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Edward Sonshine, Chief Executive Officer, of RioCan REIT, is photographed on the fifth floor patio at the company's Toronto head office on March 19, 2019.

Fred Lum/The Globe and Mail

Some CEOs just can’t let go and, by his own admission, Ed Sonshine is firmly in that camp.

The 72-year-old is sitting beside me in the back seat of a black Chevy Suburban, in the middle of winter, spelling out a transformation vision as we crawl through the parking lot of a suburban strip mall.

Everything around us – the endless asphalt, the industrial-looking storefronts – earned him accolades two decades ago. As the founder and chief executive of RioCan REIT, he built power centres such as this one in Vaughan, Ont. across the country. By 2005, RioCan had an army of concrete fortresses housing retailers such as HomeSense and Blacks Photography, all protecting courtyards of cars.

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“They don’t look great,” Mr. Sonshine concedes as we roll past a Dollarama, “but they’re cheap to build.”

The plazas could make urban planners weep, but Canadians adored them. In turn, investors did, too.

As one of the first real-estate investment trusts to list on the Toronto Stock Exchange, RioCan offered ordinary stock pickers the chance to dabble in commercial properties. Cash-strapped retirees were particularly intrigued by the promise of reliable, ever-increasing monthly distributions – especially after interest rates plummeted in the wake of the 2008 financial crisis. From its debut on the TSX in 1994 to its peak value in 2015, RioCan returned a total of 2,408 per cent, including distributions.

All of that can feel like it was eons ago. What has transpired in the past four years has been a revolution in retail real estate.

To start, in early 2015 Target Corp. cut and ran from Canada – and RioCan was its largest landlord. The REIT had to scramble to fill all that vacant space. In the years since, more big-box retailers such as Toys "R" Us have flirted with bankruptcy, creating dismal optics for landlords. And while Amazon and e-commerce have been a threat for years, lately they’ve gotten everyone spooked.

Investors are getting skittish about anything that touches traditional retail. Today the hot money is flowing to rival REITs that own apartment buildings and industrial warehouses, creating an existential crisis for RioCan. Since peaking in 2015, its units have shed 13 per cent. Canadian Apartment Properties REIT, the largest of its kind in Canada, has soared 77 per cent over the same time frame. RioCan has also vastly underperformed the broad Canadian REIT universe.

To retool, Mr. Sonshine is pivoting away from retail – hence our property tour. The parking lot we’re driving through is slated for redevelopment, to be replaced by offices and rental apartment units – maybe even a few stores. Similar revamps will be rolled out across RioCan properties in six urban markets.

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This much has been told to investors. What hasn’t been clear is how Mr. Sonshine really feels about it all. He puts on a brave face when selling the story, but so much change, so late in his career, has to be disorienting.

After our tour, we retreat to his cavernous office in midtown Toronto, where he drops his guard.

Is it frustrating to have investors lose faith, no matter what you do?


He is adamant, though, that the crisis is overblown. RioCan’s retail properties, which make up the bulk of its portfolio, are essentially full, with a tenant occupancy rate of 97.2 per cent “There won’t be a retail apocalypse,” Mr. Sonshine says. E-commerce penetration as a percentage of total retail sales is still in the single digits in Canada. “Do you really think all of retail is going to go away over the next three years?”

The trouble is that investors fall for stories, and right now retail isn’t a good one to tell. In environments like this one, Mr. Sonshine admits, “Charles Dickens can’t sell stocks.”

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So RioCan is evolving. But because it’s a giant with 35 million square feet of retail space, it can’t pivot as easily as a startup would. And the new strategy to build properties that complement the retail portfolio alters the very essence of the REIT’s investment thesis.

In the early 1990s a handful of trusts, including RioCan, emerged out of the ashes of Canada’s real-estate disaster. At the time, a number of big players, from Olympia & York to Bramalea to Cadillac Fairview, were almost – or went – broke. REITs helped recapitalize the industry, but to do so, they promised stability to their retail investors. These trusts would acquire income-producing properties and pay out most of their cash flow as distributions. RioCan still hands over a major chunk of its operating funds directly to its shareholders.

What Mr. Sonshine envisions now is a different model. Real-estate development is a riskier business, because approval and construction timelines can drag on forever, and because cost overruns are rampant. He acknowledges all of this. But one of the benefits of being an old man, he says, is that he lived through the last real-estate crisis, so he knows what traps to avoid.

“You see this line?” he asks, pointing to a wrinkle on his face. “1990.” He points to another, then another, then another. “’91. ’92. ‘93.” RioCan’s younger leaders, he says, “think I’m conservative.” The reality: “It’s easy to be a cowboy in this business.” But playing fast and loose with debt eventually comes back to haunt you.

As RioCan retools, he abides by some fundamental principles. No tenant accounts for more than 5 per cent of the REIT’s revenue and no more than 15 per cent of its assets can be development projects at any one time. (Once the apartment and office projects are finished, they become income-producing properties.)

And instead of loading the balance sheet with debt to fund the cash-intensive buildout, Mr. Sonshine has found other ways to pay for it. In the past three years, he sold the REIT’s U.S. portfolio for almost a $1-billion profit – owing to his brilliant timing of the U.S. economic recovery – and in Canada he’s been “asset recycling.” That’s a fancy word for selling about $2-billion worth of properties in second-tier markets, to focus on what is known as VECTOM – the six key urban markets of Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal.

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This pivot is not for the faint of heart. Mr. Sonshine could have chosen the exit strategy of his long-standing rival, Stephen Johnson, who sold Canadian REIT last year to Choice Properties REIT, which is controlled by the Weston family. The combination created Canada’s largest REIT, stealing the title that RioCan had held.

Or he could have bought a rival, something that had been rumoured for some time. “Could I go out and buy CAP REIT? I thought about it,” he says.

Instead, he is building from scratch. A little while back, an analyst on a conference call asked him why he’s redeveloping so many properties, instead of acquiring. “I said: ‘With respect, you can put lipstick on a pig, but it’s still a pig,’ ” Mr. Sonshine recalls. (He wasn’t calling out any one property owner in particular, but CAP REIT’s former CEO, the late Tom Schwartz, gave him an earful for that one. “He called me up to yell at me.”)

“People, particularly young people, they like new,” Mr. Sonshine says. In old buildings, there are old fridges and old countertops. “When you’ve got 50 years of cooking in a building, the walls smell. And you can’t replace anything, because then you have to kick people out."

RioCan’s research also showed that young people in urban markets love two amenities in particular: spiffy lounges, and a concierge and cold storage for their deliveries. Give them that and they’ll pay a premium in rent.

To complement this buildout, RioCan has been changing its retail tenant mix. “All the shopping centres we used to own had a video store,” Mr. Sonshine says. Today, fitness clubs are all the rage – “It’s become a social thing” – and nail salons and restaurants are now lucrative tenants. Across the industry, landlords gush about offering “experiences.”

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Analysts are appreciative, even if investors aren’t. “Not only are RioCan's remaining properties more resilient in nature, the proceeds from the sale of secondary assets will help fund (at least partially) the REIT's extensive development pipeline, which will ostensibly help compound value over time,” CIBC World Markets analyst Dean Wilkinson wrote in a recent note to clients.

But while the strategy is sound, there is a cloud hanging over it all. Who will oversee this transformation?

When the subject is broached, Mr. Sonshine interjects. He knows – he has heard the whispers too. “How does this old guy stay there so long?” he says.

“It creates this image that the guy just can’t let go,” I say.

“Like every rumour, there’s some truth to it,” he says, chuckling.

The reality is more nuanced. Mr. Sonshine says he tried to groom two successors, but they didn’t pan out. “You know, some guys just aren’t cut out to be leaders,” he says.

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He admits, as well, that his own hubris has played a role. “I also think I’ve done a great job,” he says. “I’m probably not the poster child for humility.” Over 2½ hours, I don’t think I’ve heard him say “we” once – instead, it’s “my shareholders,” “my decisions.”

“Being around this long, you build up relationships, and they can’t be transferred that easily,” he adds. “Guys like Jon Love [the CEO of KingSett] are happy to do business with me, because you can do business with a handshake.”

And yet, he knows, he knows. He’s 72. He can’t even have an RRSP anymore. “It’s turning into a RRIF – I’m that old,” he jokes.

A calm has come over him. “The truth is,” Mr. Sonshine confesses, “I don’t want to do this any more. For a guy my age, it’s too much work.

“I’m not quitting tomorrow,” but there’s a plan. He’s grooming another successor, Jonathan Gitlin, RioCan’s chief operating officer. “It’s his to lose. And I’ve told him that.”

Whether he’ll ever fully walk away is anyone’s guess. RioCan was his baby, and he feels a kinship with the shareholders – even the ones who voice their opinions when they run into him at the Oakdale Golf & Country Club.

“I feel an obligation to them,” Mr. Sonshine says. “I know it sounds corny.”

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