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The Yonge Eglinton Centre in Toronto, owned and managed by RioCan, has a number of retail tenants that had to close during the COVID-19 pandemic.

Melissa Tait/The Globe and Mail

RioCan REIT is doubling down on its strategy to divest from brick-and-mortar apparel retailers in favour of grocery stores, pharmacies and e-commerce.

The real estate investment trust swung to a large loss in its latest quarter amid rent deferrals resulting from COVID-19 lockdowns. The role of landlords has changed, executives said on a conference call with analysts, as the weak spots in the retail sector began to buckle.

“We went through it literally tenant by tenant. After conversations with the tenants, and in some cases thorough review of their financial statements, we assessed which ones would survive and which ones wouldn’t,” said Jonathan Gitlin, president and Chief Operating Officer, while reporting on the REIT’s quarterly results.

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RioCan says it collected about 73 per cent of rent due in April, May and June, calling the period “the most challenging quarter ever” for many tenants.

The company said that most tenants are now operating and have payment plans in place, and it expects rent collection to improve as businesses reopen, after collecting 85 per cent of rent in July. But some “bad debt” is stemming from the fashion sector, which was struggling before the pandemic and has now seen some businesses file for creditor protection, executives told analysts.

“Consumers are going out to shop and most of our tenants are gaining momentum,” said Gitlin. “However, the reality is that COVID-19-related business closures will impact these numbers through the balance of 2020.”

Chief executive Edward Sonshine wrote in a letter to shareholders that while the COVID-19 health crisis was unexpected, the changes to the retail landscape did not come as a surprise, as the company has been shifting its holdings over time away from malls and toward necessity retailers such as grocers and pharmacies in urban areas. Among tenants that bring in the greatest cash for the company are Canadian Tire Corporation, Loblaw Cos. Ltd., TJX Companies, Inc., Cineplex, Metro, Inc. and Walmart.

“This category of tenants is more resilient to changes in economic cycles,” said Gitlin, predicting that fashion retailers would fall below eight per cent of its holdings going forward. “There have been a lot of CCAA filings since March. ... there are more restructurings and failures to come.”

The company said it had participated in Canada Emergency Commercial Rent Assistance for all eligible tenants (about 14 per cent), with total CECRA rent abatements of $9.9 million for the quarter. The company also wrote down the value of some properties in enclosed shopping centres and Alberta properties in “the depressed oil and gas market,” and brought in lower fees for property management and lease cancellations.

“About half our space was forced to shut,” said Sonshine. “Basically the entire company, including myself and Jonathan, we have turned into rent collectors. I think we have been successful in keeping the relationships.”

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Gitlin says that the company is hoping to benefit from long-term sustainability of businesses. But after dedicating more than two months and two dozen workers just to time-intensive CECRA applications, RioCan will tighten its grip on rents going forward for those that had previously applied.

“This has undoubtedly been the most unusual quarter in the 26 years I have been CEO of RioCan. The reasons are obvious,” said Sonshine on the call.

“But it introduced a whole new issue into being a landlord: a time when some tenants feel they ought not be required to pay rent, as opposed to traditionally not being able to.”

The company posted a net loss of $350.8 million or $1.10 per diluted unit for the three-month period that June 30, down from a net income of $253 million or 83 cents per unit a year earlier.

Funds from operations were slightly softer than analyst expectations. Per unit, funds from operations hit 35 cents per diluted unit, compared with 48 cents per diluted unit a year ago and 38 cents per unit expected by analysts polled by Refinitiv.

Still, RioCan gave rare forward guidance, saying it predicts funds from operations per unit to be about $1.60 for the full year of 2020, impacted negatively by the pandemic.

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“While the actual rent collection results are, I believe, quite satisfactory given the situation, we are certainly not satisfied with the (funds from operations) for this quarter,” said Sonshine.

Despite soft quarterly results, the company also got a $4.2 million boost in operating income from its first three residential rental towers. Sonshine wrote that RioCan expects “a steady stream of residential rental” income going forward, and Gitlin said that there have been no cases of COVID-19 in the properties managed by RioCan.

RioCan also said there has been a “very palpable push” to use its spaces for micro-fulfillment centres for online retailers, or for socially-distanced space for hospitals.

“I would like to differ from all the pundits who currently predict not only the death of retail but the death of the office as we know it,” said Sonshine.

“Part of what we are doing is being driven by retailers and existing technologies. We are not becoming a technology company – we are looking for partners in this – but we have the space and locations to make a difference in the logistical side of the e-commerce business, and that is going to be one of our many focuses in the next couple of years.”

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