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RioCan pares spending, but Sonshine sees ‘silver lining’ ahead

RioCan REIT will defer upwards of $150 million in 2020 spending in response to the COVID-19 pande...

IMAGE: Edward Sonshine, the CEO of RioCan REIT. (Courtesy RioCan)

Edward Sonshine, CEO of RioCan REIT. (Courtesy RioCan)

RioCan REIT will defer upwards of $150 million in 2020 spending in response to the COVID-19 pandemic, but longtime CEO Ed Sonshine was adamant about three things on the trust’s Q1 2020 earnings call on May 5.

First, he believes the strength of RioCan’s major-market, retail-based portfolio will see it through whatever the coming months can throw at it; second, he’s optimistic about how long it will take for business to return to something resembling normal; and third, perhaps because of that outlook, the REIT (REI-UN-T) is not wasting any time dealing with tenants it feels can pay rent, but have chosen not to.

That latter point was driven home both by Sonshine – who first discussed the issues of default notices to some larger tenants last week – and president and COO Jonathan Gitlin.

“Our position is clear: those who can pay need to pay, so we can offer relief to those tenants that need it most,” Gitlin said during opening remarks on the call.

Sonshine expanded a few moments later during his own comments.

“Almost all of the tenants who have simply not paid, as opposed to the mostly smaller tenants who have entered into 60-day deferral arrangements, are national covenant retailers whose only escape from eventual payment is to not only lose some of their best locations, but perhaps also to be followed by insolvency,” Sonshine pointed out.

“We are confident that virtually all the tenants who we are busy serving default notices on will indeed pay what they owe under the contract.

“Let’s remember that a lease is a contract.”

Long-term rent collection RioCan’s focus

RioCan collected 66 per cent of its undeferred rents during April – and more was trickling in.

Moving forward, Sonshine said RioCan is focused on collecting the maximum possible amount of rent over the mid- to long-term, not how much gets paid each month.

“We are not going to be issuing month-by-month rent collection numbers, because it just doesn’t mean much in our opinion,” he said.

Sonshine reiterated RioCan will work with smaller, independent tenants and others who are struggling, but have engaged with RioCan to deal with the issue. However, he said RioCan believes its shopping centres offer great value to retailers and it won’t hesitate to take space back.

“Where we don’t feel tenants are being forthright about this, or being reasonable in their approach, we will not hesitate to exercise the remedies that are available to us,” he stated.

“I’d be less than forthright if I didn’t tell you, No. 1, we’ll be exercising remedies. And No. 2, I’d be less than forthright if I didn’t tell you that there are certain locations we very much wouldn’t mind getting back.”

Sonshine suggested other retailers would be interested in some of the prime locations these businesses occupy, or it could be repurposed for redevelopment.

Although some future projects might be delayed by the $150 million in reduced spending this year (out of a budget of about $500 million), RioCan’s diversification will continue apace.

“Even though we have put a temporary hold on some new, or early-stage projects during the current pandemic, we are confident in the long-term value creation of our development pipeline and remain committed to it,” said CFO Qi Tang.

Cost reductions, Q1 stats

Other cost-management measures include a reduction of about $1 million per month in operating expenses, the deferral of about $35 million in tax payments and “staffing level adjustments as appropriate,” Gitlin said.

RioCan’s Q1 2020 financials were not significantly impacted by the pandemic — management agreed a more complete picture will come in Q2 and subsequent quarters.

Its funds from operations rose slightly on a year-over-year basis, to $144.6 million in 2020 from $142.2 a year earlier. This reflected an FFO per unit (diluted) of 46 cents, a cent lower than 2019 although there are about 12 million additional shares outstanding.

Same-property NOI growth was three per cent year-over-year and RioCan achieved two milestones in its two-year-old portfolio repositioning efforts; it now receives 90.2 per cent of total annualized revenues from Canada’s six major markets (Toronto, Vancouver, Montreal, Ottawa, Calgary and Edmonton) and the Greater Toronto Area accounts for about 51 per cent of revenues.

Committed occupancy is 96.8 per cent and the blended leasing spread for the quarter was 5.6 per cent.

IMAGE: The first of five rental towers at the Ottawa Frontier development is now being occupied. RioCan and Killam are partners on the project. (Don Wilcox RENX)

The first of five rental towers at the Ottawa Frontier development has occupied. RioCan and Killam are partners on the project. (Don Wilcox, RENX)

On the leasing front, Gitlin said RioCan completed 17 renewals during the quarter and 74 new leasing deals on its commercial properties (averaging $31.09 per square foot).

857 new apartments constructed

Recently completed developments and redevelopments have added 857 apartment units in Ottawa, Toronto and Calgary to the revenue streams, with more than 1,800 additional apartments in the pipeline. RioCan and its partners also have about 3,000 condos and townhomes completed or at various stages of the development process.

Sonshine is looking ahead with optimism. He said although up to 60 per cent of RioCan’s retail tenants are not deemed “essential services,” many are finding ways to operate at least parts of their business.

Online ordering and curbside pickup — RioCan unveiled a portfolio-wide program this week called Curbside Collect — are an example of their resiliency.

He also noted many retailers are using bricks-and-mortar locations as mini-warehouses, distribution and pickup points for products marketed and sold online. Canadian Tire, he said, is one example and even e-commerce giants such as Amazon are moving toward the model.

“I think the silver lining will be the greater use of e-commerce by bricks-and-mortar tenants, whose e-commerce platform is built around that bricks-and-mortar location,” Sonshine pointed out.

Hope for June reopenings

As provinces tentatively begin to open up parts of their economies, he’s hopeful the worst could soon be over.

“I think we are all working on one assumption,” Sonshine said. “I think certainly by the beginning of June, if not earlier, most of our retailers will be permitted to carry on business.”

He said Canada will be able to watch developments in many U.S. states to determine how quickly to move, and in what areas. Some 30 states are moving at varying speeds to open up sectors of their economies.

“We’re going to get a benefit, in a backward way, from watching what is going on in the United States,” he said, noting U.S. shopping centre owner Simon is opening about 60 of its facilities this week.

Even in Canada, RioCan malls in places like P.E.I., New Brunswick and Manitoba are being allowed to open with varying degrees of restrictions.

“I don’t really expect right now a second giant surge (in the pandemic),” Sonshine said, though he agreed, “I expect this disease will be with us until there is an effective vaccine or until it somehow disappears.”


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