RioCan Real Estate Investment Trust (REIUN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Second Quarter 2026 Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary. Ms. Suess, you may begin.

Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary of RioCan. Before we begin, I am required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the Trust's underlying core performance and provides these additional measures so that investors may do the same. Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures can be found in the financial statements filed yesterday and management's discussion and analysis related thereto, as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedarplus.com. I will now turn the call over to RioCan's President and CEO, Jonathan Gitlin.

Thank you, Jennifer. Good morning, everyone, and thanks for joining us. Our second quarter results reinforce the message we've been delivering since our November 2025 Investor Day. RioCan's strategy is working. We own an irreplaceable retail portfolio in Canada's most in-demand markets. We simplified the business. We're allocating capital with discipline, and we're translating those advantages into durable growth, increased financial flexibility and long-term value creation. Progress in the quarter was broad-based across operations, leasing, capital recycling and the balance sheet. This progress is supported by our proven independent future-focused platform, the culture of excellence, continued innovation, technology advancement and prudent ESG practices. We believe RioCan is demonstrating exactly what our stakeholders are looking for, a simpler business model, greater earnings visibility and a clear path to sustained durable cash flow growth. Delivering on that path requires not only strong execution, but also strong governance and strategic oversight. And with that in mind, I'd like to extend a warm welcome to Susan McArthur, who has recently been appointed to RioCan's Board of Trustees. Susan brings deep public company governance and capital markets experience, and we look forward to benefiting from her insights as we continue executing on our strategy. I'll start now with our operating results. Retail fundamentals remain exceptionally strong. Demand for high-quality retail space continues to exceed supply across our markets, supporting high occupancy, leasing spreads and same-property NOI growth. Retail occupancy is at a record high of 98.8%. Commercial SPNOI growth was 4.3% in the quarter, representing the fourth straight quarter of 4% or higher. This continued strength is reflected in our updated SPNOI guidance. Sustained organic growth reflects the success of our leasing strategy. Leasing spreads continue to underscore strong retailer demand for RioCan's well-located, high demographic necessity-based assets. The blended leasing spread of 23.1% in the quarter was supported by new and renewal leasing spreads of 40.8% and 20.7%, respectively. Average net rent for new leasing was CAD 37.73 per square foot. This is 60% above average net rent per occupied square foot. For RioCan, the retail leasing super cycle is not a short-term phenomenon. With approximately 1 million square feet of lease maturities remaining for the balance of this year and an additional 3.7 million square feet of lease maturities in each of 2027 and 2028, we have significant mark-to-market opportunities. Approximately 30% of RioCan's portfolio leases roll through 2028, and there remains a meaningful gap between in-place rents and market rents. That embedded mark-to-market opportunity provides visibility into future growth. What makes RioCan's platform especially powerful is that we aren't simply capturing rent growth. We're also improving the quality of our income. As an independent Canadian REIT, RioCan is directly accountable to unitholders and is not influenced by an external sponsor. That gives us the flexibility to make tenant and capital decisions based on what's best for each property and the portfolio overall. Citing only one example, we were able to double the renewal rent of a grocery store in the GTA during the quarter. The only influence on this outcome was market rents. There were no extraneous considerations other than what was best for our property and best for our unitholders. We can be selective, choose the right tenants on the right terms while minimizing downtime and capital outlay. The result is a more productive portfolio, more durable cash flow and attractive risk-adjusted returns. Today's leasing spreads are tomorrow's SPNOI growth. Increasingly, they're also laying the foundation for stronger long-term cash flow generation. Leasing spreads are not simply an operating metric. They represent embedded future earnings growth that has already been substantially secured. As those rents commence and annual escalations take effect, leasing will remain an important contributor to durable ongoing growth. Our operating performance demonstrates our ability to execute the commitments we made at Investor Day. This extends beyond operations to capital allocation, where we've made significant progress, including the near completion of the RioCan Living portfolio monetization. Including transactions completed over the last 18 months and assets currently under contract, we have sold CAD 1.26 billion of RioCan Living assets. As such, we've effectively reached our CAD 1.3 billion capital repatriation target. As we've said before, this is about more than dispositions. It's about simplifying the business, enhancing financial flexibility and directing capital to opportunities where it can create the greatest long-term value for our unitholders. Capital allocation remains an important differentiator for RioCan. Our objective is straightforward: generate capital from lower growth or noncore assets, reallocate that capital toward opportunities that improve per unit value creation and do so while maintaining balance sheet strength. Whether we're repurchasing units, investing in retail intensification opportunities, enhancing existing assets or reducing leverage, the common thread is disciplined capital deployment. Many of our highest return opportunities already exist within our portfolio, and we have the talent, relationships and expertise to unlock that value efficiently. With the right team and disciplined execution, opportunities such as unlocking retail density, optimizing the merchandising mix and repositioning vacant space generate highly attractive returns with a fraction of the capital required for ground-up development. We invested CAD 44 million in retail infill and asset enhancement projects in the first half of the year, and we remain on track to deploy approximately CAD 100 million into RioCan's portfolio in 2026. About half of that capital is being directed to asset enhancements, such as the metro expansion and LCBO relocation at Yonge Eglinton Centre. The remainder is being invested in high-return retail infill projects, including the new Costco at RioCan Burloak and additional retail at RioCan's East Hills, Windfields Farm and South Edmonton Common sites. In a market where capital remains expensive, this is a meaningful advantage. It allows us to drive growth, improve property performance and preserve financial flexibility while maintaining a disciplined approach to capital outlay. Our credit metrics remain within our target ranges, and our balance sheet continues to be a source of strength. It provides optionality, resilience and the ability to act and create value when attractive opportunities become available. Looking ahead, based on the performance we've delivered so far this year, we now expect commercial same-property NOI growth to modestly exceed our original guidance range of 3.5% to 4%. As a result, we are raising our 2026 Commercial SPNOI guidance to 4% to 4.5%. Given the many factors that contribute to core FFO, we are maintaining our 2026 core FFO per unit guidance range of CAD 1.60 to CAD 1.62. I'll close with 3 points. First, retail fundamentals continue to support growth. Demand remains strong, supply remains constrained, and we continue to see significant embedded leasing upside throughout the portfolio. Second, RioCan is a simpler and more focused business. We're enhancing earnings visibility and increasing financial flexibility. Third, we remain disciplined stewards of capital. Every major decision we make is evaluated through the lens of long-term value creation. As we increase the earnings power of our business, we create value within our portfolio. This quarter's NAV growth is evidence of that. It was driven primarily by organic growth and higher cash flows rather than cap rate compression. With meaningful embedded growth remaining, we believe RioCan is well positioned to continue creating and compounding value for unitholders over the long term. We have significant opportunities ahead, and we remain confident in our ability to continue delivering durable growth and value for our unitholders. With that, I'll turn the call over to Franca.

Thank you, Jonathan, and good morning, everyone. Our second quarter results reflect the strength of our core retail, the near completion of our RioCan Living monetization strategy and disciplined capital allocation. Together, they are improving our financial flexibility and strengthening our balance sheet. I'll walk through the quarter, starting with core FFO. Core FFO in the second quarter was CAD 0.40 per unit, up 5.3% year-over-year. There were four primary drivers of these results. Commercial same-property NOI increased 4.3% year-over-year, contributing CAD 0.02 per unit. The accretive impact of unit repurchases pursuant to our NCIB also contributed approximately CAD 0.01 per unit. These factors were partially offset by higher net interest expense and lower interest income, which had a combined impact of approximately CAD 0.01 per unit. Our core FFO payout ratio was 73.8% on a trailing 12-month basis, approximately 100 basis points lower than last quarter and trending towards our long-term target of 70%. Looking at other financial results, adjusted G&A expense was 4.1% of rental revenue for the quarter and 3.7% year-to-date. We continue to expect full year adjusted G&A expense to be below 4% of rental revenue. Maintenance CapEx for the quarter was CAD 14 million and CAD 21 million year-to-date. We expect full year spend to be in line with our normalized CapEx level of CAD 55 million. The strength of our operating performance is also translating into value creation. During the second quarter, net asset value increased by CAD 0.23 per unit or CAD 68 million compared to the prior quarter. This was driven largely by CAD 52 million of net fair value gains on our investment properties, higher stabilized NOI from rent steps, rent increases on renewals and new deals and strong leasing activity across the portfolio supported the increase. This quarter's valuation gains highlight the power of compounding NOI growth from our retail core, driving higher property values and long-term NAV creation. Turning to capital recycling. During the quarter, we closed on the sale of FourFifty The Well and Bellevue Phase 1 and 2 for total gross proceeds of CAD 234 million, bringing total RCL disposition gross proceeds to approximately CAD 280 million year-to-date. Subsequent to quarter-end, we entered into two conditional deals to sell our interest in two additional RioCan Living properties for total gross proceeds of CAD 206 million. With respect to residential inventory, we have repatriated CAD 143 million of proceeds year-to-date, primarily from the collection of accounts receivable in 2026 related to prior year sales. Since the start of 2025, we have repatriated CAD 365 million, largely in line with our stated target of CAD 370 million. As a result, the balance of unsold units has been reduced to CAD 86 million or approximately 1% of our NAV. With only a de minimis residual balance remaining, this component of the RCL monetization program is now substantially complete. Our balance sheet remains strong, and our credit metrics are in line with the targets we provided at Investor Day. As we continue to execute our financing plan, we are reducing our secured debt obligations and broadening our unencumbered asset pool. Our mix of unsecured debt to total debt improved to approximately 70%, bringing this metric in line with our internal target range. As a result, our unencumbered asset pool increased to approximately CAD 9.7 billion on a proportionate share basis. During the quarter, we repaid the CAD 500 million Series A unsecured debentures and CAD 91 million of maturing mortgages using existing liquidity. We also repaid construction loans related to condo projects of approximately CAD 114 million on a proportionate share basis, including the full repayment of the Queen & Ashbridge facility. Following these repayments, only CAD 30 million of debt maturities remain for the balance of the year. With approximately CAD 700 million of available liquidity, additional proceeds expected from capital recycling and access to diverse sources of funding, we are well positioned to proactively manage our 2027 debt maturities. To conclude, the second quarter demonstrated strong operational execution, substantial completion of our RioCan Living monetization plan and disciplined approach to capital allocation. We remain focused on delivering against the strategy we outlined at Investor Day and creating long-term value for our unitholders. With that, I will turn the call back to the operator to begin the question-and-answer session.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Sam Damiani from TD Cowen.

Just I want to congratulate everyone on a good quarter, good progress on several fronts, as you alluded to, Jonathan. I guess just on the guidance raise for this year, it seems to be a result of realized leasing spreads sort of tracking ahead of what you had assumed for the year. What spreads are assumed in your three-year guidance of 3.5% plus same property? Just curious how you view the upside potential to that guidance at this point given the trends you're seeing?

Thank you for the congratulatory wishes. We are proud of the quarter. The question is answered by -- if you look at the package that we had put up at the Investor Day, the list of assumptions show that we had a 15% leasing spread assumption for the three years. So we certainly outperformed in this first year of that three-year period.

And I guess just the rest of the question was really like how you're feeling about the likelihood of being able to increase that guidance. I know you're -- I guess you're just being cautious and maybe conservative. But if trends hold, is there anything out there that would hold you back from raising the guidance?

I mean, look, there's always risk in the retail business. We feel that we've done a good job of mitigating against those risks like large tenant failures. But again, if you look at our top 30 list of tenants, there are very few, if any, weak spots at this point. The economy is always a question mark. But then again, we've also taken big strides in ensuring that we've got necessity-based tenants that are quite resilient to any economic gyrations. So the short answer is, we feel very good about our path going forward. I would also say that the backdrop is very strong. I mean we've spoken about it a number of times, but there really is a significant supply constraint, high barriers to entry, and we feel that we are well positioned to absorb whatever demand there is, as is evidenced by the fact that we're 98.8% full. So we feel very strong about the backdrop. We feel very good about our positioning within that backdrop. And so we feel that the trends right now are sustainable. But again, there will always be fluctuations. But yes, the 15% at this point is looking quite conservative.

And one more from me before I turn it back is just on the cap rates. We've seen cap rate surveys come out and call out grocery-anchored open-air shopping center cap rates coming down notably this year. And I noticed, RioCan, you haven't really changed your cap rates too, too much on a same-property basis. Just curious what's holding you back from adjusting your fair value cap rates lower at this time?

Well, we're seeing organic growth in our valuations coming largely from an increase in NOI, and that's a really good thing, just which is something that is more within our control. Cap rates, of course, are outside of our control. We are looking at some of the transactions that haven't yet closed like the First Capital transaction, which serve as indicators that the type of product we have is highly sought after and very valuable, and we'll continue to assess that and work those factors into our valuations. But for now, we're just again, waiting for some of those to finalize and close, and we'll keep on relying on the market and third-party appraisals as well as our own internal assessments as to where cap rates should be. But right now, we're comfortable with what we have in our portfolio.

Your next question comes from the line of Lorne Kalmar from Desjardins.

Congratulations on the progress made on the disposition side. It looks to be tracking pretty darn well. Just wondering on the three remaining RioCan Living assets, if you back into sort of the target and where you guys are pro forma these deals, I think you get about just over CAD 50 million of value. It seems a little light for three multi-res assets. So I just wanted to get an idea if you can give us maybe an idea of the value on those and perhaps a stabilized cap rate.

We don't have a specific valuation for those assets, but you're right to assume that they're higher than CAD 50 million. You may recall that our original range was CAD 1.3 billion to CAD 1.4 billion. We just sort of simplified that message to say CAD 1.3 billion, and we'll, of course, exceed that once the remainder of the assets are sold. But the cap rates, we've seen a very vibrant market for our RioCan Living assets based on the fact that they are new, they don't have rent control, there's limited CapEx. And so we expect that trend to continue regardless of what's going on in the broader multi-res market. And so I feel quite confident in our ability to sell those at our current IFRS valuations or hopefully in that range. But in terms of the overall number, you're right to assume that CAD 1.3 billion was our conservative estimate, and we will ultimately likely exceed that. Keep in mind, Lorne, too that, that included condo dispositions as well. And we still have about CAD 85-ish million of condo inventory that we feel confident will be sold over the short to medium term as well. So that's why we express that confidence in our ability to exceed that CAD 1.3 billion number.

Okay. I was going to say switch to the other side of the coin on the acquisition side. I know I believe it's the Heartland Center that's been rumored to be out there, and I'm sure with the FCR deal closing, there will be some opportunities there. Just wondering how you're thinking about acquisitions, if you're seeing anything interesting at this time that you guys could action?

Yes. I mean, look, acquisitions was always one of the levers we have for capital allocation. When we did our Investor Day, obviously, our cost of capital was a lot higher and acquisitions were less logical than some of the other opportunities we had like NCIB, paying down debt and building out pads and strips. But as our cost of capital decreases and these opportunities come into view, RioCan feels well positioned to be able to take some of the assets that may become available, add the value that our platform can create to them and really see growth drivers going forward. But again, we always have to weigh that against our other -- the other possibilities for capital allocation, which thankfully, we have as well in our purview.

Okay. And then just one kind of ticky-tacky one here. I think there was some aborted deal costs in the quarter. Just wondering if you could shed some light on what that was related to.

Some normal course deals that we had started down the road and then for a few different reasons didn't work out for the benefit of our unitholders. So those deals didn't go through. But again, they were de minimis in the scheme of things. And I think as an active REIT, we're always pursuing very good and logical transactions. And as you know, Lorne, sometimes they just don't work out. But thankfully, most of the time they do.

Your next question comes from the line of Pammi Bir from RBC Capital Markets.

I just want to come back to the FFO guidance and increase in the same-property NOI guidance. So just can you maybe reconcile maybe the rationale for not increasing the FFO guidance range? Or maybe what were some of the offsetting factors that have impacted that?

Thanks, Pammi. So the outperformance in SPNOI is -- it's definitely showing up in core FFO, but our CAD 1.60 to CAD 1.62 core FFO guidance range, it was designed to accommodate a range of outcomes across the underlying drivers, including same-property NOI. The timing of capital recycling activities, interest expense and other items below NOI. So there's a lot of factors that go into core FFO. We remain confident that the existing core FFO guidance range remains appropriate. And we're going to wait and see what happens through the course of the year just to ensure that, that is the case. But we just felt that SPNOI, the increase in that guidance is only one factor of many. So we feel very confident in keeping the core FFO guidance intact.

Okay. Got it. Just maybe switching to just, again, the fundamentals. Just given the strength of the demand that you are seeing, has your thinking evolved at all in terms of pushing for some higher embedded annual rent steps in the leases or on new leasing? Or any color you can share there?

Well, it's really embedded within our leasing team and our operations team to always push for the highest possible going-in rents, the highest annual bumps as well as the best call them, nonfinancial terms. This leasing team is -- I will say it hyperbolically, but the best in Canada and possibly the best in North America. And they understand the environment and what we are offering and we will push for the best terms always. Now the backdrop obviously serves us well right now. And in recognition of that, we continue to see embedded growth in these leases increase over time, and I think that's a very good thing. But you can rest assured that our team is always looking at ways to improve the overall spectrum of matters that come out of a lease, including annual bumps.

Okay. Coming back to the unsold condo inventory, I think it was CAD 86 million that Franca cited. Any consideration at this point as to maybe selling some of that to bulk buyers that are out there? I think you mentioned you do expect to eventually move some of it, but curious if you can shed any light on the process there.

I would say the answer to that, Pammi, is that we're considering all options for that inventory. It's certainly something that would be better served in someone else's hands. And so we are looking at -- we are looking at bulk purchasers. We're looking at also just selling them individually with the current sales program. So there's a number of different outcomes possible, but bulk sellers or bulk buyers, I should say, is certainly one of those opportunities, and we have been in touch with some of those organizations. And thankfully, it's quite a vibrant business at this point. And again, just going back to the fact that it's CAD 86 million. And so it's really -- it's de minimis in the scheme of things. It is now effectively wound down. So the tail end of it, it would benefit us to sell. But either way, it doesn't have a significant impact on RioCan's performance going forward.

Okay. And then just last one. I think the total value for the proportionate residential inventory sits at about CAD 480 million. Has that value been marked down over time? And just curious if you're still comfortable with that figure at this point?