Ed Sonshine took part in his final quarterly results conference call as chief executive officer of RioCan REIT on Thursday, as he’ll pass that title to president and chief operating officer Jonathan Gitlin and become non-executive board chairman on April 1.
“Thank you to everyone for putting up with me for 27 years,” said Sonshine, who noted he spent the first few years of investor meetings and calls explaining what a real estate investment trust was and why it was a good investment.
“While it is the right time for me to transition to chair, I do regret that I will be in a watching role as opposed to a doing one while Jonathan and his team create enormous value and new cash flows for our unitholders over the next few years.
“Mind you, as a significant unitholder myself, and as non-executive chair, I will certainly be cheering them on and watching with pleasure.”
Net loss of $64.8 million for 2020
Gitlin opened the call by reviewing RioCan’s (REI-UN-T) fourth quarter and the 12 months ended Dec. 31. There was some good news to report, but it was far from a banner year for the REIT. RioCan’s fourth-quarter net income was $65.6 million, down 56 per cent year-over-year from $150.8 million. The REIT posted a net loss of $64.8 million for the year, compared to net income of $775.8 million in 2019. Same-property net operating income declined by 6.5 per cent.
“While we continue to face the pandemic and an uneven road to economic recovery, I’ve got total confidence that RioCan’s team is well-positioned to unlock the value that’s embedded in our incredible portfolio,” said Gitlin, who pointed out that it ended the year with record liquidity of $1.6 billion and that strong position is expected to be maintained in 2021.
While 25 per cent of RioCan’s tenants were closed as of Dec. 31 due to government-enforced measures implemented to try to curb the second wave spread of COVID-19, the trust still collected 94.2 per cent of total fourth-quarter rents.
RioCan’s retail tenants
RioCan categorized 79 per cent of its retail tenants as strong and stable, including grocery stores, pharmacies, liquor stores, essential services and value retailers with strong covenants that have demonstrated resilience during volatile times.
The remaining 21 per cent are classified as potentially vulnerable and include those that were of concern prior to the pandemic as well as those that have been significantly impacted by it.
“Most of these tenants are going to survive and we’ve collected more than 80 per cent of their rent,” said Gitlin.
Gitlin expects the number and size of movie theatres to be reduced, though formerly high-performing theatres will remain so post-pandemic. RioCan’s exposure to theatres has already declined due to dispositions and redevelopments, he said.
The pandemic has had a serious negative impact on most restaurants, but Gitlin believes that many of them on RioCan’s properties will be able to survive after another tough year.
Retail tenant retention, leasing and rents
RioCan had committed occupancy of 95.7 per cent at the end of the year. Gitlin said tenant retention was strong and close to pre-pandemic levels.
RioCan’s retail leasing pipeline is “looking remarkably good,” particularly in well-located major market centres, according to Gitlin.
Empty spaces due to apparel tenants leaving have backfilled pretty quickly and RioCan is looking at more unconventional tenants than in the past, including governments and healthcare operations.
The leasing team completed 359,000 square feet of new leasing and renewed another 1.2 million square feet during the fourth quarter. The average net rent per square foot for new leases was $43.90 for the quarter and $32.05 for the year, which were both above the trust’s portfolio average of $19.80.
Residential portfolio and development
RioCan collected 98 per cent of residential rents in the fourth quarter and its RioCan Living portfolio continued to grow, with 1,218 units in eCentral and Pivot in Toronto, Frontier in Ottawa, and Brio in Calgary.
Total net operating income from residential rental operations was $8.2 million for the year, which was up $5.8 million from 2019.
Gitlin said that number will continue to increase as new projects are completed throughout this year. There are 1,453 residential units under construction at six projects and an additional 1,542 will be in different phases of development by 2022.
RioCan has a 50 per cent interest in three condominium and townhouse projects at various phases of pre-sale and construction: U.C. Uptowns and U.C. Tower at RioCan Winfields in Oshawa; and 11 YV in Toronto. They have a combined 1,242 units and are 98-per cent pre-sold.
There are seven other active condo or townhouse projects in various stages of development, totalling an estimated 3,730 units, which are scheduled to be completed in phases between 2024 and 2027.
Residential development accounts for 83.2 per cent, or 34.7 million square feet, of RioCan’s 41.8 million square feet of development pipeline.
It’s estimated that development spending will be about $500 million this year. A significant portion of RioCan’s portion of The Well mixed-use development in Toronto, as well as Toronto’s Strada and Litho, and the second phase of Ottawa’s Latitude, are scheduled for delivery this year.
Despite a relatively less active than normal transaction market under the pandemic, RioCan closed $193.1 million in dispositions in 2020 to recycle capital, with $66.3 million of that from income-producing assets and $126.8 million from development properties.
“I think you’ll see an uptick in divestments this year and a recycling of capital,” said Sonshine.
“We’re starting to see the investment market come back to life. It all depends on the type of asset.”
As the conference call for Sonshine’s 108th and final quarter as CEO came to a close, the 73-year-old drew chuckles by concluding:
“I won’t say I look forward to speaking to you next quarter because you’ll get to hear from younger and smarter people than me.”