'Stronger' commercial leasing environment emerged amid COVID: RioCan

RioCan Real Estate Investment Trust is seeing demand for commercial leasing opportunities, even after the COVID-19 pandemic pushed many Canadian businesses to close both temporarily and permanently.

The Toronto-based trust said Tuesday that it saw 102,193 square metres (1.1 million square feet) of new and renewed leases signed during the first quarter of the year, exceeding pre-pandemic levels.

That included 86 new deals with an average rent of $23.19 per square foot, well above the company's usual $19.87 per square foot average, RioCan chief executive Jonathan Gitlin said.

"We are seeing a stronger leasing environment," said Gitlin, in his first earnings call since he took the company's helm after Ed Sonshine's retirement in March.

"Well-capitalized, forward-thinking companies are seizing on the opportunity to lease well-located space."

While food and hospitality businesses experienced the brunt of closures and are currently operating solely through curbside pickup and takeout in many hot spots, Gitlin said sit-down restaurants and personal service providers leased new space or renewed contracts during the quarter.

Furniture, housewares and essential retailers also turned to leasing, he said.

These clients helped RioCan's new leasing spreads--the change in rent per square foot on a new lease in comparison with its previous price--more than double from pre-pandemic levels. The spreads reached 14.2% across RioCan's whole portfolio and 18.6% in major markets in the quarter.

Gitlin believes the REIT remained resilient during the crisis because many of its tenants were deemed essential.

"We can't predict the length or the extent of the mandated closures, but more than 90% of RioCan's annualized rental revenue is from grocery anchors, mixed-use and open-air centres," Gitlin said.

"These asset classes are more insulated from the impacts of pandemic-related lockdowns."

He classified more than 80% of RioCan's tenants as "strong or stable" and said the company was buoyed by tenants that continued paying rent even as the country plunged into a third wave of COVID-19.

About 9% of the trust's tenants were closed at the end of the quarter and nearly 20% of tenants were shut as of May 3, but RioCan still collected 93.9% of billed gross rent in the first quarter.

That rate was a slight dip from the fourth quarter of 2020, when it collected 95.1% of billed gross rent, but up from the second quarter of 2020, when 89.6% was collected.

Based on patterns he's seen in the U.S. amid its reopening, Gitlin believes rent collection rates will climb higher as COVID-19 restrictions are lifted in Canada.

"It really does depend on the vaccination roll out," Gitlin said.

"My sense is that by the summer and then certainty by the early fall, you are going to see consumer activity return to a very active pace, in fact, higher than pre-pandemic phases, which will put our tenants in good stead."

RioCan reported its net income climbed to $106.5 million in its first quarter, up from the $102.8 million a year ago at the onset of the pandemic.

Funds from operations, a key metric in real estate, reached $106 million, a fall from $144.6 million last year.

Its FFO per unit amounted to 33 cents per diluted unit for the quarter ended March 31, down from 46 cents per diluted unit previously.