RioCan REIT can absorb Bed Bath & Beyond Canada ‘tenant failures:’ CEO

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Bed Bath and Beyond Canada and BuyBuy Baby locations will be permanently closing their doors this year

RioCan boss Jonathan Gitlin. RioCan boss Jonathan Gitlin. Photo by Peter J Thompson/National Post files

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The chief executive of Canada’s largest real estate investment trust says the REIT is well-positioned to survive the closure of Bed Bath and Beyond Canada’s stores and said on a conference call this week that he is prepared for such an eventuality.

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“The combination of high deductibles, rental spreads and rising average net rent allows us to absorb tenant defaults like those recently announced by Bed Bath and Beyond,” RioCan CEO Jonathan Gitlin told analysts about the results of the REIT for the fourth quarter on February 27, 16.

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The Bed Bath and Beyond Canada and BuyBuy Baby locations will permanently close their doors this year after the company was granted an initial bankruptcy protection order by a court last week.

The Canadian division of US chain Bed Bath and Beyond will close 54 Bed Bath and Beyond stores and 11 BuyBuy Baby stores – 13 of which are RioCan tenants.

“Let me tell you that this outcome was very well predicted and we have taken steps to mitigate and address it,” Gitlin said on the conference call. “I also tell you that this was taken into account when developing our forecast for 2023.”

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According to the REIT’s annual report, Bed Bath and Beyond was the 19th largest tenant, accounting for 0.08 percent of annualized gross contractual rent. It occupied an area of ​​300,000 square meters.

In a letter to shareholders in the third quarter, Gitlin warned that economic waters were getting choppy.

“A recessionary environment often leads to tenant weakness and increases the risk of default,” he wrote, but assured shareholders that RioCan’s “defensive portfolio” would isolate the REIT. “Even if there are certain tenants outside of our strong and stable list that are in need, we firmly believe that there is a shortage of quality retail in Canada, particularly where we operate.”

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The closures come after what Gitlin said was a strong end to a year marked by significant challenges and disruptions, including pandemic-related restrictions earlier in the year, extreme inflation and rate hikes throughout the year.

“At our investor day in February last year, we presented our strategic roadmap with financial targets for five years. We are setting ambitious goals and are pleased to report that despite ongoing economic turmoil, our performance in 2022 is on track to achieve our goals,” he said.

The REIT recorded five million square feet of new and renewed leases in the fourth quarter, a committed retail occupancy rate of 97.9 percent, and a retention rate of 91.5 percent.

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RioCan also hit a new tenant retention high of 93.5 percent, “reflecting strong tenant demand for quality, well-located retail space that is in short supply,” the report said.

Rising rents also provide a cushion against “tenant defaults” like Bed Bath and Beyond Canada and could be a tailwind for the commercial real estate market in general.

“Rent per square foot for new leases in the fourth quarter was $24.10 above the average net rent for the portfolio of just under $21,” Gitlin said on the call.

One topic that was largely absent from the conference call’s discussion was e-commerce company Shopify, which would become the primary tenant of The Well, a large mixed-use development in downtown Toronto being developed by RioCan and Allied Properties, but in mid-December it was announced that she would no longer fill the office.

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Since then, Shopify’s 348,103-square-foot space, which spans seven floors, has hit the sublease market.

When asked on the conference call whether the Well’s retail leases had any sort of co-lease clause or whether the office leases had an out, Gitlin replied, “negative.”

Co-rental clauses can make the rental agreement dependent on the continued presence of another main tenant.

Gitlin said the well’s completion would make 2023 a success.

Meanwhile, RioCan’s balance sheet remains strong. The REIT ended the year with $1.5 billion in cash and cash equivalents and an unencumbered asset pool of $8.3 billion.

RioCan’s board of directors has approved a 6 percent increase in monthly distributions to shareholders from $0.085 to $0.09 per unit, bringing RioCan’s annual distribution to $1.08 per unit.

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