RioCan’s $2B sale raises questions about retail strategy, report finds

Firm may be shifting from smaller markets

TORONTO • A report from real estate company Colliers International questions whether the decision by

to dispose of up to $2 billion of its property portfolio could signal a shift away from retail assets.

Toronto-based RioCan said Monday it is accelerating its plan to focus on six core markets where there is more opportunity for growth and will sell off up to 100 properties. Chief executive Ed Sonshine said rent growth in some of the secondary markets is just too low.

“If guidance for the future for retail in Canada is to be taken from this change in direction for RioCan, it may be that retail as an asset class is a questionable focus, given RioCan’s move toward a more diversified portfolio that will include residential,” Craig Hennigar, director of market intelligence in Canada for Colliers International, said in the confidential report.

“There is no doubt that RioCan will remain the largest REIT in Canada, and will still have a predominantly retail-oriented portfolio, but this move combined with a planned repurchase of 19.2 per cent of the outstanding units would seem to indicate a more drastic change in long-term focus than noted in the past.”

RioCan is expecting net proceeds of $1.5 billion from the sale and while some money is being used to cancel its own shares, the company plans to spend $300 million to $400 million annually on the REIT’s development pipeline. It is also cancelling RioCan’s dividend reinvestment program.

“This type of stock repurchase strategy is a clear move toward a hawkish view of the retail market in general, whereby RioCan is narrowing its ownership strategy to key assets in key markets,” said Hennigar, RioCan is aiming to divest some of its holdings in smaller markets such as London, Ont., Colliers says. noting the planned sale is a reduction of one-third of the company’s 299 assets.

The RioCan plan is to focus on transit-oriented development opportunities and intensify its existing portfolio, which includes the diversification into the residential sector.

“In essence, RioCan is moving away from retail as a focus and is now looking to become entrenched in the type of live/work/play lifestyle centres that have been topical over the past number of years, not least of which because of the potential headwinds that retail may face, and the common expectation that millennials will be likely to rent accommodation in such locations,” the report states.

Hennigar said there will be temptation to buy those properties because of the high return.

“The question is: will the retail market get as bad as some pundits may suggest, or are we at the point of maximum pessimism on the backs of the Sears and Toys “R” Us receivership announcements?”