RioCan REIT (REI-UN-T) might be nearing completion of its $2-billion divestment of non-core assets, but CEO Ed Sonshine expects the trust to conduct “many hundreds of millions” of dollars in transactions during the coming year.
The pace isn’t expected to change, but the types of transactions RioCan will be involved in likely will. Sonshine said RioCan expects a mix of outright sales of its remaining non-core assets and, increasingly, a move toward joint ventures.
To divest properties the REIT does not have in its pipeline for growth or future improvements and to raise equity to continue redeveloping its major-market retail sites into more lucrative mixed-use assets.
“As we hurtle toward the end of 2019, and in fact the end of this decade, I can’t help but reflect on the journey RioCan has been on,” said Sonshine, waxing poetic during RioCan’s Q3 financials call on Nov. 6. During the past five years, he said, the REIT divested $3.5 billion in assets, including the secondary markets properties and its entire U.S. portfolio.
“We then used the proceeds of those sales to significantly expand in Canada’s major markets, while launching a large-scale development program aimed primarily at the repurposing of many of our shopping centres to mixed-use properties with heavy emphasis on rental residential.
RioCan’s first multires projects operating
“That program is successfully underway and is starting to hit some of the lofty targets RioCan set for itself almost five years ago. Our first multires properties are open and operating. Within a few years we will have a large, growing and, uniquely, all-new multi-use portfolio located only in Canada’s major urban areas under the Riocan Living banner.”
Sonshine said the REIT must inject about $2 billion to its developments during the next two years to keep its momentum. To maintain a 60-40 equity/debt split for the projects, that means raising about $1.2 billion in equity.
“I think you will see quite a few more joint venture situations,” Sonshine said. “Those are actually quite wondrous for us.”
First, it raises equity. Second, JVs generate a current market value for the property, allowing RioCan to “write up the value of our remaining 50 per cent interest, assuming it’s a 50/50 deal.” Third, it precludes RioCan raising money through share issues.
“We have done all this without letting our balance sheet deteriorate,” Sonshine said, addressing RioCan’s recent $230-million public share offering, which closed in late October.
“To the contrary, our recent, very well-received equity issue was done solely for the purpose of ensuring the wonderful acquisitions of the other 50 per cent of Yonge Sheppard Centre and our continuing expansion in the Yonge-Eglinton corridor don’t cause us to deviate from our own focus on the credit metrics, which have allowed us to enjoy the lowest cost of funds in our sector.
“That equity issue of $230 million was our first in five years and we will continue to use equity issues sparingly, if at all, over the next few years.”
Multiple major developments
On the development front, RioCan is now receiving revenue from its first two purpose-built apartment buildings, Frontier Phase I in Ottawa and eCentral in Toronto. It expects stabilization at the end of 2019, and Q1 2020 respectively for those buildings.
Phase II is under construction at the multi-tower Frontier site.
Some of its other projects include condo developments at 11YV in Yorkville in Toronto and Windfields Farms in Oshawa. They are 73 per cent and 62 per cent pre-sold, respectively, and construction is set to begin in coming months.
Work is ongoing on several aspects of the Yonge Sheppard Centre project, a $300-million refurbishment that has added new retail space and will include the Pivot apartment tower now being constructed.
All this is in addition to massive The Well mixed-use, multi-tower development in Toronto, where RioCan is a partner.
In all, RioCan’s current pipeline includes 4,800 residential units under construction, or will be by 2021. The trust has 27.4 million square feet of major market density remaining to be developed, including 13.3 million already zoned for mixed-use development.
Retailers depart, RioCan benefits
On the retail front, president and COO Jonathan Gitlin said the loss of retailers such as Payless Shoes, Bowring and Bombay only created a temporary vacancy blip.
RioCan has already backfilled two-thirds of the space left by Payless and Gitlin said the new tenants are paying higher rents. Average leasing rates for RioCan’s existing portfolio were about $19 per square foot, while new tenants are paying about $26.
“The story is almost identical for the former Bombay and Bowring spaces, where two-thirds of the space has also been backfilled with tenants that will bring significantly more traffic and vibrancy to those centres,” Gitlin said.
“We expect to re-lease the rest of the space in due course; however it is worthy to note we have already replaced 85 per cent of the total lost annual rental revenue through the successful leasing of only 66 per cent of Bombay, Bowring and Payless space.”
The bottom line during Q3 was:
* steady FFO at 47 cents per unit;
* a year-over-year increase of 2.3 per cent in major market, same-property NOI (2.1 per cent overall);
* an increase of .2 per cent in committed occupancy to 97.2 per cent;
* and a renewal leasing spread of 7.7 per cent in its major markets.
Forecast three per cent NOI growth
Sonshine said RioCan forecasts three per cent NOI growth during 2020, a number the trust expects to increase in subsequent years.
“Yes, it is very sustainable and we hope will go even higher,” he said. “When we announced our secondary market disposition, the reason for it beside the obvious one that I’ve mentioned about raising capital without issuing equity, was actually to create a portfolio that would ultimately be able to achieve same-property growth of three to five per cent.
“We’re getting there,” he said.
If economic conditions in Canada’s major markets continue to be strong, and as more projects complete, Sonshine expects to improve many of its metrics in 2020.
“Next year we are going to be really hitting on all cylinders. We expect our occupancy rate to go up,” Sonshine said. “Office rents in properties like Yonge Sheppard, like Yonge Eglinton Centre, even Lawrence Square and others, will continue to move up.
“We’re very confident we are going to hit rent increases because the type of retail we are leasing to, they can afford it, and they don’t have a lot of alternatives.”
In conclusion, Sonshine said the extensive retooling of RioCan’s portfolio and operations are actually designed to create stability for its shareholders. He said the REIT is poised for “consistent steady growth.”
“Riocan is built for safety, not for speed, although we are trying to go pretty fast.”