Target Corp.'s largest landlord in Canada is feeling the pain of its worst year yet of retail failures, especially as a result of the U.S. discounter's collapse in this country.
RioCan Real Estate Investment Trust, whose malls had housed 26 of Target Canada's 133 stores, has been given back 19 of those leases, resulting in about more than $11-million of annual unpaid rent plus an estimated $7.5-million-plus of annual maintenance costs and taxes, the company said on Tuesday.
(One of the abandoned Target leases in RioCan property reverted to Wal-Mart Canada Corp., which is paying rent.)
Now RioCan is locked in talks with Target's U.S. parent over its obligations to cover landlord guarantees for rent on remaining lease terms, industry sources have said. And RioCan is grappling with an unprecedented amount of retail space over all that faltering merchants, ranging from Target to electronics chain Future Shop and photo specialist Blacks, have abandoned in the past year.
"This has been one bad year," Edward Sonshine, chief executive officer of RioCan, said in an interview.
He added that it has been the shopping centre company's worst year for retail failures.
"For RioCan, between Target and all the others … it's been a very ugly year – the ugliest ever. Just look at the amount of square footage returned to us."
Amid the unravelling of Target Canada and other retailers this year, landlords such as RioCan struggle to fill their vacant mall spaces. At the same time, key Target creditors are battling over the insolvent retailer's $1.9-billion of intercompany claims as well as its landlord lease guarantees, with potentially hundreds of millions of dollars at stake for RioCan.
The challenging retail landscape has taken its toll on RioCan. It reported that its third-quarter occupancy rate fell to 94 per cent from 97 per cent a year earlier. It doesn't expect to return to its usual 97-per-cent level until 2017, Mr. Sonshine said.
Michael Smith, real estate analyst at RBC Dominion Securities, said the "re-tenanting" of empty Target stores is causing "disruption" among landlords, although the financial impact on REITs such as RioCan "will be manageable" because most Target leases are well located with below-market rents.
Even so, "a lot of uncertainty still surrounds the empty stores as replacement tenants try to make sense of a multitude of new leasing options," Mr. Smith said last month. Retailers are also trying to figure out their physical space needs as a growing number of customers turn to e-commerce, he said.
Target, which went into bankruptcy protection in January and closed all its stores by mid-April, owes creditors about $2.6-billion, according to a court documentlast week. The total includes $1.9-billion of landlord claims but excludes about that same amount in Target's intercompany claims, it says.
On Friday, Justice Geoffrey Morawetz of Ontario Superior Court refused Target's request to extend the protection period to Feb. 5 and gave it instead until Dec. 11. The judge said he remained "concerned about the length of time that has passed without a plan having been filed," urging that one be presented before the end of 2015.
Mr. Sonshine said he hoped to have a resolution in the Target talks within the next month. "But if you don't satisfactorily end settlement discussions, then the alternative is litigation if it comes to a bad end. But we are cautiously optimistic they won't come to a bad end."
Mr. Sonshine predicted that, ultimately, replacing Target will be a boon to RioCan because the retailer didn't attract many shoppers to its malls and paid low rents – an average of $6.67 a square foot. Already, RioCan has nine deals with tenants and 18 in "advanced" talks, company executives said.
But the landlord generally hasn't been able to replace Target with just one alternative tenant, such as Wal-Mart Canada Corp., because it and others want to stock food, he said. Many Target leases restrict food offerings because other mall tenants have got first dibs on selling food, he said. As a result, RioCan has to divvy up Target store sites among multiple tenants, which will increase costs. Still, some retailers, such as TJX Cos. Inc.'s Marshalls, HomeSense and Winners, are expanding, he said.
And RioCan is becoming "resilient and diverse" in its planning, foreseeing the shifting retail market, he said. It has a number of residential and other commercial developments in the works to add to its retail properties.
RioCan's seven remaining Target leases were bought by Lowe's Canada (six) and one by Canadian Tire, representing annual revenue of $3.4-million, the landlord said.
Other landlords also are racing to replace Target. First Capital Realty Inc. said this week that its Target location in Hamilton has been substantially re-leased to Loblaw Cos. Ltd. and GoodLife Fitness.
RioCan's third-quarter profit (attributable to unitholders) fell to $144.5-million or 44 cents a unit from $161.6-million or 51 cents the previous year, while revenue rose to $320.6-million from $306.9-million. Operating funds from operations grew to $140.2-million or 44 cents a unit from $133.6-million or 43 cents.