HBC's demise has hurt RioCan. It could help, too

Globe and Mail

09-05-2025

The case for investing in Canadian shopping centres has a lot of strikes against it: consumer confidence is in the dumps, economic activity is declining and the unemployment rate is up.
If that's not enough to scare off investors, the failure of Hudson's Bay Co. – which filed for creditor protection in March and will leave big holes in malls across the country – should do it.
No wonder mall owner RioCan Real Estate Investment Trust REI-UN-T is in another slump. The unit price has declined 16 per cent since the end of February, amid questions about rising vacancies and deteriorating financial performance.
Full disclosure: As a unitholder, I've been caught in this latest tumble. But I'm not giving up.
My reasoning? I figure that most of the glum economic news is priced into the units, while an economic rebound – perhaps fuelled by saner trade policies in Washington or a resilient Canadian economy – is not.
As well, I figure that HBC's demise might not be such a bad thing for landlords who want dynamic retailers that can attract shoppers looking for the sort of experiences they can't find online. HBC did not fit that description.
Admittedly, this optimistic outlook appears a bit weak right now.
RioCan announced a flurry of disappointing news with its first-quarter financial results this week.
It took a $209-million writedown associated with a real estate joint venture with HBC. It lowered its profit targets for the year. And it postponed a spring investor day, normally a time to boast about upbeat developments, amid forecasting challenges.
'It's been a tough quarter,' Jonathan Gitlin, RioCan's chief executive officer, said during a call with analysts.
The unit price, which had risen above $20 in February – before U.S. President Donald Trump's bizarre trade policies had slaughtered consumer confidence or renewed concerns about inflation – said bye-bye to $17 on Thursday.
It is now within earshot of a four-year low.
The downturn is demoralizing for long-term investors who had bet on resurgent retail activity after the end of pandemic restrictions (guilty).
And it's a setback for anyone who had expected REITs to shine after the Bank of Canada began to slash interest rates, raising the appeal of dividend-generating investments (guilty again).
But look at it this way: RioCan's monthly payout, which is now yielding 6.8 per cent, is again appealing to our – well, my – greedy instincts.
The payout doesn't look particularly risky.
RioCan slashed its distribution by a third in 2021 after pandemic restrictions shuttered stores, demonstrating that it is capable of making a trim when trouble arises.
Since then, though, it has raised the payout each year since 2022, by a combined total of 20.6 per cent.
The payout remains conservative, at 62 per cent of funds from operations, or FFO, a measure of profits. That's down from a payout ratio of 77.9 per cent in the first quarter of 2019, and implies that RioCan has a financial buffer.
Mr. Gitlin did not address potential growth of the monthly distribution, but he did suggest that the current payout is safe.
'We have a powerful and resilient business that can absorb these types of curveballs and ensure the sustainability of RioCan's distribution,' he said.
His decision to sell RioCan's attractive residential rental assets within the next two years will help pay down debt and buy back units. The sale could contribute $1-billion to the REIT's financial flexibility.
The demise of HBC adds some uncertainty, but investors shouldn't lose sleep. The department store chain contributed just 2.5 per cent to RioCan's FFO.
And as analysts have pointed out in recent weeks, malls have been through this before: After Sears and Target departed, they were soon replaced by tenants that were more relevant to shoppers, generated better foot traffic and paid higher rents.
'The loss of iconic Canadian retailer HBC has almost myopically focused investor attention on the potential downside,' Dean Wilkinson, an analyst at CIBC Capital Markets, said in a note this week.
He thinks it is unlikely the empty space will remain vacant, though.
If new tenants deliver a vibrancy to malls that was lacking under HBC, then RioCan's beaten-up unit price looks like a golden opportunity for investors who aren't put off by concerns of a recession and erratic U.S. leadership.
A shopping mall REIT isn't an obvious choice right now. And yeah, there's risk. But that's what makes RioCan worth a look.