High interest rates and rising costs have pushed RioCan Real Estate Investment Trust REI-UN-T to put a halt to starting any major new construction projects.
The company is pushing on with existing builds, but the timing isn’t right to put shovels in the ground on any new ambitious projects, said chief executive Jonathan Gitlin in an interview.
“We’ve made a decision that in the short term, starting construction isn’t the most effective use of our shareholders’ money.”
Given high interest rates, and the variable debt that comes with a lot of construction financing, he said it makes more sense to pay down RioCan’s debt, which stands at about $7.3-billion.
“It becomes quite accretive, and quite productive, immediately.”
The shift means RioCan will continue building the 1.7 million square feet of space under construction, but a further 1.5 million square feet of “shovel ready” projects will have to wait until market conditions improve. The company will also continue to push projects through the development and permitting stages.
RioCan will likely have to wait until they get more clarity from the Bank of Canada on its rate trajectory before moving on those projects, Mr. Gitlin said.
“As inflation does begin to settle and there’s more adherence to the target level of inflation, I think that will allow the Bank of Canada to give more clarity. And from that clarity, we will be able to take more logical prognostications on how our projects are going to turn out.”
The pause on new construction starts comes as the company reported a net loss of $73.5-million in its most recent quarter.
It attributed the loss in the period ended Sept. 30 to fair value losses of $199.5-million on investment properties that reflect current market conditions resulting from rising interest rates.
Funds from operations totalled $135.4-million, or 45 cents per diluted unit, a slight increase from $134.8-million a year ago, or 44 cents per diluted unit.
High interest rates and economic headwinds are also creating struggles for retailers, but RioCan said it considers 87.4 per cent of tenants to be “strong and stable.”
“The vast majority of our tenants are in on very strong footing, we are not seeing a slowdown in the ability to pay rent,” said Gitlin.
RioCan’s committed occupancy rate for the quarter was 97.5 per cent, up from 97.3 per cent a year ago. Retail occupancy hit 98.3 per cent, up from 97.8 a year prior.
In the office sector, which makes up about 10 per cent of RioCan’s portfolio, compared with 86 per cent retail and four per cent residential, the company is managing, Gitlin said.
“It’s a market that you have to swim very hard to stay afloat at this point,” said Gitlin.
“Our office portfolio is doing fine, but it’s not ... as successful or productive as our retail portfolio.”