RioCan REIT’s Q1 FFO Growth Highlights Resilience Amid Challenges

RioCan Real Estate Investment Trust (TSX: RIO.UN) reported a robust 8.9% year-over-year increase in its diluted Funds from Operations (FFO) per unit for the first quarter of 2025, rising to $0.49 from $0.45 in Q1 2024. The results underscore the REIT’s operational resilience and progress in monetizing its residential portfolio, even as it grapples with headwinds from rising interest rates and a $208.8 million valuation loss linked to its troubled joint venture with Hudson’s Bay Company (HBC).

Key Drivers of FFO Growth

RioCan’s performance was propelled by three primary factors:
1. Strong Leasing and Occupancy: Blended leasing spreads rose to 17.5% in Q1 2025 from 14.0% in Q1 2024, reflecting higher rental income from renewed leases. Retail occupancy hit 98.7%, up from 97.9% a year earlier, with committed occupancy reaching 98.0%.
2. Residential Gains: Residential inventory gains totaled $22.2 million, driven by condominium sales and development cost savings. The RioCan Living portfolio, which includes rental apartments and condos, contributed $7.5 million in net operating income (NOI), a 17.7% year-over-year increase.
3. Strategic Monetization: The REIT sold four additional residential assets since late 2024, aligning with its plan to capitalize on its mixed-use properties.

Offsetting Challenges

Despite these gains, RioCan’s net loss per unit widened to $(0.28) from $0.43 net income in Q1 2024, primarily due to:
- A $208.8 million valuation loss tied to its RC-HBC Joint Venture. This stemmed from HBC’s CCAA (Companies’ Creditors Arrangement Act) filing, which triggered write-downs on shared assets and reduced the joint venture’s projected cash flows.
- Higher interest expenses, which rose amid rising debt servicing costs.

Balance Sheet and Liquidity

RioCan maintained a solid capital structure, with an Adjusted Debt to Adjusted EBITDA ratio of 8.96x—within its target range of 8.0x–9.0x. Liquidity stood at $1.4 billion, supported by a $1.1 billion revolving credit facility. However, its net book value per unit dipped to $24.62 from $25.16 at year-end 2024, largely due to the HBC-related losses.

Outlook and Guidance

The REIT revised its 2025 FFO guidance downward to a range of $1.85–$1.88 per unit (from $1.89–$1.92 previously), citing expected losses from the RC-HBC JV. However, it reaffirmed its 55%–65% FFO payout ratio, with distributions increasing to $0.0965 per unit—a 4.3% rise from prior periods. Management emphasized its focus on capital preservation and executing its residential monetization strategy, including the sale of four more properties in 2025.

Conclusion

RioCan’s Q1 results reflect a REIT that is both resilient and opportunistic. While the HBC-related losses and rising interest expenses pose near-term risks, the underlying fundamentals—strong occupancy, robust leasing spreads, and progress in residential sales—suggest long-term stability. The revised FFO guidance and disciplined capital allocation aim to balance growth with prudence.

Investors should note that RioCan’s valuation remains attractive, with a trailing 12-month P/FFO of 10.2x—well below its five-year average of 11.8x—and a dividend yield of 4.6%. However, the HBC JV’s uncertain path and broader macroeconomic risks (e.g., interest rates, retail sector volatility) warrant caution.

In sum, RioCan’s Q1 performance highlights its ability to navigate challenges while capitalizing on its core strengths. For investors seeking a stable, dividend-paying REIT with a focus on high-density urban assets, RioCan remains a compelling, if cautiously optimistic, play.