Riocan CEO Edward Sonshine speaks to shareholders during the RioCan annual general meeting held in Toronto, Ont. June 7, 2011.Kevin Van Paassen/The Globe and Mail
Every month now, it seems like there's a new major announcement from RioCan.
Chief executive officer Edward Sonshine's latest plans include: expanding on his own in the U.S., breaking a joint venture his REIT signed just two years ago; inking a partnership with Allied Properties to scoop up mixed-use urban sites and develop them together; and now getting in on the hostile bid to acquire Primaris Retail REIT.
The latest plans call for RioCan to shell out $1.1-billion to buy regional shopping centres from the consortium looking to buy Primaris for $4.4-billion. Five of the assets are malls and three are grocery-anchored shopping centres.
You have to wonder why RioCan is being so aggressive. While there are clearly a number of things lining up here to make this work, including incredibly cheap bank financing fuelled by rock-bottom interest rates, keep in mind that RioCan is more or less forced to grow at explosive rates to simply fund its distributions.
Last year, its payout as a percentage of adjusted funds from operations was 108 per cent, and this year it's expected to be about 100 per cent. It's the dirty little secret you'll rarely hear analysts discuss on the record, because no one wants to ruffle feathers with Canada's largest REIT, but everyone talks about it behind closed doors.
That being said, the payout's been this way for some time and RioCan has managed just fine. But remember that REITS have also been extremely hot.
Aside from the latest plans to acquire a quarter of Primaris, RioCan recently abolished its joint venture with Cedar Shopping Centers Inc., who partnered with the Canadian REIT to buy 25 retail properties n the U.S. northeast. Mr. Sonshine is now going it alone, and has plans to set up a RioCan office in the U.S. northeast by January 2013. He's also hinted that he's looking at doing a major acquisition south of the border.
His reasoning for doubling down on the U.S., which currently comprises about 14 per cent of RioCan's annual rents: "the velocity of the recovery and the growth in rents is better [than in Canada] because they had such a big falloff in 2009," he explained on a conference call last month.
Aside from the plan to develop mixed-use urban sites with Allied Properties, RioCan's also signed a joint venture with the REIT and and Diamond Corp. to acquire and redevelop the lands that The Globe and Mail currently sits on, on the west side of downtown Toronto.
RioCan's been an active buyer all year, striking deals such as its recent $95-million joint acquisition of two outlet centres outside of Montreal with Tanger. As of the third quarter, RioCan's 2012 acquisitions totalled $750-million.
To pay for the Primaris deal – should it go through – RioCan will take out a $635-million bank loan from Toronto-Dominion Bank. But that shouldn't be outstanding for too long. The REIT already has plans to sell properties over the next six to nine months to pay it back.
Tim Kiladze