Canadian real estate investment trusts (REITs) are incurring heavy losses due to the COVID-19 pandemic. While the property market is surging again after the temporary freeze in March and April 2020, Investors are losing optimism because REIT stocks are not keeping pace with the dramatic recovery.
RioCan (TSX: REI.UN), one of Canada’s largest REITs, is among the casualties in the sector’s carnage. The REIT stock is losing by nearly 41% year to date. But at the price of $14.94 per share at writing, does it mean the premier REIT stock just hit a buy signal?
Vanishing value
Both retail and office rental properties are feeling the brunt of the pandemic. The outlook is gloomier in the retail space. The length of recovery is uncertain as more people are shifting to online commerce. Meanwhile, warehouses or industrial properties are growing in importance.
For RioCan, the net loss for the first half of 2020 (six months ended June 30, 2020) was $247.9 million compared with the net income of $447.5 million for the same period in 2019. The tenants operating non-essential businesses closed down in mid-March and are just getting to reopen.
RioCan submitted about 1,800 applications for the Canada Emergency Commercial Rent Assistance (CECRA) program on behalf of its tenants. As of July 28, 2020, cash collection comprises 73.3% of RioCan’s total billed gross rents for the second quarter, while 5.8% was from CECRA government funding.
Furthermore, in the case of unresolved tenant defaults, RioCan holds $29.0 million in security deposits and $5.3 million in letters of credit from tenants. It can serve to offset unpaid rents on a tenant-by-tenant basis
Green shoots emerging
RioCan CEO Ed Sonshine is aware of loyal investors’ agony and sympathizes with them, pointing to emerging “greens shoots” that are somehow restoring optimism. The silver lining is improving rent collection rates. For July and August 2020, it expects to collect 90% of the total rent due.
The high collection rate indicates that Canada’s retail sector is not in bad shape, as many people fear. RioCan credits the federal government’s emergency relief programs and declining COVID-19 cases across the country for its gradual recovery. The release of the CECRA fund was quick, and restored the REIT’s cash flows.
Slow but sure recovery
Sonshine is confident that the bulk of RioCan’s large tenants will remain standing but will close underperforming stores. Smaller operators might not stay afloat after the federal government’s rent subsidy program ends, however. Some retailers that filed for creditor protection under the Companies’ Creditors Arrangement are starting to re-open.
But the brightest spot for RioCan is the residential rental operations. The growing purpose-built RioCan Living residential rental portfolio is growing. As of July 28, 2020, 98.7% of Frontier units are under leases, and 94.2% at the eCentral project. In the second quarter of 2020, the residential rate collection was very high, at 99.3%.
RioCan has been the top pick in the real estate sector in the past couple of years. The $4.73 billion REIT is a generous dividend-payer. Bargain hunters will find the current price ridiculously cheap and the 9.64% dividend super attractive.
