People are learning the hard way, again, that income and return of principal from equities and equity-based funds are not contractually prescribed, as with a bond, but rather at the discretion of management and market pricing.

In challenging financial conditions, management often cuts payouts to shore up capital.  This is the right thing to do in terms of the company’s solvency, but it hurts those holding the equities.  Not only do the income payouts drop, but the share prices typically plunge in response, delivering a double whammy for the majority who cannot afford to lose money.

Real estate funds are in the midst of a liquidity shock that is unlikely to end quickly.  The overconfidence and asset inflation in condo and commercial space over the last decade, particularly in Canada, has been one for the boom-bust history books.  There is much inventory to work down, repurpose and demolish as bricks and mortar demand is reduced by virtual commerce and work outside downtown centers for many.  Property prices and rents have more downside before more stable investment metrics have been restored.

Riocan is the latest widely held real estate investment trust (REIT) to slash its payout by 33% this week, in addition, the shares have lost 37% of their value since January, and are now -23% over the past 5 years.  Those who thought they were getting paid more in Riocan than in bonds over this period have now lost all of the apparent advantage and more.

Riocan is the second-largest holding in Canada’s Real Estate Investment Trust Index (XRE) which is currently down about 22% since January.  Riocan will not be the last company in the space to cut payouts.  Opportunities are coming for those who wait to buy.

It was irresponsible of Riocan CEO Sonshine to confidently assure shareholders in May that cuts were not in the cards.  This BNN clip tells the tale and reminds us of why doing our own asset allocation assessments is critical rather than relying on assurances from the sales force.

RioCan Real Estate Investment Trust is slashing its payout to investors by 33 per cent as COVID-19 wreaks havoc on the real estate industry. The move comes after RioCan’s CEO pledged to preserve the distribution earlier this year.  Here is a direct video link.