TORONTO — One of the Greater Toronto Area's most prominent landlords says it is keeping a close eye on spaces occupied by small businesses, whose owners it foresees being hardest hit by the high interest rate environment.
Jonathan Gitlin, the chief executive of RioCan Real Estate Investment Trust, said he expects some small businesses to "suffer and close" as they grapple with current market conditions.
"I have to think that if you're a smaller restaurant that is not significantly capitalized or a smaller gym or some franchises of various outfits, your balance sheet is going to be squeezed, if you've taken on debt," he said on a Wednesday call with analysts.
"I think we will see some fallout from those."
Gitlin's comments come as businesses are continuing to plot a rebound from the COVID-19 pandemic, which forced many of them to temporarily close and caused others to grapple with lower sales and patronage.
When the health crisis quelled and doors reopened, interest in dining out and entertainment was high, but elevated inflation and interest rates have caused many to be more careful with their spending.
RioCan has been insulated from much of the turmoil because it has long focused on working with tenants that are considered more resilient and are even in expansion mode now.
"We focus on tenants that are strong and stable, which means that they have relevant uses and also good balance sheets," said Gitlin.
"And we're really seeing growth in the vast majority of the categories that make up that larger category (like) grocery, pharma, dollar stores, liquor stores."
He added that RioCan has limited exposure to businesses that are more likely to falter in a higher interest rate environment.
"We're not in a position where we have significant red flags up across our portfolio," he said.
At the end of June, when RioCan's latest quarter ended, the company had a committed occupancy rate of 97.4 per cent, up from 97.2 per cent a year ago.
Its second-quarter net income, which the company revealed Wednesday, was almost 43 per cent higher this year than last. It amounted to $112 million, up from $78.5 million a year ago.
RioCan attributed the large increase to lower fair value losses on investment properties in the latest quarter.
Revenue for the quarter was $276 million, down from $308.4 million a year earlier.
Funds from operations totalled $131.6 million, or 44 cents per diluted unit, a slight decrease from $131.7 million a year ago, or 43 cents per diluted unit.
RioCan blamed the small drop in funds from operations per unit on lower residential inventory gains and lower lease cancellation fees.
Meanwhile, the company said it had been working on reversing some of its pandemic-related provisions by seeking outstanding balances from tenants that struggled to pay rent during COVID-19.
RioCan has about $10 million in provisions related to such balances left, said chief operating officer John Ballantyne.
"While we do not expect to collect on all of it, our team will continue to work through this over the balance of the year."
This report by The Canadian Press was first published Aug. 2, 2023.
Companies in this story: (TSX:REI.UN)
Tara Deschamps, The Canadian Press
