RioCan Real Estate Investment Trust, Canada’s largest retail landlord, said it’s studying how to get the most value from its U.S. assets as operating in the country gets more expensive and competitive.
Morgan Stanley and Royal Bank of Canada have been hired for a strategic review that may result in RioCan selling all or some of its U.S. properties, forming a joint venture or continuing to operate and investing in the assets, the Toronto-based REIT said in a statement Friday. The properties, located primarily in Texas and the Northeast, are worth C$2.6 billion to C$2.9 billion ($2 billion to $2.2 billion), according to analysts.
“It’s something we’ve been pondering and kicking around internally for a year after it became clear that we just couldn’t keep acquiring the way we had been in the past in the U.S.,” Chief Executive Officer Edward Sonshine said on the company’s second-quarter earnings conference call. “We’re not sure how we can grow. At the very minimum you have to go back to the beginning and say, ‘What should we do with this?’”
RioCan started purchasing U.S. shopping centers in 2009, when the credit crisis sent values plummeting. The REIT is now reconsidering its investments as the weakening Canadian dollar makes it more expensive to acquire additional assets and rising demand for U.S. real estate drives up prices.
The review “could crystallize meaningful value, given the favorable shift in cap rates and exchange rate since acquisition,” Heather Kirk, a Bank of Montreal analyst, said in a note to clients. She estimated the portfolio may fetch about C$2.9 billion. Capitalization rates are a measure of investment yield used by REITs.
The U.S. properties account for about 18 percent of RioCan’s annual rental revenue, financial documents show. The U.S. sites are predominately in Texas, with 56 percent of rental revenue coming from tenants in Dallas, Austin, Houston and San Antonio. The rest are spread across states including New York, New Jersey and Connecticut.
Giant Food Stores, Best Buy Co. and Staples Inc. are its three largest tenants by rental revenue in the U.S., where RioCan has 48 properties, according to financial documents.