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Riocan CEO Edward Sonshine speaks to shareholders during the RioCan annual general meeting held in Toronto, Ont. June 7/2011.Kevin Van Paassen/The Globe and Mail

Wasting little time, RioCan Real Estate Investment Trust has proven its willingness to trade American assets for a bigger Canadian portfolio – despite the weaker economy on this side of the border.

In late July RioCan stunned investors with news of a strategic review for its American division. Since crossing the border in 2009 the REIT has amassed 10 million square feet of space, and the American portfolio now amounts to 19 per cent of its total investment property assets. Because the expansion was so robust, many people thought the U.S. would be RioCan's growth centre for many years.

Adding to the confusion, the American economy is the bright spot globally, while Canada's is suffering from the energy market's collapse. Commercial real estate owners here are also reeling from Target's sudden withdrawal earlier this year, creating scores of vacant space.

But RioCan chief executive officer Edward Sonshine said in July he wasn't too worried about his home country's prospects. "We believe in Canada. And sure it's soft right now, but who knows what it will be in three years," he explained.

Staying true to his word, RioCan announced plans Thursday to unwind its Canadian joint venture with New York-based Kimco Realty Corp. and take full control of 22 of the partnership's 35 properties. The deal will cost RioCan $715-million, and should add $45-million to its net operating income annually.

Because the U.S. portfolio's review is still ongoing, it's hard to draw a straight line connecting it to the new Kimco transaction. But when the U.S. review was first announced, speculation arose that any profits made south of the border could be put toward buying Kimco's Canadian portfolio, which Kimco had recently announced was up for sale.

Because RioCan doesn't want the entire Kimco portfolio, the remaining 13 properties will be divided into two tiers: ten assets to be immediately put up for sale, and three properties that were once occupied by Target and "will be dealt with at a future date," according to the announcement.

Speaking at an investor conference in September, Kimco chief financial officer explained why his company was looking to sell. "Canada is the one remaining area where we really don't operate the properties day to day. It's the one area left in the overall company where we're partnered but we're not the operator. And when you look at the Canadian market today, for us it makes sense for us to start to take some chips off the table," he explained.

Kimco acquired its Canadian properties when capitalization rates were roughly 9.5 per cent. Today they hover around 5.5 per cent. (Cap rates move in the opposite direction of asset prices, which means the properties are now worth much more.) Kimco said it's happy to sell for solid prices and "redeploy that capital back into our U.S. redevelopment and development pipeline."

As for RioCan's change of heart in the U.S., Mr. Sonshine chalked it up to many of the same reasons. When RioCan first expanded to the U.S. in 2009, cap rates were much higher south of the border. The loonie was also roughly on par with the U.S. dollar. Its depreciation since has juiced RioCan's potential profit.

RioCan had also hit a wall in terms of growth potential in the U.S. "It's very difficult to grow down there, and at the same time, we don't have the infrastructure where we can duplicate the type of growth that we achieve up here – i.e., through intensification, redevelopment, additional development," Mr. Sonshine explained in July.

"Nor do we really feel that we can ever really properly build that infrastructure in a timely and cost-sensitive basis to duplicate [the Canadian portfolio] – I mean, it took us 10 years to get where we are here," he added.

Follow Tim Kiladze on Twitter: @timkiladzeOpens in a new window

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