Canada’s commercial landlords should weather Target retreat, analysts say

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Target Corp.'s retreat from Canada will leave a gaping hole in shopping malls across the country, but industry experts say it will have a limited impact on the country's commercial landlords.

With 20 million square feet of space spread out over more than a dozen landlords, analysts say no one company is particularly exposed to Target. Publicly traded real estate companies control 59 of Target's 133 locations, ranging from roughly 2 per cent of revenue for RioCan REIT and Morguard Corp. to negligible amounts for companies such as First Capital Realty Inc., Calloway REIT and Canadian Real Estate Investment Trust, said Royal Bank of Canada in a research note.

"We believe Target Corporation's announcement that it will leave Canada is a slight negative for most landlords who were, by and large, expecting the retailer to drive traffic and value in their properties," Royal Bank analysts wrote. "However, while the reorganization/re-tenanting will be disruptive, we believe the financial impact will be manageable, as many of the stores have below-market rents and are situated in well located properties."

"It's not the end of the world," said Morguard chief executive officer Rai Sahi. "When you start splitting it among all the major players, it's not as big as it seems."

Other major landlords include Ivanhoé Cambridge, a subsidiary of Quebec pension plan manager Caisse de dépôt et placement du Québec, Cadillac Fairview Inc., the real estate arm of the Ontario Teachers' Pension Plan, Bentall Kennedy and Primaris, a subsidiary of H&R REIT.

When it spent $1.8-billion in 2011 to buy up Zellers Inc. leases from Hudson's Bay Co., Target also inherited Zellers' cheap rents. For Target's most significant landlord, RioCan, rent averaged $6.62 per square foot, well below RioCan's average of $16.51 across its entire portfolio, said Edward Jones senior analyst Royal Shepard.

"The reality is that Target never came close to realizing its potential as a significant draw for other retailers," wrote Toronto-Dominion Bank analyst Sam Damiani. "Therefore, its closure and the ultimate replacement in most locations will not have a very noticeable impact on overall leasing performance in our view." By splitting up some larger Target stores into smaller locations, landlords could "triple or quadruple the rent in some locations," Damiani wrote.

In announcing it's shutting down its Canadian operations, Target said it was filing for creditor protection in Canada, which gives the company the option of cancelling many of its leases in as little as three months. However, in several cases Target assumed Zeller's leases without any modifications, often extending them by several years, Royal Bank said. Target Canada's U.S. parent company Target Corp. also guaranteed some of its Canadian leases, particularly with RioCan and H&R REIT, meaning "the retailer's U.S. parent company is on the hook for the rent," analysts wrote.