The news that RioCan Real Estate Investment Trust is in talks with Target Corp. to recoup million of dollars of lost rent is grabbing headlines, but the REIT's disclosure of a strategic review for its U.S. portfolio is potentially much more significant.
On Friday, RioCan announced it has hired Morgan Stanley and RBC Dominion Securities to analyze different options for its U.S. properties located in Texas and the Northeast. Since entering the United States in 2009 to take advantage of a strong loonie as well as depressed real estate prices south of the border, RioCan has amassed 48 properties with 10 million square feet of space. This portfolio amounts to 19 per cent of the REIT's total investment property assets.
The strategic review may ultimately yield no action, but merely weighing its options is a major change for the REIT. By 2012, RioCan was so smitten with the United States that it unwound its original joint venture platform with Cedar Shopping Centres Inc., through which the two companies scooped up 25 retail properties in the Northeast, and decided to manage properties south of the border all on its own. The REIT even opened its own U.S. office.
In only a few years, the market has quickly changed, and that's generated some significant gains for RioCan. In 2009, the loonie was roughly on par with the U.S. dollar; its depreciation has bolstered RioCan's property values when translating them to its home currency. Capitalization rates were also much higher in the United States when RioCan started buying there, but the country's economic recovery has pushed them down, propping up property values. Management estimates it's made more than $1-billion in net proceeds on its U.S. portfolio over six years.
On a conference call to discuss the REIT's quarterly earnings, chief executive officer Edward Sonshine's comments about the strategic review seemed to imply it would be silly for RioCan to not at least consider its alternatives. In his words, the REIT has been both "hugely opportunistic and successful" and any profits may be better used elsewhere.
Despite his recent fervour for the United States, Mr. Sonshine said the REIT has hit a bit of a wall. "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," he explained. "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."
The strategic review is supposed to be finished by year-end of early 2016 at the latest, and the investment banks running it have put all options on the table. BMO Nesbitt Burns analyst Heather Kirk said she believes an outright sale could generate a $1.3-billion profit, but other analysts believe possibilities include selling the Northeast assets or taking the U.S. portfolio public.
The expectation is that if RioCan sells its U.S. assets, it will redeploy the proceeds in Canada. Although that may seem counterintuitive to some, Mr. Sonshine still likes his home market. "We believe in Canada. And sure it's soft right now, but who knows what it will be in three years," he said.
Possibilities for the proceeds include funding existing Canadian development opportunities, putting them toward the takeout of a rival REIT, or even acquiring a new portfolio.
News of the strategic review is likely to catch casual observers by surprise, especially considering how bullish RioCan was on the United States only a few years ago. But people who have paid close attention to the REIT, including analysts, have noticed comments in recent quarters about management weighing options for the U.S. business. RioCan had already gone so far as to say it received some unsolicited expressions of interest in its properties.