Edward Sonshine, chief executive of Canada largest real estate investment trust, RioCan. RioCan plans to sell up to $2 billion in assets but still expects to be the largest REIT in the country after the sales.

Canada’s largest real estate investment trust is putting $2 billion of its holdings, comprising about 100 properties, onto the market over the next two to three years, a mix of assets in secondary centres that RioCan doesn’t want any more but hopes others will jump at.

Toronto-based RioCan’s said Monday it is accelerating its plan to focus on six core markets where there is more opportunity for growth —– what some in the industry call the VETCOM part of Canada which includes Vancouver, Edmonton, Toronto, Calgary, Ottawa and Montreal.

“Why now? It’s more of a RioCan specific reason, rather than the market. The market hasn’t changed much,” Ed Sonshine, chief executive of the REIT, told the Financial Post in an interview. “The trends over the last five years are continuing and that’s why the secondary markets are a little bit tougher than the primary ones. The rate of growth you can achieve in secondary markets is a good 1.5 to two percentage points lower in rent growth than you can achieve in primary markets.”

RioCan expects to generate total net proceeds of approximately $1.5 billion with the money used to buy back its own stock and fund the REIT’s development pipeline. The company is also suspending its distribution reinvestment plan effective November 1, 2017.

Once the new plan is finalized, the REIT says it will generate more than 90 per cent of its annualized rental revenue from Canada’s six major markets, up from the current 75 per cent.

On a conference call with analysts, Sonshine and management noted that RioCan’s occupancy rate in those secondary markets is about 93.5 per cent compared with an overall rate of 96.5 per cent, some of the gap determined by large tenants leaving.

“We have the issue and, we saw this with Target, when a large anchor goes sideways on you, it’s not so easy to replace in the smaller markets,” said Sonshine, noting Target stores in Orillia and Smiths Falls, two Ontario towns with populations of about 30,000 and 9,000 respectively, are still empty.

So why do other investors want property that RioCan no longer covets. Sonshine says it’s a matter of expected returns and they don’t meet the objectives of a publicly-traded REIT.

“There is nothing the matter with these properties. They are all great properties from the perspective of solid income,” he said. “A bunch of them are Wal-Mart anchored, or Loblaws anchored or Canadian Tire anchored. No matter the small town (those retailers) are always going to be there. But as far as getting rent growth out of it, it’s slow.”

RioCan units hit a 52-week low of $23.46 at the end of August, 2017 and, the company with a market capitalization of $7.8 billion, is no longer seeing the double digit returns for investors that were once the norm. The total return over the last 12 months is now a negative 6.6 per cent.

Even after the disposition — RioCan is not saying which properties are specifically on the market so it won’t say how close it hopes to get to its 100 property or $2 billion target — but Sonshine still expects to be the biggest REIT in Canada. The company will be growing as it disposes of assets with an investment of approximately $300 million to $400 million per year going into RioCan’s development pipeline, which is focused exclusively on the VETCOM markets.

“We are trying to turn ourselves into a much higher growth vehicle,” said Sonshine, adding while Wal-Mart may be a diminished presence in his portfolio, none of the REIT’s moves should be seen as an indictment of any its tenants. “Wal-Mart? I love them, they are great. From a landlord perspective though, the rent just never goes up.”

Ross Moore, a vice-president of real estate company Cresa in Vancouver, said he expects the market to be able to handle the $2 billion in activity and he can see why the growth picture doesn’t fit for RioCan with some of these secondary holdings.

“There are a lot of people who just want to park money,” said Moore. “Sure those people would like a higher return but RioCan is a publicly-traded company. People are giving him money because of the return. Generally speaking I would say in those secondary markets (RioCan) has good property. If it doesn’t own the best, it owns the second best. The problem is they just don’t get any reward for being in places like Lethbridge or even Victoria.”

Bill Argeropoulos, principal and practice leader of research for real estate company Avison Young, said he expects the sale to be a mixed bag of retail assets, primarily in Ontario and Quebec. “It should receive good interest from other REITs, privates and even smaller pension funds looking to diversify their portfolios.”

One lingering question about what’s next for RioCan’s long-term chief executive – a worry for some investors concerned about successions plans – may have been answered Monday. “I promised to stay until at least the end of 2018. And I may stay a little longer.”

Written by: Garry Marr

Original Article: financialpost.com