May 19, 2011 / 12:30 PM / 7 years ago

UPDATE 3-RioCan may consider distribution increase in 2012

* Distribution currently at C$0.115 per unit

* RioCan expects to be Target’s largest landlord in Canada

* Q1 FFO/unit rises to C$0.35 vs analyst view of C$0.37

* Units fall 0.81 pct on Toronto Stock Exchange (Adds analyst’s comment, updates share price)

By Ka Yan Ng

TORONTO, May 19 (Reuters) - RioCan Real Estate Investment Trust’s REI_u.TO growth prospects might be enough to support an increase in its monthly distribution next year, Canada’s largest landlord of retail space said on Thursday.

The company held out the possibility of an increased payout, or possibly a special distribution, after reporting a 15 percent increase in quarterly funds from operations (FFO), the benchmark measure of profitability for real estate investment trusts.

But the FFO increase fell short of analysts’ average forecast, and the stock, which is up about 17 percent since the start of the year, fell on the Toronto Stock Exchange. RioCan units fell 0.81 percent to finish at C$25.59.

“The stock has run so far that unless you’re delivering very significant quarter-to-quarter FFO in the short term, it’s kind of hard to justify the stock price where it is right now,” said Heather Kirk, analyst at National Bank Financial.

The REIT has steadily expanded its portfolio in Canada, while looking for opportunities for growth in the United States for more than a year.

While the efforts are bearing fruit, its distribution has held steady at 11.5 Canadian cents since October 2008.

“I can say with assurance that not only will our distribution continue as it is, but that by 2012 I expect our growth to be such that our board will be in a position to at least consider an increase in the monthly distribution,” RioCan Chief Executive Ed Sonshine said on a conference call.

His optimistic outlook stems from low interest rates, increasing retailer demand and acquisition opportunities. The company’s organic growth is solid, he said, while redevelopment programs are accelerating and looking especially promising.

RioCan and U.S.-based Tanger Factory Outlet Centers SKT.N, recently announced they would open the first in a series of Canadian outlet malls near Toronto in April 2013.

The outlet mall, through which makers of clothing and other consumer goods sell their own merchandise at a discount, is still a relatively new concept in Canada. But their numbers are growing in suburban areas. [ID:nASA026R4]

Calloway REIT CWT_u.TO is also planning an upscale retail outlet mall near Toronto, with the first phase set to open in 2013 as well.

CONVERTING ZELLERS LEASES

While RioCan aims to expand its footprint in the United States, it is also in talks with several U.S. retailers that have made known their plans to expand into Canada.

RioCan is in extensive leasing talks with Target Corp TGT.N, which revealed its ambitious and long-anticipated Canadian expansion plans in January.

Target will acquire the leases on up to 220 Zellers discount stores from Hudson’s Bay Co, North America’s oldest company. RioCan counts Zellers among its top five tenants.

RioCan was said nothing about specific locations where it will remain as landlord of the converted Target stores, but it expects to play a major role in Target’s plan.

“I‘m pretty confident that the same way as we’re Zellers largest landlord we will be Target’s largest landlord,” said Sonshine. He expects locations to be finalized over the next 10 days, with announcements possible in the first week of June.

The shopping mall landlord reaffirmed this year’s acquisition budget of C$600 million to be used for properties in Canada and the United States. That builds on nearly C$1 billion in expansion last year that added more than 5.7 million square feet to its portfolio.

Funds from operations in the first quarter rose to C$90 million ($92.8 million), or 35 Canadian cents a unit, up from C$78 million, or 32 Canadian cents, a year earlier.

But it was behind analysts’ average expectations of FFO per unit of 37 Canadian cents, according to Thomson Reuters I/B/E/S.

$1=$0.97 Canadian With additional reporting by Amruta Sabnis in Bangalore; Editing by Frank McGurty and Jeffrey Hodgson

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