REITs see retail rent payments plunge, only modest declines in residential

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Real estate investment trusts have seen a significant percentage of retail rents go unpaid in April as the coronavirus pandemic upends business operations, creating a sharp contrast with residential and other segments where payments remain relatively healthy.

First Capital REIT, RioCan REIT and SmartCentres REIT issued updates after the market close on Tuesday. RioCan said it has collected 66 per cent of gross rent for April, while First Capital and SmartCentres have each received about 70 per cent. (Gross rent is the base rent, plus shared costs such as maintenance and realty taxes.) Last week, H&R REIT said it had collected just 56 per cent of retail rent for April, driven largely by non-payment at enclosed malls, although some clients had reached agreements for deferrals.

“May will be worse than April if nothing happens," said Benjamin Tal, deputy chief economist of Canadian Imperial Bank of Commerce, who expects the federal government will announce more concrete measures on rent relief in the coming weeks.

Rental payments have been a flashpoint of concern during the pandemic, particularly for businesses that have been ordered to shut down and seen revenues plummet, along with millions of Canadians who have been laid off or had their work hours significantly altered.

Yet rental payments in the multifamily, industrial and office segments have all averaged in excess of 90 per cent, based on public companies that have provided updates. Minto Apartment REIT said last week that as of April 14, 97 per cent of rental revenue had been collected, in line with a typical month. Other REITs said residential payments were slightly lower than usual, but remained above 90 per cent.

CIBC’s Mr. Tal cautioned that residential collections by REITs are not indicative of the entire rental industry.

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The Canadian Federation of Apartment Associations told The Globe on Wednesday that about 75 per cent of residential tenants made full payments in April, and about 10 per cent made partial ones, based on survey results.

For RioCan, however, there was a notable residential-retail divide: While most of its tenants are in shopping plazas and offices, payment at its two apartment buildings was roughly 96 per cent in April.

RioCan chief executive Ed Sonshine said he was surprised that April rent was not paid by some of the REIT’s large American-based tenants, such as office-supply store Staples. (Staples Canada did not immediately respond to a request for comment.)

“With those guys we have been patient up until this week,” he said. “We will start enforcing our rights.”

In early April, once it became clear that some larger tenants had withheld rent, Mr. Sonshine said the REIT sent them a “fairly nice letter,” stating it understood these are difficult times but a discussion was needed about the missed payment. Some of RioCan’s tenants responded and some did not, he said.

This week, RioCan started sending letters to the unresponsive tenants, notifying them they are in default of their lease. That notice allows a commercial landlord to take various actions to recuperate the rent, such as suing the tenant or terminating the lease.

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By the beginning of May, RioCan will be in a position to lock the tenant out, but Mr. Sonshine said “that doesn’t mean we will.”

“We are going to be very be choosy as to who we do that with,” he added. “Obviously we will start with spaces that we are happy to have back.”

Some of Mr. Sonshine’s frustration with larger tenants was echoed in SmartCentres’ release.

“While we are disappointed by the non-payment of rent by some strong capable companies, we still believe that we will collect April’s rent in due course,“ president and CEO Peter Forde said. "We expect strong retailers to pay their rent obligations.”

Among REITs who issued updates on Tuesday, RioCan and SmartCentres excluded deferrals when calculating their collection rates, which resulted in higher reported rates, whereas First Capital did not make adjustments. RioCan said it has approved roughly $15-million in April rent deferrals, amounting to 17 per cent of total gross rents that month. Thus far, First Capital has approved deferrals equal to roughly 6.5 per cent of gross monthly rent.

“We believe the announced rent deferrals ... highlight the significant pressure this pandemic is placing on retailers and we expect data in following months will likely be incrementally worse,” Raymond James analysts said Wednesday in a client note, adding that deferrals could climb to as high as 60 per cent.

The federal government last week said it was creating a new program that provides loans, including forgivable loans, to commercial property owners who lower or forgo the rent payments of small businesses in April, May and June. Ottawa said the program would require partnerships between the federal government and provincial and territorial governments. Manitoba said Tuesday it would participate and contribute $16-million.

Editor’s note: (April 24, 2020) An earlier version of this story said First Capital used an adjusted version of its rent-collection rate to account for deferrals. In fact, it did not. This online version has been corrected.

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