First Capital REIT Halves Monthly Payment Due to Pandemic Closures

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Retail owner First Capital Real Estate Investment Trust cut monthly payout in half as economic shutdowns intensified across Canada, becoming the second retail REIT to cut payout during the period past month.

First Capital will now pay a distribution of 43.2 cents per unit per year, up from 86 cents, which will save the REIT approximately $ 95 million per year. The move was announced after the stock market closed on Tuesday, and First Capital management said it hopes to restore distribution to its previous level after two years.

In a statement, management said the reduction provided the REIT with “significant financial flexibility to advance its strategic objectives.”

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In addition to the difficult economic environment, First Capital has come under pressure to reduce its debt burden after borrowing hundreds of millions of dollars to buy back some of its units from a large investor.

Many retail REITs, including First Capital, have also committed to finance new developments of condos and rental apartment buildings in shopping malls and other locations to diversify their portfolio of properties as more and more. more purchases are moving online.

REITs have touted this redevelopment potential over the past five years, with plans to increase the density of several properties, especially those located in suburbs with extensive parking lots. While the projects should boost cash flow in the future, they require a lot of upfront spending – often hundreds of millions of dollars.

By bolstering its own development budget, retail owner RioCan REIT cut its distribution by a third as Ontario announced tighter restrictions on COVID-19 in December. RioCan is one of the largest retail owners in Canada and management had resisted calls to cut its distribution, but there was growing speculation that this would eventually happen because the REIT’s shares returned 8% after the price fell sharply last spring.

First Capital’s unit price has also suffered during the pandemic, falling 34% since the start of March 2020. Prior to the announcement of the cutbacks in distributions, the REIT was paying an annual return of 6%.

Across the industry, Canadian retail REITs have suffered since the national lockdowns last spring, largely because their rent collections have been hit harder than those of office buildings and industrial warehouses. Some retail owners cut back on their distributions at the start of the pandemic, but most were aimed at weathering the storm.

The strategy looked promising as retail sales rebounded last summer and fall, but a new wave of closings is likely to hit rent collections, leading to major changes. In addition to the First Capital cut, earlier this month Brookfield Asset Management announced plans to buy out the 38% of its publicly traded real estate division, Brookfield Property Partners LP, which it does not currently own.

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Brookfield Property is one of the largest retail and office owners in the United States and is expected to pay out over 100% of its annual cash flow as distributions to unitholders. The buyout was seen by some as a way to avoid a reduction in payments, as the company will be taken over by a parent company with a larger balance sheet.

Although development projects are inherently riskier than owning and operating property, some REITs have shown that it is possible to manage risk. Choice Properties REIT intends to increase the density of its properties, but it also derives 57% of its annual rent from the grocer Loblaw Cos. Ltd. – and grocers performed well during the pandemic.

Office lessor Allied Properties REIT also added development projects and increased its payout in December.

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