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RioCan primed to cash in on cannabis ‘gold rush’ amid real estate portfolio shift

RioCan, one of Canada’s largest retail landlords, is aiming to benefit from what its top executive calls the marijuana “gold rush.”

Edward Sonshine, CEO of RioCan Real Estate Investment Trust, said on Wednesday that the company is well positioned ahead of the legalization of recreational cannabis on Oct. 17.

RioCan already has about a dozen cannabis leases in Alberta and two with the Ontario government’s Ontario Cannabis Store. The cannabis retail landscape will vary from province to province.

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Marijuana plants grow at MedReleaf in Markham, Ont., on June 21, 2018. Riocan, one of Canada's largest retail landlords, is positioning itself to reap the benefits of cannabis's looming legalization in Canada. The company already holds about a dozen cannabis leases in Alberta and two with the Ontario government's Ontario Cannabis Store.

WARREN TODA/The Canadian Press

Including cannabis stores in its mix of retailers is one way RioCan is transforming its portfolio. The trust has been divesting dozens of shopping centres across the country to focus on Canada’s six largest real-estate markets: Toronto, Ottawa, Vancouver, Montreal, Edmonton and Calgary.

“We own some of the best real estate,” Mr. Sonshine said.

“The gold rush will be, we will have lots of people wanting the same piece of real estate.”

British Columbia favours a public-private hybrid system, while Alberta has adopted a private model. Quebec will rely on a public model and Ontario is planning to open up the market to private cannabis dispensers.

Mr. Sonshine believes RioCan will reap the rewards regardless of the business model.

“There is no question that whatever rules finally come down, they are not going to want four cannabis stores at one corner,” he said.

Mr. Sonshine expects cannabis retailers will account for a relatively small part of RioCan’s total space compared with major tenants such as grocers. But the cannabis rent will be at premium rates. “It is not a big amount of space. But it is a good contributor,” Mr. Sonshine said earlier on an analyst call to discuss RioCan’s quarterly results. Funds from operations, a measure of cash flow, was 46 cents a unit in the second quarter, an increase of 2.5 per cent over the year-earlier period, even though RioCan sold assets.

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It will soon have less than 200 properties compared with more than 300 shopping centres in 2017. As of the end of June, RioCan said it had sold or struck deals to divest nearly 60 per cent of its planned sales. Once the secondary-shopping properties are sold, the trust expects to pull in more than 90 per cent of its rental revenue from its six major markets.

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In addition to focusing on Canada’s biggest cities, RioCan is expanding outside of retail and into offices, apartments and large mixed-use complexes that have all three types of commercial real estate. It has nearly 70 projects under development, more than half of which have zoning approvals. That gives RioCan an advantage over other developers leaping into the hot apartment space in Toronto and Vancouver.

The trust eventually expects to pull in more than 10 per cent of its income from apartments. Like other mall owners, RioCan’s market value has suffered from the shakeup in the retail industry that has seen traditional stores such as department chain Sears Canada going bust.

Although RioCan’s retail space is more than 95 per cent occupied, the trust is trading at 2006 levels of about $25 a unit on the Toronto Stock Exchange. Mr. Sonshine said he thinks RioCan’s unit price should be closer to $30 and he said the trust will consider other ways to “surface value” if investors do not push up the stock price.

When asked if options include spinning out RioCan’s various businesses, such as its new apartment unit known as RioCan Living, Mr. Sonshine said he did not want to speculate. “I have spent a lot of time thinking of what the possibilities are. Until you put numbers to things, you really don’t know and that is why I don’t want to speculate,” he said.

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