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Flush RioCan ready to brave U.S. expansion

RioCan CEO Edward Sonshine

Jim Ross

Ed Sonshine is really, really, really excited about 2010.

RioCan REIT's chief executive officer fidgets constantly as he tries to rein in his enthusiasm - one minute wrapping his hands in elastic bands, another waving a sharpened pencil in the air - before taking a breath and trying to calm down for a few moments.

"Of course, it doesn't have to be that way," he says, suddenly cheering as RioCan's units scroll by on the television opposite his desk. "There could be any number of nasty surprises out there. But you know, I'm more excited than ever. But, I like to keep it contained."

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It's been a good year for the real estate investment trust, with its units gaining 37.4 per cent. The strength helped the company raise $250-million on the debt and equity markets, money it can use to help finance expansion in both Canada and the United States. After years of quietly and conservatively building Canada's largest shopping mall company, Mr. Sonshine is ready to do some shopping of his own.

The problem? All of the "steals" are in the United States, where RioCan is a newcomer.

"Canadians have a very bad track record in the U.S., and I'm aware of that even if I don't know why that is," he says. "Canadians are just as smart as anyone else, but every time anyone wanders down into that market we expect them to screw it up and go broke."

RioCan went public in 1994, and is now the dominant player. How did that happen?

Real estate investment trusts are the most efficient way for investors to invest in real estate. We finally came up with a model that works both in respect to real estate and the public markets. If you go back 20 years ago, the giants in Canadian real estate were companies that went broke for all sorts of reasons, but mostly debt. But it was also because they existed not necessarily to create cash flow and pay out dividends but to create value within the company. That works for a while, then it doesn't work. We took lessons from those who failed and said we needed to come up with a way that is safe and efficient for the public to invest in real estate and still have liquidity. That's the big problem with real estate - you can't sell it in a minute.

How has the market changed in the last five years?

You really have to be careful when you are developing power centres [unenclosed shopping malls]because if you have a centre where most of your clients are the third or fourth guys [smaller players]in a category, you're going to have trouble in that centre. In the good times, the rising tide carries all the boats. In bad times, you'll get hurt the worst. But we don't have many players in any category any more - we're lucky if we have two. We really only have one movie chain. You want books? One chain. Sure, you can buy books anywhere. But we have one national chain.

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How does that affect your business?

In the good times like we had until 18 months ago, we didn't get the growth in rents that were seen in the U.S. nor did we get the pace of development because once you had a Cineplex or Indigo there wasn't going to be another lifestyle centre built in that quadrant. There wasn't another theatre chain or book store to put in. That used to be so frustrating, and you didn't get competition so the rents didn't climb very high. Supermarket rents are basically the same as they were 15 years ago.

But surely there has been an upside to that?

Right - in times like we had in the last 18 months, you don't get any significant bankruptcies. If you look at the retailers that have gone broke here they were either broke courtesy of the United States or they were retailers that only existed because times were good. So they are gone. But by and large other than those very unique circumstances we haven't had much of a problem. I mean - most of our tenants have better credit ratings than we do.

But there are still vacancies in most power centres, right? Does it tend to be a certain type of tenant struggling or does it vary by region?

I always knew our retail market was safe and stable, that's very Canadian. But the one exception where we saw a fair bit of fallout in 2009 was what we'd call Mom-and-Pop shops. A lot more of them are going broke than I have ever seen before. The fact is we rarely have defaults with these people because once they've been there a few years they become established in the community. When you have Pizza Pizza selling large pizzas for $6.99 the small guy can't compete, especially when people are so frugal. Those are the tenants we've seen go, and they are very hard to replace. And you know it's tricky - in times of high unemployment, a lot of people tend to start their own stores. But we're not seeing that this time, maybe because the banks are being so cautious and it's hard to secure financing.

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One of your major deals was in the United States where you bought some grocery-store anchored shopping malls, your first foray into that market. Is this the right time?

I think it is, but it's a scary opportunity. We are going in with extreme caution and not all that heavy. I mean, it's $150-million but when we close the deal it will represent less than 2 per cent of our assets. We have a lot of money to invest, and the opportunities there are better. There just haven't been that many distressed sellers in Canada, nor will there be. You can't steal things here, but you can still steal a few things down there.

Do you worry the cultural differences will be too much? The U.S. market has proven difficult for many Canadian companies.

A lot of shareholders are not only skeptical, they are nervous. But I believe that if you have money and there are opportunities, you need to take advantage. Otherwise, why the hell be in business? I hate to be simplistic, but if you aren't moving forward then you are moving backward.

What other deals are you considering? Are there many?

Believe me, we get calls. I bet we get five calls a day from the U.S., because there are no buyers down there with ready access to cash. But our plate is full, we tell them to call back in January because those properties aren't going anywhere. My father always told me never to worry about whether you buy something, because if you don't you get to keep your money. Opportunities are like buses, there's always another one coming along in five minutes.

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