RioCan Expresses Second Quarter Loss of $ 350.8M Due to Rent Deferral

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TORONTO – RioCan REIT is doubling its strategy of divesting traditional clothing retailers into grocery stores, pharmacies and e-commerce.The REIT suffered a significant loss in its final quarter amid rent deferrals resulting from COVID-19 lockdowns. The role of owners has changed, executives said on a conference call with analysts, as weaknesses in the retail sector began to warp.

“We literally walked it tenant by tenant. After conversations with tenants and, in some cases, a thorough review of their financial statements, we assessed which would survive and which would not, ”said Jonathan Gitlin, President and COO. , while reporting the REIT’s quarterly results.

RioCan says it collected about 73% of the rent owed in April, May and June, calling the period “the most difficult quarter ever” for many tenants.

The company said most tenants are now functioning and have payment plans in place, and it expects rent collection to improve as businesses reopen, after collecting 85% of the rent in July. But some “bad debts” come from the fashion industry, which was struggling before the pandemic and has now seen some companies file for creditor protection, executives told analysts.

“Consumers are going to be shopping and most of our tenants are getting bigger,” Gitlin said. “However, the reality is that business closures related to COVID-19 will impact these numbers until the end of 2020.”

Chief Executive Officer Edward Sonshine wrote in a letter to shareholders that while the COVID-19 health crisis was unexpected, the changes in the retail landscape were no surprise as the company shifted its holdings over the years. time away from malls and towards the need for retailers such as grocers and drugstores in urban areas. Among the tenants who bring in the most money for the business are the Canadian Tire Corporation, Loblaw Cos. Ltd., TJX Companies, Inc., Cineplex, Metro, Inc. and Walmart.

“This category of tenants is more resilient to changes in economic cycles,” Gitlin said, predicting that fashion retailers would fall below eight percent of its holdings in the future. “There have been a lot of CCAA filings since March. … There are other restructurings and failures to come. ”

The company said it had participated in emergency commercial rent assistance in Canada for all eligible tenants (around 14%), with total CECRA rent cuts of $ 9.9 million for the quarter. . The company also downgraded some properties in closed shopping malls and properties in Alberta in “the depressed oil and gas market” and reduced property management fees and lease cancellations.

“About half of our space has been forced to close,” Sonshine said. “Basically the whole company, including myself and Jonathan, we became rent collectors. I think we have been successful in maintaining the relationship. ”

Gitlin says the company hopes to benefit from the companies’ long-term sustainability. But after dedicating more than two months and two dozen workers just to time-consuming CECRA applications, RioCan will tighten its grip on rents in the future for those who had already applied.

“This is without a doubt the most unusual quarter in my 26 years as CEO of RioCan. The reasons are obvious, ”Sonshine said on the call.

“But it introduced a whole new problem as a landlord: a time when some tenants feel they shouldn’t be required to pay rent, which they traditionally couldn’t. ”

The company recorded a net loss of $ 350.8 million or $ 1.10 per diluted unit for the three-month period of June 30, down from net income of $ 253 million or 83 cents per unit one year earlier.

Funds from operations were slightly weaker than analysts’ expectations. Per unit, funds from operations are 35 cents per diluted unit, compared to 48 cents per diluted unit a year ago and 38 cents per unit expected by analysts polled by Refinitiv.

Still, RioCan has given scant forward guidance, saying it predicts that funds from operations per unit will amount to around $ 1.60 for the whole of 2020, negatively impacted by the pandemic.

“While the actual rental collection results are, I think, quite satisfactory given the situation, we are certainly not happy with the (funds from operations) for this quarter,” Sonshine said.

Despite weak quarterly results, the company also earned operating income of $ 4.2 million from its first three residential rental rounds. Sonshine wrote that RioCan expects “a steady stream of residential rental income” going forward, and Gitlin said there have been no cases of COVID-19 at properties managed by RioCan.

RioCan also said there has been a “very palpable push” to use its spaces for micro-fulfillment centers for online retailers, or for socially distant spaces for hospitals.

“I would like to be different from all of the pundits who currently predict not only the death of the retail business, but the death of the office as we know it,” Sonshine said.

“Part of what we do is driven by retailers and existing technology. We are not becoming a technology company – we are looking for partners in this area – but we have the space and the locations to make a difference in the logistics side of e-commerce, and that will be one of our many goals in the world. over the next two years. “



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