What a time to hand over the reins
RioCan’s CEO reflects on his 27-year career and surviving pandemic before leaving role
Landlords get little love at the best of times, but sympathy for their plight during the pandemic has been particularly scant. RioCan REIT, one of Canada’s largest landlords with 38 million square feet of space largely occupied by retailers, has struggled with tenants going broke or refusing to pay their rent. But during a conversation in mid-February, things were looking up for 73year-old founder and CEO Ed Sonshine: not only was it his first day out of a two-week quarantine following a vacation, but in a few weeks he would cede the CEO title, along with the attendant headaches, to his successor, Jonathan Gitlin. Gitlin takes over at the end of March.
You’ve picked a heck of a time to hand over executive reins and become chair. Did the pandemic hasten the move?
It wasn’t a factor. I’ve been in this job for 27 years and the only CEO RioCan has ever had. When I hit my 25-year mark, I told the board I didn’t want to keep doing this.
When did you know Jonathan was the guy to take over?
Six years ago, we started building multi-residential apartment buildings. I gave the whole initiative to Jonathan and told him, “You’ve got to beef up the development team, you have to learn the apartment rental business and you need to learn condominiums.” And he did a fabulous job.
How has the residential part of your business been faring over the past year?
The governments hurt us, obviously,
by capping rents and putting all kinds of barriers on evictions. Our new buildings are higher-end. Those tenants are still getting paycheques, so we have about a 98 per cent rent collection rate. But many people have financial issues. Dr. (Eileen) De Villa (Toronto’s chief medical officer) is getting paid and (Mayor) John Tory is getting paid, but not everybody else is — and that probably gave away my views on what’s going on. So occupancy has gone down, people are doubling up or moving back in with their parents. You also have two big holes in the rental business. Typically, Toronto gets 200,000 foreign students every year and that whole population is missing. And, in 2020, immigration has been a fraction of what Canada needs.
About 90 per cent of RioCan’s revenues come from retail and that sector has been hammered.
We’re doing better than I expected at the outset. Last March, I thought we were in for a disaster because tenants had to close. I don’t want to pick on anybody, but large chains like Staples, the Gap, Winners — companies with way better balance sheets than RioCan’s — said, “I’m not open so I’m not paying rent.” We had a series of hard negotiations, and when I say hard, I mean everybody was bringing out the cudgels.
How did you fight back?
By saying, “Guys, we’re gonna sue you or we’re gonna close you down.” Landlords have remedies and the biggest is putting a lock on the door. It’s hard to close somebody down when they’re not open, but if a tenant has a good store, they don’t want their lease terminated. There is one very big chain and back in May, when they were starting to reopen, we picked their best store — we had their sales numbers — and put a lock on the door late Friday night. They hadn’t paid any rent for three months. We got our rent that afternoon because they didn’t want to lose Saturday sales.
Have you renegotiated leases with struggling retailers or accepted percentage-of-sales deals that some landlords have adopted?
Very few. With some retailers like Cineplex or GoodLife that had just been shattered by this crisis, we agreed to forgive one-third of the rent for 2020 and defer one-third, but they had to pay one-third. Where somebody went into CCAA, we approached it on a case-bycase basis, but generally we took a fairly tough position. But to percentage-of-sales deals, as a rule we said, “We’re not your partner.” We’d rather have a store empty and our leasing guys working to lease it. Over the summer and fall, things started to normalize. Our rent collection through 2020 was 93 per cent or 94 per cent, which is pretty good.
Are you expecting an increase in retail bankruptcies?
For those who have made it this far, you probably won’t see much in the way of bankruptcies, unless this goes on, God forbid, for another year or two. If Mr. Trudeau is correct, and this is one time I really hope he is, and whoever wants to be vaccinated will be by the end of September, there will be a boom in spending.
The public has little compassion for landlords. Do you feel that has affected the support for the sector?
You’re right, we’re not the most popular people in the world. Has the support been decent? There has been some. The city postponed payment of realty taxes for a few months but now they want their money, and we paid it. But the CECRA (rent assistance) program required landlords to give up 25 per cent of the rent. No mortgage companies gave up 25 per cent of their payments. So no, I don’t think we’ve been treated particularly well. Happily, in the case of RioCan, we didn’t need much help.
You’ve been shifting away from malls and toward more mixed-use developments. What’s the rationale?
We sold $2 billion worth of assets between 2017 and 2019 and that included most of our malls. There was an element of good luck with timing, but the reason was malls are just too expensive to operate. If you look around, who has built malls in the past 20 years? The other aspect is that the apparel industry is shrinking and, at some of the best malls, I’m guessing it’s 80 per cent apparel retail.
You think malls have a grim future, then?
The most successful ones will continue. Certainly, my 17-year-old granddaughter, who you think would buy everything online, loves going to Yorkdale. Smaller malls based on single anchor stores have been struggling for years and I don’t think will get better.
You launched RioCan in the 1990s, during a huge real-estate downturn. How does today’s environment compare?
It’s totally different. The great real estate recession, as we call it in our business, was caused by a complete lack of liquidity combined with high interest rates. You had tenants going broke, banks not lending and there were no buyers. It was a problem. The only people who survived were those without much debt. That was a lesson I learned when I started RioCan: don’t have a lot of debt. Today, you have low interest rates, plenty of cash around, everybody is much more conservative than they were back then, and tenants are much stronger because of the retail industry shakeout in the ’90s. And with consolidation came strength. These guys can ride out the storm.
You became infamous as “Darth Vader of Kensington” for trying to bring Walmart into that downtown neighbourhood. What do you think of that project in hindsight?
Things have worked out for the best. Walmart has not done well in urban stores when they are not on the ground floor with lots of parking, so they ended up happy with the outcome. And by agreeing to get rid of Walmart, we were able to negotiate with the city an extra floor on the building. I’m not sure why everybody hates Walmart but they sure did there.