Ed Sonshine called it “the most unusual quarter” of his 26 years as CEO of RioCan REIT. Q2 2020 will go down as one of the toughest financially for the trust, but both Sonshine and president/COO Jonathan Gitlin focused on restoring future value and growth during Wednesday’s financial results call with analysts.
RioCan (REI-UN-T) reported a $350.8-million Q2 loss mainly due to a 3.1 per cent fair value writedown on its assets, which knocked $452 million off the value of its retail-based portfolio. Hardest hit was the enclosed shopping malls segment, which took a 10.1 per cent fair value writedown.
“Let me state the obvious and say that this pandemic has had a major impact on these quarterly results. We are far from happy with them,” said Gitlin. “That said, we fundamentally do not feel that these results are in any way indicative of our long-term performance and underlying value.”
Sonshine elaborated by offering rare guidance for RioCan’s financial outlook for the remainder of 2020. Funds from operations were 35 cents per diluted unit in Q2 ($110 million, down from $145 million in Q1), as same-property NOI declined 10.8 per cent.
“We are quite confident that for the year RioCan will achieve FFO in the neighbourhood of $1.60-plus,” Sonshine predicted. “This number, while perhaps higher than some analysts expect, is also not satisfactory and we will certainly strive to do better.”
Sonshine said RioCan has factored abatements, deferrals and bad debt contingencies into that figure.
“The reason we are giving this guidance at this time is not only to counter some of the fear and anxiety that is clearly out there, but also to reassure our investors of our continued commitment and ability to maintain our current level of distributions.”
Pandemic effects on RioCan
Gitlin said Q2 rent collections, including agreed-upon deferrals and anticipated proceeds from the Canada Emergency Commercial Rent Assistance (CECRA) program for smaller tenants, add up to 87 per cent of RioCan’s total rent roll. Only 73 per cent had actually been collected, however.
“Basically the whole company, including myself and Jonathan, have been turned into rent collectors,” Sonshine said. They and other RioCan staff have been holding one-on-one meetings with tenants, working down from the largest to the smallest.
About 14 per cent of RioCan’s tenants qualify for CECRA. For the quarter, RioCan accrued a $19.1 million provision for rent abatements and potential bad debts, a figure it expects to decline in subsequent quarters.
“There is a positive trend in our cash collection,” Gitlin continued. “Eighty-five per cent of July’s rent has been collected in cash as of July 28. We expect this upward trajectory to accelerate as more businesses resume operations and our collections and negotiations continue with our smaller tenants.”
RioCan also holds $29 million in deposits and $5.3 million in letters of credit from its tenants, which could offset potential bad debts.
Diversification and development
On the plus side, both Gitlin and Sonshine discussed RioCan’s diversification and development program, as well as avenues to improve and solidify future revenue streams. The trust is in the midst of a massive program to unlock value at many of its existing retail sites through residential and commercial densification.
While about 90.5 per cent of its rental revenues still come from retail, that percentage has already shifted as the first developments have been completed. Residential now accounts for 1.7 per cent of its revenues and office for 7.8 per cent.
Another 840 of its 2,700 apartment units under development will begin renting during the next 12 months.
Including its residential and mixed-use projects, RioCan plans to spend about $400 million this year on development.
The company is also adjusting its retail mix and seeking new streams of commercial revenue. Necessity- and service-based retailers comprise about 75 per cent of RioCan’s retail revenues, with the hard-hit fashion sector at eight per cent.
“I expect that number to drop even further in the future,” Gitlin said, noting that confirmed closures, so far, comprise 0.5 per cent of RioCan’s GLA.
Transitioning its commercial/retail
The REIT is also pursuing potential new, or expanded, commercial sectors. Chief among these is incorporating e-commerce and/or micro-fulfillment centres within its properties as retailers shift to online sales.
Sonshine said this includes partnering with technology companies to offer e-commerce solutions within its facilities and working with existing retailers to shift the configurations of their space.
“There’s a number of opportunities that we are considering and we’ve been approached by a number of companies as well,” Sonshine said.
“These are largely existing retailers looking to set up logistics or hubs in our well-located shopping centres, or taking part of their existing stores and converting (them) into that type of micro-fulfillment centres.”
He said one thing retailers have learned during the pandemic is having ready access to online customers is critical.
“Logistics and getting stuff delivered, and getting stuff into people’s homes has been an enormous problem for everybody. Many of our retailers have reached out to us and said, ‘Look you’ve got these great shopping centres, can you help us?’
“We have the space and the locations to really make a difference on the logistical side of the commerce business. That’s going to be one of our many focuses over the next couple of years.”
Another possibility is an expanded role in providing space for health care providers via community care centres.
“As space requirements within hospitals become more constrained, there has been a very palpable push to move many of the non-critical services offsite and our locations serve as ideal sites to host such services,” Sonshine said.
$302M in divestments under negotiation
Although transaction activity has slowed, RioCan is working on deals involving $302 million worth of its assets. It hopes to close on these ($220 million worth of income-producing assets, $82 million in development properties) during the next two quarters, Sonshine said.
While not getting into specifics, Sonshine said the majority are for partial interests because “they are some of our better assets.”
He called the buyer profiles “very interesting.” Among the groups RioCan is negotiating with are two “foreign entities” as well as Canadian institutional investors.
“It’s pretty mixed group, and we are seeing a lot of interest.”
Some other stats from RioCan’s Q2 financials:
* committed occupancy was at 96.4, down slightly from 96.8 per cent in Q1;
* the trust has about $1 billion in liquidity;
* debt to total assets was at 44.4 per cent, above its target of 38-42 per cent due to the writedowns;
* and RioCan holds $8.7B in unencumbered assets.
About RioCan REIT
RioCan is one of Canada’s largest real estate investment trusts, owning, operating and managing a portfolio of 221 properties with an aggregate net leasable area of approximately 38.6 million square feet.
Comprised mainly of retail assets in Canada’s six largest metro areas, the portfolio also includes office, residential rental and 15 development properties.