RioCan Looks to Rising Rents as Interest Rates Climb

RioCan Looks to Rising Rents as Interest Rates Climb

One of Canada’s oldest real estate investment trusts says today’s borrowing rates are beyond any internal forecast by executives, but RioCan believes rental increases will mitigate the damage from a rising interest rate environment.

“With the reopening of the nation, Canadians look forward to putting the pandemic well behind us. However, we’re now facing different challenges. We’re facing rising interest rates, global economic uncertainty based on more tensions, trade disruptions and unprecedented inflation,” Jonathan Gitlin, chief executive of RioCan, founded in 1993, said on a conference call with analysts last week.

The CEO said RioCan, which still gets the bulk of its income from retail despite a growing presence in the multifamily segment of the market, said the REIT’s tenant mix is evolving to include more essential retailers.

Dennis Blasutti, chief financial officer of the REIT, said RioCan had anticipated higher interest rates and locked in some debt while hedging some of its other debt.

“Our well-staggered debt ladder ensures that only a relatively small portion of our refinancing activities will take place at any given point in the economic cycle,” said the CFO on the call.

“As our tenant revenue grows, we expect to capture some of this in the form of rent increases. At the same time, rising replacement costs are supportive of the value of our well-positioned retail and mixed-use real estate as either revenues will increase to support the development or new supply will be constrained,” Blasutti said.

Jenny Ma, an analyst with BMO Capital Markets, asked how RioCan was dealing with the inflationary market when signing leases.

“Are there any changes that you’re making in terms of your ability to chargeback certain expenses or rent increases that are more closely tied to CPI or just anything that may have shifted because of what we’ve seen on the inflation front and how you write up your leases?” the analyst said on the call.

Gitlin said the company has always tried to get consumer price index provisions into its leases and noted all of RioCan’s leases are triple net, so the tenant takes the risk of rising expenses related to property including real estate taxes, building insurance, and maintenance.

Jeff Ross, senior vice president of leasing and tenant construction with RioCan, told analysts the market is seeing pre-pandemic conditions where there are multiple offers on the same units.

“We’re also seeing an influx of Americans starting to kick tires again. We’ve got a RECon conference coming up in a couple of weeks. We are solidly filled on both days with no Canadians by design. Very much we’re dealing with the American-based tenants that we have, but there’s a whole lot of new tenants from Europe as well,” said Ross, referring to the upcoming International Council of Shopping Centers event in Las Vegas.

Tal Woolley, an analyst with National Bank Financial, asked what type of tenants are “coming out of the woodwork” from America and Europe.

“The smaller fashion boutique guys are looking for more high street locations, but the guys that are really pushing in hard are the food and beverage guys. So there’s a lot of both fast-food and full-service sit-down restaurants. We’re seeing a lot of that. And certainly, on the entertainment side, we’re seeing a lot of those starting to press in,” said Ross, referring to a deal with Arcadia Earth, an immersive augmented reality exhibit that has locations in New York and Las Vegas and plans to open in RioCan’s site known as The Well in downtown Toronto.
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