Canada’s No. 2 REIT Says No to US Expansion; CEO Sees More Failing American Retailers
RioCan Signals to Global Investors His Bet for the Best Canadian Markets
BY GARRY MARR (via CoStar Group)
RioCan is developing the Litho in Toronto as the company expands into apartments. Image: RioCan.
The United States, a global economic powerhouse, holds no appeal at the moment for Canada’s second-largest real estate investment trust. Blame U.S. department stores.
Canada’s No. 2 REIT by stock market value has no plans to reenter its close trading partner, with Ed Sonshine, the chief executive of RioCan, telling shareholders at the REIT’s annual general meeting that investment will be heavily focused on Toronto in the future.
“We made a lot of money down there in our five or six years,” he said in response to a question about further investments south of the border, where RioCan sold a portfolio of 49 retail properties located in the northeastern United States and Texas for about $2.6 billion to Blackstone Real Estate Partners VIII in 2016. RioCan made about $1 billion on its U.S. investment over that time, much of it based on currency gains.
“It’s behind us, and we are completely not in the United States and have no plans to go back. That retail market, as we suspected at the time when we made the decision to exit, has been really difficult. I see no reason to go back. The market is already tough, and they haven’t dealt with Sears yet. They have many more department stores” that could go bankrupt.
RioCan has a history of willingness to walk away from the U.S. market. It first attempted a foray into the United States with a proposed billion-dollar joint venture deal with Michigan-based Ramco-Gershenson Properties Trust in 2006, but ended up dropping the transaction before it closed.
He also signaled to real estate investors around the world what his firm’s research says are Canada’s best property markets for his company.
The 72-year-old Sonshine, who has agreed to stay on as chief executive until his retirement on March 31, 2021, subject to a potential one-year extension, said the REIT is getting closer to its goal of being primarily focused on Canada’s six largest cities: Vancouver, Edmonton, Toronto, Calgary, Ottawa and Montreal, also referred to as VETCOM.
It announced almost two years ago a $2 billion disposition program in secondary markets and has reached about 75% of that target, though the REIT told shareholders the process is slowing a bit.
Still, the REIT’s net operating income from the big six – or VETCOM – cities has jumped to 87.5% in the first quarter of 2019, up from 75% three years ago. The greater Toronto area now accounts for almost 48% of NOI, up from 41% three years ago.
Sonshine, in an interview with CoStar News, said the REIT is actively looking at ways to diversify its retail holdings. “We’ve looked at hotels, we’ve looked at senior citizens [homes] who like to be next to malls. We are looking at medical uses and other specialized uses,” said Sonshine, who told shareholders his REIT expects to build an apartment rental portfolio of up to 10,000 units.
But, he added, “retail is not going away.”
Instead, RioCan has focused on development sites that were once intended for retail use that are now being repurposed.
One example is the 100 acres the REIT bought just east of Toronto in Oshawa, Ontario, for a 1 million-square-foot power centre, before the recession and continued layoffs started happening at the General Motors plant in the area.
“For the last 10 years, it’s been killing me,” said Sonshine, about the site which has since been converted to profitable housing developments that RioCan has partnered on.