Retail frenzy hits peak REIT
There’s a buyer out there for at least one of Sears Canada’s properties — the country’s largest real estate investment trust.
There’s no deal or even discussions going on but Ed Sonshine, the chief executive of RioCan Real Estate Investment Trust, would be more than happy to buy the Sears location at Georgian Mall in Barrie, Ont.
“They unloaded some of the low hanging fruit but, for an example — and it’s on public record — we own Georgian Mall. Sears owns their own store, we don’t — they are not our tenant. I’m sure there are lots of Sears stores like that across the country,” Mr. Sonshine said in an interview.
On Wednesday, Sears Holdings Corp. in the U.S. said it is forming a REIT.
The new entity, Seritage Growth Properties, will acquire 254 of the retailer’s properties and generate more than US$2.5 billion in proceeds for the department store chain. Sears Canada has been actively pruning its real estate portfolio, selling property outright and selling leases back to landlords.
The trend of retailers creating value from their real estate holdings has been in full swing for years in Canada with grocery chains like Empire Co. Ltd., which controls Sobey’s, and Loblaw Co. Ltd. creating stand alone REITs. Canadian Tire Corp. Ltd. has since followed with its own REIT and Hudson’s Bay Co. teamed with Rio Can to create a joint venture which helped put a valuation on HBC’s real estate holdings.
While there are other retailers with considerable real estate holdings in Canada — Costco Wholesale Corp. and Home Depot Inc. are two names — there doesn’t appear to be another retailer ready to break out its real estate holdings into a new entity any time soon.
“There are some strong American [retailers] that own their own real estate here,” said Mr. Sonshine, adding he doesn’t think any of the retailers left with significant real estate holdings need the cash.
It’s not just the real estate that has value for retailers — some of their leases, which are well below market rents, have proven to be valuable. Sears sold leases back to landlords at the Yorkdale and Square One malls for $191 million in 2013.
“Back when all these deals were made, Sears and all the department stores used to get these leases for almost nothing,” Mr. Sonshine said.
For the time being, the Canadian real estate market is still trying to deal with Target Corp.’s exit from Canada, which has dumped 133 stores with 15 million square feet on the market.
RBC Capital Markets analysts Neil Downey and Michael Smith suggested selling Sears stores in Canada would flood the market.
“Surfacing value for Sears real estate just got a lot harder because all 133 superbly renovated Target stores are now on the market,” the pair wrote in a note to clients.
Ross Moore, national research director of CBRE Canada, says you never say never but he wonders what retailers in Canada might be left to sell their real estate.
“I think we are pretty well at the end of the cycle,” Mr. Moore said. “But you know it’s always dangerous to say you’ve reached the end because you find someone you hadn’t thought of before.”