TD commentsRIOCAN REIT (BUY-rated, $21.00 Target Price)
FFO/AFFO:We forecast FFO/unit of $0.41 or $0.39 excluding condo profits. For AFFO/unit (excluding condo profits), we forecast $0.33, representing an anomalous - 14% y/y decline (we forecast largely flat AFFO in H2/24) due to the confluence of the Q1/24 temporary NOI step-down and 25% higher y/y interest expense (expected to revert to single-digit y/y increases by Q4/24).
Occupancy: We are looking for a rebound in in-place occupancy after being -110bps to 96.0% in Q1/24 (by early May, it had already bounced back +30bps) largely due to 10 new vacancies caused by the failures of Bad Boy and Rooms+Spaces. Committed occupancy was down only -30bps in Q1/24, in part because six of those spaces had already been re-leased (including to grocers) at significantly higher rents.
SPNOI: We also look for SPNOI to get back on track after skidding to 0.5% (adjusted) in Q1/24 due to the same reasons (FY guidance: +3%).
Condo Pipeline: The $700mm pipeline has received more attention, given the sharp fall-off in new project pre-sales. Our focus is on just one building in Oshawa (U.C. Tower 3), which has below-average pre-sales and represents 18% of total projected condo revenue at Q1/24.Sustainably Strong Operating Fundamentals (figures 2 & 3).
Although two of the larger Retail REITs (RioCan & SmartCentres) saw noticeable occupancy declines in Q1/24, we see a low likelihood of a repeat. Occupancy rates for the remaining peers in Q1/24 were at/ near historical highs. Rent spreads on new and renewal leasing are also at/near historical highs. Key drivers supporting these results include the demand-supply imbalance that has materialized in recent years, given Canada's strong population growth (+8% since prepandemic) has been paired with very little construction of new retail space (market rents in most cases are still not high enough to induce development).The result has been a 6% decline in Canada's per-capita retail space since 2017 (Figure 1).
Also, the shift toward more high-density housing and less single-family detached homes is increasing the number of addressable households in many shopping centre trade areas across the country. Finally, store closures over the past decade by retailers such as Target, Sears, and a few other national chains (in addition to the turnover of some weaker retailers during the pandemic) have paved the way for rapid growth of stronger retailers, which we believe offer far greater stability (e.g., Winners, Marshalls, HomeSense, and Dollarama). All these, we believe, mean the tenant bases today of most shopping centres are the strongest in several years. We reiterate our expectation of recurring SPNOI growth in the 2-3% range with higher stability vs. prior years.