Retail landlord First Capital Real Estate Investment Trust cut its monthly distribution in half as economic shutdowns escalate across Canada, marking the second major retail REIT to slash its payout over the past month.
First Capital will now pay a distribution worth 43.2 cents per unit annually, down from 86 cents, saving the REIT roughly $95-million a year. The decision was announced after stock markets closed Tuesday, and First Capital’s management said it hopes to restore the distribution to its previous level after two years.
In a statement, management said the cut provides the REIT “with meaningful financial flexibility to advance its strategic objectives.”
On top of the tough economic environment, First Capital has been under pressure to lower 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 funding new developments of condos and rental apartment buildings at malls and other sites in order to diversify their property mix as more shopping moves online.
REITs have touted this redevelopment potential for the past five years, with plans to increase density on multiple properties – especially those in suburban locations with sprawling parking lots. Although the projects are expected to boost cash flows in the future, they require a lot of upfront spending – often hundreds of millions of dollars.
Bolstering its own development budget, retail landlord RioCan REIT cut its distribution by one-third as Ontario announced tighter COVID-19 restrictions in December. RioCan is one of the largest retail landlords in Canada and management had been resisting calls to slash its distribution, but there was growing speculation that it would eventually happen because the REIT’s units were yielding 8 per cent after the price fell sharply last spring.
First Capital’s unit price has also suffered during the pandemic, dropping 34 per cent since early March, 2020. Before the distribution cut was announced, the REIT paid a 6-per-cent annual yield.
Across the sector, Canadian retail REITs have suffered since last spring’s countrywide lockdowns, largely because their rent collections have been hit harder than those for office buildings and industrial warehouses. Some retail landlords cut their distributions early in the pandemic, but most aimed to ride out the storm.
The strategy seemed promising as retail sales roared back last summer and fall, but a new wave of shutdowns is likely to hit rent collections, and that has prompted major changes. In addition to First Capital’s cut, earlier this month Brookfield Asset Management announced plans to buy back the 38 per cent of its real estate arm, publicly listed Brookfield Property Partners LP, it does not currently own.
Brookfield Property is one of the largest retail and office landlords in the United States and was expected to pay out more than 100 per cent of its annual cash flow in distributions to unitholders. The repurchase has been viewed by some as a way of sidestepping a payout cut, because the company will be absorbed into a parent with a bigger balance sheet.
Although development projects are inherently riskier than owning and operating properties, some REITs have shown it is possible to manage the risks. Choice Properties REIT has plans to increase density on its properties, but it also earns 57 per cent of its annual rent from grocer Loblaw Cos. Ltd. – and grocers have performed well during the pandemic.
Office landlord Allied Properties REIT has been adding development projects as well, and it raised its payout in December.
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Tim Kiladze