People cycle past the Hudson's Bay department store in downtown Montreal on March 17.Christinne Muschi/The Canadian Press
RioCan Real Estate Investment Trust REI-UN-T is writing down $209-million on its real estate joint venture with Hudson’s Bay Co. after the historic retailer filed for creditor protection, while also lowering its profit targets for the year and postponing its investor day as management re-evaluates a turbulent and uncertain outlook.
The REIT, which is one of Canada’s largest publicly traded owners of retail real estate, formed a joint venture with HBC in 2015 and jointly owns 12 properties with the retailer. On Tuesday, the REIT said it is taking an impairment charge that will lower the value of its investment in the joint venture to $41-million from $249-million.
RioCan is also dropping its 2025 estimate for funds from operations – a REIT’s measure of profitability – to a range of $1.85 to $1.88 per unit from $1.89 to $1.92, and postponing its investor day, which was supposed to take place this spring.
“The backdrop, well, it’s been, let’s say, turbulent,” chief executive officer Jonathan Gitlin told analysts on a quarterly conference call Tuesday. Beyond HBC, “the macro-environment is ripe with uncertainty, including trade complexity, economic instability, dampened market and consumer sentiment, and a general risk-off approach to trading.”
Mr. Gitlin also said RioCan is changing the strategy for its residential property business, which develops rental apartments and condominium buildings. RioCan launched the business roughly a decade ago as a way to diversify its business mix when retail real estate was starting to struggle. At the time, multifamily real estate, an industry term for apartments and condos, was booming.
But RioCan now plans on selling the buildings it has developed and will use the proceeds to pay down debt or repurchase shares.
Mr. Gitlin stressed that RioCan is not exiting the business altogether. “When the time is appropriate, we will either build additional mixed-use properties or sell [the right to build],” he told analysts. However, RioCan will use a different funding strategy that will see outside investors providing the majority of the required capital, “while RioCan will contribute its land and its expertise.”
News of RioCan’s pivot caught analysts off guard. “The staged exit from the residential rental business was, and has been, something management has alluded to for some time; however, the announcement was arguably not expected to occur this early,” CIBC World Markets analyst Dean Wilkinson wrote in a note to clients.
Despite the changes in its residential and HBC portfolios, RioCan’s core retail real estate business continues to perform well. Over the past two years the division’s blended leasing spread – which includes leases to new tenants as well as tenant renewals – is 15.2 per cent. That means new leases are being signed at rates that are 15 per cent higher than previous levels, on average.
Investors, though, have remained timid and RioCan’s units are trading around $17 a piece, the same price they traded for in September, 2009.
Because the units have fallen, RioCan pays a 6.8-per-cent distribution yield – a rate that would normally entice retail investors, who make up 60 per cent of RioCan’s shareholder base.
In an interview, Mr. Gitlin said many investors are skittish right now because news like the joint venture writedown dominates headlines. And “beyond HBC, there are a lot of macro dynamics,” he said, such as U.S. President Donald Trump’s trade war.
Despite these woes, he said RioCan continues to put our strong operating metrics – including high occupancy rates in its core retail portfolio – and that most of its retail tenants are “necessity-based” for consumers.
Dollarama, Loblaw, Metro, Walmart and Sobeys are five of the REIT’s 10 largest tenants by revenue, according to regulatory filings.
“Mr. Gitlin also noted that RioCan can confidently fund its current monthly payouts to investors. “Our distribution is exceptionally safe,” he said.
Analysts have noted in the past that RioCan owns a lot of real estate in urban markets. Asset sales are hard to come by at the moment, because real estate development is subdued, but the REIT could sell the land to developers or private equity firms.