Struggling to make sales gains, more retailers are looking to bolster their bottom lines by milking the land beneath them.
Sears Canada Inc. plans to build a $1-billion office and condominium tower complex on 3.6 hectares of property it owns in Burnaby, B.C., part of a wider strategy among merchants to try to cash in on healthy real estate values in an increasingly competitive retail market. It joins a growing group of retailers rushing to unlock the value of their properties during a time when real estate values remain strong.
Both grocer Loblaw Cos. Ltd. and general merchandiser Canadian Tire Corp. have announced plans to spin off much of their property in real estate investment trusts (REITs) that are estimated to be worth more than $7-billion and $3.5-billion, respectively.
Toronto-based Sears has applied to the city of Burnaby for approval to redevelop the land, including one of its department stores that is tied to the Metropolis at Metrotown shopping centre.
Sears will unveil details of the project within the next few weeks, Calvin McDonald, chief executive officer at Sears Canada, said in an interview on Monday.
“We can participate in the development of that land and the value which it creates,” he said. “There are areas in the business that we believe we can do more of this. There are other properties we own that could potentially be developed in a similar fashion.”
Sears has already profited from the $170-million sale last year of three of its prime store leases back to landlord Cadillac Fairview Corp., which led to the developer selling the leases to U.S. retailer Nordstrom Inc.
“Everyone is milking their real estate,” said Jack Klaiman, president at retail real estate adviser Oberfeld Snowcap. “This is the hidden asset. … It’s a smart move.”
The real estate market has been buoyant, with REITs posting profit gains of about 8 per cent in 2012, said Neil Downey , a real estate analyst at RBC Dominion Securities. Those rates are expected to decelerate to 5 per cent this year and 4 per cent in 2014, partly because of less acquisition activity, he said.
Sears owns roughly $900-million of real estate, according to a past estimate by retail analyst Keith Howlett at Desjardins Securities. It includes more than 10 owned stores, a number of distribution centres and joint mall holdings. But the retailer hasn’t disclosed all its property holdings in public filings, including the one at Burnaby, he said.
The Burnaby site is an attractive one, in the middle of a residential community, near public transit, and at one of the most productive malls in the area, he said.
Mr. McDonald, a former Loblaw executive who arrived at Sears two years ago to spearhead its revival effort, is looking at a number of ways to bolster returns.
They include focusing on key areas of its retail business, such as appliances, mattresses and children’s goods, while unloading “non-strategic” assets, including real estate, and cutting costs.
He said the Burnaby project entails seven residential and office towers, as well as a redeveloped Sears store that would be 100,000 square feet rather than the current 140,000. Sears is working with a developer on the project, which he valued at more than $1-billion. He did not provide a forecast of how much it could raise for Sears.
“We believe participating in the development opportunity will create more value than if we pursued other opportunities with this parcel of land,” he said.
He suggested Sears isn’t a strong candidate to spin out its real estate into a REIT, as Loblaw and Canadian Tire are doing, because most of Sears’ properties are leased rather than owned. “Real estate has always been a valuable aspect of many businesses, particularly in retail,” he added. “This is the right development opportunity for us to pursue.”
Real estate is a hot commodity in retail as a growing array of foreign retailers look for sites here amid a dearth of locations. Retailers, including Nordstrom, are believed to be interested in some Sears sites, especially its flagship store at the Toronto Eaton Centre, where its head office also is located.
Sears’ latest results showed signs of a turnaround in some key categories such as clothing, although overall first-quarter sales at stores open a year or more dropped 2.6 per cent.