‘We were quite surprised’: Investors punish RioCan units after REIT slashes monthly payout

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RioCan Real Estate Investment Trust’s unit price tumbled 4 per cent by mid-morning Friday, after the REIT cut its monthly distribution by one-third amid growing uncertainty about some of its tenants’ futures.

The move caught some analysts by surprise, largely because management had been preaching the REIT’s stability amid the retail sector storm.

“We were quite surprised by RioCan REIT’s announcement of a distribution cut, the first in a very long time for a Canadian retail REIT,” BMO Nesbitt Burns Jenny Ma wrote in a note to clients Friday. Separately, Canaccord Genuity analyst Mark Rothschild downgraded his recommendation on RioCan to “hold” from “buy” on Friday.

Under the new distribution plan, effective January, RioCan’s monthly payout will fall to 8 cents per unit from 12 cents, saving the real estate investment trust $152-million annually.

RioCan’s units initially dropped 10 per cent in early Friday trading, after closing at $18.03 Thursday before the payout cut was announced, but recovered more than half that loss by mid-morning. The units are down 38 per cent from the 2020 peak before the pandemic hit.

As of Thursday’s market close, RioCan’s units were trading at 18 per cent below the REIT’s net asset value, according to analysts at RBC Dominion Securities, which was double the nine per cent average discount for the sector. While the analysts expect the payout cut will hurt for some time, they are more optimistic in the long-term.

“A 33 per cent distribution cut is anything but a holiday present for unitholders, especially after the year this one has been,” they wrote in a note to clients Friday. “As painful as it is, though, we ultimately see it as a step toward a structurally stronger long-term valuation for RioCan, as the additional retained cash improves its financial flexibility.”

RioCan is best known for its suburban shopping plazas and its list of tenants range from movie theatres to retail apparel stores. Until now, management had resisted calls to slash its distribution, yet there had been speculation it would eventually happen because the real estate investment trust’s units were yielding 8 per cent after their price fell sharply this spring.

RioCan’s management team changed course late Thursday, attributing the decision in a statement to an “uncertain retail landscape” and the “unknown length and breadth of closures.”

“A more conservative payout ratio is important in this undeniably challenging environment despite our well-positioned portfolio, solid base of tenants and deep liquidity,” chief executive officer Ed Sonshine said in the statement.

RioCan is not the first REIT to cut its distribution – early in the pandemic, H&R REIT and Morguard REIT slashed their own – but it is one of the best-known names in the sector. And for much of the year, RioCan had put a positive spin on its outlook.

When the REIT reported its most recent quarterly earnings, management said the company collected 93.4 per cent of its billed rent. It added that of all the retailers that had filed for bankruptcy protection, the confirmed closings represented just 0.9 per cent of RioCan’s total revenue.

“Now I’m not downplaying the very real struggles within the industry, but I do want to emphasize that to date, the relative impact on RioCan’s revenue is far less than what one might believe in light of the ongoing negative retail narrative,” chief operating officer Jonathan Gitlin said during the most recent quarterly conference call.

But at the same time, management had also disclosed they created two categories of tenants across its portfolio, and 22 per cent of its net rent was characterized as “potentially vulnerable.” This group includes movie theatres, gyms and sit-down restaurants.

RioCan has been diversifying its portfolio mix away from retail in recent years, largely by getting into residential development that centres on building high-end rental apartments. While this shift will add new revenue streams over time, the buildout is capital intensive.

In an interview, Mr. Gitlin characterized the payout cut as a “capital allocation decision,” adding that it wasn’t out of absolute necessity. “It’s out of prudence” he said.

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