong. Retail committed occupancy for the total portfolio and six major markets remained unchanged during Q1 2021 relative to the prior quarter despite the pandemic. New deals with two large office tenants for approximately 22,000 square feet were the primary reason for the 30 basis point increase in office committed occupancy, as well as the 10 basis point increase in total commercial committed occupancy. The 30 basis point increase in retail in-place occupancy from 2020 year end was primarily due to more tenants taking possession in Q1 2021 while the 80 basis point decline in office in-place occupancy was related to the vacancies that occurred this quarter. These two factors combined led to a 20 basis point increase in total portfolio in-place occupancy from the previous quarter end. Average Net Rent The portfolio weighted average net rent per occupied square foot for our income producing properties is as follows:
As at March 31 2021 2020 Average net rent per occupied square foot (i) $ 19.87 $ 19.77 Retail $ 19.97 $ 19.92 Office $ 18.46 $ 17.47 (i) Net rent is primarily contractual base rent pursuant to tenant leases. Average net rent per occupied square foot increased when compared to the prior quarter mainly due to contractual rents steps, rent increases upon renewal and higher than average rents on new deals that commence operations.
RioCan First Quarter 2021 18 MANAGEMENT’S DISCUSSION AND ANALYSIS
New Leasing Activity
(in thousands, except per sqft amounts) Three months ended March 31 2021 2020 New Leasing NLA at 100% - IPP & PUD 435 372
Average net rent per square foot - IPP & PUD (i) $ 23.19 $ 31.09 IPP $ 21.03 $ 26.33 PUD $ 29.10 $ 37.24
New Leasing Spread IPP - Overall Portfolio 14.2% 6.7% New Leasing Spread IPP - Major Markets 18.6% 8.2% (i) Net rent is primarily contractual base rent pursuant to tenant leases. Includes new square footage that has not previously been tenanted and existing square footage leased to a new tenant. For further clarity, net rent on new leases signed on new square footage from new development projects is included in the average net rent per square foot for new leases but is excluded in calculating the new leasing spread given that there is no base to compare to for such new developments. Renewal Leasing Activity A summary of our 2021 and 2020 commercial renewal leasing activity is as follows:
(in thousands, except percentage and per sqft amounts) Three months ended March 31 2021 2020 Square feet renewed at market rental rates (at 100%) 451 451 Square feet renewed at fixed rental rates (at 100%) 206 251 Total square feet renewed (at 100%) 657 702 Average net rent per square foot (i) $ 19.81 $ 22.78 Renewal leasing spread in average net rent (ii) $ 0.95 $ 1.15 Renewal leasing spread percentage - Overall Portfolio (iii) 5.0% 5.3% Renewal leasing spread percentage - Major Markets (iii) 5.6% 5.9% Retention ratio - Overall Portfolio 72.6% 83.1% Retention ratio - Major Markets 70.9% 82.5%
(i) Net rent is primarily contractual base rent pursuant to tenant leases. (ii) Represents increase in average net rent per square foot for renewal leasing. (iii) Represents percentage increase in average net rent per square foot for renewal leasing. The decrease in the retention ratio compared to the previous quarter is mainly the result of a vacating large tenant. The space which was unoccupied was re-leased at significantly higher average rent. Excluding this tenant vacancy the retention ratios for the overall portfolio and major markets would have been 84.2% and 84.4%, respectively. Blended Leasing Spread
Three months ended March 31 2021 2020 Blended leasing spread for both new and renewal leasing - Overall Portfolio (i) 8.1% 5.6% Blended leasing spread for both new and renewal leasing - Major Markets (i) 9.8% 6.5% (i) The blended leasing spread is the weighted average net rent leasing spread for both renewal leasing as discussed in the previous section of this MD&A and new leasing. For new leasing, the spread is calculated based on the percentage change in net rent between new leases and the respective previous leases for units that have been vacant for two years or less as of the respective comparable period end dates. In other words, the new leasing spread excludes any space that has not previously been tenanted (such as a newly completed development) or has been vacant for longer than two years. The quarterly new leasing spread is calculated for properties owned by the Trust as of each quarter end date. The annual leasing spread is the weighted average of quarterly new leasing spread as reported over the four quarters of a year. The blended leasing spread more than doubled from Q4 2020 for both the overall portfolio and the major market portfolio as a result of a double digit new leasing spread and a stronger renewal spread. This illustrates the strength of the Trust's portfolio despite the fact that we are still in the midst of the pandemic.
19 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Retailer Restructuring Filings The percentage of annualized total rental revenue from both tenants undergoing restructuring filings and confirmed closures was relatively flat when compared to the prior quarter. Typically we see a number of closings in the first quarter in any given year. However, closures by weaker tenants were accelerated by the pandemic and most occurred in 2020. In addition, we believe that many businesses recognize the impending consumer resurgence that will accompany the lifting of restrictions and they wish to avail themselves of those opportunities when they arise. Confirmed closures continue to represent less than 1.0% of the total portfolio on an annualized total rental revenue basis. Such vacant space is expected to be re-tenanted in due course to new uses better suited to the evolving economy and consumer trends. Retailers who file for protection under the Companies' Creditors Arrangement Act (CCAA) in Canada or Chapter 11 in the U.S., are allowed to restructure their affairs during a stay period and therefore, do not necessarily close their store locations. RioCan is entitled to gross rents during the stay period until a lease is disclaimed or terminated. Lease Expiries Lease expiries for the next five years are as follows:
(in thousands, except per sqft and percentage amounts) For the years ending Total At RioCan's interest IPP NLA 2021(i) 2022 2023 2024 2025 Square feet 35,748 1,767 4,009 4,157 4,603 4,364 Square feet expiring/Portfolio NLA 4.9 % 11.2 % 11.6 % 12.9 % 12.2 % Average net rent per occupied square foot $ 22.39 $ 20.39 $ 20.84 $ 21.39 $ 20.88 (i) Lease expiries for the remaining nine months of 2021. Contractual Rent Increases Certain of our leases provide periodic increases in rates during the lease terms which contribute to growth in same property NOI. Contractual rent increases in each year for the next five years for our properties are as follows:
(thousands of dollars) For the years ending At RioCan's interest 2021(i) 2022 2023 2024 2025 Contractual rent increases $ 6,477 $ 7,017 $ 6,584 $ 5,045 $ 3,502
(i) Increases for the remaining nine months of 2021. The contractual rent increases noted above are based on existing leases as of March 31, 2021 and are on a year-over-year incremental increase basis. The contractual rent increases are higher in the remainder of 2021 and 2022 as they reflect more market rent changes as a result of new leasing and renewals completed in 2020. The above schedule is on a cash rent basis and takes into account the timing of contractual rent increases year-over-year (in other words, not on an annualized basis but based on a year-over-year cash rent change basis). Future Lease Commencements Subsequent to Q1 2021, we expect to generate approximately $8.1 million of annualized net incremental rent under IFRS from tenants that have signed leases but have not taken possession of the space as of March 31, 2021. This includes base rent, operating cost recoveries and straight-line rent, but excludes operating costs capitalized while a property is under redevelopment.
RioCan First Quarter 2021 20 MANAGEMENT’S DISCUSSION AND ANALYSIS
An IFRS rent commencement timeline for the NLA on our properties (at RioCan's interest) that have been leased but are not currently in possession as at March 31, 2021 is as follows:
(in thousands, except percentage amounts) At RioCan's Interest Annualized Total Q2 2021 Q3 2021 Q4 2021 Q1 2022+ Square feet: NLA commencing (i) 252 137 60 22 33 Cumulative NLA commencing (i) 252 137 197 219 252 % of NLA commencing 54.4 % 23.8 % 8.7 % 13.1 % Cumulative % total 54.4 % 78.2 % 86.9 % 100.0 % Average net incremental IFRS rent: Monthly net incremental IFRS rent commencing (ii) $ 679 $ 411 $ 139 $ 79 $ 50 Cumulative monthly net incremental IFRS rent commencing $ 8,148 $ 679 $ 411 $ 550 $ 629 $ 679 % of net incremental IFRS rent for NLA commencing 60.5 % 20.5 % 11.6 % 7.4 % Cumulative % total net incremental IFRS rent commencing 60.5 % 81.0 % 92.6 % 100.0 % (i) Includes NLA expected to be completed from expansion and redevelopment projects. (ii) Based on monthly IFRS rental revenue. Property Operations - Residential Rental RioCan Living is RioCan's residential brand which includes purpose-built residential rental buildings developed by RioCan near or on Canada’s prominent transit corridors. The locations, design, amenities, community-focused event programming, professional management and access to strong retail offerings are all key strengths of RioCan Living. While it is difficult to project the longer term impact of the current worldwide pandemic on the Canadian economy and housing market, RioCan believes in the long-term value creation and risk mitigation benefits of its residential strategy. Refer to the Business Overview and Strategy, Business Environment and Outlook, and Risks and Uncertainties sections of this MD&A for further discussions on the impact of the pandemic on the Trust's business. The Trust currently has four completed RioCan Living projects as summarized below and ten projects in different phases of development by 2023. None of the Trust's residential rental units (other than the rental replacement units, which are rented at prescribed rents) are subject to rent controls. For the first quarter of 2021, RioCan has received approximately 98.2% of the residential rents at eCentral, Frontier, Brio and Pivot as of May 3, 2021. As a result of COVID-19, the Ontario provincial government has passed legislation that freezes rent at 2020 levels in 2021 for most residential units in the province. Occupancy as of March 31, 2021 Leasing as of May 3, 2021 Number of Number of % of occupied Number of % of leased Residential Rental Buildings in Operations total units occupied units units leased units units eCentral (Yonge Eglinton Northeast Corner, Toronto) (i) 466 374 80.3 % 394 84.5 % Frontier (Gloucester, Ottawa) (ii) 228 217 95.6 % 224 98.7 % Brio (Brentwood Village, Calgary) (ii) 163 100 61.7 % 120 74.1 % Pivot (Yonge Sheppard Centre, Toronto) (iii) 361 43 11.9 % 75 20.8 % (i) eCentral lease-up has been slowed by the current COVID-19 pandemic. As at March 31, 2021, the total of 374 units included 314 market rent units occupied. As at May 3, 2021, the total of 394 units leased were comprised of 335 market rent units leased at rents inline with current pro forma. (ii) Total units include one guest suite, which is excluded in the occupied and leased percentage calculation for the property. (iii) As at March 31, 2021, the total of 43 units included 37 market rent units occupied. As at May 3, 2021, the total of 75 units leased were comprised of 69 market rent units leased at rents inline with current pro forma. Capital Expenditures on Income Properties Maintenance Capital Expenditures Maintenance capital expenditures refer to investments that are necessary to maintain the existing earnings capacity of our property portfolio and are dependent upon many factors. These include, but are not limited to, lease expiry profile, tenant vacancies, the age and location of the income properties and general economic and market conditions, which impact the level of tenant bankruptcies. As at March 31, 2021, the estimated weighted average age of our income property portfolio is approximately 26 years. Maintenance capital expenditures consist primarily of tenant improvements, third-party leasing commissions and certain recoverable and non-recoverable capital expenditures. Actual maintenance capital expenditures can vary widely from period to period depending on a number of factors as noted above, as well as the level of acquisition and disposition activity.
21 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
As a result, management believes that for the purpose of determining ACFO which, as discussed in the Non-GAAP Measures section of this MD&A, is used as an input in assessing a REIT's distribution payout ratio, normalized capital expenditures are more relevant than using actual capital expenditures. Refer to the Non-GAAP Measures section of this MD&A for details on how management estimates its normalized capital expenditures used in the determination of ACFO. Tenant improvements and external leasing commissions The Trust's portfolio requires ongoing investments of capital for costs related to tenant improvements, broker commissions on new and renewal tenant leases and other third-party leasing costs. The amount and timing of capital outlays to fund tenant improvements on the Trust's income property portfolio depend on several factors, which may include the lease maturity profile, unforeseen tenant bankruptcies and the location of the income property. Recoverable and non-recoverable capital expenditures The Trust also invests capital on a regular basis to physically maintain its income properties. Typical costs incurred are for expenditures such as roof replacement programs and the resurfacing of parking lots. Tenant leases generally provide for the ability to recover a significant portion of such costs from tenants over time as property operating costs. The Trust expenses or capitalizes these amounts to income properties, as appropriate. The majority of such activities occur when weather conditions are favourable. As a result, these expenditures are generally not consistent throughout the year. Revenue Enhancing Capital Expenditures Capital spending for new or existing income properties that is expected to create, improve and/or add to the overall earnings capacity of the property portfolio is considered revenue enhancing. RioCan considers such amounts to be investing activities. As a result, it does not expect such expenditures to be funded from cash flows from operating activities and does not consider such amounts as a key determinant in setting the amount that is distributed to our Unitholders. Revenue enhancing capital expenditures are not included in the determination of ACFO. Summary of Capital Expenditures Expenditures for third-party leasing commissions and tenant improvements, recoverable and non-recoverable, and revenue enhancing capital expenditures pertaining to our income properties are as follows:
Three months ended Normalized capital March 31 expenditures (i) (thousands of dollars) 2021 2020 Q1 2021 Maintenance capital expenditures: Tenant improvements and external leasing commissions $ 7,967 $ 9,994 $ 6,750 Recoverable from tenants 965 2,911 3,000 Non-recoverable 895 1,648 1,500 $ 9,827 $ 14,553 $ 11,250 Revenue enhancing capital expenditures 2,352 3,871 $ 12,179 $ 18,424 (i) Refer to the Non-GAAP Measures section in this MD&A for details on how management estimates its normalized capital expenditures. For the three months ended March 31, 2021, the Trust's total capital expenditures on income properties decreased by $6.2 million compared to the same quarter last year, primarily due to $2.0 million in lower tenant improvements, $2.7 million in lower recoverable and non-recoverable capital expenditures and $1.5 million in lower revenue enhancing capital expenditures. Quarterly variations were primarily due to timing of expenditures. RioCan's total maintenance capital expenditures for the three months ended March 31, 2021 was $9.8 million, $1.4 million lower than our quarterly normalized capital expenditures estimate of $11.3 million, primarily related to timing of expenditures. For 2021, normalized maintenance capital expenditure guidance is set at $45.0 million, allocated evenly to each quarter, although quarterly fluctuations between the estimated normalized maintenance capital expenditures and actual expenditures are expected. The Trust will reassess the estimated normalized maintenance capital expenditures as necessary on a go forward basis. Refer to the Non-GAAP Measures section of this MD&A for details on how estimates of normalized capital expenditures were determined for 2021.
RioCan First Quarter 2021 22 MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS Summary of Selected Financial Information Below is a summary of key selected financial information that is based on or derived from, and should be read in conjunction with the Consolidated Financial Statements of the Trust for the respective years.
(thousands of dollars, except where otherwise noted) Three months ended March 31 2021 2020
Revenue $ 276,799 $ 286,256 Net operating income (NOI) (i) 165,032 173,579 FFO (i) 106,036 144,585 FFO (excluding debenture prepayment costs) (i) 113,054 144,585 Operating income 167,102 175,318 Net income 106,729 102,822 Distributions declared 76,264 114,372 Weighted average Units outstanding (in thousands) Basic 317,758 317,714 Diluted 317,758 317,725
Per unit basis Net income - basic $ 0.34 $ 0.32 Net income - diluted $ 0.34 $ 0.32 FFO - diluted (i) $ 0.33 $ 0.46 FFO per unit - diluted (excluding debenture prepayment costs) (i) $ 0.36 $ 0.46 Unitholder distributions (vi) $ 0.24 $ 0.36
FFO Payout Ratio (i) (iv) 92.2% 77.4% FFO Payout Ratio (excluding debenture prepayment costs) (i) (iv) 90.8% 77.4% ACFO Payout Ratio (i) (iv) 92.9% 85.0% ACFO Payout Ratio (excluding debenture prepayment costs) (i) (iv) 91.5% 85.0%
As at March 31, 2021 December 31, 2020 Investment properties $ 14,119,293 $ 14,063,022 Total assets 15,174,530 15,267,708 Unencumbered assets (RioCan's proportionate share) 8,718,757 8,727,354 Total debt (ii) 6,823,788 6,927,883 Total equity 7,795,125 7,734,973 Debt to total assets (i) (iii) 44.7% 44.5% Debt to total assets (RioCan's proportionate share) (i) (iii) 45.3% 45.0% Interest coverage (RioCan's proportionate share) (i) (v) 2.99 3.10 Debt to Adjusted EBITDA (RioCan's proportionate share) (i) (v) 10.02 9.47 Weighted average contractual interest rate 3.00% 3.13% Unencumbered assets to unsecured debt (RioCan's proportionate share) (i) 221% 215% Net book value per unit $ 24.53 $ 24.34 (i) Represents a non-GAAP measure. RioCan's method of calculating non-GAAP measures may differ from other reporting issuers' methods and accordingly may not be comparable. For definitions and the basis of presentation of RioCan's non-GAAP measures, refer to the Non-GAAP Measures section in this MD&A. (ii) Total debt is defined as the sum of mortgages payable, lines of credit and other bank loans, mortgages on properties held for sale and debentures payable. (iii) Debt to total assets is a non-GAAP measure and is calculated as total debt less cash and cash equivalents, divided by total assets, excluding cash and cash equivalents. (iv) Calculated on a trailing twelve-month basis. For further discussion of the Trust's FFO and ACFO payout ratios, refer to the FFO and ACFO sections in this MD&A. (v) Calculated on a trailing twelve-month basis. Refer to the Debt Metrics section of this MD&A for further details. (vi) Effective January 2021, the distribution was reduced to $0.96 on an annualized basis.
23 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Rental Revenue The rental revenue for the three months ended March 31, 2021 and 2020 is as follows:
(thousands of dollars) Three months ended March 31 2021 2020 Base rent $ 171,911 $ 174,702 Realty tax and insurance recoveries 53,612 57,688 Common area maintenance recoveries 43,505 46,036 Percentage rent 851 917 Straight-line rent 1,686 2,703 Lease cancellation fees 1,748 357 Parking revenue 311 1,042 Rental revenue $ 273,624 $ 283,445 Q1 2021 The $9.8 million decrease in rental revenue for the quarter compared to the same period in 2020 was primarily due to the pandemic's effect on property operations such as occupancy which in turn impacted base rents, recovery revenues, percentage rent and parking revenues, as well as the impacts of operating costs savings achieved including wage subsidy benefits transferred to tenants which led to lower recovery revenues. Net Operating Income (NOI) NOI represents rental revenue from income properties less property operating costs, and is a subset of IFRS operating income. The NOI for the three months ended March 31, 2021 and 2020 is as follows:
(thousands of dollars, except where otherwise noted) Three months ended March 31 2021 2020 Operating income (i) $ 167,102 $ 175,318 Adjusted for the following: Property management and other service fees (3,175) (2,402) Residential inventory Sales — (409) Cost of sales — 36 Operational lease revenue and (expenses) from ROU assets 1,105 1,036 NOI $ 165,032 $ 173,579 NOI as a percentage of rental revenue (excluding the impact of lease cancellation fees) 59.8% 60.9%
Add: NOI of proportionate share of equity-accounted investments RioCan-HBC JV: 3,747 3,253 Rental income (excluding straight-line rent) 5,329 3,839 Straight-line rent 413 380 Property operating costs (1,018) (684) Operational lease revenue and (expenses) from ROU assets (170) (126) Other (ii) 164 (52) NOI of proportionate share of equity-accounted investments $ 4,718 $ 3,357 NOI - RioCan's proportionate share $ 169,750 $ 176,936 (i) In accordance with IFRS. (ii) Includes NOI from RioCan's equity-accounted investments in Dawson-Yonge LP, RioCan-Fieldgate JV, WhiteCastle New Urban Fund, LP, WhiteCastle New Urban Fund 2, LP, WhiteCastle New Urban Fund 3, LP and WhiteCastle New Urban Fund 4, LP. NOI as a percentage of rental revenue (excluding the impact of lease cancellation fees) was lower for the three months ended March 31, 2021 over the comparable period primarily due to the $6.4 million provision for rent abatements and bad debts as a result of the COVID-19 pandemic. Excluding the provision, the NOI margin would have been 62.1% for the three months ended March 31, 2021, which increased from the comparable period primarily due to lower operating costs. The increase in NOI from equity-accounted investments was primarily due to the ownership increase in the HBC JV since February 5, 2021.
RioCan First Quarter 2021 24 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table provides a breakdown of NOI by the commercial and residential portfolios.
(thousands of dollars) Three months ended March 31 2021 2020 NOI Commercial $ 164,367 $ 171,726 Residential (i) 665 1,853 Total NOI $ 165,032 $ 173,579 (i) Includes NOI lease-up loss during lease-up of Pivot and the impact of the sale of a non-managing 50% interest in eCentral. Q1 2021 The $8.5 million or 4.9% decrease in NOI for the quarter compared to the same period in 2020 was the effect of a $7.4 million decrease in commercial NOI and a $1.2 million decrease in residential NOI due to lease-up loss at Pivot and the sale of a 50% non-managing interest in eCentral during the quarter. The decrease in commercial NOI was largely due to: • $6.4 million provision for rent abatements and bad debts as a result of the pandemic; • $1.3 million lower NOI due primarily to lower occupancy resulting from the pandemic; and • $1.0 million lower straight-line rent; partially offset by, • $1.4 million in higher lease cancellation fees. Same Property NOI Same property NOI for the three months ended March 31, 2021 and 2020 is as follows:
(thousands of dollars) Three months ended March 31 2021 2020 Same property (i) $ 156,252 $ 163,796 NOI from income producing properties: Acquired (ii) 813 479 Disposed (ii) 1,225 2,101 2,038 2,580 NOI from completed properties under development 1,872 338 Properties under de-leasing for development 771 1,952 Lease cancellation fees 1,748 357 Straight-line rent adjustment 1,686 2,703 NOI from residential rental 665 1,853 NOI $ 165,032 $ 173,579
NOI of proportionate share of equity-accounted investments $ 4,718 $ 3,357 NOI - RioCan's proportionate share $ 169,750 $ 176,936
Total straight-line rent - RioCan's proportionate share $ 2,099 $ 3,083 (i) Represents a non-GAAP measure. For the definition and the basis of presentation of same property NOI, refer to the Non-GAAP Measures section of this MD&A. (ii) Includes properties acquired or disposed during the periods being compared. Q1 2021 Same property NOI for the quarter decreased by 4.6% or $7.5 million compared to the same period in 2020, primarily due to the provision for rent abatements and bad debts as a result of the pandemic. Including completed properties under development, primarily 5th & THIRDTM and East Hills in Calgary and Windfields Farm in Oshawa, same property NOI decreased by 3.7% for the Trust's commercial portfolio. Excluding the provision and incremental development NOI, same property NOI decreased by 1.1%.
25 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Operating Income The IFRS operating income for the three months ended March 31, 2021 and 2020 is as follows:
(thousands of dollars) Three months ended March 31 2021 2020 Revenue Rental revenue $ 273,624 $ 283,445 Property management and other service fees 3,175 2,402 Residential inventory sales — 409 $ 276,799 $ 286,256 Operating costs Rental operating costs Recoverable under tenant leases $ 97,287 $ 105,070 Non-recoverable costs 12,410 5,832 Residential inventory cost of sales — 36 109,697 110,938 Operating income $ 167,102 $ 175,318
Breakdown of operating income: Commercial $ 166,438 $ 173,092 Residential 664 2,226 Operating income $ 167,102 $ 175,318 Q1 2021 The $8.2 million or 4.7% decrease in operating income for the quarter compared to the same period in 2020 consisted of a $6.7 million decrease in commercial operating income and a $1.6 million decrease in residential operating income. The decrease of $6.7 million in commercial operating income was largely the effect of the following: • $7.4 million decrease in NOI primarily from a $6.4 million provision for rent abatements and bad debts as a result of the COVID-19 pandemic; partially offset by • $0.8 million higher construction and development fees, as well as higher financing fees. The decrease of $1.6 million in residential operating income was the effect of the following: • $1.2 million decrease in NOI for lease-up loss at Pivot and the sale of a 50% interest in eCentral; and • $0.4 million lower inventory gains due to timing of condominium closings (more condominium closings in Q1 2020). Other Income (Loss)
(thousands of dollars) Three months ended March 31 2021 2020 Interest income $ 2,929 $ 3,967 Income from equity-accounted investments 3,629 1,886 Fair value gains (losses) on investment properties, net 8,866 (24,253) Investment and other income 221 5,044 Other income (loss) $ 15,645 $ (13,356) Q1 2021 The $1.0 million lower interest income when compared to the same period in 2020 largely consisted of $0.7 million lower interest income primarily due to lower average mortgages and loans receivable and $0.4 million decrease from condominium interim occupancy fees related to interest. RioCan's share of FFO from equity-accounted investments was $4.6 million for the quarter, $2.0 million higher than the comparative period in 2020, primarily due to an increase in RioCan's ownership in the HBC-RioCan JV and higher gains from other equity-accounted investments during the quarter. For further details on the results of operations of the RioCan-HBC joint venture, refer to the Joint Arrangements section of this MD&A.
RioCan First Quarter 2021 26 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Trust recognized net fair value gains of $8.9 million on investment properties during the quarter compared to fair value losses of $24.3 million recorded at the onset of the pandemic in Q1 2020. For the three months ended March 31, 2021, the Trust concluded that no major pandemic-related adjustments were warranted for the first quarter of 2021 as the IFRS values as of the 2020 year end appropriately reflected the estimated effects of the pandemic and the Alberta oil & gas market on property cash flows and capitalization rates given the $526.8 million fair value losses recorded during 2020. In addition, property values for necessity-based and grocery anchored shopping centres have shown strength based on the resilience of the asset type. Refer to the Property Valuations section of this MD&A for further details. Investment and other income decreased by $4.8 million over the same period in 2020. However, this was the net result of the following, of which changes in unrealized fair value on marketable securities and transaction costs do not impact FFO: • $11.1 million in lower realized gains on the sale of marketable securities and dividend income; • $4.0 million in lower other income due to an investment in e2 (a development adjacent to ePlace) in Q1 2020; largely offset by, • $10.2 million increase in the change in unrealized fair value on marketable securities in Q1 2020. Other Expenses Interest Costs
(thousands of dollars, except where otherwise noted) Three months ended March 31 2021 2020 Total interest $ 53,968 $ 55,197 Interest costs capitalized (i) (10,044) (9,794) Net interest $ 43,924 $ 45,403 Percentage capitalized 18.6% 17.7% (i) Includes amounts capitalized to properties under development and residential inventory. Total interest costs decreased by $1.2 million for the quarter, compared to the same period in 2020. This was primarily due to lower average cost of debt, partially offset by higher average debt balances. As at March 31, 2021, the weighted average effective interest rate of our total debt is 3.08% (March 31, 2020 - 3.35%). Interest capitalized to development properties increased compared to the same period in 2020 . This was primarily due to continuing progress on existing and new active developments, partially offset by lower interest rates. Interest was capitalized to properties under development and residential inventory at a weighted average effective interest rate of 3.18% for the three months ended March 31, 2021 (three months ended March 31, 2020 – 3.43%). As a result of the changes in total interest costs and interest costs capitalized, net interest costs decreased by $1.5 million for the three months ended March 31, 2021, compared to the same period in 2020. General and Administrative (G&A)
(thousands of dollars, except where otherwise noted) Three months ended March 31 2021 2020 Non-recoverable salaries and benefits $ 13,071 $ 10,850 Capitalized to development and residential inventory (i) (2,643) (2,773) Internal leasing salaries and benefits (2,272) (2,482) Non-recoverable salaries and benefits, net 8,156 5,595 Unit-based compensation expense 5,982 1,450 Depreciation and amortization 1,010 1,096 Other general and administrative expense (recovery) (ii) 2,683 (736) Total general and administrative expense $ 17,831 $ 7,405 Total general and administrative expense as a percentage of rental revenue 6.5% 2.6% (i) Include salaries and benefits related to properties under development and residential inventory, as well as landlord work. (ii) Primarily includes information technology costs, public company costs, travel, marketing, legal and professional fees, as well as trustee costs. The REIT continues to participate in the Canadian federal government Canada Emergency Wage Subsidy (CEWS) program. First introduced by the Canadian federal government in 2020 in response to COVID-19, CEWS is designed to subsidize up to 75% of eligible employee wages and is in effect until June 2021. Subject to legislative approvals, the recently announced federal budget extended the CEWS program to September 25, 2021 with certain changes to the qualification requirements and the maximum weekly benefit per employee.
27 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three months ended March 31, 2021, the Trust accrued $1.0 million of the CEWS subsidy as a reduction to gross general and administrative expenses. Approximately 70% of the wage subsidy pertained to recoverable operational salaries and benefits and as such, the majority of the wage subsidy is passed back to the tenants through lower recoverable operating costs. The remaining 30% pertained to non-recoverable salaries related to wages for development and internal leasing staff, and general and administrative functions. The net benefit of the CEWS program to the Trust was $0.1 million in net general and administrative expenses savings for the three months ended March 31, 2021, which benefited FFO accordingly. There were no such wage subsidies in Q1 2020. Q1 2021 The $10.4 million increase in G&A costs from the same period in 2020 was primarily due to: • $6.8 million increase in compensation costs including the accelerated expensing of certain unit-based compensation, of which $5.8 million is not expected in future quarters; and • $3.4 million increase in other general and administrative expenses mainly as a result of a mark-to-market adjustment for cash-settled unit-based trustee costs in the prior year same quarter. Internal Leasing Costs Internal leasing costs are comprised of the payroll costs of our internal leasing department and related administration costs. For the three months ended March 31, 2021, leasing costs decreased by $0.2 million, compared to the same period in 2020. The change was primarily related the impact of the CEWS program as discussed in the General and Administrative section earlier in this MD&A. Transaction and Other Costs Transaction and other costs increased by $3.6 million for the quarter, compared to the same period in 2020. The increase was primarily due to dispositions during the quarter, as well as higher marketing costs. During the three months ended March 31, 2021, the Trust incurred $0.7 million of marketing costs (three months ended March 31, 2020 - $0.1 million). Such marketing costs are mainly comprised of those related to condominium and townhouse projects which are expensed as incurred before condominium sales revenues are recognized into income. Debenture Prepayment Costs On January 15, 2021, RioCan redeemed the Series R unsecured debentures due December 13, 2021. The Trust recorded a prepayment cost of $7.0 million, which includes a write-off of the Series R unamortized deferred financing costs. Net Income Attributable to Unitholders
(thousands of dollars, except per unit amounts) Three months ended March 31 2021 2020 Net income attributable to Unitholders $ 106,729 $ 102,822 Net income attributable to Unitholders (basic) $ 0.34 $ 0.32 Net income attributable to Unitholders (diluted) $ 0.34 $ 0.32 Q1 2021 Excluding $33.1 million in changes in fair value gain (loss) on investment properties as discussed in the Other Income (Loss) section of this MD&A, net income attributable to Unitholders for the quarter was $97.9 million compared to $127.1 million in the same period in 2020, representing a decrease of $29.2 million or 23.0%. This decrease was largely the net effect of the following: • $8.2 million decrease in operating income primarily due to a $6.4 million provision for rent abatements and bad debts, and $1.2 million lower NOI from residential rental resulting from the sale of 50% non-managing interest in eCentral; • $4.1 million decrease in other income (loss), primarily due to income from an investment in e2 (a development adjacent to ePlace); • $10.4 million increase in general and administration costs mainly due to one-time or special items as discussed in the General and Administration section of this MD&A; • $7.0 million prepayment costs on the early redemption of our Series R debenture; partially offset by, • $2.4 million decrease in current and deferred taxes.
RioCan First Quarter 2021 28 MANAGEMENT’S DISCUSSION AND ANALYSIS
Funds from Operations (FFO) RioCan’s method of calculating FFO is in compliance with the REALPAC whitepaper issued in February 2019 except that RioCan excludes unrealized fair value gains or losses on marketable securities in its calculation of FFO and continues to include realized gains or losses on marketable securities in FFO. Refer to the Non-GAAP Measures section of this MD&A for a more detailed discussion. The following table presents a reconciliation of IFRS net income attributable to Unitholders to FFO from operations:
(thousands of dollars, except where otherwise noted) Three months ended March 31 2021 2020 Net income attributable to Unitholders $ 106,729 $ 102,822 Add back/(Deduct): Fair value (gains) losses, net (8,866) 24,253 Fair value losses included in equity-accounted investments 512 468 Deferred income tax expense — 1,000 Internal leasing costs 2,852 3,043 Transaction losses on investment properties, net (i) 155 22 Transaction costs on sale of investment properties 3,638 579 Change in unrealized fair value on marketable securities — 10,219 Current income tax expense (recovery) (163) 1,284 Operational lease revenue (expenses) from ROU assets 763 683 Operational lease revenue (expenses) from ROU assets in equity-accounted investments (9) (6) Capitalized interest on equity-accounted investments (ii) 425 218 FFO $ 106,036 $ 144,585
Add back: Debenture prepayment costs 7,018 — FFO (excluding debenture prepayment costs) $ 113,054 $ 144,585
FFO per unit - basic $ 0.33 $ 0.46 FFO per unit - diluted $ 0.33 $ 0.46 FFO per unit - diluted (excluding debenture prepayment costs) $ 0.36 $ 0.46 Weighted average number of Units - basic (in thousands) 317,758 317,714 Weighted average number of Units - diluted (in thousands) 317,758 317,725 FFO Payout Ratio (iii) 92.2% 77.4% FFO Payout Ratio (excluding debenture prepayment costs) (iii) 90.8% 77.4% (i) Represents net transaction gains or losses connected to certain investment properties during the period. (ii) This amount represents the interest capitalized to RioCan's equity-accounted investment in WhiteCastle New Urban Fund, LP, WhiteCastle New Urban Fund 2, LP, WhiteCastle New Urban Fund 3, LP, WhiteCastle New Urban Fund 4, LP and RioCan-Fieldgate JV. This amount is not capitalized to properties under development under IFRS, but is allowed as an adjustment under REALPAC’s definition of FFO. (iii) Calculated on a twelve-month trailing basis. For a definition of the Trust's Unitholder distributions as a percentage of FFO, refer to the Non-GAAP Measures section of this MD&A. FFO Highlights Q1 2021 FFO for the quarter decreased by $38.5 million or 26.7% from same period in 2020. Excluding the $7.0 million prepayment costs on early redemption of the Series R debentures, however, FFO decreased by $31.5 million or 21.8% over the comparable period. On a diluted per unit basis, FFO excluding debenture prepayment costs decreased by $0.10 or 21.8%. The $31.5 million decrease was primarily the net effect of the following: • $11.1 million in lower realized gains on the sale of marketable securities; • $10.4 million higher general and administration expenses primarily from an increase in compensation costs including the accelerated expensing of certain unit-based compensation and a mark-to-market adjustment for cash-settled, unit-based trustee costs in the prior year same quarter; • $6.4 million provision for rent abatements and bad debts as a result of the pandemic; and • $3.8 million in lower other income primarily due to income in Q1 2020 from an investment in e2 (a development adjacent to ePlace).
29 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
The FFO payout ratio was 92.2% for the twelve-month period ended March 31, 2021. Excluding the $7.0 million debenture prepayment costs, the FFO payout ratio was 90.8%, 13.4% higher than the FFO payout ratio as of March 31, 2020 but only 0.6% higher than the FFO payout ratio as of the 2020 year end. The FFO payout ratio is calculated on a rolling twelve-month basis. It increased by 13.4% from the payout ratio as of March 31, 2020 because the latter was based on twelve-month pre-pandemic FFO from April 1, 2019 to March 31, 2020 and units outstanding also increased significantly over the twelve-month period ended March 31, 2021 resulting from equity issues in August 2019 and October 2019 which reduced the benefit of the one-third distribution cut since January 2021. The FFO payout ratio increased marginally by 0.6% from the FFO payout ratio for the year ended December 31, 2020, despite the one-third reduction in distributions effective January 2021, as the 2020 year end payout ratio included the higher pre- pandemic Q1 2020 results. Furthermore, the FFO for the twelve months ended March 31, 2021 included $48.9 million of pandemic-related provision on a cumulative basis. The payout ratio is expected to fall gradually in 2021 given the lower distributions and an expected lower pandemic-related provision than that of 2020, despite the recent tightened restrictive measures in Ontario and certain other provinces. Based on distributions declared during the quarter and quarterly FFO, instead of on a rolling twelve-month basis, the FFO payout ratio (excluding debenture prepayment costs) for this quarter was 67.5%. Adjusted Cashflow from Operations (ACFO) RioCan’s method of calculating ACFO is in accordance with the REALPAC whitepaper issued in February 2019. The following table presents a reconciliation of cash provided by operating activities to ACFO:
(thousands of dollars) Three months ended March 31 2021 2020 Cash provided by operating activities $ 80,648 $ 116,802 Add back/(Deduct): Adjustments to working capital changes for ACFO (i) 3,263 (14,351) Distributions received from equity-accounted investments 33,486 1,775 Transaction costs on sale of investment properties 3,638 579 Normalized capital expenditures (ii): Leasing commissions and tenant improvements (6,750) (4,000) Maintenance capital expenditures recoverable from tenants (3,000) (4,500) Maintenance capital expenditures not recoverable from tenants (1,500) (1,500) Realized gain on disposition of marketable securities — 11,097 Internal leasing costs related to development properties 526 561 Taxes related to non-operating activities (iii) (163) 1,284 Operational lease revenue and expenses from ROU assets 763 683 ACFO $ 110,911 $ 108,430
Add back: Debenture prepayment costs 7,018 — ACFO (excluding debenture prepayment costs) $ 117,929 $ 108,430 (i) Includes working capital changes that, in management’s view and based on the REALPAC February 2019 whitepaper, are not indicative of sustainable cash flow available for distribution. Examples include, but are not limited to, working capital changes relating to residential inventory and developments, prepaid realty taxes and insurance, interest payable and interest receivable, sales and other indirect taxes payable to or receivable from applicable governments, income taxes and transaction cost accruals relating to acquisitions and dispositions of investment properties. Working capital changes related to payment deferrals that are implemented during the COVID-19 pandemic are not excluded from ACFO as they are intended to offset the short-term increase in net contractual rent receivables and other tenant receivables, which are not excluded in ACFO either. (ii) Normalized capital expenditures are management's estimate of ongoing capital investment required to maintain the condition of the physical property and current rental revenues. Refer to the Non-GAAP Measures section of this MD&A for further discussion. (iii) Includes income tax expenses (recoveries) associated with the sale of our U.S. portfolio, which have been deducted in determining cash provided by (used in) operating activities from operations. This adjustment effectively excludes this item's impact to ACFO based on the REALPAC February 2019 whitepaper.
RioCan First Quarter 2021 30 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table represents a breakdown of adjustments for working capital changes used in the calculation of ACFO. These are working capital changes that, in management’s view and based on the REALPAC February 2019 whitepaper, are not indicative of sustainable cash flow available for distribution:
(thousands of dollars) Three months ended March 31 2021 2020 Working capital changes related to: Residential inventory $ 5,825 $ (10,298) Interest expense, net of interest income 2,220 (9,439) Realty taxes and insurance 8,080 4,484 Transaction related costs (i) (5,517) (714) Other (ii) (7,345) 1,616 Adjustments to working capital changes for ACFO $ 3,263 $ (14,351) (i) Represents costs associated with dispositions and acquisitions. (ii) Includes working capital changes related to sales and other indirect taxes payable to or receivable from applicable governments, other investments, and income tax payments (accruals) relating to the sale of our U.S portfolio in May 2016. As ACFO starts with cash provided by operating activities, the adjustments outlined neutralize the above working capital changes to ACFO. The net impact to ACFO of working capital changes is determined as follows:
(thousands of dollars) Three months ended March 31 2021 2020 Adjustments for other changes in working capital items as reported on the consolidated statements of cash flows $ (19,843) $ (8,631) Add: Adjustments to working capital changes for ACFO 3,263 (14,351) Net working capital decrease included in ACFO $ (16,580) $ (22,982) ACFO Highlights Q1 2021 ACFO for the quarter increase d by $2.5 million or 2.3% compared to the same period in 2020 . Excluding the $7.0 million prepayment costs on early redemption of the Series R debentures, ACFO increased by $9.5 million or 8.8% over the comparable period. The $9.5 million increase was primarily the net effect of the following: • $31.7 million increase in cash distributions received from equity-accounted investments particularly the RioCan-HBC JV; • $6.4 million in lower net working capital decrease relating to property operations; partially offset by • $11.1 million in lower realized gains on the sale of marketable securities; • $6.4 million provision for rent abatements and bad debts as a result of the pandemic; • $5.9 million higher general and administration expenses primarily from an increase in compensation costs including a mark- to-market adjustment for cash-settled, unit-based trustee costs in the prior year same quarter; and • $3.8 million in lower other income primarily due to income recognized in Q1 2020 on an investment in e2 (a development adjacent to ePlace).
31 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following tables present RioCan's ACFO payout ratio for the twelve months ended March 31, 2021 and 2020:
(thousands of dollars, except where otherwise Twelve months ended noted) March 31, 2021 Q1 2021 Q4 2020 Q3 2020 Q2 2020 ACFO $ 465,257 $ 110,911 $ 129,092 $ 146,998 $ 78,256 ACFO (excluding debenture prepayment costs) 472,275 117,929 129,092 146,998 78,256 Distributions paid 432,121 88,971 114,385 114,378 114,387 ACFO Payout Ratio 92.9% ACFO Payout Ratio (excluding debenture prepayment costs) 91.5% Net working capital increase (decrease) included in ACFO $ 7,459 $ (16,580) $ 16,441 $ 26,389 $ (18,791)
(thousands of dollars, except where otherwise Twelve months ended noted) March 31, 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 ACFO $ 526,411 $ 108,430 $ 133,592 $ 144,904 $ 139,485 Distributions paid 447,478 114,371 113,285 110,224 109,598 ACFO Payout Ratio 85.0% Net working capital increase (decrease) included in ACFO $ (1,659) $ (22,982) $ (148) $ 14,624 $ 6,847 The ACFO payout ratio for the twelve months ended March 31, 2021 was 92.9%. Excluding the $7.0 million debenture prepayment costs, the ACFO payout ratio was 91.5%, 6.5% higher than that of March 31, 2020, but 7.4% lower than that of 2020 year end. The ACFO payout ratio is calculated on a rolling twelve-month basis. It increased by 6.5% from the payout ratio as of March 31, 2020 because the latter was based on twelve-month pre-pandemic ACFO from April 1, 2019 to March 31, 2020 and units outstanding also increased significantly over the twelve-month period ended March 31, 2021 resulting from equity issues in August 2019 and October 2019 which reduced the benefit of the reduced January 2021 distribution. The ACFO payout ratio decreased 7.4% from the ACFO payout ratio as of the 2020 year end, primarily due to higher distributions from the RioCan-HBC JV in the current quarter, which more than offset the effect of the pandemic on the quarter. The ACFO for the twelve months ended March 31, 2021 included $48.9 million of pandemic-related provision. The ACFO payout ratio is expected to fall gradually in 2021 for the same reasons as discussed with respect to FFO payout ratio in this MD&A. Based on distributions declared during the quarter and quarterly ACFO, instead of on a rolling twelve-month basis, the ACFO payout ratio (excluding debenture prepayment costs) for this quarter was 64.7%. As previously discussed, the REALPAC ACFO definition includes net working capital fluctuations relating to recurring operating activities. In RioCan management's view, this tends to introduce greater volatility in the ACFO payout ratio. Management, therefore, also uses the FFO payout ratio, in addition to the ACFO payout ratio, in assessing its distribution paying capacity because FFO is not subject to such working capital fluctuations. PROPERTY VALUATIONS Refer to Note 3 of the Condensed Consolidated Financial Statements for the change in consolidated fair value IFRS carrying values of our investment properties. Valuation Processes Internal valuations RioCan measures the vast majority of its investment properties, including co-owned properties, using valuations prepared by its internal valuation team. The internal valuation team utilizes appraisal methodologies largely consistent with the practices employed by third-party appraisers. This team consists of individuals who are knowledgeable and have specialized industry experience in real estate valuations and report directly to a senior member of the Trust's management. The internal valuation team's processes and results are reviewed and approved by the Valuations Committee on a quarterly basis. The Trust's Valuations Committee is responsible for approving any fair value changes to the investment properties and consists of senior management of the Trust including the President & Chief Operating Officer, the Senior Vice President & Chief Financial Officer, and other executive members. Given the recent executive changes effective April 1, 2021, as further discussed in the Related Party Transactions section of this MD&A, the Chief Investment Officer will become a member of the Valuation Committee, replacing the vacancy created by the promotion of the President & Chief Operating Officer to Chief Executive Officer.
RioCan First Quarter 2021 32 MANAGEMENT’S DISCUSSION AND ANALYSIS
External valuations Depending on the property asset type and location, management may opt to obtain independent third-party valuations from firms that employ experienced valuation professionals having the required qualifications in property appraisals for purposes of adopting such appraised values in the case of land parcels or assessing the reasonableness of its internal investment property valuations. During the three months ended March 31, 2021, the Trust obtained a total of six external property appraisals (no appraisals for vacant land parcels), which supported an IFRS fair value of approximately $0.3 billion, or 2.3% of the Trust's investment property portfolio as at March 31, 2021. Our mandate is to conduct an average of six external appraisals on investment properties on a quarterly basis or 24 investment properties a year, plus a selection of external land valuations, which is done every fourth quarter on our excess land and greenfield sites. Capitalization Rates The capitalization rate is based on the location and quality of the properties and takes into account market data at the valuation date. The table below provides details of the average capitalization rate (weighted by stabilized NOI) by market category:
Weighted average capitalization rate As at March 31, 2021 December 31, 2020 Major markets (i) 5.22 % 5.22 % Secondary markets 7.67 % 7.67 % Total average portfolio capitalization rate 5.44 % 5.44 % (i) Includes properties located in the six major Canadian markets of Calgary, Edmonton, Montreal, Ottawa, Vancouver and the Greater Toronto Area. At March 31, 2021, the weighted average capitalization rate of the Trust's investment portfolio was 5.44%, unchanged from the prior year end. COVID-19 Pandemic and Its Impact on Investment Property Valuation For the three months ended March 31, 2021, the Trust recorded net marginal fair value gain of $8.9 million, representing 0.1%, of the IFRS carrying value of its investment properties as of December 31, 2020, including assets held for sale. In 2020, the Trust wrote down $526.8 million or 3.7% of its IFRS carrying value as of the beginning of 2020 to reflect the estimated effect of the pandemic on property cash flow and capitalization rates, as well as the estimated effect of the depressed oil and gas markets. For the three months ended March 31, 2021, the Trust estimated that no further major pandemic-related adjustments were warranted as the carrying value for its investment properties reflected its best estimate for the highest and best use as of March 31, 2021. The resiliency shown by open air shopping centres during the pandemic has created an enhanced view of their value and pricing for such properties now matches that of pre-pandemic levels. The factors underlying the estimated cash flows and capitalization rates include but are not limited to: geographic location, property type, the strength of the underlying tenant covenants, the proportion of tenants within the property subject to discretionary consumer spending, discounted cash flow impact of the rent deferral and abatement arrangements, estimated vacancy allowances and the resulting re-tenanting costs. The short and long-term impact of the pandemic on the Trust's investment property valuation remains difficult to assess and predict, especially given the tightened restrictive measures introduced in Ontario and certain other provinces post the quarter end. Refer to the Risks and Uncertainties - COVID-19 Health Crisis section of this MD&A for discussions on the risks and uncertainties associated with the COVID-19 pandemic, including the pandemic's impacts on property valuation. Further, refer to Note 3 of the Condensed Consolidated Financial Statements for a sensitivity analysis of investment property valuations to changes in the three key inputs to the property valuation - stabilized net operating income (SNOI), capitalization rates and costs to complete. ACQUISITIONS AND DISPOSITIONS Acquisition On January 19, 2021, RioCan acquired a 100% interest in the 2978 Eglinton Avenue East property, located in Toronto, Ontario, for the purchase price of $11.5 million, including transaction costs. Acquisitions subsequent to March 31, 2021 On April 7, 2021, RioCan completed the acquisition of an additional 10% of the air rights in The Well Building 6 (FourFifty The Well) for the net purchase price of $7.6 million, including transaction costs. Following this transaction, RioCan owns 50% of FourFifty The Well air rights, increased from the previous 40%.
33 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Dispositions Despite the global pandemic, the Trust closed a number of dispositions during the three months ended March 31, 2021 as summarized below: Gross sales proceeds (in thousands of dollars) ( At RioCan's interest) Debt NLA associated disposed at with RioCan's Ownership property Interest Property name and interest Capitalization Residential (thousands (thousands location Date disposed disposed rate (i) IPP PUD Inventory Total of dollars) of sq. ft.) Q1 2021 Westgate - Phase One (Rhythm), March 11, 2021 50.0 % n/a $ — $ 17,574 $ — $ 17,574 $ — — Ottawa, ON (ii) Tanger Outlets St. Sauveur, St. Sauveur, March 1, 2021 50.0 % 15.97 % 6,000 — — 6,000 — 57 QC Windfields Farm - School Site, Oshawa, January 22, 2021 100.0 % n/a — 3,400 — 3,400 — — ON
ePlace, Toronto, ON January 7, 2021 50.0 % 4.60 % 21,862 — — 21,862 15,192 11
eCentral, Toronto, ON January 7, 2021 50.0 % 3.56 % 127,746 — — 127,746 67,444 145
Total Q1 2021 Dispositions $ 155,608 $ 20,974 $ — $ 176,582 $ 82,636 213
(i) Capitalization rate is based on in-place NOI calculated on a trailing 12 month basis when the related sale agreement becomes firm. (ii) Includes cost recoveries of $12.1 million. In addition to the dispositions closed during the first quarter, as of May 3, 2021, the Trust has closed or entered into firm or conditional agreements to dispose of 100% or partial interests in a number of properties for total sales proceeds of $366.5 million. This brings total closed, firm and conditional deals since the beginning of the year to $543.1 million, consisting of $421.2 million of income producing properties at a weighted average in-place capitalization rate of 5.15% based on in-place NOI and $121.8 million of development properties with no in-place NOI. RioCan's disposition program permits, in some cases, the advantages of shedding low growth or vulnerable assets, but in all cases, is an effective means to raising capital that can be put to beneficial use to strengthen its balance sheet and fund development. A number of these transactions involve the sale of partial interests in development properties or future density which allows the Trust to not only realize inherent density value and recycle capital, but also to mitigate risk, share costs, earn additional fee income, and attract new partners or strengthen existing partner relationships. The quality of RioCan's assets are evident in the pricing achieved and in the well respected and established partners attracted despite uncertainty during challenging pandemic circumstances. JOINT ARRANGEMENTS Co-ownership activities represent real estate investments in which RioCan has joint control and either owns an undivided interest in the assets and liabilities with its co-owners (joint operations) or ownership rights to the residual equity of the co-ownership (joint ventures). The Trust’s co-ownership arrangements are governed by co-ownership agreements with its various co-owners. RioCan’s standard co-ownership agreement provides exit and transfer provisions, including, but not limited to, buy/sell and/or right of first offers or refusals that allow for the unwinding of these co-ownership arrangements should the circumstances necessitate. Generally, the Trust is only liable for its proportionate share of the obligations of the co-ownerships in which it participates, except in limited circumstances. Credit risk arises in the event that co-owners default on the payment of their proportionate share of such obligations. Co-ownership agreements will typically provide RioCan with an option to remedy any non-performance by a defaulting co-owner. These credit risks are mitigated as the Trust has recourse against the assets under its co-ownership agreements in the event of default by its co-owners, in which case the Trust’s claim would be against both the underlying real estate investments and the co-owners that are in default. In addition to the matter noted above, RioCan has provided guarantees on debt totalling $227.9 million as at March 31, 2021 on behalf of co-owners (December 31, 2020 - $139.9 million).
RioCan First Quarter 2021 34 MANAGEMENT’S DISCUSSION AND ANALYSIS
Selected Financial Information of Joint Operations (at RioCan's interest)
RioCan's Number of Three months ended (thousands of dollars, except where otherwise noted) ownership investment March 31, 2021 As at March 31, 2021 interest properties (i) Assets (ii) Liabilities (ii) NOI (iii) Allied 50 % 6 $ 190,287 $ 7,178 $ 1,893 Allied/Diamond (The Well) (iv) 50 % 1 654,647 44,579 18 Boardwalk 50 % 2 58,019 21,352 82 CMHC Pension Fund 50 % 1 54,114 28,092 746 CPPIB 40 % 2 96,904 11,336 868 First Gulf 50 % 1 92,594 43,432 1,195 Killam 50 % 4 151,694 58,193 818 KingSett 50 % 1 119,497 79,807 1,186 Metropia/CD (v) 50 % 1 117,707 95,056 3 Sun Life 40 % 1 27,138 466 313 Tanger 50 % 2 127,092 4,677 1,713 Trinity 75 % 1 23,991 12,326 325 Woodbourne 50 % 5 277,485 131,889 903 Other 30% - 75% 17 418,174 127,258 3,796 45 $ 2,409,343 $ 665,641 $ 13,859 (i) Includes both income producing properties and properties under development and is based on the number of proportionately owned properties as of March 31, 2021. (ii) Assets and liabilities are stated at RioCan's interest. (iii) Represents RioCan's interest of NOI related to all properties for which we owned a proportionate interest during the period. (iv) The Trust has a 50% interest in the commercial component (RioCan/Allied) and a 40% interest in the residential component (RioCan/Allied/ Diamond) of The Well project as of March 31, 2021. On April 7, 2021, the air rights transaction for residential development at FourFifty The Well was completed. RioCan and its partner Woodbourne each owns 50% of the air rights for this building subsequent to the transaction. Air rights sales for three of the six residential buildings at The Well are now complete with the conveyance of the air rights of the three remaining buildings on track to be completed in 2021, where RioCan continues to own 40% interest in the remaining residential air rights to be sold. (v) RioCan also has a 15.6% interest in e2 Condos, a development adjacent to ePlace (northeast corner of Yonge Street and Eglinton Avenue) together with Metropia and four other partners, which is carried at fair value and included in Other Assets and is therefore excluded from the table above. Selected Financial Information of Joint Operations and Joint Ventures Total Assets
(thousands of dollars) Total assets as Income Residential at December As at March 31, 2021 properties PUD (i) inventory (ii) Other (iii) Total assets 31, 2020 Total assets of proportionately $ 1,200,555 $ 998,212 $ 136,299 $ 74,277 $ 2,409,343 $ 2,164,179 consolidated joint operations Equity-accounted joint ventures (iv): HBC (RioCan-HBC JV) $ 398,314 $ — $ — $ 34,480 $ 432,794 $ 254,241 Marketvest Corporation/Dale-Vest Corporation (Dawson-Yonge LP) 8,853 — — 195 9,048 9,154 Bloor Street West (RioCan- — 1,729 14,899 28 16,656 16,503 Fieldgate LP) Total assets of equity-accounted 407,167 1,729 14,899 34,703 458,498 279,898 joint ventures (iv) Total joint arrangements $ 1,607,722 $ 999,941 $ 151,198 $ 108,980 $ 2,867,841 $ 2,444,077 (i) The value of properties under development includes active development projects as well as the value of development lands where development is currently non-active. (ii) Residential inventory is comprised of the 11 YV development in the prestigious Yorkville area of Toronto, Ontario with Metropia and CD, the Windfields Farm condominium and townhouse projects in Oshawa, Ontario with Tribute, the Dufferin Plaza development at Dufferin Street and Apex Road in Toronto, Ontario with Maplelands Development Inc, and the Bloor Street West development with Fieldgate. (iii) Primarily includes finance lease receivable, cash and cash equivalents, rents receivable and other operating expenditures recoverable from tenants. (iv) Includes the Trust's equity-accounted joint arrangements only and excludes the equity-accounted investments in the WhiteCastle Funds.
35 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Total NOI
(thousands of dollars) Three months ended March 31 2021 2020 Total NOI of proportionately consolidated joint operations $ 13,859 $ 15,696 Equity-accounted joint ventures (i): HBC (RioCan-HBC JV) $ 4,554 $ 3,409 Marketvest Corporation/Dale-Vest Corporation 110 128 (Dawson-Yonge LP) Bloor Street West (RioCan-Fieldgate LP) 17 — Total NOI of equity-accounted joint ventures 4,681 3,537 Total joint arrangements $ 18,540 $ 19,233 (i) Includes the Trust's equity-accounted joint arrangements only and excludes our equity-accounted investment in the WhiteCastle Funds. RioCan-HBC JV On February 5, 2021, RioCan contributed the remaining $140.1 million investment commitment related to the RioCan-HBC JV, which increased RioCan's ownership interest in the RioCan-HBC JV to 20.2% (December 31, 2020 - 12.6%). The following tables present the financial results of the RioCan-HBC JV on a 100% basis: Condensed Statements of Financial Position
(thousands of dollars) As at March 31, 2021 December 31, 2020 Current assets $ 15,869 $ 4,068 Non-current assets 1,991,144 1,990,538 Current liabilities 418,274 313,707 Non-current liabilities (i) 401,327 508,094 Net assets $ 1,187,412 $ 1,172,805 RioCan's share of net assets in RioCan-HBC JV (ii) $ 266,886 $ 150,578 (i) Includes mortgages payable and lines of credit with maturities beyond twelve months. (ii) Represents RioCan's proportionate share of net assets and other acquisition-related costs. Condensed Statements of Income
(thousands of dollars) Three months ended March 31 2021 2020 Rental revenue $ 35,999 $ 36,179 Operating expenses 5,534 5,500 Fair value losses (2,550) (3,761) Interest expense 8,858 9,739 Net income $ 19,057 $ 17,179 RioCan's share of net income in RioCan-HBC JV $ 3,162 $ 2,162
RioCan's share of FFO in RioCan-HBC JV $ 3,669 $ 2,630 RioCan's share of net income and FFO in the JV increased by $1.0 million for the quarter when compared to the same period in the prior year primarily due to ownership increase in Q1 2021.
RioCan First Quarter 2021 36 MANAGEMENT’S DISCUSSION AND ANALYSIS
DEVELOPMENT PROGRAM Properties Under Development RioCan’s development program is an important component of its long-term growth strategy and is focused on well-located properties in the six major markets in Canada. Often these are properties that RioCan already owns and are located directly on, or in proximity to, major transit lines such as the existing Toronto Transit Commission's subway lines or the Eglinton LRT line, which is currently under construction. Development opportunities also arise from the fact that retail centres are generally built with lot coverages of approximately 25% of the underlying lands and municipalities are supporting additional density particularly near major infrastructure investments. Considering that RioCan already owns the land for its portfolio of mixed-use redevelopment opportunities, these projects are expected to generate strong incremental returns and increase the Trust's net asset value. The overall development environment in Canada is undergoing changes. Refer to the Business Overview and Strategy, Business Environment and Outlook, and Risks and Uncertainties sections of this MD&A for discussions about the development environment in general and under the pandemic specifically, as well as associated risks. Development risk management is essential to the Trust's success. The Trust strategically and prudently manages its development risks as follows: • RioCan undertakes developments selectively based on opportunities in its portfolio and within the major markets it focuses on. • Development projects must be expected to generate appropriate risk-adjusted returns. The Trust will not commence construction until it has third-party market studies of the rental or for sale residential markets in the development areas and, where a large portion of the development has commercial space, the requisite leasing commitments pertaining to the commercial portion of the mixed-use developments are required. • RioCan’s well established and robust internal control framework ensures proper oversight over development approvals and construction management. • RioCan uses a staggered approach in its development program to avoid unnecessary concentration of development projects in a single period of time in order to allocate risks and manage the Trust's capital. The staggered development approach also enables proper allocation of personnel resources and ensures that the Trust’s experienced development team is at the appropriate scale, resulting in no overhead pressure for RioCan to take on suboptimal development activities. • RioCan utilizes strategic partnerships to reduce capital requirements and mitigate risks. • RioCan often already owns the assets with development potential which are income producing. This allows the Trust to manage the timing of development starts, and if required, these assets can continue to generate income until the appropriate time to commence development is reached. • RioCan's development team utilizes a variety of cost mitigation strategies, such as working with experienced construction managers early in the project design stage to validate that a project's constructability and efficiency is maximized, ensuring that soil and geotechnic al conditions are known before breaking ground, that construction drawings are finalized to the furthest extent possible prior to commencing construction, and structuring construction management contracts such that the contracts are converted to fixed price contracts as soon as all of the scope is defined thus limiting cost escalations. • The Trust's mixed-use residential development allows the Trust to access Canadian Mortgage and Housing Corporation (CMHC) insured mortgages which diversifies the Trust's funding sources and provides a lower cost of debt. • RioCan's developments are across numerous geographic markets, thus permitting diversification of market dynamics. The Trust categorizes the projects within its development program as follows:
Category Description Greenfield Development Projects on vacant land typically located in suburban markets that are being constructed or developed from the ground-up for future use as income producing properties (IPP or IPPs). Urban Intensification Projects at existing IPPs located in urban markets, which typically involve increasing the density or square footage of the properties and are often mixed-use projects.
Expansion and Existing IPPs, or components thereof, that are being repositioned through redevelopment, which typically Redevelopment increases NOI by adding to the rentable area of the properties. In addition to the above development categories, the Trust also owns vacant lands and other properties that could be used for future developments. Such vacant land and other properties are reported as “Development Lands and Other” under properties under development (PUD) in the Estimated PUD Project Costs section of this MD&A. Management's current estimates and assumptions, as discussed throughout this Development Program section, are subject to change. Such changes may be material to the Trust. Although the estimated development expenditures are based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these projections particularly under the current health crisis and development expenditures may, therefore, materially differ from management's current estimates. In addition, there is no assurance that all of these developments will be undertaken, and if they are, there is no assurance as to the mix of commercial and residential developments, the costs, the phasing of the projects, or the development yields to be achieved.
37 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Declaration of Trust and Financial Covenants The provisions of the Trust’s Declaration have the effect of limiting direct and indirect investments in greenfield developments and development properties held for resale (each net of related mortgage debt and mezzanine financing which funds the co-owners’ share of such developments) to no more than 15% of total consolidated Unitholders’ equity of the Trust, as determined under IFRS. As at March 31, 2021, RioCan's investments in greenfield development and residential inventory as a percentage of consolidated Unitholders' equity is 4.4% and, therefore, the Trust is in compliance with this restriction. In addition, RioCan's revolving unsecured operating line of credit and non-revolving unsecured credit facilities agreements require the Trust to maintain certain financial covenants, one of which includes a more restrictive covenant as it pertains to the Trust's development activities. As of March 31, 2021, the Trust is in compliance with all financial covenants pursuant to the operating line of credit and credit facilities agreements including the one relating to the Trust's development activities. Refer to Note 24 of the Condensed Consolidated Financial Statements for further details. Development Pipeline RioCan's development pipeline as at March 31, 2021 is estimated as follows:
Estimated Density (NLA) at RioCan's interest (i) Number Components of PUD of Residential Projects Inventory Residential Air Rights (thousands of sq. ft.) (ii) Total PUD (iii) (iv) Commercial Rental Sale (x) A. Active projects with detailed cost estimates Greenfield Development (v) 2 431 431 — 431 — — Urban Intensification (vi) 9 2,817 2,606 211 996 535 1,075 11 3,248 3,037 211 1,427 535 1,075 Expansion & Redevelopment (vii) 10 286 286 — 286 — — Subtotal 21 3,534 3,323 211 1,713 535 1,075 B. Active projects with cost estimates in progress(viii) 24 18,338 16,608 1,730 3,457 13,151 — Total Active Projects 45 21,872 19,931 1,941 5,170 13,686 1,075 C. Future estimated density (ix) 15 19,947 19,636 311 2,016 17,620 — Total development pipeline 60 41,819 39,567 2,252 7,186 31,306 1,075 (i) Estimated density across the various components of the development pipeline is expressed as NLA, which represents approximately 90% of Gross Floor Area (GFA) for residential rental and inventory developments. This conversion factor is an estimate, which is based on a number of assumptions including but not limited to, site plan approval, final building design and floor plans as well as the mix of commercial and residential space in a multi-use development project. (ii) Given the range of development activities and the multi-phase nature of the development projects included in the total development pipeline, a single investment property could have more than one project. Therefore, the number of projects should not be viewed as equivalent to the number of properties under development. (iii) PUD NLA includes NLA for air right sales in addition to commercial and residential rental NLA, but excludes NLA for condominiums and townhouse projects which are reported separately as Residential Inventory. (iv) Represents the density associated with the development of our residential condominiums and townhouse projects that are to be sold in the normal course of business upon project completion, not to be held for long-term capital appreciation or rental income. As such, the costs associated with this NLA are treated as residential inventory under IFRS and are thus not reported as PUD, even though this NLA forms part of RioCan’s development program and is included in the above estimated development pipeline. Condominium and townhouse developments are discussed under the Residential Inventory section of this MD&A.. (v) Greenfield Development projects include approximately 0.3 million square feet that are currently IPP. (vi) Urban Intensification projects include approximately 1.0 million square feet that are currently IPP including 0.8 million square feet of air rights that have been sold. (vii) Expansion and Redevelopment projects include approximately 0.2 million square feet of vacant NLA being redeveloped for future tenants. (viii) Active projects with cost estimates in progress include approximately 2.6 million square feet that are currently IPP. (ix) Future estimated density includes approximately 2.0 million square feet that are currently IPP. (x) Under IFRS, costs associated with air rights sales, which include, but are not limited to, the costs of underlying structure and infrastructure required for the closing of the air rights sales, are part of the costs of the properties under development until the air rights are sold. As a result, density related to air rights sales is included as part of the PUD square footage. It should be noted that the explanations or definitions in the footnotes for terms in the above table have the same meanings for the same terms across this Properties Under Development section of this MD&A and therefore will not be repeated after each relevant table.
RioCan First Quarter 2021 38 MANAGEMENT’S DISCUSSION AND ANALYSIS
Approximately 6.1 million square feet of NLA out of the total estimated 41.8 million square feet development pipeline is existing NLA which is currently income producing or air rights that have been sold, resulting in net incremental density estimated at 35.9 million square feet as of March 31, 2021. When compared to the Trust's development pipeline as of December 31, 2020, the development pipeline has increased marginally by 0.1 million square feet during the period primarily due to the addition of two Expansion and Redevelopment projects in Calgary and Ottawa, and one project Queen & Coxwell in Toronto under Active Projects with Costs Estimates in Progress, partially offset by the removal of one Urban Intensification project Pivot in Toronto as the project is now complete and in lease-up and the sale of a non-managing 50% interest in Rhythm in Ottawa. A key milestone of the development process is obtaining zoning approval. The following table details the Trust's development pipeline (at RioCan's interest) by zoning status.
Estimated Density (NLA) at RioCan's interest Components of PUD % of square (thousands of sq. ft., unless Number of footage Residential Residential Air Rights otherwise noted) Projects zoned Total PUD Inventory Commercial Rental Sale Zoning approved 38 33.9 % 14,158 12,677 1,481 4,397 7,205 1,075 Zoning applications submitted 7 18.4 % 7,714 7,254 460 773 6,481 — Future estimated density 15 47.7 % 19,947 19,636 311 2,016 17,620 — Total development pipeline 60 100.0 % 41,819 39,567 2,252 7,186 31,306 1,075 Zoned NLA increased marginally by 0.1 million square feet when compared to the year ended December 31, 2020 for the same reasons as noted earlier for the change in total development pipeline. Virtually all of the projects are located in the six major markets and are typically located in the vicinity of existing or planned substantive transit infrastructure with 73.4% of the development pipeline located in the GTA.
Estimated Density (NLA) at RioCan's Interest (thousands of sq. ft., unless otherwise noted) Number of projects NLA % of total NLA Six Major Markets Greater Toronto Area 38 30,703 73.4 % Ottawa 9 2,489 6.0 % Calgary 5 2,989 7.1 % Montreal 2 1,181 2.8 % Edmonton 2 2,712 6.5 % Vancouver 2 1,712 4.1 % Total Six Major Markets 58 41,786 99.9 % Other (i) 2 33 0.1 % Total development pipeline 60 41,819 100.0 % (i) Relates to smaller redevelopment projects. Estimated PUD Project Costs Estimated project costs include land costs measured at fair value of the land or existing IPP upon transfer to PUD, soft and hard construction costs, external leasing costs, tenant inducements, construction and development management fees, and capitalized interest and other carrying costs, as well as capitalized development staff compensation and other expenses, but are net of estimated costs recoveries and proceeds from air rights sales. RioCan's share of estimated PUD project costs as of March 31, 2021 for the 21 active PUD projects with detailed cost estimates (Category A as shown in the Development Pipeline table earlier), plus the current carrying costs of the development lands and other and net of projected proceeds from development dispositions, are summarized in the table below. Costs relating to condominiums and townhouse developments are excluded in the following table as they are included in Residential Inventory in the Condensed Consolidated Financial Statements and in this MD&A.
39 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
At RioCan's Interest Costs Incurred to Date Total Estimated (thousands of dollars or Number of Total PUD Estimated Completed PUD Costs thousands of sq. ft.) Projects NLA Costs (IPP) PUD Total to Complete Greenfield Development 2 431 $ 200,750 $ 118,829 $ 46,370 $ 165,199 $ 35,551 Urban Intensification 9 2,606 1,368,877 94,024 778,540 872,564 496,313 11 3,037 1,569,627 212,853 824,910 1,037,763 531,864 Expansion & Redevelopment (iii) 10 286 141,654 — 95,614 95,614 46,040 Active projects with detailed cost estimates 21 3,323 $ 1,711,281 $ 212,853 $ 920,524 $ 1,133,377 $ 577,904 Development Lands and Other (i) — 370,184 — 370,184 370,184 — Projected proceeds from dispositions (ii) — (20,579) — — — (20,579) Total $ 2,060,886 $ 212,853 $ 1,290,708 $ 1,503,561 $ 557,325 Fair Value to Date $ 206,079 $ 1,395,940 $ 1,602,019 (i) Development lands and other includes excess land and other properties that could be used for future developments. (ii) Represents firm or conditional land sales that the Trust intends to sell instead of holding for long-term income, which management considers to be reductions to its overall development costs. (iii) Expansion and Redevelopment projects tend to be shorter in duration and smaller in size compared to Greenfield and Urban Intensification projects, and generally pertain to the redevelopment of individual unit(s) at a property. Once the redevelopment of the individual unit(s) has/have been completed, the NLA and associated costs are transferred to IPP and no longer included in the development pipeline or development costs, resulting in nil completed IPP in this table. Total estimated costs for the 21 active projects with detailed cost estimates as of March 31, 2021 decreased by $208.2 million when compared to December 31, 2020. This decrease was primarily due to the removal of Pivot as the project is now complete and the sale of a non-managing 50% interest in Rhythm, partially offset by the addition of two projects in Expansion and Redevelopment. The above total estimated development costs as at March 31, 2021 are further broken down by committed and non-committed spending as follows:
At RioCan's Interest Costs Incurred to Date Total Estimated Completed Estimated PUD (thousands of dollars) Costs (IPP) PUD Total Costs to Complete Committed (i) $ 1,690,702 $ 212,853 $ 920,524 $ 1,133,377 $ 557,325 Non-committed 370,184 — 370,184 370,184 — Total $ 2,060,886 $ 212,853 $ 1,290,708 $ 1,503,561 $ 557,325 (i) A project is considered to be committed when all major planning issues have been resolved, anchor tenant(s) for the commercial components has/ have been secured, and/or construction is about to commence or has commenced. Although a non-committed project may have a completed portion, the Trust is not committed to completing the remaining phase(s) of the project if it so decides in due course. Development Lands and Other are included in non-committed projects. Incremental Value Creation For the 21 active properties under development with detailed costs estimates, as well as development lands and other, as summarized under the Estimated PUD Project Costs section of this MD&A, the Trust has recognized $98.5 million of cumulative fair value gains as of March 31, 2021. Most of the recognized cumulative fair value gains are related to the present value of the air rights sales at The Well based on firm agreements, increased valuations of excess land held for future development or fair value gains upon sales of co-ownership interests to partners such as in the case of Sandalwood Square. The Trust anticipates realizing substantial net value creation from its additional 18.3 million square feet of excess density that is either zoned or have zoning applications submitted as well as the 19.9 million square feet of future density. As of March 31, 2021, nominal fair value gains or inventory gains have been recognized relating to these 38.3 million square feet of density.
RioCan First Quarter 2021 40 MANAGEMENT’S DISCUSSION AND ANALYSIS
Properties under Development Continuity
(thousands of dollars) Three months ended March 31 2021 2020 Balance, beginning of period $ 1,353,982 $ 1,260,382 Acquisitions (i) — 34,039 Dispositions (i) (20,974) (21,715) Development expenditures 74,245 92,089 Transfers PUD to IPP - cost (40,869) (47,672) Transfers PUD to IPP - fair value (gains) losses 1,786 (12,250) Transfers IPP to PUD 22,900 9,745 Transfers to residential inventory — (4,519) Fair value gains, net 3,461 7,484 Earn-out consideration 1,409 — Balance end of period $ 1,395,940 $ 1,317,583
(i) Refer to the Acquisitions and Dispositions section of this MD&A for development property acquisitions and dispositions. Completed Developments in 2021 During the three months ended March 31, 2021, RioCan transferred $40.9 million in costs to income producing properties pertaining to 30,000 square feet of completed development projects. A summary of RioCan’s NLA development completions during the year is as follows:
NLA at RioCan's Interest (thousands of sq. ft.) 2021 RioCan’s % Tenants Property location ownership Total NLA Q1 Greenfield Development RioCan Windfields 100 % 22 22 The Canadian Brewhouse, Tiny Hoppers Daycare Total Greenfield Development 22 22 Expansion and Redevelopment Lincoln Field Shopping Centre 100 % 8 8 Pinecrest-Queensway Community Health Centre Total Expansion and Redevelopment 8 8 Total Development Completion 30 30 Annual Development Spending and Completion Outlook As most of the Trust's current development projects include a residential component, they are considered essential projects under the government guidelines and therefore we did not experience material slowdowns as a result of COVID-19 in the first quarter of 2021. Ontario and certain other provincial governments further tightened restrictive measures after quarter end, although no major RioCan development projects are materially impacted for the aforementioned reason. Annual development expenditures for 2021 are estimated to be in the $500 million range, which are net of projected cost recovery and proceeds from air rights sales. This estimated range of annual development expenditures includes approximately $400 million of costs on PUD projects and approximately $100 million on residential inventory projects. Inventory projects satisfy market demand for home ownership and enable the Trust to accelerate capital recycling to further fund its development program. For 2022 and beyond, the Trust expects that development spend will be lower than that of 2021 due to the completion of a significant portion of The Well in 2021, staggering development starts and sharing development costs and risks through existing and future strategic partnerships.
41 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Trust's long-term goal is to keep the total IFRS value of PUD and residential inventory on the consolidated balance sheet as a percentage of consolidated gross book value of assets at approximately 10% or lower (except for short-term fluctuations as large projects are completed), despite the maximum of 15% permitted under the Trust's revolving unsecured operating line of credit and other credit facilities agreements. As of March 31, 2021, this metric was 10.7%. Refer to Note 24 of the Condensed Consolidated Financial Statements for additional details. The modest 0.4% increase in this metric when compared to last year end was mainly driven by the timing of development spend and completions. The Trust has been funding and will continue to fund its developments primarily through proceeds from dispositions, sales proceeds from residential inventory developments or air rights sales, strategic development partnerships with existing or new partners, as well as retained earnings or excess cash flows after maintenance capital expenditures and distributions have been paid. The one-third distribution reduction that took effect in January 2021 will conserve approximately $152.0 million in a year to fund development and other value creation initiatives. The Trust's estimated development completions for the next two years are summarized as follows:
(thousands of dollars, unless otherwise noted) Projected Development Completions (at RioCan's Interest) Year of completion NLA Completion (SF) Cost Transfers from PUD to IPP (i) Incremental Stabilized NOI 2021 (ii) 711,456 $546,356 $23,161 2022 772,900 $732,208 $33,508 (i) 2022 cost transfers include multiple projects, most notably the substantial completion of The Well and its transfer to IPP. (ii) Represents development completions for 2021 including completions transferred to IPP in Q1 2021. The above project completion estimates are subject to changes due to risks and uncertainties as discussed in this MD&A. The cost transfer estimates represent estimated gross IFRS project costs net of proceeds from sales of air rights including costs recoveries and are not net of applicable interim or fee income during the development period to arrive at net project costs, which RioCan uses in estimating a project's development yield. Mixed-Use Residential Development RioCan is committed to its residential development program despite the current COVID-19 health crisis, even though the longer- term impact of the pandemic is difficult to predict. Refer to the Business Overview and Strategy, Business Environment and Outlook, and Risks and Uncertainties sections of this MD&A for more details. RioCan targets to develop approximately 10,000 residential rental units over the next decade. The following table summarizes the number of residential units that have been completed, are under construction or are expected to be in different phases of development by 2023:
Units (100%) Number of projects Condominium/ Total Residential Rental Townhouse (i) Total Units Projects Completed 1,218 925 2,143 7 Under construction 1,453 1,242 2,695 9 Subtotal 2,671 2,167 4,838 16 Different phases under development by 2023 (ii) 1,014 4,181 5,195 12 Total by 2023 3,685 6,348 10,033 28 (i) Includes 242 units from one condominium project at Bloor Street West in Toronto which is presented as an equity-accounted investment under IFRS given the partnership structure. (ii) Residential Rental Units included in different phases under development are only units that will be under construction by 2023. The following table summarizes the Trust's mixed-use residential projects that have been currently identified, some of which are actively being developed and others that are considered to be strong possible intensification opportunities. This summary does not include Greenfield Development and Urban Intensification projects that have commercial components only.
RioCan First Quarter 2021 42 MANAGEMENT’S DISCUSSION AND ANALYSIS
Estimated Density (NLA) at RioCan's interest PUD Components Total RioCan Ownership NLA at Residential Residential Air Rights (thousands of sq. ft.) Locations % (Partner) 100% Total PUD Inventory Commercial Rental Sale Active mixed-use residential projects with A detailed cost estimates (ii) Urban Intensification Dupont Street (Litho) (i) Toronto, ON 50% (Woodbourne) 178 89 89 — 16 73 — Fifth and Third East Village (5th & THIRD) (i) Calgary, AB 100% 795 795 795 — 153 — 642 50% (CD Capital/ Yorkville (11 YV) (i) Toronto, ON Metropia) 502 251 40 211 17 23 — 50% commercial (Allied), The Well (i) Toronto, ON 40% residential 2,614 1,199 1,199 — 766 — 433 (Allied/Diamond) The Well - (FourFifty The Well) (i) Toronto, ON 50% (Woodbourne) 393 196 196 — — 196 — College & Manning (Strada) (i) Toronto, ON 50% (Allied) 108 54 54 — 30 24 — Gloucester - Phase Two (Latitude) (i) Gloucester, ON 50% (Killam) 167 83 83 — — 83 — Elmvale Acres - Phase One (Luma) (i) Ottawa, ON 50% (Killam) 135 68 68 — 5 63 — Westgate - Phase One (Rhythm) (i) Ottawa, ON 50% (Woodbourne) 165 82 82 — 9 73 — Total active mixed-use residential projects with detailed cost estimates - 9 projects (ii) 5,057 2,817 2,606 211 996 535 1,075
Active mixed-use residential projects with cost B estimates in progress (iii) Approved Zoning Sunnybrook Plaza (i) Toronto, ON 50% (Concert) 339 170 170 — 22 148 — Clarkson Village (i) Mississauga, ON 100% 454 454 454 — 35 419 — Gloucester Future Phases (i) Gloucester, ON 50% (Killam) 482 241 241 — 10 231 — Brentwood Village - Phase Two (i) Calgary, AB 100% 810 810 810 — 405 405 — Millwoods Town Centre (i) Edmonton, AB 100% 1,649 1,649 1,649 — 749 900 — Elmvale Acres Future Phases (i) Ottawa, ON 100% 423 423 423 — 113 310 — Westgate Future Phases (i) Ottawa, ON 100% 537 537 537 — 67 470 — Southland Crossing (i) Calgary, AB 100% 968 968 968 — 187 781 — 100% of commercial, RioCan Windfields / U.C. Tower / Towns (i) (v) Oshawa, ON 50% of residential 1,812 1,256 700 556 700 — — (Tribute) Markington Square (i) Toronto, ON 100% 893 893 893 — 79 814 — RioCan Durham Centre (i) Ajax, ON 100% 292 292 292 — 8 284 — Queensway (i) Toronto, ON 100% 415 415 40 375 32 8 — Dufferin Plaza (i) Toronto, ON 50% (Maplelands) 449 224 15 209 15 — — Queen & Coxwell (i) Toronto, ON 50% (Context) 465 233 103 130 9 94 — Strawberry Hill Shopping Centre (i) Surrey, BC 100% 900 900 900 — — 900 — Jasper Gates Shopping Center (i) Edmonton, AB 100% 1,063 1,063 1,063 — 243 820 — 2955 Bloor Street (i) Toronto, ON 100% 96 96 96 — 10 86 — 12,047 10,624 9,354 1,270 2,684 6,670 — Zoning applications submitted RioCan Grand Park Mississauga, ON 100% 216 216 216 — 17 199 — RioCan Scarborough Centre Toronto, ON 100% 3,851 3,851 3,851 — 71 3,780 — RioCan Leaside Centre Toronto, ON 100% 1,344 1,344 884 460 240 644 — RioCan Hall Toronto, ON 100% 757 757 757 — 280 477 — Sandalwood Square Mississauga, ON 50% (Boardwalk) 1,196 598 598 — 15 583 — Impact Plaza Surrey, BC 100% 812 812 812 — 114 698 — 2323 Yonge Street Toronto, ON 50% (Streamliner) 271 136 136 — 36 100 — 8,447 7,714 7,254 460 773 6,481 — Total active mixed-use residential projects with cost estimates in progress - 24 projects (iii) 20,494 18,338 16,608 1,730 3,457 13,151 — Total active mixed-use residential projects - 33 projects 25,551 21,155 19,214 1,941 4,453 13,686 1,075
C Future estimated density - 15 projects (iv) 24,085 19,947 19,636 311 2,016 17,620 —
Total mixed-use residential developments - 48 projects 49,636 41,102 38,850 2,252 6,469 31,306 1,075
Mixed-use residential developments as a percentage of total development pipeline 98.3 % 98.2 % 100.0 % 90.0 % 100.0 % 100.0 %
43 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
(i) As at the date of this MD&A, RioCan has obtained final zoning approvals for the development of these properties. The above table includes only mixed-use residential development projects and thus does not include Greenfield Development and Expansion and Redevelopment projects that do not have residential components. As a result, the Trust has more projects with zoning approvals than what is included in this table. (ii) Active mixed-use residential projects with detailed cost estimates include approximately 1.0 million square feet that are currently IPP including 0.8 million of air rights that have been sold. (iii) Active mixed-use projects with cost estimates in progress include approximately 2.6 million square feet that are currently IPP. (iv) Future estimated density includes approximately 2.0 million square feet that is currently IPP. (v) Excludes Phase One of RioCan Windfields which includes 0.1 million square feet of commercial space. Refer to the Greenfield Development section of this MD&A for further details. Mixed-use residential projects account for approximately 98.3% or 41.1 million square feet of NLA of the Trust’s total estimated development pipeline, of which 13.4 million square feet currently have zoning approvals, 7.7 million square feet currently have zoning applications submitted and 19.9 million square feet represent sites with future density. In comparison to Q4 2020 mixed- use residential projects decreased by 0.1 million square feet due to similar factors as explained earlier for the decrease in the entire development pipeline. Residential developments including rental, air rights sales, and residential inventory account for 82.8% or 34.6 million square feet of the Trust's current development pipeline. Greenfield Development
As at March 31, 2021, RioCan's two active commercial greenfield development projects with detailed costs estimates are summarized as follows:
At RioCan's Interest Total NLA Upon Project Completion Costs incurred to date Estimated Anticipated RioCan's Total PUD % Date of (thousands of dollars or % Estimated Costs to Commercial Development thousands of sq. ft.) Ownership Completed PUD Total Costs Completed PUD Total Complete Leased (i) Completion
East Hills, Calgary, AB 40 % 176 116 292 $ 122,099 $ 62,800 $ 30,022 $ 92,822 $ 29,277 61 % 2023
RioCan Windfields Phase One, Oshawa, ON (ii) 100 % 110 29 139 78,651 56,029 16,348 72,377 6,274 89 % 2021
Total Estimated PUD Costs 286 145 431 $ 200,750 $ 118,829 $ 46,370 $ 165,199 $ 35,551 Fair Value to date $ 114,575 $ 30,419 $ 144,994 (i) Leasing activity includes leasing that is conditional on receiving municipal approvals and meeting construction deadlines. The percentage of commercial leasing activity is as at May 3, 2021. (ii) Excluding approximately 17 thousand square feet of planned but still undeveloped pads, 100% of the space currently under construction has been leased. Windfields Farm is a multi-phase, mixed-use project that includes commercial and residential uses. Phase One of the commercial component of the project has detailed cost estimates approved and is therefore included in the above table. Further details of the remaining components of the Windfields Farm project are included in the Mixed-Use Residential Development and Residential Inventory sections of this MD&A. As of May 3, 2021, approximately 300,000 square feet of the above greenfield development NLA has committed leases, which includes tenants that have taken possession of the space, at a weighted average net rental rate of approximately $22.84 per square foot.
RioCan First Quarter 2021 44 MANAGEMENT’S DISCUSSION AND ANALYSIS
Urban Intensification A focus within our development growth strategy is urban intensification, which is the category for our mixed-use residential development program. As at March 31, 2021, the Trust has nine active urban intensification projects with detailed cost estimates, which are summarized in the following table. Most of the nine projects are located in Toronto and Ottawa, except for one located in Calgary.
At RioCan's Interest Total PUD NLA Upon Project Completion Costs incurred to date Estimated Anticipated RioCan’s Completed Total PUD % Date of (thousands of dollars or % PUD Total Estimated Completed PUD Total Commercial thousands of sq. ft.) Ownership (viii) Costs Costs to Leased (i) Development Complete Completion Dupont Street (Litho), Toronto, ON (iv) 50 % — 89 89 $ 77,782 $ — $ 56,479 $ 56,479 $ 21,303 100 % 2021 Fifth and Third East Village (5th & THIRD), 100 % 774 21 795 95,837 84,901 7,901 92,802 3,035 89 % 2021 Calgary, AB (iv) (vii) Yorkville (11 YV), Toronto, ON (iv) (vi) 50 % — 40 40 47,501 — 17,660 17,660 29,841 n/a 2025 Gloucester - Phase Two (Latitude), Ottawa, ON 50 % — 83 83 45,754 — 31,611 31,611 14,143 n/a 2021 (iv) College & Manning (Strada),Toronto, ON 50 % 27 27 54 42,648 9,123 25,330 34,453 8,195 91 % 2021 (iv) 50% of commercial The Well, Toronto, ON 40% of 135 1,064 1,199 821,561 — 578,646 578,646 242,915 85 % 2021-2022 (iii) (iv) (v) residential air rights The Well - (FourFifty The Well), Toronto, ON 50 % — 196 196 142,650 — 15,499 15,499 127,151 n/a 2023 (iv) (ix) Elmvale Acres - Phase One (Luma), Ottawa, 50 % — 68 68 45,926 — 26,033 26,033 19,893 n/a 2022 ON (iv) Westgate - Phase One (Rhythm), Ottawa, ON 50 % — 82 82 49,218 — 19,381 19,381 29,837 n/a 2022 (iv) Total Estimated Costs (ii) 936 1,670 2,606 $ 1,368,877 $ 94,024 $ 778,540 $ 872,564 $ 496,313 Fair Value to date $ 91,503 $ 849,017 $ 940,520 (i) Leasing activity includes leasing that is conditional on receiving municipal approvals and meeting construction deadlines. Leasing shown in this table is calculated as a percentage of commercial square footage only as there is typically no pre-leasing for residential rental square footage. The percentage of commercial leasing activity is as at May 3, 2021. (ii) Total Costs incurred to date exclude fair value gains of $70.5 million for properties under development. (iii) The total estimated PUD costs for The Well are net of approximately $54.0 million of recoverable costs at RioCan's interest relating to matters such as parking, parkland dedication, and an Enwave thermal energy tank and approximately $75.6 million of air rights sales based on the air rights sale agreement and other agreements in place. Air rights sales for buildings A & B were closed during Q4 2020 while air rights sales for building F (FourFifty The Well) were closed subsequent to the quarter end on April 7, 2021. Over 98% of the hard costs have been tendered and 98% awarded. (iv) These projects are committed, representing projects where all planning issues have been resolved, anchor tenant(s) has or have been secured, and/or construction is about to commence or has commenced. (v) The 992,001 square feet or 85% of total commercial square footage leased at The Well is based on committed leases, including extension rights, for office space only. The Well project will be completed in phases with the first office possession expected to occur in 2021, with the majority of the phases expected to reach completion by 2022. Retail leasing has commenced at The Well and currently we have committed leases for 34% of the retail space. (vi) The Yorkville project (11 YV) consists of three components; the condominium tower, rental replacement units and retail. The NLA noted above represents only the rental replacement units and retail components of the project representing approximately 17% of the total area. For information on the condominium component refer to the Residential Inventory section in the MD&A. (vii) Approximately $32.1 million of air rights sale proceeds were received upon closing during 2020, which have been netted in total estimated and completed costs. (viii) Comp leted NLA includes units transferred to IPP as well as NLA associated with air rights sold. As of March 31, 2021 RioCan has sold 0.8 million square feet of air rights. (ix) On April 7, 2021, RioCan completed the acquisition of an additional 10% of the air rights in The Well Building F (FourFifty The Well) for the net purchase price of $7.6 million, including transaction costs. Following this transaction, RioCan owns 50% of the air rights at FourFifty The Well. As of May 3, 2021, approximately 708,000 square feet of the above urban intensification NLA under development has committed or in-place leases at a weighted average net rent rate of approximately $39.80 per square foot.
45 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Expansion & Redevelopment A summary of RioCan’s expansion and redevelopment projects as at March 31, 2021 is as follows:
At RioCan's Interest Costs Incurred to Date RioCan's Total PUD Total % NLA Upon Estimated Costs Historical Estimated PUD (thousands of dollars or thousands of sq. ft.) Ownership Project Costs Incurred to IPP Costs Total Cost to Completion Date (iii) Complete Burlington Centre, Burlington, ON 50 % 9 $ 4,736 $ 2,153 $ 2,481 $ 4,634 $ 102 Five Points Shopping Centre, Oshawa, ON 100 % 10 7,310 324 2,680 3,004 4,306 Place St Jean, Saint-Jean-sur-Richelieu, QC 100 % 2 1,264 361 — 361 903 Tanger Outlets - Kanata, Kanata, ON 50 % 18 7,991 2,615 1,314 3,929 4,062 Yonge Sheppard Centre Commercial, Toronto, ON 100 % 31 38,251 31,416 — 31,416 6,835 Lincoln Fields Shopping Centre, Ottawa, ON 100 % 52 35,260 17,702 4,037 21,739 13,521 RioCan Shawnessy, Calgary, AB 100 % 124 35,012 104 22,900 23,004 12,008 Properties with former Sears units (ii) - 3 projects 40 11,830 4,461 3,066 7,527 4,303 Total Estimated PUD Costs (i) 286 $ 141,654 $ 59,136 $ 36,478 $ 95,614 $ 46,040 PUD Fair Value to date $ 64,762 (i) Total estimated costs include carrying amounts transferred from IPP for redevelopment and exclude historical fair value losses of $30.9 million. (ii) RioCan transferred carrying value associated with the spaces formerly occupied by Sears from IPP to PUD. The estimated PUD costs to complete are based upon various scenarios with the objective of developing these assets, such that RioCan can attract new tenants, achieve higher rents and improve the overall shopping centres. (iii) Historical costs were costs of IPP prior to the transfer to PUD.
RioCan First Quarter 2021 46 MANAGEMENT’S DISCUSSION AND ANALYSIS
Residential Inventory Residential inventory is comprised of properties acquired or developed which RioCan intends to dispose all or part of in the ordinary course of business, rather than hold on a long-term basis for capital appreciation or for rental income purposes. It is expected that the Trust will earn a return on these assets through a combination of (i) property operating income earned during the relatively short interim occupancy period, which will be included in net income, and (ii) sales proceeds.
At RioCan's Interest
(thousands of Condominium/Townhouse Costs incurred to date dollars or Inventory thousands of Units Upon Project Completion (at 100%) Estimated gain sq. ft., except RioCan's Total Costs to % Pre ($ Anticipated where otherwise Ownership Completed Estimated Commissions Complete - sold millions) Date of noted) % (Partner) (i) Inventory Total Costs (ii) Completed Inventory (ii) Total (ii) (iii) (v) Completion A. Active mixed-use residential inventory projects with detailed cost estimates U.C. Towns, 50% Oshawa, ON (Tribute) 170 — 170 $ 35,066 $ 35,066 $ — $ — $ 35,066 $ — 100.0 % $13.0 2020 U.C. Uptowns, 50% $4.5 - 2021 - Oshawa, ON (Tribute) — 153 153 31,495 — 9,723 431 10,154 21,341 100.0 % $5.0 2022 U.C. Tower, 50% $16.0 - Oshawa, ON (Tribute) — 503 503 73,185 — 21,073 1,595 22,668 50,517 100.0 % $17.0 2022 Yorkville (11 50% (CD YV), Toronto, Capital / $72.0 - ON Metropia) — 586 586 253,666 — 87,885 5,733 93,618 160,048 98.5 % $76.0 2025 $105.5- Subtotal 170 1,242 1,412 $ 393,412 $ 35,066 $ 118,681 $ 7,759 $ 161,506 $ 231,906 $111.0 B. Active mixed-use residential inventory projects with detailed cost estimates in progress U.C. Tower / Towns Future Phases, Oshawa, ON 50% 2023 - (iv) (Tribute) — 1,065 1,065 TBD $ — $ 1,208 $ — $ 1,208 TBD n.a TBD 2027
Dufferin Plaza, 50% Toronto, ON (Maplelands) — 561 561 TBD — 16,410 — 16,410 TBD n.a TBD 2027 Shoppers World Brampton Phase One, Brampton, ON 100 % — 274 274 TBD — 2,564 — 2,564 TBD n.a TBD 2025 RioCan Leaside Centre, Toronto, ON 100 % — 637 637 TBD — 38,775 — 38,775 TBD n.a TBD 2027 Queensway, Toronto, ON 100 % — 533 533 TBD — 31,199 — 31,199 TBD n.a TBD 2025 Clarkson Village, Mississauga, ON 100 % — 470 470 TBD — 18,673 — 18,673 TBD n.a TBD 2024+ Queen & Coxwell 50% $40.0 - 2024 - Toronto, ON (Context) — 399 399 TBD — — — — TBD 88.6 % $50.0 2025 Subtotal — 3,939 3,939 TBD $ — $ 108,829 $ — $ 108,829 TBD n.a TBD
Total 170 5,181 5,351 TBD $ 35,066 $ 227,510 $ 7,759 $ 270,335 TBD n.a TBD (i) Excludes a total of 755 condominium units at eCondosTM and KinglyTM for which all final closings have occurred prior to 2020. (ii) Selling commissions paid are included in prepaid and other assets and will be transferred to costs of sales upon buyer possession of the units. Such selling commissions are included in the total estimated costs and estimated costs to complete in the above table. (iii) % Pre-sold as of May 3, 2021. (iv) U.C. Tower / Towns Future Phases represents the additional condominiums and townhomes expected to be developed at the site. (v) Queen & Coxwell inventory gain is an estimate that is based on a very preliminary proforma which is currently under review by the partners. For the quarter, the following new project was added to residential inventory. • Queen & Coxwell - This is a 50/50 joint venture project with Context and in collaboration with the City of Toronto and Toronto Community Housing Corporation (TCHC), to develop a mixed-use master plan community on 3.5 acres of land located on the southwest corner of Queen Street East and Coxwell Avenue in Toronto, Ontario. Serviced by the Queen Streetcar and a short bus ride from the Coxwell Subway Station, and steps from waterfront Lake Ontario and Ashbridges Bay in Toronto East, this mixed-use project will contribute to the revitalization of the neighbourhood and provide much-needed housing for all income levels and introduces vital retail amenities to serve this growing neighbourhood. This project also has important ESG implications as highlighted in the ESG Priorities and Progress section of this MD&A.
47 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
The overall project consists of the following components: ◦ A new building to replace the TCHC’s existing 120 apartment units on the site, which will be retained and owned 100% by TCHC; ◦ New residential space consisting of 367 new condominium units, 183 market rental units and 50 affordable rental units, as well as 32 affordable rental units that will ultimately be sold to the City upon completion at a pre- determined price; and ◦ Approximately 16,000 square feet of new podium retail space. The land is currently owned by TCHC. Land title transfer to RioCan and Context is pending part-lot severance which is expected in the summer of 2021 and at which point the partners will proceed with demolition activity. The partners have started condominium pre-sales with 88.6% (325 units) pre-sold as of May 3, 2021 (at 100%), despite the pandemic. RioCan has forward purchase obligations to purchase Context’s 50% interest in the retail and residential rental components of the project at predetermined purchase prices upon meeting certain pre-determined thresholds such as reaching certain stabilized NOI target, certain time limits, or certain planning act compliance requirements. More information will be disclosed upon land transfer and start of project construction. The partners have applied for financing through the Rental Construction Financing Initiative (“RCFI Financing”) to help finance the non-condominium components of the project. RCFI Financing is provided directly by the Canada Mortgage Housing Corporation (“CMHC”) for eligible affordable rental housing projects and typically bears interest at rates lower than standard CMHC insured loans. If the application is successful, such financing will serve to further augment the overall project economics. In addition to the above projects reported under Residential Inventory by IFRS, the Trust has a 50% interest in one condominium project at Bloor Street West in Toronto with approximately 242 condominium units. This project is reported as an equity-accounted investment under IFRS given the partnership structure. Overall, in addition to the 1,242 condominium or townhouse units currently under construction, the Trust has eight active condominium or townhouse projects in various stages of development, totalling an estimated 4,181 units, which are scheduled to be completed in phases between 2023 and 2027. The following table shows changes in the aggregate carrying value of RioCan's residential inventory during the quarter:
(thousands of dollars) Three months ended March 31 2021 2020 Balance, beginning of period $ 214,181 $ 108,956 Acquisitions — — Dispositions — — Development expenditures 13,329 10,946 Transfers from investment properties — 4,519 Balance, end of period $ 227,510 $ 124,421 MORTGAGES AND LOANS RECEIVABLE Contractual mortgages and loans receivable as at March 31, 2021 and December 31, 2020 are comprised of the following:
(thousands of dollars) Contractual interest rates Weighted average As at Low High interest rate (i) March 31, 2021 December 31, 2020 Mezzanine financing to co-owners 4.20% 6.35% 5.75 % $ 118,109 $ 128,884 Vendor-take-back and other 5.00% 6.35% 5.64 % 31,986 31,762 Total 4.20% 6.35% 5.73 % $ 150,095 $ 160,646 (i) Information presented as at March 31, 2021. All of the $150.1 million of mortgages and loans receivable as at March 31, 2021 are carried at amortized cost. RioCan’s Declaration of Trust contains provisions that have the effect of limiting the aggregate value of the investment by the Trust in mortgages, other than mortgages taken back on the sale of RioCan’s properties, to a maximum of 30% of consolidated Unitholders’ equity. Additionally, RioCan is limited in the amount of capital that can be invested in greenfield developments and development properties held for resale, including any mortgages receivable to fund the co-owners’ share of such developments referred to as mezzanine financing, to no more than 15% of the book value of RioCan's total consolidated Unitholders’ equity. At March 31, 2021, RioCan was in compliance with these restrictions.
RioCan First Quarter 2021 48 MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL RESOURCES AND LIQUIDITY Capital Management Framework RioCan defines capital as the aggregate of Unitholder and preferred Unitholders’ equity and debt. The Trust’s capital management framework is designed to maintain a level of capital that: • complies with investment and debt restrictions pursuant to the Trust’s Declaration; • complies with debt covenants; • enables RioCan to achieve target credit ratings; and • funds the Trust’s business strategies and builds long-term Unitholder value. The key elements of RioCan’s capital management framework are set out in the Declaration of Trust, and/or approved by the Trust’s Board, through the Board’s annual review of the strategic plan and budget, supplemented by periodic Board and related committee meetings. Management monitors capital adequacy of the Trust by assessing performance against the approved annual plan throughout the year, which is updated accordingly, and by monitoring adherence to investment and debt restrictions contained in the Declaration of Trust and debt covenants (refer to Note 24 of RioCan's Condensed Consolidated Financial Statements). In selecting appropriate funding choices, RioCan’s objective is to manage its capital structure such that it diversifies its funding sources while minimizing its funding costs and risks. RioCan expects to be able to satisfy all of its financing requirements through the use of some or all of the following: cash on hand, cash generated by operations, refinancing of maturing debt, utilization of its operating line of credit, credit facilities, construction financing facilities, sale of non-core and secondary market properties or sale of partial interests in developments or air rights, and through public offerings of unsecured debentures and common equity. In challenging market conditions, the Trust could finance certain assets currently unencumbered by debt or issue preferred units. Total Capital RioCan uses both debt and equity in its capital structure, which is summarized as follows as at March 31, 2021:
(thousands of dollars) IFRS RioCan's proportionate share As at March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020 Capital: Debentures payable $ 3,091,134 $ 3,340,278 $ 3,091,134 $ 3,340,278 Mortgages payable 2,750,234 2,797,066 2,912,616 2,905,403 Lines of credit and other bank loans 982,420 790,539 1,021,332 819,255 Total debt $ 6,823,788 $ 6,927,883 $ 7,025,082 $ 7,064,936 Total equity 7,795,125 7,734,973 7,795,125 7,734,973 Total capital $ 14,618,913 $ 14,662,856 $ 14,820,207 $ 14,799,909 Total assets $ 15,174,530 $ 15,267,708 $ 15,403,565 $ 15,414,445 Cash and cash equivalents (i) $ 79,685 $ 238,456 $ 86,899 $ 240,659 (i) Included in total assets.
49 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Debt Metrics The following table summarizes the Trust's key debt metrics presented on both an IFRS and RioCan's proportionate share basis:
Rolling 12 months ended IFRS RioCan's proportionate share Targeted March 31, December 31, March 31, December 31, Ratios 2021 2020 2021 2020 Ratio of total debt to total assets (net of cash and cash equivalents) (i) 38.0%-42.0% 44.7 % 44.5 % 45.3 % 45.0 % Debt to Adjusted EBITDA (i) <8.0x 10.03 9.49 10.02 9.47 Interest coverage (i) >3.00x 2.99 3.11 2.99 3.10 Debt service coverage (i) >2.25x 2.50 2.60 2.49 2.60 Fixed charge coverage (i) >1.10x 1.03 1.02 1.05 1.03 Ratio of floating rate debt to total debt <15.0% 4.1% 1.3% 4.8% 1.9% Weighted average term to maturity (in years) (ii) 3.88 3.86 3.78 3.83 Weighted average contractual interest rate (ii) 3.00% 3.13% 3.03% 3.14% Weighted average effective interest rate (ii) 3.08% 3.21% 3.10% 3.22% (i) Refer to the Non-GAAP Measures section of this MD&A for further details. See tables below for the calculation of Adjusted EBITDA for the respective periods. (ii) Information is as of respective period end. The Trust's leverage ratio (total debt to total assets) at proportionate share increased marginally from December 31, 2020, mainly due to higher debt levels (net of cash and cash equivalents) resulting from timing of development completions relative to development spends. The Trust remains committed to maintaining a strong balance sheet and maintains its long-term goal to lower this metric to its target range of between 38% - 42% although near-term increase is possible given the pandemic. The Trust's Debt to Adjusted EBITDA at proportionate share increased to 10.02x for the rolling twelve months ended March 31, 2021 when compared to December 31, 2020. The increase was primarily because this is a twelve-month trailing metric and thus the ratio for the current quarter included four quarters under the pandemic while the year end ratio included only three quarters under the pandemic. The Trust's long-term goal remains to lower this metric to its target range of below 8.0x. It expects a marginal increase in this ratio in the near-term during the pandemic, but disposition sale proceeds and continuous operations improvements will bring down the metric in the medium-term. The interest coverage ratio at RioCan's proportionate share for the rolling twelve months ended March 31, 2021 is slightly lower than its target of 3.0x and declined marginally compared to December 31, 2020, mainly due to lower Adjusted EBITDA because of four quarters under the pandemic, partially offset by lower interest costs from the net impact of lower average cost of debt and higher average debt balances. Debt service coverage at RioCan's proportionate share for the rolling twelve months ended March 31, 2021 also declined but remained above its target of 2.25x due to lower Adjusted EBITDA as noted above and higher scheduled principal amortization, partially offset by lower interest costs as noted above. The fixed charge coverage ratio at RioCan's proportionate share for the rolling twelve months ended March 31, 2021 was slightly higher than December 31, 2020, primarily as a result of lower interest costs and lower distributions as a result of the one-third distribution reduction effective in January 2021, which will increase the fixed charge coverage ratio in 2021 relative to 2020, partially offset by lower Adjusted EBITDA. The Trust has been reducing its floating interest rate debt exposure over the last couple of years. Its floating interest rate debt exposure increased from December 31, 2020 mainly because the prior year end ratio was unusually low due to the timing of the green bond issue in December 2020 and the timing of the use of proceeds from the green bond issue to redeem the $250.0 million fixed rate Series R unsecured senior debenture in January 2021. The Trust's floating interest rate debt level is primarily driven by utilization on its revolving unsecured line of credit, which could vary quarter by quarter depending on the timing of various factors such as debenture or mortgage financing timing, and timing of dispositions, acquisitions and development spend.
RioCan First Quarter 2021 50 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents a reconciliation of consolidated net income attributable to Unitholders to Adjusted EBITDA:
12 months ended IFRS RioCan's proportionate share March 31, December 31, March 31, December 31, (thousands of dollars) 2021 2020 2021 2020 Net loss attributable to Unitholders $ (60,873) $ (64,780) $ (60,873) $ (64,780) Add (deduct) the following items: Income tax expense (recovery): Current (1,722) (275) (1,722) (275) Deferred 9,905 10,905 9,905 10,905 Fair value losses on investment properties, net 493,656 526,775 503,313 536,388 Change in unrealized fair value on marketable securities (i) — 10,219 — 10,219 Internal leasing costs 10,001 10,192 10,001 10,192 Non-cash unit-based compensation expense 14,053 9,120 14,053 9,120 Interest costs 179,332 180,811 184,390 185,599 Debenture prepayment costs 7,018 — 7,018 — Depreciation and amortization 4,256 4,342 4,256 4,342 Transaction losses on the sale of investment properties, net (ii) 636 503 636 503 Transaction costs on investment properties 3,826 768 3,827 768 Operational lease revenue and expenses from ROU assets 2,652 2,572 2,621 2,544 Adjusted EBITDA $ 662,740 $ 691,152 $ 677,425 $ 705,525
Debt, net of cash and cash equivalents is calculated as follows: Average debt outstanding $ 6,754,038 $ 6,667,444 $ 6,895,909 $ 6,793,278 Less: average cash and cash equivalents (108,721) (111,487) (111,474) (113,407) Debt, net of cash and cash equivalents $ 6,645,317 $ 6,555,957 $ 6,784,435 $ 6,679,871 Debt to Adjusted EBITDA 10.03 9.49 10.02 9.47 (i) The fair value gains on marketable securities in the consolidated statements of income include both the change in unrealized fair value and realized gains on the sale of marketable securities. By adding back the change in unrealized fair value on marketable securities, RioCan effectively continues to include realized gains or losses on the sale of marketable securities in Adjusted EBITDA and excludes unrealized fair value gains (losses) on marketable securities in Adjusted EBITDA. Refer to the Non-GAAP Measures section of this MD&A for more detailed discussion on Adjusted EBITDA. (ii) Includes transaction gains and losses realized on the disposition of investment properties. Credit Ratings RioCan intends to maintain strong debt service coverage and fixed charge coverage ratios as part of its commitment to maintaining its investment-grade debt ratings. RioCan is rated by two independent credit rating agencies: Standard and Poor’s (S&P) and DBRS Morningstar (DBRS). A credit rating generally provides an indication of the risk that the borrower will not fulfill its obligations in a timely manner. On October 12, 2020 S&P confirmed the rating of BBB with stable outlook and on November 30, 2020 DBRS confirmed the rating of BBB(high) and changed the trends on the ratings to Negative from Stable. A credit rating of BBB- or higher is an investment-grade rating. The following table summarizes RioCan’s credit ratings as at March 31, 2021:
S&P DBRS Credit Rating Outlook Credit Rating Trend Issuer Credit Rating BBB Stable BBB (high) Negative Senior Unsecured Debentures BBB N/A (i) BBB (high) Negative (i) S&P does not provide an outlook on the Debentures.
51 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Total Debt Profile RioCan’s debt maturity profile and future repayments are as outlined below:
Contractual principal maturities and interest rates Weighted Weighted Lines of Weighted Weighted average average credit average Total average Debentures contractual Mortgages contractual and other contractual aggregate contractual (thousands of dollars) payable interest rate payable interest rate bank loans interest rate debt interest rate Year of debt maturity 2021(i) $ 300,000 2.19 % $ 139,673 4.12 % $ 57,478 1.65 % $ 497,151 2.67 % 2022 550,000 3.25 % 212,695 3.17 % — — % 762,695 3.22 % 2023 500,000 3.42 % 340,786 3.31 % 229,866 3.14 % 1,070,652 3.32 % 2024 300,000 3.29 % 338,013 3.10 % 658,578 2.94 % 1,296,591 3.07 % 2025 500,000 2.58 % 527,202 3.34 % 38,630 2.32 % 1,065,832 2.94 % Thereafter 950,000 2.54 % 1,195,399 3.06 % — — % 2,145,399 2.83 % $ 3,100,000 2.85 % $ 2,753,768 3.21 % $ 984,552 2.89 % $ 6,838,320 3.00 % Unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition of — 4,395 443 4,838 properties and unamortized debt modification losses Unamortized debt financing costs, net of premiums and discounts (8,866) (7,929) (2,575) (19,370) Balance, end of period $ 3,091,134 $ 2,750,234 $ 982,420 $ 6,823,788 (i) Amounts pertain to the remaining nine months of 2021. The total debt continuity schedule for the three months ended March 31, 2021 was as follows:
(thousands of dollars) Lines of Credit Debentures Mortgages and Other Bank Three months ended March 31, 2021 Payable Payable Loans Total Contractual obligations, beginning of period $ 3,350,000 $ 2,801,848 $ 792,854 $ 6,944,702 Borrowings — 256,000 191,698 447,698 Scheduled amortization — (11,522) — (11,522) Repayments (250,000) (209,922) — (459,922) Disposed on the sale of properties — (82,636) — (82,636) Contractual obligations, end of period $ 3,100,000 $ 2,753,768 $ 984,552 $ 6,838,320 Unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition of properties and unamortized debt modification losses — 4,395 443 4,838 Unamortized debt financing costs, net of premiums and discounts (8,866) (7,929) (2,575) (19,370) Balance, end of period $ 3,091,134 $ 2,750,234 $ 982,420 $ 6,823,788
Debentures Payable RioCan’s debentures maturity profile and future repayments are as outlined below: Weighted average Principal Year of debenture maturity contractual interest rate maturities 2021(i) 2.19 % $ 300,000 2022 3.25 % 550,000 2023 3.42 % 500,000 2024 3.29 % 300,000 2025 2.58 % 500,000 Thereafter 2.54 % 950,000 Contractual obligations $ 3,100,000 Unamortized debt financing costs (8,866) $ 3,091,134 (i) Amounts pertain to the remaining nine months of 2021 and are comprised of $300 million Series Z unsecured debentures that were redeemed in full upon maturity on April 9, 2021.
RioCan First Quarter 2021 52 MANAGEMENT’S DISCUSSION AND ANALYSIS
The unsecured debentures have covenants similar to the Trust's 60% debt to aggregate assets limit as set out in RioCan’s Declaration of Trust, the maintenance of at least $1.0 billion in Adjusted Unitholders' Equity (as defined in the indenture) and maintenance of an interest coverage ratio of 1.65 times or better. There are no requirements under the unsecured debenture covenants that require RioCan to maintain unencumbered assets. The Series I debentures, which are due in 2026 and are $100 million in aggregate, have an additional provision that provides RioCan with the right, at any time, to convert these debentures to mortgage debt, subject to the acceptability of the security given to the debenture holders. In such an event, the covenants relating to the 60% leverage limit, minimum Adjusted Unitholders' Equity and interest coverage ratio would be eliminated for this series of debentures. Redemption On January 15, 2021, RioCan redeemed, in full, its $250.0 million, 3.716% Series R unsecured debentures due December 13, 2021, in accordance with their terms, at a total redemption price of $256.8 million, plus accrued and unpaid interest of $0.8 million, up to but excluding, the redemption date. The Trust recorded a prepayment cost of $7.0 million, which includes a write-off of the related unamortized deferred financing costs. On April, 9, 2021, RioCan redeemed, in full, its $300.0 million, 2.194% Series Z unsecured debentures upon maturity. Mortgages Payable Mortgages payable consist of the following:
(thousands of dollars) As at March 31, 2021 December 31, 2020 Fixed rate mortgages (i) (ii) $ 2,750,234 $ 2,797,066 (i) Includes hedged floating rate mortgages. (ii) Amount outstanding deducts a total of $3.5 million in unamortized financing costs, net of unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition of properties and unamortized debt modification losses. At the outset of 2021 , RioCan had $380.0 million of mortgage principal maturing in 2021 at a weighted average contractual interest rate of 4.23%. For the three months ended March 31, 2021, RioCan completed new term mortgage borrowings of $256.0 million and renewed maturity balances of $21.8 million at a combined weighted average interest rate of 2.29% and a weighted average term of six years, repaid $221.4 million of mortgage balances and scheduled amortization and disposed of $82.6 million mortgages on the sale of investment properties. Included in mortgages payable at March 31, 2021 are CMHC insured mortgages for Frontier and eCentral and the retail component ePlace in the aggregate net carrying amount of $107.6 million (at RioCan's interest), at a weighted average effective interest rate of 2.50% and a weighted average remaining term of 9.1 years. The decrease in CMHC financing over the prior year end was primarily because of the sale of a 50% non-managing interest in eCentral and the retail component of ePlace. Maximizing CMHC insured mortgages is a key component of the Trust’s debt strategy as it provides access to a new source of financing and lowers its overall cost of debt. The majority of our mortgage debt provides recourse to the assets of the Trust, as opposed to only having recourse to the specific property charged. The Trust follows this policy as it generally results in lower interest rates for the Trust. Lines of Credit and Other Bank Loans Lines of credit and other bank loans consist of the following:
(thousands of dollars) As at March 31, 2021 December 31, 2020 Revolving unsecured operating line of credit (i) (ii) $ 152,498 $ (1,648) Non-revolving unsecured credit facilities (i) 699,371 699,333 Construction lines and other bank loans 130,551 92,854 $ 982,420 $ 790,539 (i) Amount outstanding deducts a total of $2.1 million in unamortized financing costs, net of unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition of properties and unamortized debt modification losses. (ii) The negative balance shown for the 2020 year end represents unamortized financing costs. Revolving Unsecured Operating Line of Credit As at March 31, 2021, RioCan had a drawn balance of $154.0 million and $846.0 million of credit available to be drawn from this revolving unsecured operating line of credit compared to $1.0 billion of undrawn credit availability as at December 31, 2020. The weighted average contractual interest rate on amounts drawn under this facility was 1.61% as of March 31, 2021 (December 31, 2020 - nil).
53 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Subsequent to March 31, 2021, the Trust exercised its option to extend the maturity on its operating line of credit by two years to May 31, 2026. All other terms and conditions remained the same. The spread for this credit facility has always been based on the higher of the credit ratings between S&P and DBRS. Non-revolving Unsecured Credit Facilities The Trust has a $200 million non-revolving unsecured credit facility with two financial institutions (consisting of a Schedule I and a Schedule III bank), with a maturity date of January 31, 2023 and a weighted average annual all-in fixed interest rate of 3.28% through interest rate swaps. In addition, the Trust has a $150.0 million non-revolving unsecured credit facility with two financial institutions (consisting of a Schedule I and a Schedule III bank), with a maturity date of June 27, 2024 and fixed annual all-in interest rate of 3.43% through an interest rate swap. The Trust also has a $350.0 million five-year non-revolving unsecured credit facility with three financial institutions (consisting of two Schedule I banks and one Schedule III bank). This credit facility matures on February 7, 2024 and, through an interest rate swap, bears an annual all-in fixed interest rate of 3.34%. As of March 31, 2021, all of the Trust's non-revolving unsecured credit facilities are fully drawn. The underlying spreads for these unsecured credit facilities have also been based on the higher of the credit ratings between S&P and DBRS. Construction Lines of Credit and Other Bank Loans In addition to the revolving unsecured operating line of credit and non-revolving unsecured credit facilities, the Trust has secured credit facilities and other bank loans, which include variable rate non-revolving secured construction facilities for the funding of certain development properties. At March 31, 2021, these secured facilities and other bank loans have an aggregate maximum borrowing capacity of $437.7 million (December 31, 2020 - $384.2 million) and mature between 2021 and 2025, of which the Trust had drawn $130.6 million (December 31, 2020 - $92.9 million). The weighted average contractual interest rate on the aggregate amounts outstanding is 1.98% (December 31, 2020 - 1.97%). Letter of Credit Facilities and Surety Bonds The Trust has aggregate letter of credit facilities with certain Schedule I banks totalling $95.0 million (December 31, 2020 - $93.6 million). As at March 31, 2021, the Trust’s outstanding letters of credit under these facilities was $66.1 million (December 31, 2020 - $66.8 million). The Trust is contingently liable for surety bonds that have been provided to support condominium developments and warranties in the amount of $70.8 million (December 31, 2020 - $68.8 million). Liquidity Liquidity refers to the Trust having credit availability under committed credit facilities and/or generating sufficient amounts of cash and cash equivalents to fund the ongoing operational commitments including maintenance capital and development capital expenditures, distributions to Unitholders and planned growth in the business. RioCan maintains a committed revolving unsecured operating credit facility to provide financial liquidity which can be drawn or repaid on short notice, reducing the need to hold liquid resources in cash and deposits. This minimizes costs arising from the difference between borrowing and deposit rates, while reducing credit exposure.
RioCan First Quarter 2021 54 MANAGEMENT’S DISCUSSION AND ANALYSIS
As at March 31, 2021, RioCan had approximately $1.3 billion of liquidity as summarized in the following table:
(thousands of dollars, except where IFRS RioCan's proportionate share otherwise noted) As at March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020 Cash and cash equivalents $ 79,685 $ 238,456 $ 86,899 $ 240,659 Undrawn revolving unsecured operating line of credit 846,000 1,000,000 846,000 1,000,000 Undrawn construction lines of credit and other bank loans 307,135 291,332 349,640 336,030 Liquidity $ 1,232,820 $ 1,529,788 $ 1,282,539 $ 1,576,689 Contractual debt: Debentures payable $ 3,100,000 $ 3,350,000 $ 3,100,000 $ 3,350,000 Mortgages payable 2,753,768 2,801,848 2,916,509 2,910,452 Lines of credit and other bank loans 984,552 792,854 1,023,493 821,597 Total contractual debt $ 6,838,320 $ 6,944,702 $ 7,040,002 $ 7,082,049
Percentage of total contractual debt: Liquidity 18.0% 22.0% 18.2% 22.3% Unsecured debt 57.8% 58.3% 56.2% 57.2% Secured debt 42.2% 41.7% 43.8% 42.8% The $294.2 million decrease in liquidity on a proportionate share basis over the prior year end was primarily due to the timing of the green bond issue in December 2020 and the timing of the use of the proceeds to redeem the $250.0 million Series R debenture on January 15, 2021 at a prepayment cost of $7.0 million. RioCan has unencumbered investment properties with a fair value of $8.7 billion on a proportionate share basis as of March 31, 2021, which gives RioCan the potential to obtain additional mortgages to bolster liquidity, if needed, and preserve credit availability under its revolving unsecured line of credit, while maintaining compliance with debt covenants under various credit facilities. Over the long-term, the Trust targets its unsecured/secured debt composition to 70/30 (56/44 as of March 31, 2021 on a proportionate share basis). This transition is going to take time and will be balanced with credit rating implications, cost of debt, debt ladder composition, and liquidity needs. The Trust's liquidity is impacted by contractual debt commitments and committed expenditures on active development projects. Its contractual debt commitments and committed development expenditures for the next five years are as follows:
(thousands of dollars) 2021(i) 2022 2023 2024 2025 Thereafter Total Contractual obligations: Lines of credit and other bank loans $ 57,478 $ — $ 229,866 $ 658,578 $ 38,630 $ — $ 984,552 Mortgages payable 139,673 212,695 340,786 338,013 527,202 1,195,399 2,753,768 Unsecured debentures 300,000 550,000 500,000 300,000 500,000 950,000 3,100,000 Lease liabilities (ii) 7,387 1,621 1,668 1,669 1,655 26,256 40,256 Other lease obligations 542 477 358 21 — — 1,398 $ 505,080 $ 764,793 $ 1,072,678 $ 1,298,281 $ 1,067,487 $ 2,171,655 $ 6,879,974 Committed developments: Active committed PUD (iii) 292,476 192,543 62,412 9,130 764 — 557,325 Active committed residential inventory (iii) 59,071 65,098 34,883 53,244 19,610 — 231,906 $ 351,547 $ 257,641 $ 97,295 $ 62,374 $ 20,374 $ — $ 789,231 Total $ 856,627 $ 1,022,434 $ 1,169,973 $ 1,360,655 $ 1,087,861 $ 2,171,655 $ 7,669,205 (i) Amounts pertain to the remaining nine months of 2021. (ii) Represents the discounted minimum lease payments of lease liabilities under IFRS 16. (iii) Represents estimated development costs to complete committed properties under active development and active residential inventory projects. A project is committed only when all major planning issues have been resolved, anchor tenant(s) for the commercial components has/have been secured, and/or construction is about to commence or has commenced. The costs of additional projects will be added to this schedule once a project becomes committed. The amounts are presented net of projected proceeds from dispositions including air rights sale proceeds related to a portion of The Well in Toronto, Ontario, which sales currently remain on plan to close in 2021.
55 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Trust's contractual debt obligations and projected development expenditures can be funded by proceeds from mortgage refinancing, net proceeds from the sale of assets (including, but not limited to, sale of excess land and development density), existing cash on hand, revolving unsecured operating line of credit, proceeds from the issuance of unsecured debentures or issuance of equity Units. The debenture maturity of $300.0 million in the remainder of 2021 has been effectively refinanced through the green bond issue in December 2020 and was repaid on April 9, 2021. As of May 3, 2021, $102.1 million of RioCan's mortgage maturities for the remainder of 2021 have yet to be refinanced or do not have refinancing commitments in place. They are all expected to be refinanced in due course. RioCan has also entered into purchase obligations to acquire certain interests from its partners as further described in Note 3 in the Condensed Consolidated Financial Statements. RioCan, as a mutual fund trust, expects to make monthly distributions to Unitholders with the cash generated from ongoing operating activities. Its Unitholder dividend reinvestment plan (DRIP) allows it to conserve liquidity by issuing additional Units, as opposed to paying cash distributions. Although RioCan suspended its DRIP effective November 1, 2017, RioCan can elect to reinstate the DRIP in the future, should we decide that it is beneficial to do so. Unencumbered Assets At RioCan's proportionate share, unencumbered investment property assets as at March 31, 2021 have an estimated fair value of $8.7 billion, which represents 59.6% of the total fair value of investment properties and generates 59.5% of annualized NOI at RioCan's proportionate share. The decrease in the unencumbered assets from December 31, 2020 was due to mortgage financing obtained on certain formerly unencumbered assets, as well as fair value decreases for certain unencumbered assets. The table below summarizes RioCan's unencumbered assets and unsecured debt:
IFRS RioCan's proportionate share (thousands of dollars, except where otherwise noted) Targeted March 31, December 31, March 31, December 31, As at Ratios 2021 2020 2021 2020 Unencumbered assets (i) (ii) $ 8,656,061 $ 8,685,469 $ 8,718,757 $ 8,727,354 Unsecured debt: Debentures $ 3,100,000 $ 3,350,000 $ 3,100,000 $ 3,350,000
Amounts drawn on revolving unsecured operating 154,000 — 154,000 — line of credit Amounts drawn on non-revolving unsecured credit 700,000 700,000 700,000 700,000 facilities Total unsecured debt outstanding $ 3,954,000 $ 4,050,000 $ 3,954,000 $ 4,050,000 Unsecured debt to total debt 70.0% 57.8 % 58.3 % 56.2 % 57.2 % Unencumbered assets to unsecured debt (i) > 200% 219 % 214 % 221 % 215 % NOI generated from unencumbered assets (i) > 50.0% 59.0 % 58.6 % 59.5 % 58.9 % (i) Refer to the Non-GAAP Measures section of this MD&A for further details. (ii) As at March 31, 2021, included in total investment properties and properties held for sale of $14.2 billion on an IFRS basis are $8.7 billion of unencumbered assets and $5.5 billion of encumbered assets. On a proportionate share basis, included in total investment properties and properties held for sale of $14.6 billion are $8.7 billion of unencumbered assets and $5.9 billion of encumbered assets.
RioCan First Quarter 2021 56 MANAGEMENT’S DISCUSSION AND ANALYSIS
Guarantees As at March 31, 2021, the Trust is contingently liable for debt guarantees, provided on behalf of certain of our co-owners' interests and mortgages assumed by purchasers on property dispositions, of $282.8 million (December 31, 2020 - $195.1 million), with expires between 2021 and 2030. As at and for the three months ended March 31, 2021, there have been no defaults by the primary obligors for debts on which we have provided guarantees and no provision for expected losses on these guarantees has been recognized in our Condensed Consolidated Financial Statements. The parties on behalf of which RioCan has outstanding guarantees are as follows:
(thousands of dollars) As at March 31, 2021 December 31, 2020 Partners and co-owners Woodbourne $ 105,326 $ 18,968 HBC (RioCan-HBC JV) 37,320 41,187 Bayfield 21,700 23,100 Metropia and Capital Developments 38,630 36,635 Other 24,944 20,019 $ 227,920 $ 139,909
Assumption of mortgages by purchasers on property dispositions 54,839 55,207 $ 282,759 $ 195,116 Hedging Activities Interest Rate Risk As at March 31, 2021, the outstanding notional amount of floating-to-fixed interest rate swaps was $1.3 billion (December 31, 2020 – $1.3 billion) and the term to maturity of these agreements ranges from April 2021 to November 2028. We assess the effectiveness of the hedging relationship on a quarterly basis and have determined there is no ineffectiveness in the hedging of interest rate exposures as at March 31, 2021. Refer to Note 23 of the Condensed Consolidated Financial Statements for further details. EQUITY Trust Units As at March 31, 2021, there are 317.8 million Units outstanding, including exchangeable limited partnership units. All Units outstanding have equal rights and privileges and entitle the holder to one vote for each Unit at all meetings of Unitholders. During the three months ended March 31, 2021 and 2020, we issued Units as follows:
(in thousands) Three months ended March 31, 2021 2020 Units outstanding, beginning of period (i) 317,748 317,710 Units issued: Direct purchase plan 7 5 Exchangeable limited partnership units 6 — Units outstanding, end of period (i) 317,761 317,715 (i) Included in Units outstanding are exchangeable limited partnership units of three limited partnerships that are subsidiaries of the Trust (the LP units) which were issued to vendors, as partial consideration for investment properties acquired by RioCan (March 31, 2021 – 499,754 LP units, March 31, 2020 – 481,769 LP units). As of May 3, 2021, there are 317.8 million Units issued and 7.6 million Unit options issued and outstanding under the Trust’s incentive Unit option plan. Senior Executive Restricted Equity Plan (Senior Executive REU Plan) As at March 31, 2021, 401,631 Senior Executive REUs are outstanding (December 31, 2020 - 251,899), of which 97,606 are vested (December 31, 2020 - 55,720). On February 23, 2021, the Trust granted 189,231 REUs under its Senior Executive REU Plan. The grant date price was $18.13 per unit, based on the five-day volume weighted average market price of RioCan's Units traded on the TSX prior to the grant date, resulting in an aggregate fair value of $3.4 million.
57 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
The number of REUs granted shall vest one-third on each of the first, second and third anniversary of the grant date, provided however that all vested REUs are only eligible for settlement upon the third anniversary of the grant date (Settlement Date). Settlement of vested REUs and accumulated distribution equivalents is generally made within 30 days after the Settlement Date by way of the delivery of an equivalent number of Units purchased on the secondary market, net of applicable withholding taxes. Employee Restricted Equity Plan (Employee REU Plan) As at March 31, 2021, 346,082 Employee REUs are unvested and outstanding (December 31, 2020 - 279,342). On February 23, 2021, the Trust granted 139,714 REUs under its Employee REU Plan. The grant date price was $18.13 per unit, based on the five-day volume weighted average market price of RioCan's Units traded on the TSX prior to the grant date, resulting in an aggregate fair value of $2.5 million. The number of REUs granted shall vest fully on the Settlement Date, including distribution equivalents that have accumulated during the vesting period. Settlement of vested REUs is generally made within 30 days after the Settlement Date by way of the delivery of an equivalent number of Units purchased on the secondary market, net of applicable withholding taxes. Performance Equity Unit Plan (PEU Plan) As at March 31, 2021, 485,305 PEUs are unvested and outstanding (December 31, 2020 - 449,641). On February 23, 2021, the Trust granted 189,231 PEUs under its PEU Plan at a fair value of $21.15 per unit resulting in an aggregate fair value of $4.0 million on the grant date. PEUs issued contain a multiplier factor and the final number of PEUs that will be paid out upon vesting will vary based on the achievement of certain performance targets over a three-year period from the year the award was granted. The performance targets attributable to PEUs are set by the Trust at the time the awards are granted, or from time to time adjusted as permitted under the terms of the PEU plan. The performance targets may vary between grants. Further information regarding the PEUs and the related performance metrics attributable to such PEUs are set out in the Trust's management information circular (MIC). Incentive Unit Option Plan As at March 31, 2021, 11.3 million Unit options remain available to be granted under the Plan (December 31, 2020 – 12.5 million Unit options). The exercise price for each option is equal to the volume weighted average trading price of the units on the TSX for the five trading days immediately preceding the dates of grant. Options granted prior to February 2021 have a contractual life of 10 years and vest at 25% per annum commencing on the first anniversary of the grant date, and become fully vested after four years. On February 23, 2021, 1.3 million of Unit options were granted to senior management (March 31, 2020 - nil) with a contractual life of 7 years and the following vesting conditions: • 500,000 Unit options with time -based vesting conditions that will vest 50% on April 1, 2022 and 50% on April 1, 2023; and • 800,000 Unit options have vesting conditions that are 50% time-based service condition only (Time-Based Options) and 50% with a time-based service condition and market-based performance condition (Performance Options). The Time-Based Options will vest 50% on February 23, 2023 and 50% on February 23, 2025. Vesting of the Performance Options depends on achieving certain performance measures based on 20 consecutive trading days (the "20-day VWAP") and only when certain time-vesting conditions are also met as follows: (i) 50% of the Performance Options shall be exercisable on or after the second anniversary of the Grant Date provided that the 20-day VWAP is equal to or greater than $20, at any point during the seven-year term; and (ii) 50% of the Performance Options shall be exercisable on or after the fourth anniversary of the Grant Date provided that the 20-day VWAP is equal to or greater than $24, at any point during the seven-year term. Trustee Deferred Unit Plan (DU Plan) As at March 31, 2021, there are 467,809 deferred units vested and outstanding (December 31, 2020 - 452,368). During the three months ended March 31, 2021, 8,216 deferred units were granted and no deferred units were exercised (three months ended March 31, 2020 - 7,391 deferred units granted and no deferred units exercised). During the year ended December 31, 2020, the Board approved an amendment effective January 1, 2021 to the DU Plan to provide that, on or after the date upon which a Trustee ceases to be a Trustee of the Trust (Termination Date), all vested deferred units issued after January 1, 2021 shall be redeemed and settled only by the issuance of Units. Effective January 1, 2021, each of the Trustees also provided an irrevocable election with respect to the outstanding deferred units held by such Trustee such that all such vested deferred units shall be redeemed and settled only by the issuance of Units upon each Trustee's respective Termination Date. Normal Course Issuer Bid On October 14, 2020, RioCan received TSX approval of its notice of intention to renew its NCIB (the 2020/2021 NCIB), to acquire up to a maximum of 31,615,029 Units, or approximately 10% of the public float as at October 8, 2020, for cancellation or to satisfy RioCan's obligation to deliver Units under the REU and PEU plans, over the next 12 months, effective October 22, 2020.
RioCan First Quarter 2021 58 MANAGEMENT’S DISCUSSION AND ANALYSIS
The number of Units that can be purchased pursuant to the 2020/2021 NCIB is subject to a current daily maximum of 545,810 Units (which is equal to 25% of 2,183,243, being the average daily trading volume from April 1, 2020 to September 30, 2020, excluding RioCan's purchases on the TSX under its former NCIB), subject to RioCan’s ability to make one block purchase of Units per calendar week that exceeds such limits. RioCan intends to fund the purchases primarily out of net proceeds from its asset dispositions, available cash and undrawn credit facilities. During the three months ended March 31, 2021, the Trust did not purchase and cancel any Units. Distributions to Unitholders RioCan qualifies as a mutual fund trust and a “real estate investment trust” (REIT Exemption) for Canadian income tax purposes. We expect to distribute all of our taxable income to Unitholders and are entitled to deduct such distributions for Canadian income tax purposes. From time to time, RioCan may retain some taxable income and net capital gains, when appropriate, in order to utilize the capital gains refund available to mutual fund trusts without incurring any income taxes. Accordingly, no provision for current income taxes payable is required, except for amounts incurred in our incorporated Canadian subsidiaries. The Trust consolidates certain wholly-owned incorporated entities that are subject to tax. Any tax disclosures, expense and deferred tax balances relate only to these entities. If the Trust were to cease to qualify for the REIT Exemption for Canadian income tax purposes, certain distributions (taxable distributions) would not be deductible in computing income for Canadian income tax purposes and it would be subject to tax on such distributions at a rate substantially equivalent to the general corporate income tax rate. Any remaining distributions, other than taxable distributions, would generally continue to be treated as returns of capital to Unitholders. From year-to-year, the taxability of the Trust's distributions may fluctuate depending upon the timing of recognition of certain gains and losses based on the activities of the Trust. The Trust's monthly distribution during 2021 was $0.08 per unit, which decreased from $0.12 in 2020. Distributions declared to Unitholders are as follows:
(thousands of dollars) Three months ended March 31 2021 2020 Distributions declared to Unitholders $ 76,264 $ 114,372 RioCan suspended its DRIP effective November 1, 2017 and Unitholders that were enrolled in the DRIP receive cash distributions commencing with any distribution declared in November 2017. If RioCan elects to reinstate the DRIP in the future, Unitholders who were enrolled in the DRIP at the time of its suspension and remain enrolled at the time of its reinstatement will automatically resume participation in the DRIP. Total distributions declared decreased for the three months ended March 31, 2021 when compared to the same period in the prior year due to the one-third distribution reduction effective in January 2021. Difference between cash flows provided by operating activities and distributions to Unitholders A comparison of distributions to Unitholders with cash flows provided by operating activities and distributions is as follows:
Three months ended Twelve months ended March 31 March 31 (thousands of dollars) 2021 2020 2021 2020 Cash flows provided by operating activities $ 80,648 $ 116,802 $ 516,430 $ 606,452 Add / (deduct) the (increase) / decrease in non-cash working capital items 19,843 8,631 (66,312) (82,164) Cash flows provided by operating activities, excluding non-cash working capital items (i) 100,491 125,433 450,118 524,288 Less: Distributions declared to Unitholders (76,264) (114,372) (419,417) (449,098) Excess $ 24,227 $ 11,061 $ 30,701 $ 75,190 (i) Three months ended March 31, 2021 includes an expense for debenture prepayment costs of $7.0 million. For the three months ended March 31, 2021, cash flows provided by operating activities, excluding non-cash working capital items, were higher than distributions declared to Unitholders during the period by $24.2 million. For the twelve months ended March 31, 2021, cash flows provided by operating activities, excluding non-cash working capital items, were higher than distributions declared to Unitholders during the period by $30.7 million.
59 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Distribution reduction effective January 2021 In December 2020, the Trust announced a reduction in its monthly distribution from $0.12 per unit to $0.08 per unit, or from $1.44 to $0.96 on an annualized basis. This decrease was effective for the Trust's January 2021 distribution, payable in February 2021. This decrease is expected to provide $152.0 million of additional cash flow a year. The additional capital will be used to fund initiatives that drive long-term net asset value growth for RioCan’s Unitholders such as its mixed-use residential developments, unit buybacks through its normal course issuer bid program, and debt repayment. The Trust does not use net income in accordance with IFRS as the basis to establish the level of Unitholders’ distributions as net income includes, among other items, non-cash fair value adjustments related to its investment property portfolio and deferred income taxes. In establishing the level of distributions to Unitholders, consideration is given by RioCan to the level of cash flow from operating activities, capital expenditures for the property portfolio and preferred Unitholder distributions (if any). As always, the Board will continuously reevaluate the distribution on a regular basis based on various factors. In determining the level of distributions to Unitholders, the Board considers, among other factors, cash flow from operating activities, forward-looking cash flow information including forecasts and budgets and the future business prospects of the Trust including the impact of the pandemic, the interest rate environment and cost of capital, estimated development completions and development spending, impact of future acquisitions and dispositions, and maintenance capital expenditures and leasing expenditures related to our income producing portfolio. In determining the level of distributions to Unitholders, the Board also considers the impact of its distribution reinvestment plan, if reinstated, when assessing its ability to sustain current distribution levels during the current period and on a rolling twelve-month basis. RELATED PARTY TRANSACTIONS In the ordinary course of business, we may enter into transactions with entities whose directors or trustees are also RioCan trustees and/or part of RioCan's senior management. All such transactions are in the normal course of operations and are measured at market-based exchange amounts. RioCan's related parties include the following persons and/or entities: (a) associates, joint ventures, or entities which are controlled or significantly influenced by the Trust; and (b) key management personnel including the Trustees and those persons having the authority and responsibility for planning, directing and controlling the activities of RioCan, directly or indirectly. Effective April 1, 2021, following his retirement as Chief Executive Officer of the Trust on March 31, 2021, RioCan’s founder, Edward Sonshine, transitioned to Non-Executive Chairman of the Board. Jonathan Gitlin, previously the Trust’s President and Chief Operating Officer, succeeded Mr. Sonshine as President and Chief Executive Officer. Concurrently with Mr. Gitlin’s appointment to the role of President and Chief Executive Officer, the Board appointed Mr. Gitlin as an additional Trustee to the Board. Mr. Paul V. Godfrey, stepped down as Chairman of the Board and now serves as Lead Trustee. For the three months ended March 31, 2021, the Trust’s key management personnel include each of the Trustees and the following members of the executive team: Chief Executive Officer, Edward Sonshine; President and Chief Operating Officer, Jonathan Gitlin; and Senior Vice President and Chief Financial Officer, Qi Tang (collectively, the "Key Executives"). Effective April 1, 2021, the Key Executives will consist of the following members of the executive team: President and Chief Executive Officer, Jonathan Gitlin; Senior Vice President and Chief Financial Officer, Qi Tang; and Chief Investment Officer, Andrew Duncan. On March 2, 2021, RioCan announced the resignation of Qi Tang as Senior Vice President and Chief Financial Officer, effective as of May 12, 2021. The executive search for her successor is progressing well and the Trust anticipates announcing a permanent CFO successor by the third quarter of 2021. In the meantime, Ms. Franca Smith, RioCan's Vice President Finance since 2017, will serve as Interim CFO effective upon Ms. Tang’s resignation on May 12, 2021. On March 11, 2021, Andrew Duncan, RioCan's former Senior Vice President Development, was appointed to the newly created position of Chief Investment Officer of RioCan, effective as of April 1, 2021. Remuneration of the Trust’s Trustees and Key Executives during the three months ended March 31, 2021 and 2020 is as follows:
(thousands of dollars) Trustees Key Executives Three months ended March 31 2021 2020 2021 2020 Compensation and benefits $ 33 $ 43 $ 3,507 $ 1,549 Unit-based compensation 281 (3,263) 5,290 923 Post-employment benefit costs — — 33 32 $ 314 $ (3,220) $ 8,830 $ 2,504 The negative amount in unit-based compensation costs for the Trustees in Q1 2020 was due to a mark-to-market adjustment resulting from a substantial decrease in the Trust's unit price from December 31, 2019 to March 31, 2020, among the broad equity market drop in connection with the COVID-19 health crisis and sharp decline in oil prices. The increase in Key Executive costs over the comparable period was primarily due to the one-time $5.8 million general and administrative expenses relating to the executive transitions including the accelerated expensing of certain unit-based compensation. For further details on related party transactions, refer to Note 26 of the Condensed Consolidated Financial Statements.
RioCan First Quarter 2021 60 MANAGEMENT’S DISCUSSION AND ANALYSIS
SELECTED QUARTERLY RESULTS AND TREND ANALYSIS
(millions of dollars, except per unit amounts) 2021 2020 2019 As at and for the quarter ended (i) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Revenue $ 277 $ 285 $ 302 $ 270 $ 286 $ 321 $ 354 $ 328 Net income (loss) attributable to Unitholders $ 107 $ 66 $ 118 $ (351) $ 103 $ 151 $ 178 $ 253 NOI (ii) $ 165 $ 167 $ 158 $ 154 $ 174 $ 176 $ 173 $ 175 FFO (ii) (v) $ 106 $ 124 $ 129 $ 110 $ 145 $ 146 $ 143 $ 145 ACFO (ii) (v) $ 111 $ 129 $ 147 $ 78 $ 108 $ 134 $ 145 $ 139 Unitholder distributions $ 76 $ 114 $ 114 $ 114 $ 114 $ 114 $ 111 $ 110 Weighted average Units outstanding – diluted 317,758 317,739 317,728 317,721 317,725 315,080 306,280 304,636 (in thousands) Per unit basis (diluted) Net income (loss) attributable to Unitholders $ 0.34 $ 0.21 $ 0.37 $ (1.10) $ 0.32 $ 0.48 $ 0.58 $ 0.83 FFO (ii) (v) $ 0.33 $ 0.39 $ 0.41 $ 0.35 $ 0.46 $ 0.46 $ 0.47 $ 0.48 Unitholder distributions $ 0.24 $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 0.36 Net book value per unit (iii) $ 24.53 $ 24.34 $ 24.48 $ 24.45 $ 25.92 $ 26.14 $ 26.01 $ 25.78 Closing market price per unit $ 19.46 $ 16.75 $ 14.06 $ 15.36 $ 16.13 $ 26.76 $ 26.38 $ 25.99 Key Performance Indicator Ratios Same Property NOI growth (decline) % (ii) (4.6%) (7.9%) (9.1%) (10.8%) 3.0% 2.3% 2.1% 2.2% FFO payout ratio (ii) (v) 92.2% 90.2% 86.2% 83.2% 77.4% 76.9% 77.4% 77.2% ACFO payout ratio (ii) (v) 92.9% 98.9% 97.7% 97.2% 85.0% 84.3% 83.5% 86.7%
Debt to total assets 45.3% 45.0% 44.8% 44.4% 43.0% 42.1% 43.6% 42.9% (RioCan's proportionate share) (ii) Debt to Adjusted EBITDA 10.02 9.47 9.13 8.80 8.22 8.06 8.07 7.92 (RioCan's proportionate share) (ii) Other Total portfolio NLA 37,976 38,260 38,394 38,647 38,623 38,402 39,336 39,071 Number of properties 223 223 221 221 222 220 225 230 Number of employees 587 586 585 587 605 605 605 597 Residency of Unitholders (iv) – Canadian 74.6% 74.4% 77.2% 73.1% 66.3% 67.6% 66.3% 75.6% – Non-resident 25.4% 25.6% 22.8% 26.9% 33.7% 32.4% 33.7% 24.4% (i) Refer to RioCan’s respective annual and interim MD&As issued for a discussion and analysis relating to those periods. (ii) For definitions and the basis of presentation of RioCan's non-GAAP measures, refer to the Non-GAAP Measures section of this MD&A. Debt to total assets is a non-GAAP measure and is calculated as total debt less cash and cash equivalents, divided by total assets, excluding cash and cash equivalents. (iii) A non-GAAP measurement. Calculated by RioCan as Unitholders’ equity divided by the number of Units outstanding at the end of the reporting period. RioCan’s method of calculating net book value per unit may differ from other issuers’ methods and, accordingly, may not be comparable to net book value per unit reported by other issuers. (iv) Estimates based on Unitholder mailing addresses on record at the end of each reporting period. (v) As of March 31, 2021, excluding the $7.0 million debenture prepayment costs, FFO, FFO per unit and the FFO payout ratio were $113.1 million, $0.36 and 90.8%, respectively. Similarly, the ACFO and ACFO payout ratio were $117.9 million and 91.5%, respectively. Our revenue and operating results are not materially impacted by seasonal factors. However, macroeconomic and market trends, and the unprecedented COVID-19 pandemic, as described under the Business Environment and Outlook section of this MD&A, impact on the demand for space, occupancy levels and consequently, the Trust's revenue, financial performance and property valuations. The Trust's quarterly changes in revenues, NOI, FFO, ACFO and net income, as well as other key financial information were primarily impacted by acquisitions and dispositions, the timing and magnitude of its residential condominium and townhouse projects closings, the magnitude and pace of development expenditures and project completions, and in 2021 and three quarters in 2020 the global pandemic and its effects on the economy and RioCan operations. ACFO was also impacted by changes in working capital, which experienced larger quarterly fluctuations from Q2 2020 to Q1 2021 in particular, driven primarily by the timing of the collection of contractual rents receivable as a result of the pandemic. Net income, investment properties and certain other financial position related measures such as debt to total assets were further impacted by the changes in the fair values of investment properties, particularly the significant fair value write-downs in Q2 2020 as a result of the pandemic. The above factors resulted in similar impacts to FFO and ACFO payout ratios, debt to total assets and debt to adjusted EBITDA.
61 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
NON-GAAP MEASURES The financial statements of RioCan are prepared in accordance with IFRS. In addition to reported IFRS measures, industry practice is to evaluate real estate entities giving consideration, in part, to certain non-GAAP performance measures described below. Management believes that these measures are helpful to investors because they are widely recognized measures of a REIT's performance and provide a relevant basis for comparison among real estate entities. In addition to the IFRS results, we also use these measures internally to measure the operating performance of our investment property portfolio. These non-GAAP measures, and related per unit amounts, should not be construed as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of RioCan’s performance, liquidity, cash flows and profitability and may not be comparable to similar measures presented by other real estate investment trusts or enterprises. These non-GAAP measures are defined below and are cross referenced, as applicable, to a reconciliation elsewhere in this MD&A to the most comparable IFRS measure. RioCan believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Trust for the reasons outlined below.
Non-GAAP Measure Description Reconciliation
FFO is a non-GAAP financial measure of operating performance widely used by the Canadian real estate industry based on the definition set forth by REALPAC. It is RioCan's view that IFRS net income does not necessarily provide a complete measure of RioCan's recurring operating performance. This is primarily because IFRS net income includes items such as fair value changes of investment property that are subject to market conditions and capitalization rate fluctuations, unrealized gains or losses on marketable securities and gains and losses on the Funds from disposal of investment properties, including associated transaction costs, which Operations (FFO) are not representative of recurring operating performance. Funds from and FFO (excluding debenture prepayment costs) starts with FFO but adds back debenture prepayment costs since these costs are not indicative of recurring Operations (FFO) section FFO (excluding operating performance. debenture prepayment RioCan regards FFO as a key measure of operating performance and as a key costs) measure for determining the level of employee incentive based compensation. RioCan also uses FFO in assessing its distribution paying capacity. FFO should not be construed as an alternative to net income or cash flows provided by or used in operating activities determined in accordance with IFRS. RioCan’s method of calculating FFO may differ from other issuers' methods and, accordingly, may not be comparable to FFO reported by other issuers.
ACFO is a non-GAAP financial measure of sustainable economic cash flow available for distributions based on the definition set forth by REALPAC. RioCan adopted the REALPAC definition of ACFO effective January 1, 2017 and uses it as an input, together with FFO, in assessing RioCan's distribution payout ratios. The REALPAC ACFO definition effectively includes working capital fluctuations Adjusted Cashflow relating to recurring operating activities in ACFO, such as working capital From Operations changes relating to trade accounts receivable and trade accounts payable and (ACFO) accrued liabilities. This, in management's view, introduces greater fluctuations in quarterly and twelve-month trailing ACFO. As a result, RioCan uses ACFO, Adjusted Cashflow and together with FFO, in assessing its distribution payout ratios. from Operations (ACFO) section ACFO (excluding ACFO (excluding debenture prepayment costs) starts with ACFO but adds back debenture prepayment debenture prepayment costs since these costs are not indicative of sustainable costs) economic cash flow for distributions. ACFO should not be construed as an alternative to cash flows provided by or used in operating activities determined in accordance with IFRS. RioCan’s method of calculating ACFO is in accordance with REALPAC’s recommendations, but may differ from other issuers' methods and, accordingly, may not be comparable to ACFO reported by other issuers.
RioCan First Quarter 2021 62 MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-GAAP Measure Description Reconciliation
Normalized capital expenditures are an estimate made by management of the amount of ongoing capital investment required to maintain the condition of the physical property and current rental revenues. Management considers a number of factors in estimating normalized capital expenditures relative to the growth in the age and size of the Trust's property portfolio. Such factors include, but are not limited to, review and analysis of historical capital spending, comparison of each quarter's annualized actual spending activity to the annual budgeted capital expenditures as approved by our Board of Trustees at the beginning of each year and management's expectations and/or plans for the properties. Property capital expenditures that are generally expected to add to the overall earnings capacity of the property are considered revenue enhancing capital expenditures by management and are also excluded in determining the normalized capital expenditures estimate. RioCan does not obtain support from independent sources for its normalized capital expenditures but relies on internal diligence and expertise in arriving at this management estimate. RioCan’s long tenured management team has extensive experience in commercial real estate and in-depth knowledge of the Capital Normalized Capital property portfolio. As a result, RioCan believes that management is best suited to Expenditures on Expenditures make the assessment of normalized capital expenditures without independent Income Properties third-party sources. section Since actual capital expenditures can vary widely from quarter to quarter depending on a number of factors, management believes that normalized capital expenditures are a more relevant input than actual capital expenditures in assessing a REIT's distribution payout ratio and for determining an appropriate level of sustainable distributions over the long run. For 2020, the Trust determined that $40.0 million was a reasonable estimate for its normalized capital expenditures. This normalized capital expenditures estimate for 2020 does not include capital expenditures for mixed-use residential projects given these are newly constructed buildings. In 2021 the Trust anticipates a gradual resumption of a more normal level of business activities given the roll out of the immunization program in response to COVID-19. Given that there have been certain vacancies in 2020 resulting from the COVID-19 pandemic, the Trust anticipates that it will incur additional tenant improvements in 2021 and has determined that $45.0 million is a reasonable normalized capital expenditure estimate for 2021 although quarterly fluctuations between the $11.3 million quarterly normalized capital expenditures spend and actual spend are expected.
FFO and ACFO payout ratios, and FFO and ACFO payout ratios (excluding debenture prepayment costs) are supplementary non-GAAP measures of a REIT's distribution paying capacity. These payout ratios are computed on a rolling twelve-month basis by dividing total Unitholder distributions paid (including FFO and ACFO distributions paid under RioCan's distribution reinvestment program) by FFO and Payout Ratios ACFO, FFO (excluding debenture prepayment costs) and ACFO (excluding debenture prepayment costs), respectively, over the same period. RioCan’s Funds from Operations (FFO) and method of calculating these payout ratios may differ from other issuers’ methods and, accordingly, may not be comparable to payout ratios reported by other and Adjusted issuers. Cashflow from FFO and ACFO Operations (ACFO) Payout Ratios As previously discussed, the REALPAC ACFO definition includes net working sections (excluding debenture capital increases and decreases relating to operating activities, which tend to prepayment costs) fluctuate period-over-period in the normal course of business. In management's view, this tends to introduce greater fluctuations in ACFO calculations. As a result, RioCan management uses the FFO payout ratio in addition to the ACFO payout ratio in assessing its distribution paying capacity, as FFO is not subject to such working capital fluctuations.
63 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-GAAP Measure Description Reconciliation
NOI is a non-GAAP measure and is defined by RioCan as rental revenue from income properties less property operating costs. For the calculation of NOI, rental revenue includes all amounts earned from tenants related to lease agreements, including property tax and operating cost recoveries, to the extent recoverable under tenant leases. Amounts payable by tenants to terminate their lease prior to the contractual expiry date (lease cancellation fees) are included in rental revenue for the calculation of NOI. Management believes that NOI is a meaningful supplementary measure of operating performance of the Trust's income producing properties in addition to the most comparable IFRS measure, which we believe is operating income. The IFRS measure of operating income also includes residential inventory gains and Net Operating Net Operating Income losses as well as property and asset management fees earned from co-owners. Income (NOI) (NOI) While management considers its residential inventory and portfolio management section activities part of its business operations, and thus operating income, such revenues are not part of how we evaluate the operating performance of our income producing properties. As such, we report NOI as a useful supplementary non-GAAP measure to report the operating performance of our income producing properties. NOI is an important measure of the income generated from the income producing properties and is used by the Trust in evaluating the performance of the portfolio, as well as a key input in determining the value of the income producing property portfolio. RioCan’s method of calculating NOI may differ from other issuers’ methods and, accordingly, may not be comparable to NOI reported by other issuers.
Same property NOI is a non-GAAP financial measure used by RioCan to assess the period-over-period performance of those properties owned and operated by RioCan in both periods. In calculating same property NOI growth, NOI for the period is adjusted to remove the impact of lease cancellation fees and straight- line rent revenue in order to highlight the 'cash impact' of contractual rent Net Operating Same Property NOI increases embedded in the underlying lease agreements. Same property NOI Income (NOI) also excludes NOI for a limited number of properties undergoing significant de- section leasing in preparation for redevelopment or intensification. Same property NOI is a meaningful measure of operating performance because it allows management to assess rent growth and leasing activity of its portfolio on a same property basis and the impact of capital investments.
Enterprise value is a non-GAAP measure calculated at the reporting period date as the sum of RioCan's total debt measured on a proportionate basis, Unit market capitalization and preferred unit market capitalization. This non-GAAP measure Business Overview Enterprise Value is used by RioCan management and the industry as a measure of total value of section the REIT based on book value of debt and market price of equity instead of IFRS total assets.
Debt metrics, such as those described below, are shown on both an IFRS and a RioCan proportionate basis (as defined below). All references to “RioCan’s proportionate share” refer to a non-GAAP financial measure representing RioCan’s proportionate interest in the financial position and results of operations of its entire portfolio, taking into account the difference in accounting for joint ventures using proportionate consolidation versus equity- accounting. Management considers certain results presented on a proportionate basis to be a meaningful measure because it is consistent with how RioCan and RioCan's its partners manage the net assets and assess the operating performance of Total Capital section proportionate Share each of its co-owned properties. The Trust currently accounts for its investments in joint ventures and associates using the equity method of accounting. The remaining definitions outlined below pertain to measures and/or inputs to our financial leverage, coverage ratios and other key metrics that we use to manage capital and to assess our liquidity, borrowing capacity and cost of capital. The following ratios are calculated on the basis of both a RioCan's proportionate share basis and using IFRS reported amounts to convey a more meaningful measure of financial performance with respect to the periods reported.
RioCan First Quarter 2021 64 MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-GAAP Measure Description Reconciliation
Adjusted EBITDA is a non-GAAP measure that is used by management as an input in several of our debt metrics, providing information with respect to certain financial ratios that we use in measuring our debt profile and assessing our ability to satisfy obligations, including servicing our debt. Adjusted EBITDA is used as an Adjusted Earnings alternative to IFRS net income, because it excludes major non-cash items Before Interest, Taxes, (including, but not limited to, depreciation and amortization expense, unit-based Depreciation and compensation costs, fair value gains and losses on investment properties, and Debt Metrics section Amortization (Adjusted unrealized gains and losses on marketable securities, interest costs, debenture EBITDA) prepayment costs, current and deferred tax expenses and recoveries, transaction gains and losses on the disposition of investment properties and equity- accounted investments, transaction costs and other items that management considers either non-operating in nature or related to the capital cost of our investment properties).
Ratio of Total Debt to Total Assets is a non-GAAP measure of our financial Total Capital and Ratio of Total Debt to leverage calculated by taking the total debt net of cash and cash equivalents Total Assets Debt Metrics divided by total assets net of cash and cash equivalents. sections
Debt to Adjusted EBITDA is a non-GAAP measure of our financial leverage Debt to Adjusted calculated on a trailing twelve-month basis and is defined as our quarterly Debt Metrics section EBITDA average total debt (net of cash and cash equivalents) divided by Adjusted EBITDA.
Debt service coverage is a non-GAAP measure calculated on a trailing twelve- month basis and is defined as Adjusted EBITDA divided by the sum of total Debt service interest costs (including interest that has been capitalized) and scheduled Debt Metrics section coverage mortgage principal amortization. It measures our ability to meet our debt service obligations on a trailing twelve-month basis.
Interest coverage is a non-GAAP measure calculated on a trailing twelve-month basis and is defined as Adjusted EBITDA divided by total interest costs (including Interest coverage interest that has been capitalized). It measures our ability to meet our interest Debt Metrics section cost obligations on a trailing twelve-month basis.
Fixed charge coverage is a non-GAAP measure calculated on a trailing twelve- month basis and is defined as Adjusted EBITDA divided by total interest costs (including interest that has been capitalized) and distributions declared and/or Fixed charge Debt Metrics section coverage paid to Unitholders and preferred unitholders. It measures our ability to meet our interest, Unitholder and preferred unitholder distribution obligations on a trailing twelve-month basis.
Percentage of NOI generated from unencumbered assets is a non-GAAP Percentage of NOI measure defined as the annualized in-place NOI from unencumbered assets as Unencumbered Generated from of the end of a reporting period divided by total annualized NOI as of the end of Unencumbered Assets the same reporting period. Unencumbered assets are investment properties that Assets section have not been pledged as security for debt.
The unencumbered asset to unsecured indebtedness ratio is a non-GAAP Unencumbered Unencumbered Assets measure calculated as the carrying value of all investment properties that have to Unsecured Debt not been pledged as security for debt divided by total unsecured indebtedness. Assets section
65 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
ACCOUNTING POLICIES AND ESTIMATES Our significant accounting policies are described in Note 2 of RioCan's Condensed Consolidated Financial Statements. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates under different assumptions and conditions. Estimation Uncertainty as a Result of COVID-19 In the preparation of RioCan’s Condensed Consolidated Financial Statements, the Trust has incorporated the potential impact of COVID-19 into its significant estimates and assumptions that affect the reported amounts of its assets, liabilities, net income and related disclosures using available information as at March 31, 2021. The significant estimates and assumptions that are most impacted by COVID-19 are those underlying the valuation of investment properties and the estimates of expected credit losses on net contractual rents receivable and other tenant receivables, refer to Note 3 and Note 6 , respectively of the Condensed Consolidated Financial Statements. Due to the continuing risks and uncertainties arising from the COVID-19 health crisis, actual results may differ from these estimates and assumptions. Adoption of New Accounting Standards Effective January 1, 2021, the Trust adopted the following amended standards as issued by the International Accounting Standards Board (IASB). As a result, significant accounting policies, estimates and judgments most affected by the adoption of the new pronouncements have been updated as applicable as indicated in Note 2 of the Condensed Consolidated Financial Statements and further described below. Amendments to IFRS 7, Financial Instruments: Disclosures, IFRS 9, IAS 39, Financial Instruments: Recognition and Measurement, IFRS 4, Insurance Contracts, and IFRS 16, Leases - Interbank Offered Rate (IBOR) Reform - Phase 2 (IBOR Reform Phase 2) In August 2020, the IASB published IBOR Reform Phase 2 which addresses issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. For financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in the contractual cash flows is as a result of IBOR reform and occurs on an economically equivalent basis, the change will be accounted for by updating the effective interest rate with no immediate gain or loss recognized. The amendments also provide temporary relief that allow the Trust's hedging relationships to continue upon replacement of the existing interest rate benchmark with the alternative risk-free rate resulting from IBOR reform. The relief requires hedge designations and hedge documentation to be updated by the end of the reporting period in which a replacement takes place. The IBOR Reform Phase 2 amendments are effective for annual periods beginning on or after January 1, 2021, with earlier application permitted. As at March 31, 2021 and December 31, 2020, all of RioCan's hedging relationships are based on 1-month CDOR, which is expected to continue as a benchmark rate for the foreseeable future. As a result, these amendments did not impact the Trust's consolidated financial statements upon adoption. Future Changes in Accounting Policies RioCan monitors the potential changes proposed by the IASB and analyzes the effect that changes in the standards may have on RioCan’s operations. Standards issued, but not yet effective, up to the date of issuance of the Condensed Consolidated Financial Statements for the three months ended March 31, 2021, are described below. This description is of standards and interpretations issued, which we reasonably expect to be applicable at a future date. We intend to adopt these standards when they become effective. Amendment to IAS 1, Presentation of Financial Statements - Classification of Liabilities as Current or Non-Current In January 2020, the IASB issued amendments to paragraphs 69-76 of IAS 1 to clarify the requirements for classifying liabilities as current or non-current. The amendments specify that the conditions which exist at the end of a reporting period are those which will be used to determine if a right to defer settlement of a liability exists. The amendments also clarify the situations that are considered a settlement of a liability. The amendments are effective January 1, 2023, with early adoption permitted. The amendments are to be applied retrospectively. Management is currently assessing the impact of this amendment.
RioCan First Quarter 2021 66 MANAGEMENT’S DISCUSSION AND ANALYSIS
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure Controls and Procedures (DCP) The CEO and CFO of the Trust have designed or caused to be designed under their direct supervision the Trust’s DCP to provide reasonable assurance that: (i) material information relating to the Trust is made known to management by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Trust in its annual and interim fillings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation. The CEO and CFO are assisted in this responsibility by a Disclosure Committee, which is composed of RioCan senior management. The Disclosure Committee has established disclosure controls and procedures so that it becomes aware of any material information affecting RioCan in order to evaluate and communicate this information to management of the Trust, including the CEO and CFO, as appropriate and determine the appropriateness and timing of any required disclosure. Internal Controls over Financial Reporting (ICFR) The CEO and CFO of the Trust have designed or caused to be designed under their direct supervision the Trust’s ICFR which has been effected by RioCan’s Board of Trustees, management and other personnel in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. There were no changes in the Trust’s ICFR during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Trust’s ICFR. Inherent Limitations It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Due to inherent limitations in all such systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. Accordingly, RioCan's DCP are designed to provide reasonable, not absolute assurance, that the objectives of the Trust's disclosure control system are met. These inherent limitations include, among other items: (i) that management’s assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of any undetected errors; and (iii) controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. Canadian REIT Status and Monitoring RioCan currently qualifies for the REIT Exemption for purposes of the Income Tax Act (Canada). Accordingly, RioCan continues to be able to flow taxable income through to Unitholders on a tax effective basis. Generally, to qualify for the REIT Exemption, RioCan's Canadian assets must be comprised primarily of real estate and substantially all of our Canadian source revenues must be derived from rental revenue, capital gains and fee income from properties in which we have an interest. RioCan monitors its REIT Exemption status to ensure that we continue to qualify as a Canadian REIT. From time to time, the members of the Board of Trustees, Audit Committee and senior management are updated on RioCan's continued REIT Exemption qualification, including any significant legislation updates. RISKS AND UNCERTAINTIES The achievement of RioCan’s objectives is, in part, dependent on the successful mitigation of business risks identified. Real estate investments are subject to a degree of risk. They are affected by various factors including changes in general economic and local market conditions, equity and credit markets, fluctuations in interest costs, the attractiveness of the properties to tenants, competition from other available space, the stability and creditworthiness of tenants, and various other factors. On June 17, 2015, Unitholders authorized and approved amendments made to the Trust’s Declaration of Trust to further align it with evolving governance best practices. The rights granted in the amended Declaration of Trust are granted as contractual rights afforded to Unitholders (rather than as statutory rights). Similar to other existing rights contained in the Declaration of Trust (i.e. the take-over bid provisions and conflict of interest provisions), making these rights and remedies and certain procedures available by contract is structurally different from the manner in which the equivalent rights and remedies or procedures (including the procedure for enforcing such remedies) are made available to shareholders of a corporation, who benefit from those rights and remedies or procedures by the corporate statute that governs the corporation, such as the Canadian Business Corporations Act (CBCA). As such, there is no certainty how these rights, remedies or procedures may be treated by the courts in the non- corporate context or that a Unitholder will be able to enforce the rights and remedies in the manner contemplated by the proposed amendments. Furthermore, how the courts will treat these rights, remedies and procedures will be in the discretion of the court, and the courts may choose to not accept jurisdiction to consider any claim contemplated in the proposed provisions. For a detailed discussion of risk factors that have been identified by RioCan, refer to the 2020 Annual Report and RioCan's AIF, which can be found on SEDAR at www.sedar.com or RioCan's website at www.riocan.com, together with the below risk factor.
67 RioCan First Quarter 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS
COVID-19 Health Crisis Since the initial outbreak of the global COVID-19 pandemic, resulting government restrictive measures have led to a general slowdown of the global and domestic economy. The extent of restrictive measures varied with the extent of the spread of the virus with governments in Canada and in many other countries easing the containment measures as case counts fell, only to reimpose them when there was a resurgence in the number of cases. Some countries are experiencing a third wave of the pandemic resulting from variants of the disease which spread more easily and may cause more severe illness. Rollout of various vaccines is underway. While the vaccines are proven to be highly effective against the initial strain of the virus, scientists continue to study the efficacy of the current vaccines against the new variants closely. Nevertheless, there is expectation that once a sufficient proportion of the population is vaccinated, the recent restrictions will ease or become more targeted as governments attempt to avoid full scale shut downs of the economy, leading to a reopening of economies and global and domestic economic recovery. COVID-19 imposes additional risks and uncertainties to RioCan's business, operations and financial performance as discussed throughout this MD&A. The Trust has implemented additional safety measures at all of its properties, including increased frequency in cleaning and disinfecting, as well as physical distancing practices. As the COVID-19 pandemic evolves, the Trust will continue to act according to directions provided by the Federal and respective Provincial and Municipal governments. At the current stage, the longevity and extent of the pandemic, the duration and intensity of resulting business disruptions and related financial, social and public health impacts continue to be uncertain. Such continuing risks and uncertainties arising from the COVID-19 health crisis include, but are not limited to, consumer demands for tenant's products or services; consumer foot traffic to tenant stores and RioCan properties; changing consumer habits and level of discretionary spending; mobility restrictions; increased unemployment; tenants' ability to adequately staff their businesses; tenants' ability to pay rent as required under their leases; the extent of tenant business closures and changes in tenant business strategies that may impact retail real estate occupancy; changes in the creditworthiness of tenants; leasing activities; market rents; the availability, duration and effectiveness of various support programs that are or may be offered by the various levels of government in Canada; the availability and extent of support programs that the Trust may offer its tenants; timelines and costs related to the Trust's development projects; the pace of property lease-up and rents and yields achieved upon development completion; domestic and global supply chains; labor supply and demand; and the capitalization rates that arm's length buyers and sellers are willing to transact on properties. Many of these factors could not only impact RioCan's operations and financial performance but could also have a material adverse impact on RioCan's investment property valuations because such factors could have a direct or indirect impact on stabilized NOI, cash flows or capitalization rates, among others, that are inputs to investment property valuations. In 2020, the Trust wrote down $526.8 million or 3.7% of its IFRS carrying value as of the beginning of 2020 to reflect the estimated effect of the pandemic on property cash flow and capitalization rates, as well as the estimated effect of the depressed oil and gas markets. For the three months ended March 31, 2021, the Trust estimated that no further major pandemic-related adjustments were warranted as the carrying value for its investment properties reflected its best estimate for the highest and best use as of March 31, 2021. However, the short and long-term impact of the pandemic on the Trust's investment property valuation remains difficult to assess and predict, especially given the tightened restrictive measures introduced in Ontario and certain other provinces following the end of the quarter. Refer to Note 3 of the Condensed Consolidated Financial Statements for a sensitivity analysis of investment property valuations. The ongoing pandemic could also impact the timelines and costs related to the Trust’s development projects, the progress of its development program and annual development spend, the pace of property lease-up or rents and yields achieved upon development completion, as well as the pace of maintenance capital expenditures. The current pandemic could also increase risks associated with cyber security, information technology systems and networks, which in turn could impact the Trust's business and operations. The spread, duration and severity of COVID-19 could adversely affect global economies, including credit and capital markets, resulting in a short-term or long-term economic downturn, which could potentially increase the difficulty and cost of accessing capital. It could also potentially impact RioCan’s current credit ratings, total return and dividend yield of the Trust’s Units.
RioCan First Quarter 2021 68
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) TABLE OF CONTENTS
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS 70 UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME 71 UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 72 UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 73 UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 74
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 75 1 . General Information 75 2 . Significant Accounting Policies 75 3 . Investment Properties 77 4 . Equity-accounted Investments and Joint Arrangements 80 5 . Residential Inventory 81 6 . Receivables and Other Assets 81 7 . Leases 82 8 . Lines of Credit and Other Bank Loans 82 9 . Mortgages Payable 83 10 . Debentures Payable 83 11 . Accounts Payable and Other Liabilities 84 12 . Unitholders' Equity 84 13 . Unit-based Compensation Plans 85 14 . Distributions to Unitholders 87 15 . Revenue 87 16 . Investment and Other Income 88 17 . Interest Income 88 18 . Interest Costs 88 19 . General and Administrative 89 20 . Transaction and Other Costs 89 21 . Net Income per Unit 89 22 . Fair Value Measurement 89 23 . Risk Management 91 24 . Capital Management 92 25 . Supplemental Cash Flow Information 93 26 . Related Party Transactions 93 27 . Segmented Information 94 28 . Contingencies and Other Commitments 94 29 . Events after the Balance Sheet Date 95
69 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of Canadian dollars)
As at Note March 31, 2021 December 31, 2020
Assets Investment properties 3, 7 $ 14,119,293 $ 14,063,022 Equity-accounted investments 4 321,803 209,676 Mortgages and loans receivable 150,095 160,646 Residential inventory 5 227,510 214,181 Assets held for sale 3 78,058 198,094 Receivables and other assets 6 198,086 183,633 Cash and cash equivalents 79,685 238,456 Total assets $ 15,174,530 $ 15,267,708
Liabilities Debentures payable 10 $ 3,091,134 $ 3,340,278 Mortgages payable 9 2,750,234 2,797,066 Lines of credit and other bank loans 8 982,420 790,539 Accounts payable and other liabilities 7, 11 555,617 604,852 Total liabilities $ 7,379,405 $ 7,532,735
Equity Unitholders' equity 7,795,125 7,734,973 Total liabilities and equity $ 15,174,530 $ 15,267,708 The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
Approved on behalf of the Board of Trustees
(signed) Siim A. Vanaselja (signed) Jonathan Gitlin Siim A. Vanaselja Jonathan Gitlin Chair of Audit Committee President and Chief Executive Officer Trustee Trustee
RioCan First Quarter 2021 70 RIOCAN REAL ESTATE INVESTMENT TRUST UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands of Canadian dollars, except per unit amounts)
Three months ended March 31, Note 2021 2020 Revenue Rental revenue 15 $ 273,624 $ 283,445 Property management and other service fees 15 3,175 2,402 Residential inventory sales 15 — 409 276,799 286,256 Operating costs Rental operating costs Recoverable under tenant leases 97,287 105,070 Non-recoverable costs 12,410 5,832 Residential inventory cost of sales — 36 109,697 110,938 Operating income 167,102 175,318 Other income (loss) Interest income 17 2,929 3,967 Income from equity-accounted investments 4 3,629 1,886 Fair value gain (loss) on investment property, net 3 8,866 (24,253) Investment and other income, net 16 221 5,044 15,645 (13,356) Other expenses Interest costs 18 43,924 45,403 General and administrative 19 17,831 7,405 Internal leasing costs 2,852 3,043 Transaction and other costs 20 4,556 1,005 Debenture prepayment costs 10 7,018 — 76,181 56,856 Income before income taxes 106,566 105,106 Current income tax (recovery) expense (163) 1,284 Deferred income tax expense — 1,000 Net income $ 106,729 $ 102,822
Net income Unitholders $ 106,729 $ 102,822 $ 106,729 $ 102,822
Net income per unit Basic 21 $ 0.34 $ 0.32 Diluted 21 $ 0.34 $ 0.32 The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
71 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands of Canadian dollars)
Three months ended March 31, Note 2021 2020 Net income $ 106,729 $ 102,822 Other comprehensive income (loss) Items that may be reclassified subsequently to income, net of tax: Interest rate swap agreements: Unrealized gain (loss) during the period 12 13,952 (53,641) Reclassified during the period to income 12 5,436 929 Other comprehensive loss from equity-accounted investments 4, 12 (183) (381) Other comprehensive income (loss), net of tax 19,205 (53,093) Comprehensive income, net of tax $ 125,934 $ 49,729 Comprehensive income, net of tax attributable to: Unitholders $ 125,934 $ 49,729 The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
RioCan First Quarter 2021 72 RIOCAN REAL ESTATE INVESTMENT TRUST UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
73 (In thousands of Canadian dollars) RioCan First Quarter 2021 Accumulated other Note Trust Units Contributed surplus Retained earnings comprehensive loss Total equity Balance, December 31, 2019 $ 4,814,097 $ 36,068 $ 3,472,324 $ (17,278) $ 8,305,211
Changes during the period: Net income — — 102,822 — 102,822 Other comprehensive loss 12 — — — (53,093) (53,093) Unit-based compensation exercises, net of Units repurchased for settlement of Unit exercises 12 480 (6,583) — — (6,103) Units issued, net of issuance costs 12 128 — — — 128 Unit-based compensation awards 12 — 1,849 — — 1,849 Distributions to Unitholders 14 — — (114,372) — (114,372) Balance, March 31, 2020 $ 4,814,705 $ 31,334 $ 3,460,774 $ (70,371) $ 8,236,442
Accumulated other Note Trust Units Contributed surplus Retained earnings comprehensive loss Total equity Balance, December 31, 2020 $ 4,815,230 $ 38,066 $ 2,950,019 $ (68,342) $ 7,734,973
Changes during the period: Net income — — 106,729 — 106,729 Other comprehensive income 12 — — — 19,205 19,205 Unit-based compensation exercises, net of Units repurchased for settlement of Unit exercises 12 1,966 (6,130) — — (4,164) Units issued, net of issuance costs 12 223 — — — 223 Unit-based compensation awards 12 — 14,423 — — 14,423 Distributions to Unitholders 14 — — (76,264) — (76,264) Balance, March 31, 2021 $ 4,817,419 $ 46,359 $ 2,980,484 $ (49,137) $ 7,795,125 The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements. RIOCAN REAL ESTATE INVESTMENT TRUST UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of Canadian dollars)
Three months ended March 31, Note 2021 2020 Operating activities Net income $ 106,729 $ 102,822 Items not affecting cash: Depreciation and amortization 19 1,010 1,096 Amortization of straight-line rent 15 (1,686) (2,703) Unit-based compensation expense 12 6,782 1,849 Income from equity-accounted investments 4 (3,629) (1,886) Fair value (gain) loss on investment property, net 3 (8,866) 24,253 Deferred income tax expense — 1,000 Fair value gains on marketable securities 16 — (878) Transaction losses (gains), net on disposition of investment properties 151 (120) Adjustments for changes in other working capital items (19,843) (8,631) Cash provided by operating activities 80,648 116,802 Investing activities Acquisitions of investment properties (11,654) (80,039) Construction expenditures on properties under development (96,068) (98,842) Capital expenditures on income properties: Recoverable and non-recoverable costs (3,392) (7,858) Tenant improvements and external leasing commissions (8,787) (10,566) Proceeds from sale of investment properties 95,085 6,360 Earn-outs on investment properties (993) (561) Contributions to equity-accounted investments 4 (140,181) (5,165) Distributions received from equity-accounted investments 4 33,486 1,775 Advances of mortgages and loans receivable (2,787) (33,106) Repayments of mortgages and loans receivable 13,663 5,739 Proceeds from sale of marketable securities, net of selling costs 16 — 19,001 Lease payments received from finance lease receivables 789 670 Cash used in investing activities (120,839) (202,592) Financing activities Proceeds from mortgage financing, net of issue costs 255,220 208,903 Repayments of mortgage principal (221,444) (177,270) Advances from bank credit lines, net of issue costs 191,182 6,881 Repayment of bank credit lines — (189,120) Proceeds from issuance of debentures, net of issue costs 10 — 348,399 Repayment of unsecured debentures 10 (250,000) — Distributions paid to Unitholders 25 (88,971) (114,371) Units repurchased for settlement of Unit compensation exercises and proceeds received from issuance of Units, net of issue costs (4,098) (5,922) Repayment of lease liabilities (469) (151) Cash (used in) provided by financing activities (118,580) 77,349 Net change in cash and cash equivalents (158,771) (8,441) Cash and cash equivalents, beginning of period 238,456 93,516 Cash and cash equivalents, end of period $ 79,685 $ 85,075 Supplemental cash flow information 25 The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
RioCan First Quarter 2021 74 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 1. GENERAL INFORMATION RioCan Real Estate Investment Trust and its consolidated subsidiaries (collectively, the Trust or RioCan) own, develop and operate one of Canada's largest portfolio of retail-focused and increasingly mixed-use properties. The parent trust, RioCan Real Estate Investment Trust, is an unincorporated closed-end trust governed under the laws of the Province of Ontario, Canada, and constituted pursuant to a Declaration of Trust (Declaration) dated November 30, 1993, as most recently amended and restated on June 2, 2020. The Trust’s corporate headquarters and registered head office are located at the RioCan Yonge Eglinton Centre, 2300 Yonge Street, Toronto, Ontario, Canada. RioCan's trust units (Units) are listed on the Toronto Stock Exchange (TSX) under the ticker symbol REI.UN. These unaudited interim condensed consolidated financial statements (Condensed Consolidated Financial Statements) were authorized for issue by RioCan's Audit Committee on May 3, 2021. 2. SIGNIFICANT ACCOUNTING POLICIES 2.1 Statement of compliance RioCan’s Condensed Consolidated Financial Statements have been prepared by management in accordance with International Accounting Standard 34, Interim Financial Reporting (IAS 34), as issued by the International Accounting Standards Board (IASB). Under International Financial Reporting Standards (IFRS), additional disclosures are required in annual financial statements and, therefore, these Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the notes to the Trust’s audited annual consolidated financial statements for the years ended December 31, 2020 and 2019 (2020 Annual Financial Statements) as set out on pages 95 to 150 of the 2020 Annual Report. 2.2 Basis of presentation The accounting policies adopted in the preparation of the Condensed Consolidated Financial Statements are consistent with those followed in the preparation of the Trust's 2020 Annual Financial Statements, except for the adoption of new standards and interpretations effective as of January 1, 2021 as described in Note 2.4. 2.3 Use of estimates and assumptions The preparation of RioCan's Condensed Consolidated Financial Statements requires management to make estimates and assumptions that have a significant risk of causing a material adjustment to the reported amounts of assets, liabilities, net income and related disclosures over the following reporting period. Estimates made by management are based on events and circumstances that existed at the consolidated balance sheet date. Accordingly, actual results may differ from these estimates. Elevated estimation uncertainty as a result of COVID-19 Since the outbreak of COVID-19 and the declaration by the World Health Organization as a global pandemic on March 11, 2020, various authorities, including Canadian federal and provincial governments, introduced certain restrictive measures which include, but are not limited to, travel bans, quarantines, self-isolation, social distancing and the closure of non-essential businesses in an effort to reduce the spread of the pandemic. Many of the measures that were introduced at the outset of the pandemic continue to remain in place, and vary depending on the spread and rate of infections. Given the continuously evolving circumstances surrounding COVID-19, it is difficult to predict with certainty the nature, extent and duration of COVID-19, and the duration and intensity of resulting business disruptions and related financial, social and public health impacts. Such effects could be adverse and material, including their potential effects on RioCan's business, operations and financial performance both in the short-term and long-term. Estimates and assumptions that are most subject to increased uncertainty caused by the COVID-19 pandemic relate to the valuation of investment properties and the assessment of collectability of contractual rents receivable due to the forward-looking nature of the information (Note 3 and Note 6). The amounts recorded in these Condensed Consolidated Financial Statements are based on the latest reliable information available to management at the time the Condensed Consolidated Financial Statements were prepared where that information reflects conditions at the date of the Condensed Consolidated Financial Statements. However, given the heightened level of uncertainty caused by COVID-19, these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in the future.
75 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 2.4 Changes in accounting policies and disclosures Amendments to IFRS 7, Financial Instruments: Disclosures, IFRS 9, IAS 39, Financial Instruments: Recognition and Measurement, IFRS 4, Insurance Contracts, and IFRS 16, Leases - Interbank Offered Rate (IBOR) Reform - Phase 2 (IBOR Reform Phase 2) In August 2020, the IASB published IBOR Reform Phase 2 which addresses issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. For financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in the contractual cash flows is as a result of IBOR reform and occurs on an economically equivalent basis, the change will be accounted for by updating the effective interest rate with no immediate gain or loss recognized. The amendments also provide temporary relief that allow the Trust's hedging relationships to continue upon replacement of the existing interest rate benchmark with the alternative risk-free rate resulting from IBOR reform. The relief requires hedge designations and hedge documentation to be updated by the end of the reporting period in which a replacement takes place. The IBOR Reform Phase 2 amendments are effective for annual periods beginning on or after January 1, 2021, with earlier application permitted. As at March 31, 2021 and December 31, 2020, all of RioCan's hedging relationships are based on 1-month CDOR, which is expected to continue as a benchmark rate for the foreseeable future. As a result, these amendments did not impact the Trust's consolidated financial statements upon adoption. 2.5 Future changes in accounting policies Amendment to IAS 1, Presentation of Financial Statements - Classification of Liabilities as Current or Non-Current In January 2020, the IASB issued amendments to paragraphs 69-76 of IAS 1 to clarify the requirements for classifying liabilities as current or non-current. The amendments specify that the conditions which exist at the end of a reporting period are those which will be used to determine if a right to defer settlement of a liability exists. The amendments also clarify the situations that are considered a settlement of a liability. The amendments are effective January 1, 2023, with early adoption permitted. The amendments are to be applied retrospectively. Management is currently assessing the impact of this amendment.
RioCan First Quarter 2021 76 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 3. INVESTMENT PROPERTIES
As at March 31, 2021 December 31, 2020 Income properties $ 12,732,603 $ 12,740,959 Properties under development 1,386,690 1,322,063 $ 14,119,293 $ 14,063,022
Year ended Three months ended March 31, 2021 December 31, 2020 Properties Income under properties development Total (iv) Total (iv) Balance, beginning of period $ 12,907,134 $ 1,353,982 $ 14,261,116 $ 14,380,927 Acquisitions 11,482 — 11,482 110,219 Dispositions (155,608) (20,974) (176,582) (150,860) Development expenditures — 74,245 74,245 457,109 Capital expenditures: Recoverable and non-recoverable expenditures 1,054 — 1,054 14,083 Leasing commissions and tenant improvements 14,021 — 14,021 35,648 Transfers, net (i) 16,183 (16,183) — — Transfers to residential inventory (ii) — — — (71,259) Fair value gain (loss), net 5,405 3,461 8,866 (526,775) Straight-line rent (iii) 1,686 — 1,686 7,177 Transfers to finance lease receivables — — — (4,009) Other changes 54 — 54 5,966 Earn-out consideration — 1,409 1,409 2,890 Balance, end of period $ 12,801,411 $ 1,395,940 $ 14,197,351 $ 14,261,116
Investment properties $ 12,732,603 $ 1,386,690 $ 14,119,293 $ 14,063,022 Properties held for sale 68,808 9,250 78,058 198,094 $ 12,801,411 $ 1,395,940 $ 14,197,351 $ 14,261,116 (i) During the three months ended March 31, 2021, transfers to income properties from properties under development totalled $39.1 million, reflecting completed developments. Transfers from income properties to properties under development totalled $22.9 million, reflecting the commencement of active development on certain income properties during the period. (ii) During the year ended December 31, 2020, a portion of RioCan Leaside Centre, a portion of Queensway, 2939 – 2943 Bloor Street West and a portion of Clarkson Village were transferred to residential inventory from investment property as appropriate evidence of a change in use was established. (iii) Included in investment properties is $117.8 million of net rents receivable arising from the recognition of rental revenue on a straight-line basis over the lease term (December 31, 2020 - $116.5 million). (iv) Included in investment properties are 12 properties held as ROU assets as at March 31, 2021 (December 31, 2020 - 12 properties). Refer to Note 7. Acquisitions The following table summarizes the Trust's acquisitions of properties:
Income properties Properties under development Three months ended March 31, 2021 2020 2021 2020 Properties acquired during the period: Total consideration $ 11,482 $ 68,700 $ — $ 34,039 Debt assumed — (15,701) — — Total consideration, net of liabilities assumed $ 11,482 $ 52,999 $ — $ 34,039
77 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Investment properties acquisitions On January 19, 2021, RioCan acquired a 100% interest in the 2978 Eglinton Avenue East property, located in Toronto, Ontario, for the purchase price of $11.5 million including transaction costs. Purchase obligations The Trust has agreed to purchase its partners' interest in the retail portion of the Yorkville project upon completion, currently estimated to be during 2024, at a 6.0% capitalization rate. Dispositions The following table summarizes the Trust's dispositions of investment property:
Income properties Properties under development Three months ended March 31, 2021 2020 2021 2020 Properties disposed during the period: Total consideration $ 155,608 $ — $ 20,974 $ 21,715 Mortgages associated with investment property dispositions (82,636) — — — Total consideration, net of related debt $ 72,972 $ — $ 20,974 $ 21,715 Investment properties dispositions
IPP PUD sales sales Property name and location Date disposed Interest disposed proceeds proceeds
Q1 2021 Westgate - Phase One (Rhythm), Ottawa, ON (ii) March 11, 2021 50 % $ — $ 17,574 Tanger Outlets St. Sauveur, St. Sauveur, QC March 1, 2021 50 % 6,000 — Windfields Farm - School Site, Oshawa, ON January 22, 2021 100 % — 3,400 ePlace, Toronto, ON (i) January 7, 2021 50 % 21,862 — eCentral, Toronto, ON (i) January 7, 2021 50 % 127,746 — Total dispositions for the three months ended March 31, 2021 $ 155,608 $ 20,974
(i) Upon disposition of ePlace and eCentral, the purchaser assumed $82.6 million of debt. (ii) Includes cost recoveries of $12.1 million. Properties held for sale Presented below are details of the Trust's properties held for sale:
As at March 31, 2021 December 31, 2020 Assets Income properties $ 68,808 $ 166,175 Properties under development 9,250 31,919 Total assets held for sale $ 78,058 $ 198,094 As at March 31, 2021, RioCan has five investment properties held for sale with a carrying value of $78.1 million. Valuation methodology Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). Expectations about future improvements or modifications to be made to the investment property to reflect its highest and best use may be considered in the valuation. Investment properties and properties held for sale are carried at fair value, and the Trust uses significant unobservable inputs to estimate fair value of these assets at each reporting date. See below for further description of inputs used by the Trust in estimating the fair value of its properties. Significant unobservable inputs are classified as Level 3 inputs under IFRS. See Note 22 for further details. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for fair value measurement, when available. When quoted market prices are not available, judgment is required to estimate fair value based on the best information available, including prices for similar assets and the use of other valuation techniques. These valuation techniques are consistent with the objective of measuring fair value and involve a degree of estimation depending on the availability of market-based information.
RioCan First Quarter 2021 78 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Valuation processes External valuations During the three months ended March 31, 2021, the Trust obtained a total of six external property appraisals (without any appraisals for vacant land parcels), which supported an IFRS fair value of approximately $0.3 billion, or 2.3% of the Trust's investment property portfolio as at March 31, 2021. In 2021, the Trust intends to select approximately six income properties for external appraisal on a quarterly basis. Valuation techniques Income properties The internal valuation team estimates the fair value of each income property based on a valuation technique known as the direct capitalization income approach. The fair value is determined by applying a capitalization rate to stabilized net operating income (SNOI). SNOI and the capitalization rate are both unobservable inputs, supported by internal budgets and external evidence where appropriate and adjusted according to the property specific characteristics and market conditions. Properties under development Management uses an internal valuation process to estimate the fair value of properties under development that consist of undeveloped land on a land value per acre basis using the particular attributes of the project with respect to zoning and pre- development work performed on the site. Where a site is partially developed and meets certain thresholds, the direct capitalization method is applied to capitalize the pro forma net operating income, stabilized with market allowances, from which the costs to complete the development are deducted. Pro forma net operating income, costs to complete and capitalization rates are unobservable inputs supported by internal budgets and external evidence where appropriate and adjusted according to property specific characteristics and market conditions. The primary method of valuation for land acquired for development is the comparable sales approach, which considers recent sales activity for similar land parcels in the same or similar markets. Land values are estimated using either a per acre or per buildable square foot basis based on highest and best use, and adjusted for property specific characteristics. The table below summarizes the classification, valuation approach and inter-relationship between the Level 3 key unobservable inputs and fair value measurements for the Trust's investment properties:
Key Valuation unobservable Relationship between key unobservable inputs Classification approach input and fair value measurement There is an inverse relationship between the capitalization rate and the fair value; in other words, Capitalization rate the higher the capitalization rate, the lower the estimated fair value. Income-producing properties/ Direct capitalization Generally, an increase in SNOI will result in an Properties under development income approach SNOI increase in the estimated fair value of the properties. There is an inverse relationship between costs to Costs to complete complete and fair value; in other words, the higher the costs to complete, the lower the estimated fair value. Properties under development - Comparable sales Market undeveloped land approach comparison Land value is in line with market trends. As at March 31, 2021, the weighted average capitalization rate for the Trust's investment properties and properties held for sale is 5.44% (December 31, 2020 - 5.44%). The carrying value of the Trust's investment properties reflects its best estimate for the highest and best use as at March 31, 2021 and December 31, 2020, and have incorporated the estimated effect of the COVID-19 pandemic on property cash flows and capitalization rates, as well as the estimated effect of the depressed oil and gas markets. The longevity and extent of the pandemic, the duration and intensity of resulting business disruptions and related financial, social and public health impacts continue to be uncertain. Such effects could be adverse and material, including their potential effects on RioCan's tenants and the Trust's business, operations and financial performance both in the short-term and long-term, which in turn, could further impact RioCan investment property valuations. As the events unfold in association with the pandemic, further adjustments to the Trust's IFRS value of investment properties, which could be negative or positive, may be required. Refer to below for a sensitivity analysis of investment property valuations.
79 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Sensitivity analysis of changes in stabilized net operating income (SNOI), capitalization rates and costs to complete The following table is a sensitivity analysis applied to the portion of the Trust's investment properties and properties held for sale carrying value that is measured using the direct capitalization approach and, therefore, is sensitive to changes in capitalization rates:
Weighted average Capitalization rate sensitivity increase (decrease) capitalization rate Fair value variance (1.00%) 4.44 % $ 3,261,288 (0.75%) 4.69 % 2,339,188 (0.50%) 4.94 % 1,454,973 (0.25%) 5.19 % 686,103 March 31, 2021 5.44 % — 0.25% 5.69 % (618,072) 0.50% 5.94 % (1,179,662) 0.75% 6.19 % (1,692,722) 1.00% 6.44 % (2,161,377) A 0.25% increase in capitalization rate would result in a lower portfolio fair value of $618.1 million. A 0.25% decrease in capitalization rate would result in a higher portfolio fair value of $686.1 million. In addition, a 1% increase in SNOI would result in a higher portfolio fair value of $133.7 million. A 1% decrease in SNOI would result in a lower portfolio fair value of $132.7 million. A 1% increase in SNOI coupled with a 0.25% decrease in capitalization rates would result in a higher portfolio fair value of $825.9 million. A 1% decrease in SNOI coupled with a 0.25% increase in capitalization rates would result in a lower portfolio fair value of $744.4 million. A 1% increase in costs to complete for the development properties would result in a lower portfolio fair value of $2.4 million, and a 1% decrease in costs to complete for the development properties would result in a higher portfolio fair value of $2.4 million. 4. EQUITY-ACCOUNTED INVESTMENTS AND JOINT ARRANGEMENTS
Equity-accounted investments
The Trust has certain equity-method-accounted investments in associates and joint ventures. The following table details the Trust's ownership interest in each equity investee:
Equity Investee Principal activity March 31, 2021 December 31, 2020 RioCan-Fieldgate LP Development and sale of residential inventory 50.0 % 50.0 % Dawson-Yonge LP Owns and operates an income property 40.0 % 40.0 % RioCan-HBC JV Owns and operates income properties 20.2 % 12.6 % WhiteCastle New Urban Fund, LP (WNUF 1) 14.2 % 14.2 % WhiteCastle New Urban Fund 2, LP (WNUF 2) 19.3 % 19.3 % Development and sale of residential inventory WhiteCastle New Urban Fund 3, LP (WNUF 3) 20.0 % 20.0 % WhiteCastle New Urban Fund 4, LP (WNUF 4) 18.4 % 18.4 %
The following table shows the changes in the aggregate carrying value of RioCan's investment in associates and joint ventures for the three months ended March 31, 2021: Balance, beginning of period $ 209,676 Contributions 140,012 Share of net income 3,629 Distributions (33,486) Other comprehensive loss from equity-accounted investments (183) Other 2,155 Balance, end of period $ 321,803 RioCan-HBC Joint Venture
On February 5, 2021, RioCan contributed the remaining investment commitment of $140.1 million, which increased RioCan's ownership interest to 20.2%.
RioCan First Quarter 2021 80 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 5. RESIDENTIAL INVENTORY Residential inventory consists of assets that are developed by RioCan for sale in the ordinary course of business. The following table shows the changes in the aggregate carrying value of RioCan's residential inventory:
Three months ended Year ended March 31, 2021 December 31, 2020 Balance, beginning of period $ 214,181 $ 108,956 Acquisitions — 18,987 Dispositions — (19,143) Development expenditures 13,329 36,304 Transfers from investment properties — 71,259 Transfers to equity-accounted investments — (2,182) Balance, end of period $ 227,510 $ 214,181 6. RECEIVABLES AND OTHER ASSETS The following table details the Trust's receivables and other assets as at March 31, 2021 and December 31, 2020:
As at March 31, 2021 December 31, 2020 Non- Non- Current current Total Current current Total Prepaid expenses and other assets $ 32,761 $ 26,924 $ 59,685 $ 25,649 $ 27,014 $ 52,663 Net contractual rents and other tenant receivables 52,432 — 52,432 43,676 — 43,676 Finance lease receivables 3,340 36,295 39,635 3,273 37,192 40,465 Amounts due on condominium final closings — — — 1,038 — 1,038 Other receivables (i) 15,730 17,465 33,195 15,947 17,540 33,487 Funds held in trust 1,021 10,835 11,856 2,557 9,747 12,304 Interest rate swaps agreements — 1,283 1,283 — — — $ 105,284 $ 92,802 $ 198,086 $ 92,140 $ 91,493 $ 183,633 (i) Other receivables primarily includes fees and cost reimbursements receivable from partners, and disposition proceeds receivable, including $11.3 million of proceeds to be received related to the Dufferin Plaza disposition, which is expected to be paid upon the completion of several pre- construction development phases. Contractual rents receivable Contractual rents receivable, including common area maintenance, realty tax, and insurance recoveries, are presented net of an allowance for doubtful accounts of $16.3 million as at March 31, 2021 (December 31, 2020 - $12.5 million). RioCan determines its allowance for doubtful accounts using the simplified lifetime expected credit loss (ECL) model for contractual rents receivable. The Trust uses an accounts receivable aging provision matrix to assess the ECL and applies loss factors based on historical loss experience calibrated with forward-looking information to its aging buckets. As a result of COVID-19, RioCan has calibrated its model for estimating lifetime ECLs by performing a tenant-by-tenant assessment of contractual rents receivable of major national tenants and by incorporating a provision matrix by category of tenant based on payment history and future expectations of likely default. On October 9, 2020, the Government of Canada announced a new commercial rent relief program, the Canada Emergency Rent Subsidy (CERS) to replace the Government of Canada's Canada Emergency Commercial Rent Assistance (CECRA) program post September 2020. Subsidies under the new CERS program, are provided directly to tenants without any landlord participation and is comprised of (i) a subsidy that is available to organizations that continue to endure declining revenues or up to 65% of eligible expenses including rent, and (ii) an additional top-up, i.e. new lockdown support of 25%, for those entities that must either close or significantly restrict their activities due to a public health order. Approvals for the subsidy are based on 12-week cycles and tenants who qualify for the base rent subsidy and notify the landlord of such will be protected from eviction during that cycle. The CERS program was initially set to end in June 2021. Subject to legislative approvals, the recently announced federal budget extends the CERS program to September 25, 2021 with certain changes to the qualification requirements and maximum basic subsidy rates. The Trust accrued a $6.4 million provision for rent abatements and bad debts which has been included in non-recoverable operating costs for the three months ended March 31, 2021 as a result of the COVID-19 pandemic.
81 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) The following table summarizes the Trust's movement in allowance for doubtful accounts:
Three months ended Year ended March 31, 2021 December 31, 2020 Allowance for doubtful accounts, beginning of period $ 12,515 $ 1,360 Provision for credit losses 6,414 42,499 Write-offs (4,143) (33,702) Recoveries of previous write-offs and other 1,525 2,358 Allowance for doubtful accounts, end of period $ 16,311 $ 12,515 7. LEASES As Lessee - Real estate leases Included in investment properties are 12 properties held as ROU assets arising from land and/or building leases where RioCan is the lessee as at March 31, 2021 (December 31, 2020 - 12 properties). The real estate lease may be a lease for a portion of a property (including access roads and parking lots) or the entire property (including land and building). The carrying value of total investment properties related to these leases, including the portions relating to RioCan's leasehold building interests, and certain other property or related property interests, and excluding sublease finance lease receivables (refer to Note 6 ) is $264.4 million (December 31, 2020 - $266.7 million). The corresponding lease liability in accounts payable and other liabilities is $40.3 million (December 31, 2020 - $40.7 million). 8. LINES OF CREDIT AND OTHER BANK LOANS The Trust's revolving unsecured operating line of credit and secured construction lines and other bank loans, net of deferred financing costs, are as follows:
As at March 31, 2021 December 31, 2020 Revolving unsecured operating line of credit (i) $ 152,498 $ (1,648) Non-revolving unsecured credit facilities 699,371 699,333 Construction lines and other bank loans 130,551 92,854 $ 982,420 $ 790,539
Current $ 57,478 $ 50,125 Non-current 924,942 740,414 $ 982,420 $ 790,539 (i) As at December 31, 2020, balance represents deferred financing costs and there are no drawn amounts. Revolving unsecured operating line of credit As at March 31, 2021, RioCan had a drawn balance of $154.0 million and $846.0 million of credit available to be drawn from this revolving unsecured operating line of credit (December 31, 2020 - $1.0 billion). The weighted average contractual interest rate on amounts drawn under this facility was 1.61% as of March 31, 2021 (December 31, 2020 - nil). Non-revolving unsecured credit facilities The Trust has a $200 million non-revolving unsecured credit facility with two financial institutions (consisting of a Schedule I and a Schedule III bank), with a maturity date of January 31, 2023 and a weighted average annual all-in fixed interest rate of 3.28% through interest rate swaps. In addition, the Trust has a $150 million non-revolving unsecured credit facility with two financial institutions (consisting of a Schedule I and a Schedule III bank), with a maturity date of June 27, 2024 and an annual all-in fixed interest rate of 3.43% through an interest rate swap. The Trust also has a $350.0 million five-year non-revolving unsecured credit facility with three financial institutions (consisting of two Schedule I banks and one Schedule III bank). This credit facility matures on February 7, 2024 and, through an interest rate swap, bears an annual all-in fixed interest rate of 3.34%. As at March 31, 2021, all of the Trust's non-revolving unsecured credit facilities are fully drawn. The underlying spreads for these unsecured credit facilities were based on the higher of the credit ratings between S&P and DBRS. The non-revolving unsecured credit facility agreements require the Trust to maintain certain financial covenants similar to those of RioCan's $1 billion revolving unsecured operating line of credit. Refer to Note 24 for additional details.
RioCan First Quarter 2021 82 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Construction lines of credit and other bank loans In addition to the revolving unsecured operating line of credit and non-revolving unsecured credit facilities, the Trust has secured credit facilities and other bank loans, which include variable rate non-revolving secured construction facilities for the funding of certain development properties. As at March 31, 2021, the construction facilities have an aggregate maximum borrowing capacity of $437.7 million (December 31, 2020 - $384.2 million) and mature between 2021 and 2025, of which the Trust had drawn $130.6 million (December 31, 2020 - $92.9 million). The weighted average contractual interest rate on amounts outstanding is 1.98% (December 31, 2020 - 1.97%). 9. MORTGAGES PAYABLE Mortgages payable, net of deferred financing costs, consist of the following:
As at March 31, 2021 December 31, 2020 Current $ 163,029 $ 335,034 Non-current 2,587,205 2,462,032 $ 2,750,234 $ 2,797,066 As at March 31, 2021, total mortgages payable bear interest at a weighted average contractual interest rate of 3.21% and a weighted average effective interest rate of 3.25% (December 31, 2020 - 3.37% and 3.40%, respectively), and mature between 2021 and 2034. During the three months ended March 31, 2021, RioCan completed new term mortgage borrowings of $256.0 million and renewed maturity balances of $21.8 million at a combined weighted average interest rate of 2.29% and a weighted average term of six years. During the three months ended March 31, 2021, repayments of mortgage balances and scheduled amortization amounted to $221.4 million, and mortgages disposed on the sale of investment properties was $82.6 million. Pledged properties As at March 31, 2021, $5.8 billion of the aggregate carrying value of investment properties, properties held for sale, residential inventory and certain other assets serves as security for RioCan's mortgages payable (December 31, 2020 - $5.8 billion). 10. DEBENTURES PAYABLE
As at March 31, 2021 December 31, 2020 Current $ 300,000 $ 550,000 Non-current 2,791,134 2,790,278 $ 3,091,134 $ 3,340,278 As at March 31, 2021, total debentures payable bear interest at weighted average contractual interest rates of 2.85% and a weighted average effective interest rate of 2.99% (December 31, 2020 - 2.91% and 3.06%, respectively). Redemption activity On January 15, 2021, RioCan redeemed, in full, its $250.0 million, 3.716% Series R unsecured debentures due December 13, 2021, in accordance with their terms, at a total redemption price of $256.8 million, plus accrued and unpaid interest of $0.8 million, up to but excluding, the redemption date. The Trust recorded a prepayment cost of $7.0 million, which includes a write-off of the related unamortized deferred financing costs. Covenant compliance As at and during the three months ended March 31, 2021, the Trust was in compliance with its covenants pursuant to the Declaration and debenture indentures.
83 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 11. ACCOUNTS PAYABLE AND OTHER LIABILITIES
As at March 31, 2021 December 31, 2020 Non- Non- Current current Total Current current Total Property operating costs (i) $ 90,549 $ 32,661 $ 123,210 $ 86,542 $ 31,505 $ 118,047 Capital expenditures and leasing commissions: Properties under development 116,733 — 116,733 136,696 — 136,696 Income properties 27,171 — 27,171 24,466 — 24,466 Deferred revenue 31,050 76,121 107,171 36,256 67,075 103,331 Unitholder distributions payable 25,418 — 25,418 38,125 — 38,125 Interest payable 29,289 — 29,289 31,184 — 31,184 Lease liability (ii) 7,762 32,494 40,256 7,856 32,869 40,725 Income taxes payable 13,400 — 13,400 13,563 — 13,563 Unfunded employee future benefits — 14,827 14,827 — 14,798 14,798 Unit-based compensation payable — — — — 7,641 7,641 Contingent consideration 312 — 312 1,386 — 1,386 Interest rate swap agreements 710 44,746 45,456 1,001 62,560 63,561 Other trade payables and accruals 12,374 — 12,374 11,329 — 11,329 $ 354,768 $ 200,849 $ 555,617 $ 388,404 $ 216,448 $ 604,852 (i) Includes amounts billed in advance for common area maintenance, realty taxes and insurance recoveries. (ii) Refer to Note 7 for further details. 12. UNITHOLDERS' EQUITY Trust Units The Trust is authorized to issue an unlimited number of Units. The Units are entitled to distributions, as and when declared by the Board (and upon liquidation), and to a pro rata share of the residual net assets remaining after the preferential claims, thereon, of debt holders and preferred Unitholders. As the Trust is a closed-end trust, the Units are not puttable. The following represents the number of Units issued and outstanding, and the related carrying value of Unitholders' equity, for the three months ended March 31, 2021 and 2020:
Three months ended March 31, 2021 2020 Units $ Units $ Balance, beginning of period 317,748 $ 4,815,230 317,710 $ 4,814,097 Units issued: Unit-based compensation exercises, net of Units repurchased for settlement of Unit exercises — 1,966 — 480 Direct purchase plan 7 117 5 128 Exchangeable limited partnership units 6 106 — — Balance, end of period 317,761 $ 4,817,419 317,715 $ 4,814,705 Included in Units outstanding as at March 31, 2021 are exchangeable limited partnership Units totalling 0.5 million (March 31, 2020 - 0.5 million Units) of three limited partnerships that are subsidiaries of the Trust (the LP Units), which were issued to vendors as partial consideration for income properties acquired by RioCan. RioCan is the general partner of the limited partnerships. The LP Units are entitled to distributions equivalent to distributions on RioCan Units and are exchangeable for RioCan Units on a one-for-one basis at any time at the option of the holder. Normal course issuer bid (NCIB) On October 14, 2020, RioCan received TSX approval of its notice of intention to renew its NCIB (the 2020/2021 NCIB), to acquire up to a maximum of 31,615,029 Units, or approximately 10% of the public float as at October 8, 2020, for cancellation or to satisfy RioCan's obligation to deliver Units under the REU and PEU plans, over the next 12 months, effective October 22, 2020. The number of Units that can be purchased pursuant to the 2020/2021 NCIB is subject to a current daily maximum of 545,810 Units (which is equal to 25% of 2,183,243, being the average daily trading volume from April 1, 2020 to September 30, 2020, excluding RioCan's purchases on the TSX under its former NCIB), subject to RioCan’s ability to make one block purchase of Units per calendar week that exceeds such limits. RioCan intends to fund the purchases primarily out of net proceeds from its asset dispositions, available cash and undrawn credit facilities.
RioCan First Quarter 2021 84 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) During the three months ended March 31, 2021, the Trust did not acquire and cancel any Units. Contributed surplus Awards under the restricted equity plans (REU Plans) and performance equity plan (PEU Plan) of RioCan and its consolidated subsidiaries are settled by the delivery of Units purchased on the secondary market, net of applicable withholdings as further described in Note 13. The fair values of these equity-settled awards are recognized as an expense over the vesting period with a corresponding increase to contributed surplus, which is presented as a separate component of total Unitholders' equity. For the three months ended March 31, 2021, RioCan recorded $6.8 million in unit-based compensation costs (March 31, 2020 - $1.8 million). In addition, $7.6 million of previously recognized unit-based compensation costs were derecognized from unit-based compensation payable and recorded to contributed surplus as a result of an amendment to the deferred unit plan, refer to Note 13. Accumulated other comprehensive loss Accumulated other comprehensive loss as at and for the three months ended March 31, 2021 consists of the following amounts:
Interest rate Actuarial loss on swap agreements Equity-accounted pension plan (hedge reserve) investments Total As at December 31, 2020 $ (4,739) $ (63,070) $ (533) $ (68,342) Other comprehensive income (loss) — 19,388 (183) 19,205 As at March 31, 2021 $ (4,739) $ (43,682) $ (716) $ (49,137) 13. UNIT-BASED COMPENSATION PLANS Restricted Equity Unit Plans (REU Plans) Senior Executive REU Plan As at March 31, 2021, 401,631 Senior Executive REUs are outstanding (December 31, 2020 - 251,899), of which 97,606 are vested (December 31, 2020 - 55,720). On February 23, 2021, the Trust granted 189,231 REUs under its Senior Executive REU Plan. The grant date price was $18.13 per unit, based on the five-day volume weighted average market price of RioCan's Units traded on the TSX prior to the grant date, resulting in an aggregate fair value of $3.4 million. Employee REU Plan As at March 31, 2021, 346,082 Employee REUs are unvested and outstanding (December 31, 2020 - 279,342). On February 23, 2021, the Trust granted 139,714 REUs under its Employee REU Plan. The grant date price was $18.13 per unit, based on the five-day volume weighted average market price of RioCan's Units traded on the TSX prior to the grant date, resulting in an aggregate fair value of $2.5 million. Performance Equity Unit Plan (PEU Plan) As at March 31, 2021, 485,305 PEUs are unvested and outstanding (December 31, 2020 - 449,641). On February 23, 2021, the Trust granted 189,231 PEUs under its PEU Plan at a fair value of $4.0 million. The grant date fair value assumptions using a Monte-Carlo simulation model are as follows:
Three months ended March 31, 2021 Fair value of PEUs granted $ 4,002 PEUs granted (in thousands) 189 Grant date fair value per unit $ 21.15 Expected risk-free interest rate (i) 0.3% Expected unit price volatility (ii) 30.5% Initial total Unitholder return (iii) 10.4% (i) Derived using the yield on Government of Canada benchmark bonds with an average term similar to the PEU vesting period. (ii) Expected unit price volatility is calculated based on the average of the actual daily closing price of RioCan's trust units measured over a three-year historical period up to the grant date. Volatility is 50% for first year and 12% per annum thereafter. Average volatility is 30.5% over the three-year period. (iii) PEUs are subject to certain internal and external measures of performance. The PEUs will vest based on the following performance metrics: half are subject to three one-year internal funds from operations (FFO) growth performance hurdles and half are subject to a relative total Unitholder return (TUR) performance hurdle over a three year performance period where vesting is dependent upon RioCan's TUR performance relative to a comparative group of peer companies' weighted TUR based on market capitalization. The initial TUR performance has incorporated actual historical TUR performance for RioCan and each entity in the comparator group over the period from January 1, 2021 to February 23, 2021.
85 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Incentive Unit Option Plan The Trust provides long-term incentives to certain employees by granting options through the Incentive Unit Option Plan (Plan). RioCan is authorized to issue up to a maximum of 22 million Unit options under the Plan. As at March 31, 2021, 11.3 million Unit options remain available to be granted under the Plan (December 31, 2020 – 12.5 million Unit options). The exercise price for each option is equal to the volume weighted average trading price of the units on the TSX for the five trading days immediately preceding the dates of grant. Options granted prior to February 2021, have a contractual life of 10 years and vest at 25% per annum commencing on the first anniversary of the grant date, and become fully vested after four years. On February 23, 2021, 1.3 million of Unit options were granted to senior management (March 31, 2020 - nil). The Unit options granted on February 23, 2021 have a term of seven years and the following vesting conditions: • 500,000 Unit options have vesting conditions that are time-based and will vest 50% on April 1, 2022 and 50% on April 1, 2023; and • 800,000 Unit options have vesting conditions that are 50% time-based service condition only (Time-Based Options) and 50% with a time-based service condition and market-based performance condition (Performance Options). The Time-Based Options will vest 50% on February 23, 2023 and 50% on February 23, 2025. Vesting of the Performance Options depends on achieving certain performance measures based on 20 consecutive trading days (the "20-day VWAP") and only when certain time-vesting conditions are also met as follows: (i) 50% of the Performance Options shall be exercisable on or after the second anniversary of the Grant Date provided that the 20-day VWAP is equal to or greater than $20, at any point during the seven-year term; and (ii) 50% of the Performance Options shall be exercisable on or after the fourth anniversary of the Grant Date provided that the 20-day VWAP is equal to or greater than $24, at any point during the seven-year term. The assumptions used in the calculation of the fair value of the Units options granted for the three months ended March 31, 2021, using a Monte-Carlo simulation model are as follows:
Three months ended March 31, 2021 Fair value of unit options granted $ 2,509 Unit options granted (in thousands) 1,300 Unit option exercise price $ 18.13 Unit price on grant date $ 18.55 Expected risk-free interest rate (i) 0.17% to 0.85% Expected distribution yield (ii) 6.0 % Expected unit price volatility (iii) 50% in year 1, 12% per annum thereafter Contractual life (years) 7 Post-vesting withdrawal rate (iv) — % Early exercise provision (multiple of exercise price) (v) 2x (i) Determined using the yield on Government of Canada bonds and treasury bills under the following terms: 1 year - 0.17%; 2 years - 0.23%; 3 years - 0.31%; 5 years - 0.67%; and 7 years - 0.85%. (ii) Based on historical and future annual distribution yield estimates. (iii) Percent per annum has been estimated by considering the near-term impact of COVID-19 and the longer term historical unit price volatility. (iv) The valuation assumes there are no post-vesting early exercises due to the termination of employment. (v) To allow for the effects of early exercise, it is assumed that the holder will exercise the options after vesting date and prior to option expiry date when the share price is twice the exercise price. Unvested Unit options granted prior to January 1, 2020, which remain outstanding under the existing plan, will continue to be expensed over the vesting period over which all specified vesting conditions are satisfied. The following summarizes the changes in Unit options outstanding during the three months ended March 31, 2021:
Three months ended March 31, 2021 Units Weighted average Options (in thousands) exercise price Outstanding, beginning of period 6,367 $ 26.71 Granted 1,300 18.13 Expired (56) 23.78 Outstanding, end of period 7,611 25.26 Options exercisable at end of period 5,973 $ 26.80
RioCan First Quarter 2021 86 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Trustee Unit Plan Deferred Unit Plan Effective January 1, 2021, the deferred unit plan was amended such that all deferred units granted, vested and outstanding shall be redeemed and settled only by the issuance of Units. The deferred unit liability of $7.6 million was derecognized from unit- based compensation payable and $7.6 million was recognize in contributed surplus for this amendment. As at March 31, 2021, there are 467,809 deferred Units vested and outstanding (December 31, 2020 - 452,368). During the three months ended March 31, 2021, 8,216 deferred Units were granted and no deferred Units were exercised (March 31, 2020 - 7,391 deferred Units granted and no deferred Units exercised). 14. DISTRIBUTIONS TO UNITHOLDERS Total distributions declared to Unitholders are as follows: Three months ended March 31, 2021 2020 Total distributions $ 76,264 $ 114,372 Distributions per unit $ 0.2400 $ 0.3600 In December 2020, the Trust announced a reduction in its monthly distribution from $0.12 per unit to $0.08 per unit, or from $1.44 to $0.96 on an annualized basis. This decrease was effective for the Trust's January 2021 distribution, payable in February 2021. On April 15, 2021, RioCan declared a distribution payable of $0.08 per unit for the month of April 2021, which will be paid on May 7, 2021 to Unitholders of record as at April 30, 2021. 15. REVENUE Rental revenue
Three months ended March 31, 2021 2020 Base rent $ 171,911 $ 174,702 Realty tax and insurance recoveries 53,612 57,688 Common area maintenance recoveries 43,505 46,036 Percentage rent 851 917 Straight-line rent 1,686 2,703 Lease cancellation fees 1,748 357 Parking revenue 311 1,042 Rental revenue $ 273,624 $ 283,445
The following tables provide additional disclosure of the Trust's various revenue streams. Revenue from contracts with customers Revenue from contracts with customers includes common area maintenance recoveries and parking revenue that are included in rental revenue:
Three months ended March 31, 2021 2020 Common area maintenance recoveries $ 43,505 $ 46,036 Property management and other service fees 3,175 2,402 Parking revenue 311 1,042 Residential inventory sales — 409 Revenue from contracts with customers $ 46,991 $ 49,889
87 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Property management and other service fees Property management and other service fees consist of the following:
Three months ended March 31, 2021 2020 Property management fees (i) $ 662 $ 739 Construction and development fees (i) 1,448 1,181 Leasing fees (ii) 78 111 Financing arrangement fees (ii) 502 61 Other (iii) 485 310 Property management and other service fees $ 3,175 $ 2,402 (i) Recognized over time. (ii) Recognized at a point in time. (iii) During the three months ended March 31, 2021, $0.1 million is recognized over time and $0.3 million is recognized at a point in time (March 31, 2020 - nil and $0.3 million, respectively). 16. INVESTMENT AND OTHER INCOME
Three months ended March 31, 2021 2020 Fair value gains on marketable securities $ — $ 878 Transaction gains and other income, net 221 4,166 $ 221 $ 5,044 The following table breaks down the fair value gains on marketable securities for the three months ended March 31, 2021 and 2020: Three months ended March 31, 2021 2020 Realized gains on sale of marketable securities during the period $ — $ 11,097 Change in unrealized fair value on marketable securities during the period — (10,219) Fair value gains on marketable securities during the period $ — $ 878 17. INTEREST INCOME
Three months ended March 31, 2021 2020 Interest income measured at amortized cost $ 2,292 $ 2,727 Other interest income (i) 637 1,240 $ 2,929 $ 3,967
(i) Includes interest from finance subleases of $0.6 million for the three months ended March 31, 2021 ( March 31, 2020 - $0.6 million). 18. INTEREST COSTS
Three months ended March 31, 2021 2020 Total interest (i) $ 53,968 $ 55,197 Less: Interest capitalized (10,044) (9,794) $ 43,924 $ 45,403
(i) Includes interest from lease liabilities of $0.5 million for the three months ended March 31, 2021 ( March 31, 2020 - $0.5 million). For the three months ended March 31, 2021, interest was capitalized to properties under development and residential inventory at a weighted average effective interest rate of 3.18% (March 31, 2020 - 3.43%).
RioCan First Quarter 2021 88 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 19. GENERAL AND ADMINISTRATIVE
Three months ended March 31, 2021 2020 Salaries and benefits $ 8,156 $ 5,595 Unit-based compensation expense 5,982 1,450 Depreciation and amortization 1,010 1,096 Other general and administrative expense 2,683 (736) $ 17,831 $ 7,405 Other general and administrative costs include information technology costs, public company costs, professional fees, travel expenses, occupancy costs, donations, advertising, promotion and marketing costs. 20. TRANSACTION AND OTHER COSTS For the three months ended March 31, 2021, transaction and other costs primarily include property acquisition and disposition costs totalling $4.6 million (March 31, 2020 - $1.0 million). 21. NET INCOME PER UNIT Net income per basic and diluted unit is calculated based on net income available to Unitholders divided by the weighted average number of Units outstanding taking into account the dilution effect of Unit options.
Three months ended March 31, 2021 2020 Net income attributable to Unitholders $ 106,729 $ 102,822
Weighted average number of Units outstanding (in thousands): Basic 317,758 317,714 Dilutive effect of Unit options (i) — 11 Diluted 317,758 317,725
Net income per unit (basic) $ 0.34 $ 0.32 Net income per unit (diluted) $ 0.34 $ 0.32 (i) The calculation of diluted weighted average number of Units outstanding excludes 6.9 million Unit options for the three months ended March 31, 2021 (March 31, 2020 - 5.8 million Unit options), as the exercise price of these Unit options was greater than the average market price of Units. 22. FAIR VALUE MEASUREMENT The fair value hierarchy of assets and liabilities measured at fair value on a recurring basis in the unaudited interim condensed consolidated balance sheets is as follows:
March 31, 2021 December 31, 2020 As at Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets measured at fair value: Other investments $ — $ 5,316 $ 7,050 $ — $ 5,390 $ 6,900 Investment properties: Income properties — — 12,732,603 — — 12,740,959 Properties under development — — 1,386,690 — — 1,322,063 Properties held for sale — — 78,058 — — 198,094 Interest rate swaps — 1,283 — — — — Total assets measured at fair value $ — $ 6,599 $ 14,204,401 $ — $ 5,390 $ 14,268,016 Liabilities measured at fair value: Interest rate swaps — 45,456 — — 63,561 — Total liabilities measured at fair value $ — $ 45,456 $ — $ — $ 63,561 $ — For assets and liabilities measured at fair value as at March 31, 2021, there were no transfers between Level 1, Level 2 and Level 3 during the year. For changes in fair value measurements of investment properties and properties held for sale included in Level 3 of the fair value hierarchy, refer to Note 3 for details on the changes in beginning and ending balances.
89 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) Fair value of financial instruments The following presents the carrying values and fair values of the Trust's financial instruments, excluding those classified as at amortized cost whose carrying value reasonably approximates their fair value and lease liabilities. Financial instruments that are classified as at amortized cost whose carrying value reasonably approximates their fair value include net contractual rents and other tenant receivables, amounts due on condominium final closings, funds held in trust, other receivables, accounts payable related to property operating costs, and capital expenditures and leasing commissions, trade payables and accruals, and deposits received from customers on residential inventory.
March 31, 2021 December 31, 2020 As at Carrying value Fair value Carrying value Fair value Financial assets: Other investments $ 12,366 $ 12,366 $ 12,290 $ 12,290 Finance lease receivables 39,635 39,635 40,465 40,465 Mortgages and loans receivable 150,095 152,659 160,646 163,365 Interest rate swap assets 1,283 1,283 — — Financial liabilities: Mortgages payable $ 2,750,234 $ 2,838,515 $ 2,797,066 $ 2,953,765 Debentures payable 3,091,134 3,171,305 3,340,278 3,458,445 Lines of credit and other bank loans 982,420 982,420 790,539 790,539 Interest rate swap liabilities 45,456 45,456 63,561 63,561 The fair values of the Trust's financial instruments were determined as follows: Finance lease receivables The fair value of finance lease receivables is determined by the discounted cash flow method using applicable inputs such as prevailing discount rates. Fair value measurements of these instruments were estimated using Level 3 inputs. Mortgages and loans receivable The fair value of mortgages and loans receivable is determined by the discounted cash flow method using applicable inputs such as prevailing interest rates, contractual rates and discounts and considers the fair value of the underlying collateral. Fair value measurements of these instruments were estimated using Level 3 inputs. The carrying values of short-term and variable rate loans generally approximate their fair values. Mortgages payable, lines of credit and other bank loans, mortgages on properties held for sale, debentures payable The fair values of these instruments are estimates made at a specific point in time, based on relevant market information. These estimates are based on quoted market prices for the same or similar issues or on the current rates offered to the Trust for similar financial instruments subject to similar risk and maturities. Fair value measurements of these instruments were estimated using Level 2 inputs. The carrying values of short-term and variable rate debt generally approximate their fair values. Interest rate swaps The fair values of the interest rate swaps reported in receivables and other assets and accounts payable and other liabilities on the unaudited interim condensed consolidated balance sheet represent estimates at a specific point in time using financial models, based on interest rates that reflect current market conditions, the credit quality of counterparties and interest rate curves.
RioCan First Quarter 2021 90 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 23. RISK MANAGEMENT The main risks arising from the Trust's financial instruments are interest rate risk, liquidity risk and credit risk. The Trust's approach to managing these risks is summarized below. Interest rate risk The Trust is exposed to interest rate risk on its borrowings and could be adversely affected if it were unable to obtain cost- effective financing. The majority of the Trust's debt is financed at fixed rates with maturities staggered over a number of years, thereby mitigating its exposure to changes in interest rates and financing risks. As at March 31, 2021, approximately 4.1% (December 31, 2020 - 1.3%) of the Trust's debt is financed at variable rates (including mortgage debt related to properties held for sale, if applicable, and excluding debt that has been hedged to fixed rates), exposing the Trust to interest rate risk. From time to time, the Trust may enter into floating-for-fixed interest rate swaps as part of its strategy for managing interest rate risk. Hedge effectiveness is determined at the inception of the hedge relationship, and through quarterly effectiveness assessments to ensure that an economic relationship exists between hedged item and hedging instrument. The hedge ratio is set at a ratio of 1:1 for the specific portions of floating rate debt that have been designated as the hedged item. The Trust enters into hedge relationships where the critical terms of the hedging instrument match with the terms of the hedged item; as a result, the Trust does not expect any sources of hedge ineffectiveness, except from changes in credit risk of the Trust and the counterparty. The Trust has evaluated the extent to which its cash flow hedging relationships are subject to uncertainty driven by IBOR reform as at March 31, 2021. The Trust's hedged items and hedging instruments continue to be indexed to 1-month CDOR. Under IBOR reform a new risk free benchmark interest rate has been introduced as a fallback rate to CDOR, however, the 1-month CDOR is expected to continue to exist as a benchmark rate for the foreseeable future. The Trust has applied hedge accounting and recorded the changes in fair value for the effective portion of these derivatives in other comprehensive income (loss) (OCI) accumulated in the cash flow hedge reserve in equity from the date of hedge designation. Accumulated amounts are reclassified from OCI to net income in the periods where the forecasted cash flows impact net income. For any interest rate swaps for which the Trust does not apply hedge accounting, the change in fair value of the swap contracts is recognized in net income. As at March 31, 2021, the outstanding notional amount of the floating-for-fixed interest rate swaps is $1.3 billion (December 31, 2020 - $1.3 billion) and the term to maturity of these agreements ranges from April 2021 to November 2028. The Trust assessed the effectiveness of its hedging relationships and determined all such designated hedging relationships were effective as at March 31, 2021. As at March 31, 2021, the fair value of the interest rate swaps is, in aggregate, a net financial liability of approximately $44.2 million (December 31, 2020 - financial liability of approximately $63.6 million). As at March 31, 2021, the carrying value of the Trust's floating rate debt that is not subject to a hedging strategy is $283.0 million and a 50 basis point increase in market interest rates would result in an annualized decrease of $1.4 million in the Trust's net income. Liquidity risk Liquidity risk is the risk that the Trust will not meet its financial obligations as they become due. The Trust mitigates its liquidity risk by staggering the maturity dates of its long-term debt, actively renewing expiring credit arrangements, utilizing undrawn operating lines of credit, maintaining a large number of assets unencumbered by debt and issuing equity when considered appropriate. • For the current and non-current scheduled repayments of mortgages, and funds drawn against the Trust's lines of credit and other bank loans, refer to Notes 8 and 9 for details. • For current and non-current scheduled repayments of debentures, refer to Note 10 for details. The Trust expects to continue financing future acquisitions, development, debt obligations and other financing requirements through existing cash balances, internally generated cash flows, refinancing maturing debt, utilization of its operating line of credit, credit facilities, construction financing facilities, mortgaging unencumbered assets, issuance of unsecured debentures, the sale of non-core assets, sales proceeds from residential inventory or air rights sales, strategic development partnerships and the issuance of equity when considered appropriate. Credit risk Credit risk is the risk of financial loss to RioCan which arises from the possibility that: • Tenants may experience financial difficulty and are unable to fulfill their lease commitments or tenants fail to occupy and pay rent in accordance with existing lease agreements, some of which are conditional. • Borrowers, typically through co-ownership arrangements, default on the repayment of their mortgages or loans receivable to the Trust. • Third parties default on the repayment of debt whereby RioCan has provided guarantees, including guarantees by RioCan on behalf of its co-owners and on behalf of purchasers who assumed mortgages on property dispositions.
91 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) The Trust mitigates tenant credit risk through geographical diversification, staggered lease maturities, diversification of revenue sources resulting from a large tenant base, avoiding dependence on any single tenant by ensuring no individual tenant contributes a significant percentage of the Trust’s gross revenue, ensuring a considerable portion of the Trust’s revenue is earned from national and anchor tenants and conducting credit assessments for new tenants. Furthermore, RioCan holds security deposits and letters of credit from a number of tenants which can serve to offset rents owed on a tenant-by-tenant basis in the unfortunate event of unresolved tenant defaults. Management reviews contractual rent receivables on a regular basis and reduces carrying amounts through the use of an allowance for doubtful accounts recognizing the amount of any loss in the unaudited interim condensed consolidated statements of income within non-recoverable property operating costs. During the COVID-19 pandemic, the Trust has strategically managed its rent collection process and tailored its approach in recognition of the challenges that some of its tenants faced or continue to face as restrictions remain in flux. The Trust supported small and medium-sized businesses by actively participating in the federal government's CECRA commercial rent relief program, which was in effect up to September 2020, for eligible tenants at its properties. Post September 2020, the Government of Canada replaced CECRA with the CERS program which, according to the most recent federal budget, will be in effect until September 25, 2021. CERS provides payments directly to qualifying tenants without requiring the participation of landlords. For a further discussion of the CECRA and CERS programs see Note 6. The Trust continues to work with its national tenants on a case-by-case basis while protecting its rights and financial position. As at March 31, 2021, and December 31, 2020, the allowance for doubtful accounts totals $16.3 million and $12.5 million, respectively. RioCan holds approximately $29.6 million of security deposits and approximately $4.6 million in letters of credit from a number of tenants which could be used to offset rents owed on a tenant-by-tenant basis in the event of unresolved tenant defaults. Credit risk relating to mortgages and loans receivable and third-party guarantees is mitigated through recourse against such counterparties and/or the underlying real estate. These financial instruments are considered to have low credit risk. The Trust monitors the debt service ability and the fair value of the properties underlying the mortgages and loans receivable and third-party guarantees to assess for changes in credit risk. Credit risk relating to finance lease receivables is mitigated through recourse against such counterparties and/or re-recognition of the forfeited leased unit as investment property. Refer to Note 28 for third- party guarantees. RioCan’s Declaration of Trust contains provisions that have the effect of limiting the amount of space that can be leased to one tenant and its investment in mortgages and loans receivable. The maximum exposure to credit risk on financial assets on the unaudited interim condensed consolidated balance sheet is their carrying values. 24. CAPITAL MANAGEMENT The Trust defines capital as the aggregate of Unitholders’ equity and debt. The Trust’s capital management framework is designed to maintain a level of capital that complies with investment and debt restrictions pursuant to RioCan’s Declaration, complies with existing debt covenants, and enables the Trust to achieve target credit ratings, implement its business strategies and build long-term unitholder value. The key elements of RioCan’s capital management framework are approved by its Unitholders via the Trust’s Declaration of Trust and by its Board through their annual review of the Trust’s strategic plan and budget, supplemented by periodic Board and Board Committee meetings. Capital adequacy is monitored by the Trust by assessing performance against the approved annual plan throughout the year, which is updated accordingly, and by monitoring adherence to investment and debt restrictions contained in the Declaration and debt covenants. As at and during the three months ended March 31, 2021, the Trust was in compliance with its investment and debt restrictions pursuant to RioCan's Declaration of Trust and the financial covenants as outlined in the Trust Indenture with respect to RioCan's senior unsecured debentures. Revolving unsecured operating line of credit and non-revolving unsecured credit facilities The Trust is subject to certain key financial covenants pursuant to the agreement governing its unsecured operating credit facilities, which are calculated on a rolling twelve-month basis. As at and for the twelve months ended March 31, 2021, the Trust is in compliance with all applicable financial covenants. The following table summarizes the Trust's performance relative to these key financial covenants:
Key covenant March 31, 2021 Total indebtedness (i) (vi) < 60% 48.2 % Secured indebtedness (ii) (vi) < 40% 20.4 % Debt service coverage (iii) (vi) > 1.5x 2.4x Minimum Unitholders' equity (in millions) > $5,000 $7,795 Ratio of unencumbered property assets to unsecured indebtedness (iv) (v) (vi) > 1.5x 1.8x Properties held for development as a percentage of consolidated gross book value of assets < 15% 10.7 %
RioCan First Quarter 2021 92 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted)
(i) Total indebtedness consists of the contractual amounts outstanding on mortgages payable, lines of credit and other bank loans, debentures payable, lease liabilities, contingent liabilities and the maximum exposure to loss for all third-party debt where RioCan has provided a financial guarantee. (ii) Secured indebtedness includes mortgages payable, secured construction lines and other bank loans and lease liabilities, which are secured against investment properties. (iii) Debt service coverage includes regular mortgage principal and interest payments, including interest capitalized on properties under development. (iv) Unsecured indebtedness includes the contractual amounts outstanding of the revolving unsecured operating line of credit, non-revolving unsecured credit facilities, debentures, contingent liabilities and any third-party debt amounts guaranteed by RioCan. (v) Unencumbered property assets consist of properties that have not been pledged as security for debt. The unencumbered property assets to unsecured indebtedness ratio is calculated as unencumbered assets divided by unsecured indebtedness. (vi) These ratios include inputs from proportionately consolidated equity-accounted investments. 25. SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended March 31, 2021 2020 Interest received $ 2,469 $ 11,324 Interest paid 55,863 53,865
Distributions paid: Distributions declared during the period $ (76,264) $ (114,372) Distributions declared in the prior period paid in the current period (38,125) (38,121) Distributions declared in current period paid in the next period 25,418 38,122 Distributions paid $ (88,971) $ (114,371)
The following provides a reconciliation of liabilities arising from financing activities:
Lines of credit and Three months ended March 31, 2021 Mortgages payable other bank loans Debentures Balance, beginning of period $ 2,797,066 $ 790,539 $ 3,340,278 Proceeds/advances, net 255,220 191,182 — Repayments (221,444) — (250,000) Non-cash changes: Deferred financing costs and premiums and discounts 2,028 699 856 Contractual principal assumed (disposed) on acquisition/ disposition, net (82,636) — — Balance, end of period $ 2,750,234 $ 982,420 $ 3,091,134 26. RELATED PARTY TRANSACTIONS RioCan's related parties include the following persons and/or entities: (a) Associates, joint ventures, or entities that are controlled or significantly influenced by the Trust; and (b) Key management personnel including the Trustees and those persons having the authority and responsibility for planning, directing and controlling the activities of RioCan. Activity and transactions with associates and joint ventures are disclosed in Note 4. Key management personnel are defined by the Trust as those individuals that have the authority and responsibility for planning, directing and controlling the Trust's activities, directly or indirectly. For the three months ended March 31, 2021, the Trust’s key management personnel include each of the Trustees and the following members of the executive team: Chief Executive Officer, Edward Sonshine; President and Chief Operating Officer, Jonathan Gitlin; and Senior Vice President and Chief Financial Officer, Qi Tang (collectively, the "Key Executives"). Effective April 1, 2021, the Key Executives will consist of the following members of the executive team: President and Chief Executive Officer, Jonathan Gitlin; Senior Vice President and Chief Financial Officer, Qi Tang; and Chief Investment Officer, Andrew Duncan. Senior executive management and Board changes Effective April 1, 2021, following his retirement as Chief Executive Officer of the Trust on March 31, 2021, RioCan’s founder, Edward Sonshine, transitioned to Non-Executive Chairman of the Board. Jonathan Gitlin, previously the Trust’s President and Chief Operating Officer, succeeded Mr. Sonshine as President and Chief Executive Officer. Concurrently with Mr. Gitlin’s appointment to the role of President and Chief Executive Officer, the Board appointed Mr. Gitlin as an additional Trustee to the Board. Mr. Paul V. Godfrey, stepped down as Chairman of the Board and now serves as Lead Trustee.
93 RioCan First Quarter 2021 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) On March 2, 2021, RioCan announced the resignation of Qi Tang as Senior Vice President and Chief Financial Officer, effective as of May 12, 2021. The executive search for her successor is progressing well and the Trust anticipates announcing a permanent CFO successor by the third quarter of 2021. In the meantime, Ms. Franca Smith, RioCan's Vice President Finance since 2017, will serve as Interim CFO effective upon Ms. Tang’s resignation on May 12, 2021. On March 11, 2021, Andrew Duncan, RioCan's former Senior Vice President Development, was appointed to the newly created position of Chief Investment Officer of RioCan, effective as of April 1, 2021. Remuneration of the Trust’s Trustees and Key Executives during the three months ended March 31, 2021 and 2020 is as follows:
Trustees Key Executives Three months ended March 31, 2021 2020 2021 2020 Compensation and benefits $ 33 $ 43 $ 3,507 $ 1,549 Unit-based compensation 281 (3,263) 5,290 923 Post-employment benefit costs — — 33 32 $ 314 $ (3,220) $ 8,830 $ 2,504 27. SEGMENTED INFORMATION RioCan primarily owns, develops, manages and operates grocery anchored retail centres and mixed-use developments located in Canada. In measuring the performance of its retail centres, the Trust does not distinguish or group its operations on a geographical or any other basis and, accordingly, has a single reportable segment. Management has applied judgment by aggregating its operating segments into one reportable segment for disclosure purposes. Such judgment considers the nature of property operations, tenant mix and an expectation that operating segments within a reportable segment have similar long-term economic characteristics. The Trust's Chief Executive Officer is the chief operating decision-maker and regularly reviews RioCan's operations and performance on an individual property basis. RioCan does not have any single major tenant or a significant group of tenants. 28. CONTINGENCIES AND OTHER COMMITMENTS Third-party guarantees As at March 31, 2021, RioCan is contingently liable, as guarantor for debt, for approximately $282.8 million (December 31, 2020 - $195.1 million), which expires between 2021 and 2030, and which includes guarantees of $227.9 million (December 31, 2020 - $139.9 million) on behalf of co-owners. Debt guaranteed by RioCan that relates to the assumption of mortgages on property dispositions is $54.8 million (December 31, 2020 - $55.2 million). There have been no defaults by the primary obligors for debts on which the Trust has provided its guarantees and no provision for expected losses on these guarantees has been recognized in the Condensed Consolidated Financial Statements. Letters of credit and surety bonds The Trust has aggregate letter of credit facilities with certain Schedule I banks totalling $95.0 million (December 31, 2020 - $93.6 million). As at March 31, 2021, the Trust’s outstanding letters of credit under these facilities were $66.1 million (December 31, 2020 - $66.8 million). The Trust is contingently liable for surety bonds that have been provided to support condominium developments and warranties in the amount of $70.8 million (December 31, 2020 - $68.8 million). Investment commitments WhiteCastle New Urban Funds (WNUF) As at March 31, 2021, the Trust has total unfunded investment commitments of $63.5 million relating to WNUF 1, WNUF 2, WNUF 3 and WNUF 4 (December 31, 2020 - $63.5 million). Amounts to be funded are callable by the general partner at any point prior to the expiration of the limited partnership agreements, subject to certain extension term provisions, which are June 17, 2023 for WNUF 1; February 28, 2022 for WNUF 2; April 30, 2028 for WNUF 3; and September 15, 2027 for WNUF 4. Litigation The Trust is involved with litigation and claims that arise from time to time in the normal course of business. In the opinion of management, any liability that may arise from such contingencies will not have a significant adverse effect on the Trust’s Condensed Consolidated Financial Statements.
RioCan First Quarter 2021 94 RIOCAN REAL ESTATE INVESTMENT TRUST NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (In thousands of Canadian dollars, tabular amounts in thousands, except per unit amounts or unless otherwise noted) 29. EVENTS AFTER THE BALANCE SHEET DATE Acquisitions and dispositions On April 7, 2021, RioCan completed the acquisition of an additional 10% of the air rights in The Well Building 6 (FourFifty The Well) for the net purchase price of $7.6 million, including transaction costs. Following this transaction, RioCan owns 50% of FourFifty The Well air rights, increased from the previous 40%. On April 16, 2021, RioCan disposed of one property located in Sault Ste. Marie, Ontario for sales proceeds of $9.1 million. Financing activities Subsequent to March 31, 2021, the Trust exercised its option to extend the maturity on its operating line of credit to May 31, 2026. All other terms and conditions remained the same. On April, 9, 2021, RioCan redeemed, in full, its $300.0 million, 2.194% Series Z unsecured debentures upon maturity.
95 RioCan First Quarter 2021 Corporate INFORMATION
Senior Management Board of Trustees Auditors
Jonathan Gitlin Edward Sonshine O.Ont., Q.C. Ernst & Young LLP President & Chief Executive Officer Chairman, RioCan Real Estate Investment Trust Qi Tang Chairman, Chesswood Group Limited Senior Vice President & Chief Financial Officer Bonnie R. Brooks, C.M.3,4 Andrew Duncan Executive Chair of the Board of Directors Senior Vice President & Chief Investment Officer of Chico’s FAS Inc. (CHS: NYSE) Transfer Agent and Registrar Board Member, Rogers Communications Inc. John Ballantyne Former CEO & President, Hudson’s Bay Company Senior Vice President, Asset Management and Chico’s FAS Inc. AST Trust Company (Canada) Oliver Harrison Richard Dansereau1,2* P.O. Box 700, Station B Senior Vice President, Operations President, Global Head of Fiera Real Estate Montreal, Quebec H3B 3K3 Jeff Ross Jonathan Gitlin Answerline: 1 (800) 387-0825 Senior Vice President, Leasing & Tenant Construction President & Chief Executive Officer Fax: 1 (888) 249-6189 or (514) 985-8843 Jennifer Suess RioCan Real Estate Investment Trust Website: www.astfinancial.com/ca-en
Senior Vice President, General Counsel 3,4 Email: [email protected] & Corporate Secretary Paul Godfrey, C.M., O.Ont. Terri Andrianopoulos Non-executive Chair Postmedia Network Canada Corp. Vice President, People and Brand David Bain Dale H. Lastman, C.M., O.Ont. Vice President, Tenant Construction Chair & Partner, Goodmans LLP 2,3,4* Stock Exchange Listing Penny Barrett Jane Marshall Vice President, Accounts Receivable Trustee, Plaza Retail REIT The Toronto Stock Exchange Moshe Batalion Former COO, Choice Properties REIT Trading Symbol: Trust Units – REI.UN Vice President, Leasing Sharon Sallows1,2,4 Stuart Craig Trustee, Chartwell Retirement Residences REIT Vice President, Development Director, Home Capital Group Inc. Roberto DeBarros Siim A. Vanaselja1*,2 Vice President, Construction Director & Chair of the Board of TC Energy Corporation George Ho Director of Power Corporation Director of Great-West Lifeco Inc. Vice President, Information Technology 3*,4 Xi Huang Charles M. Winograd Vice President, Investments President, Winograd Capital Inc. Anton Katipunan Vice President, Development Rocky Kim Vice President, Financial Planning & Analysis Unitholder Information & Treasury Kim Lee Head Office Vice President, Investor Relations RioCan Real Estate Investment Trust Pradeepa Nadarajah RioCan Yonge Eglinton Centre, Vice President, Property Accounting 2300 Yonge Street, Suite 500 Paran Namasivayam P.O. Box 2386, Toronto, Ontario M4P 1E4 Vice President, Recovery Accounting Tel: (416) 866-3033 or 1 (800) 465-2733 Fax: (416) 866-3020 Stephen Roberts Website: www.riocan.com Vice President, Analytics Email: [email protected] Tim Roos Vice President, Operations - Eastern Canada & Northern Ontario Renee Simms Vice President, Insurance Investor Contact Franca Smith Vice President, Finance Kim Lee Jonathan Sonshine Vice President, Investor Relations Vice President, Asset Management Tel: (416) 646-8326 Jeffery Stephenson Email: [email protected] Vice President, Operations - GTA & Central Ontario Naftali Sturm Vice President, Real Estate Finance Kimberly Valliere 1 Member of the Audit Committee Vice President, Development Construction 2 Member of the Human Resources & Compensation Committee Kim Wingerak 3 Member of the Nominating & Governance Committee Vice President, Operations - Western Canada 4 Member of the Investment Committee Jason Wong * Committee Chair Vice President, Corporate Tax Ashtar Zubair Vice President, Enclosed Leasing Front and back cover: 5th & THIRD™ East Village, Calgary
Head Office RioCan Yonge Eglinton Centre 2300 Yonge Street, Suite 500 P.O. Box 2386 Toronto, Ontario M4P 1E4