REAL ESTATE
Tenants can’t pay or need deferrals
Retail REITS, especially mall owners, hit hard by poor rent collections.
North American retail real estate owners, particularly those with a greater exposure to enclosed malls, have been hit hard by the COVID-19 pandemic, with many reporting worse-thanexpected collections of rent from tenants in April and there’s little sign that the situation will improve come May.
H& R REIT, which owns a range of office buildings and malls primarily in Ontario and Alberta, collected just 56 per cent of owed rent from its retail tenancies, and only 40 per cent of its mall tenants paid rent for April. By contrast, almost all of H&R’S office tenants paid April rent.
A similar situation is playing out at Oxford Properties Group, the real estate investment arm of OMERS that partly owns Toronto’s Yorkdale Shopping Centre and Square One in Mississauga, among other highend mall and office spaces across Canada. On a conference call with analysts this week, executives disclosed the company had only collected 20 per cent of total rent from most of their malls for April.
And Riocan REIT, where malls make up roughly 10 per cent of its portfolio, this week stated it had collected 66 per cent of expected gross April rent from retail tenants, while 96 per cent of residential tenants have paid.
Major retailers already struggling prior to the pandemic have also stopped paying rent. For example, The Gap Inc. indicated it wasn’t paying rent on its North American stories in a filing with the U. S. Securities and Exchange Commission. And Riocan chief executive Ed Sonshine told the media that Staples, one of the company’s primary tenants, had not yet paid April’s rent.
“Retail has been very challenged for a really long time. With COVID, it has really just accelerated all of the themes that were previously in place,” said Jenny Ma, a real estate analyst at BMO
Capital Markets. “Specific to retail, however, I would say enclosed malls are the worst sub-asset classes and it’s easy to understand why mall tenants are struggling to pay rent now: they were forced to shut down.”
H&R’S stock has lost about 50 per cent of its value since the start of the pandemic almost two months ago, while Riocan’s shares have plunged by about 45 per cent in the same time frame.
In a note released earlier this week, Raymond James real estate analyst Johann Rodrigues downgraded three REITS — Riocan, First Capital and Smartcentres — by a notch, citing that their rent deferral percentages were “on the high end” of his forecast.
For example, Riocan approved $ 15 million in rent deferral requests from its commercial tenants, representing 17 per cent of gross April rents, and First Capital approved deferrals on 6.5 per cent of its tenants, with an equal amount of pending requests yet to be dealt with.
“We continue to be increasingly worried about May rent payments,” Rodrigues said in his note. “We think rent deferrals could total 40 per cent to 60 per cent.”
Smartcentres, which collected 70 per cent of the rent expected after deferrals offered to some of its smaller independent retailers, said it was “disappointed” that some “strong, stable companies” didn’t pay though it didn’t name them.
A significant portion of the REIT’S portfolio is made up of power centres, large suburban spaces that house big- box retailers such as Best Buy, Home Depot and Walmart Canada, its biggest tenant.
“Power centres are a slightly more favourable investment than enclosed malls, but they still have not been performing as well as residential, industrial or office spaces,” Ma said.
Smartcentres’ stock has lost about a third of its value since the start of the pandemic in late February.
Mark Rothschild, a longtime real estate analyst at investment firm Canaccord Genuity Corp., said industrial and residential REITS are viewed as more stable in the current environment, while retail REITS and those associated with seniors housing are viewed as riskier and likely to be negatively impacted.
“Some of these REITS say they expect to receive rents in the future, so the amount they have collected or not collected now is not really representative of what might happen,” he said. “No one knows how soon we will open up and how long it will take to get everyone out of their homes. So it’s hard to know what to expect going forward.”
Some of the more stable REITS that have only been marginally affected by the current crisis are those belonging to large essential retailers. Choice Properties REIT, owned by the Weston family and whose biggest tenant is Loblaw Cos. Ltd., this week reported it had collected 84 per cent of April’s rent from its retail tenants. Choice Properties had agreed earlier in the month to assist small businesses and independent tenants by offering 60- day rent deferrals.
The amount deferred so far, and due to be repaid over the next 12 months, stood at approximately $ 5 million. The REIT has a market cap of almost $4 billion.
Mark Paterson, vice-president of real estate service company Marcus & Millichap, said the rent situation could actually improve for landlords in the coming months as government benefits for small businesses and individuals start to kick in more broadly.
“In residential REITS, multi- family dwellings, the largest landlords have collected in excess of 90 per cent of rent,” he said. “Retail is still a challenge, but with the way the government stepped in and put in place specific programs so quickly, I’m optimistic that collections in May are actually going to be good.”
SOME ... SAY THEY EXPECT TO RECEIVE RENTS IN THE FUTURE.