BUSINESS

RioCan hit by high rate of retail closures in struggling fashion space

02/13/2015 08:16 EST | Updated 04/15/2015 05:59 EDT
TORONTO - An unusually high number of store closures, particularly in Canada's struggling fashion sector, has left RioCan Real Estate Investment Trust scrambling to find new tenants to fill vacant locations.

"The current retail environment is challenging in some sectors," president and chief operating officer Raghunath Davloor said during a conference call after the company reported its earnings Friday.

"At the end of December we started to see ... an increased level of activity in abandonments and bankruptcies, which has continued into the first quarter of 2015. The mid-level fashion sector has produced the most turnover."

RioCan (TSX:REI.UN), one of Canada's largest landlords, has been impacted by a number of recent closures, including the recent announcement by U.S.-based discount retailer Target that it will be shuttering all 133 of its Canadian stores.

RioCan has 26 Target locations, representing less than two per cent of the company's rental revenue. The store closures are expected to have minimal direct impact in the short term, since the leases are mostly guaranteed by Target's U.S. parent company.

"While we certainly could have done without Target's sudden withdrawal from Canada, which is tragic for many of their employees and small suppliers, for RioCan it is just a bump in the road generating a lot of work, and at the end of the day with no real impact," chief executive Edward Sonshine said.

A smaller chain, fashion chain Mexx, filed for bankruptcy in December, leaving RioCan with 18 empty stores.

In total, the real estate investment trust more than 200,000 square feet of space in its portfolio become vacant during the three months that ended on Dec. 31, 2014. That figure doesn't include closures announced in the first quarter of this year, such as 13 locations of the Cash Store that are in RioCan's portfolio. Sony and Jones New York have each left RioCan with two stores to fill, while RadioShack is closing seven locations in RioCan's U.S. portfolio.

Although RioCan says it expects to find new tenants for all of its vacant stores, Davloor said there will be a lag between the outgoing retailers and new tenants moving in, which will dampen how much income is generated from its existing properties.

In some cases, RioCan has been able to replace outgoing tenants with new ones who are able to pay higher rent rates. For example, the company has leased out eight former Jacob stores to retailers such as Sephora, Swarovski and Shoppers Drug Mart, and in doing so has increased the average rent per square foot on the spaces by 45 per cent to $44, from the $30 previously paid by Jacob. The Montreal-based women's clothing chain announced last fall that it was abandoning its restructuring efforts and closing all 92 of its Canadian stores.

RioCan reported Friday a fourth-quarter profit of $172 million or 54 cents per unit, down from $265 million or 86 cents per unit a year ago due to a number of factors including a smaller gain in the fair value of its property portfolio.

The fair value of its portfolio at the end of December was up $38 million, but that was less than the $134-million gain recorded in the fourth quarter of 2013.

RioCan's funds from operations — a key measure for real estate companies — rose to $130 million or 42 cents per unit in the fourth quarter of 2014, up from $124 million or 41 cents per unit a year earlier.