Jonathan Gitlin is president and CEO of RioCan REIT. (Courtesy RioCan)

RioCan REIT unveiled a five-year “quality and growth” strategy focused around four pillars during a Feb. 23 online presentation to investors.

“Quality represents the strong fundamentals of our business, upon which we’ll continue to build,” president and chief executive officer Jonathan Gitlin said. He was speaking while wearing a hard hat on location at The Well mixed-use development which is under construction in downtown Toronto.

“Growth is defined by our ability to capitalize on the opportunities in front of us. Quality and growth are mutually reinforcing. The quality of our portfolio provides the foundation for further expansion and our growth initiatives will increase the quality of our assets, our financial results and, ultimately, the value that we deliver to our unitholders.”

RioCan (REI-UN-T) is one of Canada’s largest real estate investment trusts with retail-focused and increasingly mixed-use properties — primarily in Toronto, Montreal, Vancouver, Ottawa, Calgary and Edmonton. It has an enterprise value of approximately $14 billion based on recent trading prices.

Through its new strategy, RioCan is targeting a five to seven per cent annual increase in funds from operations per unit over the next five years.

RioCan REIT’s growth pillars

RioCan is also targeting 10 to 12 per cent annualized total unitholder returns from 2022 to 2026, fuelled by its four-pillar strategy. Chief among the strategies is to reimagine its retail component through actively evolving its tenant mix and strategically investing in properties to enhance same-property net operating income (NOI) growth prospects.

“We’ve proven our ability to adapt to trends in retail and we’re fortunate to have well-positioned real estate holdings,” said Gitlin. “We’re reacting to market demands and continuing to evolve our property and tenant mix to make them more essential, resilient and synergistic.”

RioCan intends to “intelligently diversify” its asset base, income streams and tenant mix to capitalize on synergies between asset classes, accelerate NOI growth through its residential portfolio, expand fee income generation opportunities and introduce new retail uses to its commercial properties.

“Diversification offers a range of benefits,” said Gitlin. “It offers additional revenue, reduced risk, greater stability and a higher overall quality of our portfolio.”

RioCan aims to deepen its customer-centric emphasis by better understanding and meeting the needs of its tenants and partners to build on its long-standing relationships, deploy technology and generate sustainable income through its platforms.

Environmental, social and governance measures

The fourth pillar involves responsible growth, with a focus on enhancing RioCan’s culture, ESG leadership and prudent capital management.

RioCan launched its sustainability strategy in 2016 and its position on ESG involves:

– becoming a net-positive business;

– giving back more than it takes from the community;

– and generating long-term value by adopting sustainable strategies.

“We focus on ESG because not only is it the right thing to do, but it’s also a key driver of long-term value creation,” said Gitlin.

RioCan has pursued BOMA BEST and WELL certifications for existing properties and LEED certifications for developments. More than 60 per cent of its portfolio is certified and the target is 85 per cent over the next five years, said chief operating officer John Ballantyne.

RioCan has been a participant in GRESB — a globally recognized organization providing ESG data to financial markets, which both measures RioCan’s ESG progress and compares it to peers — since 2017.

Ballantyne said RioCan has more than doubled its GRESB score since then and achieved the highest available rating of five stars while ranking second among peers in North America.

The pandemic was seen as an opportunity to reinforce RioCan Cares, a community engagement program offering spaces for people to gather. This can include hosting festivals and farmers’ markets in parking lots or providing space free of charge to charitable organizations to assist with fundraising.

Diversity, equity and inclusion are also being addressed.

More than 50 per cent of employees, more than 40 per cent of people in management positions and 33 per cent of board members are female. RioCan has also signed the BlackNorth Initiative’s CEO Pledge to end anti-black systemic racism.

Pruning RioCan REIT’s portfolio

The plan updates its earlier strategy which involved selling its American property portfolio in 2015 and 2016, then selling 90 properties in Canadian secondary markets to focus on the six largest urban areas.

Those dispositions resulted in net proceeds of approximately $1.7 billion that have been deployed into new priorities, including investing in and developing mixed-use properties in high-density, transit-oriented areas.

“Mixed-use enables us to make the highest and best use of our properties while addressing the residential supply gap found in major markets,” Gitlin said. “Our portfolio is dominated by resilient assets with necessity-based retail anchor tenants.”

At the end of 2021, RioCan’s portfolio had 207 properties with an aggregate net leasable area of approximately 36.4 million square feet, including retail, office, residential rental and 13 development properties. That compares to 289 assets comprising 44 million square feet in 2017.

Ninety-one per cent of annualized rent now comes from the six major markets, compared to 76 per cent five years ago.

“It was addition by subtraction and the overall quality of our portfolio has subsequently improved dramatically,” Ballantyne said.

Retail portfolio and plans

Retail comprises 90.7 per cent of RioCan’s portfolio, office 7.6 per cent and residential 1.7 per cent. The residential share will increase as development continues.

Grocery stores, pharmacies and liquor stores account for 19.9 per cent of the retail portfolio, followed by 14.3 per cent for essential personal services, 11.9 per cent for specialty retailers and 10.6 per cent for value retailers.

Retail will continue to be the foundation of RioCan’s revenue stream and its strategy involves:

– optimizing for an omni-channel shopping experience;

– maintaining proximity to consumers;

– focusing on strategic leasing to improve the merchandising mix;

– and providing high-touch, high-quality tenant and customer service and support.

The goal is to grow same-property NOI by about three per cent per year by focusing on progressive enhancements in strong performing assets and exiting positions in weaker performers.

“If an asset has limited opportunity for growth, it no longer fits with our priorities,” said Ballantyne.

RioCan will increase revenue-enhancing capital expenditures by 150 per cent annually to create distinct aesthetic standards and improve entrance and pedestrian experiences, architecture and sustainability at its retail properties.

Ballantyne expects these changes to drive higher customer traffic while improving tenant retention and the effort to attract desirable retailers.

RioCan’s 2026 target tenant mix is: 85 to 90 per cent strong and stable tenants; five to 10 per cent compelling traffic drivers, such as services, experiential tenants and independent food service providers; and less than three per cent tenants that are fulfilling rent obligations but can be transitioned out for a strong covenant tenant to drive more meaningful traffic.

Tenants that may complement RioCan’s retail and mixed-use properties include medical offices, educational sites, fulfillment centres and community spaces.

RioCan further plans to: evolve the appearance and condition of retail assets; reduce operating costs to lower chargeback costs and increase the value to tenants; leverage technology to improve the tenant experience and increase efficiency; drive greater traffic to properties by creating a sense of community and providing a local perspective; and continue dialogue with tenants to ensure it’s adapting to their evolving needs.

Retail occupancy rates and rents

RioCan’s normalized committed occupancy rate is 96.8 per cent. It’s targeting a rate between 97 and 98 per cent by the end of 2026, in line with the pre-pandemic rate of 97.2 per cent at the end of 2019.

The REIT is forecasting average annual blended leasing spread percentages in the high single digits, comparable to the 9.4 per cent spread prior to the pandemic.

Approximately 60 per cent of existing leases come up for renewal in the next five years. Contractual rent increases will contribute from 80 cents to $1 per square foot over the five-year plan, according to chief financial officer Dennis Blasutti.

Net rent per occupied square foot for the commercial portfolio, which was $20.16 at the end of 2021, is expected to hit approximately $22.50 in 2026. That doesn’t account for new developments, such as The Well, where rents are expected to be close to $24 per square foot.

Development strategy

RioCan’s 43.1-million-square-foot development pipeline includes 13.8 million square feet where zoning has been approved, 7.2 million square feet where a zoning application has been submitted, and 22.1 million square feet where zoning is pending application.

There’s 3.1 million square feet in active pre-development, while 2.4 million is shovel-ready and 2.1 million is under construction.

All of RioCan’s development opportunities are in Canada’s six major markets, with 76 per cent in the Greater Toronto Area. Eighty-three per cent are residential developments and 70 per cent are on public transit routes.

RioCan plans to deliver 1.7 million square feet of completed projects by the end of 2023 and average approximately 500,000 square feet annually over the next five years.

It targets delivery of $55 million to $60 million of residential NOI by that time through development and strategic investment.

Chief investment officer Andrew Duncan said this development is being done at attractive yields accretive to NAV and will increase NOI upon stabilization. Staggered completion schedules are part of the strategy.

“We’ll always have shovel-ready projects ready to go so that we can redeploy capital in a timely manner, all while maintaining a strong balance sheet,” said Duncan. “We can ensure that we have a team in place that can effectively manage and oversee the projects that we have underway.”

Average annual development spending will be approximately $500 million; total development deliveries over the next five years are anticipated to be approximately $3 billion. This pattern is expected to continue for the foreseeable future as RioCan launches its next wave of projects.

Development will be largely self-funded with retained cash flow from operations of approximately $150 million per year, annual project leverage of $250 million and an average annual capital recycling run rate of $100 million to $200 million.

Total development will be approximately 10 per cent of total gross book value.