Live, work, play, profit

Opinion

If you’re familiar with the real estate investment trust RioCan, it might not be for the right reasons these days.

RioCan has made headlines for its partnership with Hudson’s Bay Co., operating a portfolio of a dozen properties that were home to the insolvent and now shuttered department store chain.

In reality, HBC accounted for a small part of the business of Canada’s second-largest REIT, which owns 177 properties, encompassing 32 million square feet.

Despite the view the Bay’s closure could be seen as another nail in the coffin of in-person retail’s demise, RioCan is bullish on the sub-sector of commercial real estate.

Its chief operating officer recently spoke with the Free Press about Canada’s oldest REIT, broader trends in commercial real estate and why the asset class is still attractive to investors.

“There has been a resurgence in physical retail, especially for essentials based retailers, and that is RioCan’s core product,” says John Ballantyne.

Providing spaces for grocery and hardware stores, pharmacies, banks and dollar stores, among other, so-called essentials, is indeed a good place to be in today’s economy — which is at best precarious as recent trade war tariffs tear through businesses, leading to increased unemployment.

People still need the basics of living, Ballantyne says, and bricks-and-mortar shopping still offers that more efficiently than e-commerce for many.

Central to RioCan’s approach is seizing on the live, work and play trend in commercial real estate, incorporating mixed uses that include multi-family residential.

“All our holdings are located in high-population, transit-oriented areas,” Ballantyne says.

Although 83 per cent of its income comes from shopping centres that are grocery anchored, RioCan has also partnered in developing purpose-built rental projects, which create a base of consumers around its retail hub holdings.

That said, residential is only three per cent of its business, as most of RioCan projects in this area are sold off, including a recent $173 million sale of a 160-unit residential mixed-use asset in Calgary.

All told, RioCan’s residential portfolio still includes 13 residential properties with more than 3,100 units, along with two other projects nearing completion.

RioCan does not currently have assets in Winnipeg — though it did once own Garden City Shopping Centre. Today, however, shopping malls are not part of its portfolio.

Ballantyne notes the distinction between shopping centres and shopping malls.

“Open-air shopping centres are what we specialize in,” he says.

Other REITs own malls, like Primaris — which owns Kildonan Place and Grant Park Mall in Winnipeg. As well, some large pension funds are outright owners of companies that own and manage malls like CF Polo Park.

Ballantyne notes malls are “healthy now, too” as people rediscover the joys of in-person shopping.

More broadly, he adds, retail real estate will benefit in the future from favourable economic fundamentals.

“Simply, the Canadian market is under-retailed,” he says, noting Canada’s retail sector GLA (gross leasable area) per capita is about 40 per cent less than in the U.S. “This is the most vibrant retail market we have seen based on the supply/demand dynamics.”

Broadly speaking, commercial real estate overall is also a good diversifier for Canadians’ portfolios, offering higher income than most fixed-income assets, along with modest capital growth.

That said, the Canadian REIT sector has largely been flat for growth over the last decade, based on the S&P/TSX Capped REIT index as a benchmark. Yet when accounting for dividends from the underlying assets, the sector has provided a more than five per cent annualized return. RioCan’s stock price performance reflects REITs’ modest performance over the last number of years (sitting at US$12.99 at close on Thursday).

Today, however, it and many other Canadian REITs have somewhat depressed share prices that present good entry points, down from their peaks when interest rates were at historical lows in the 2010s and during the COVID-19 pandemic.

Rising rates in the last few years have weighed on REITs, including RioCan, as investors see higher costs for these companies that tend to carry a lot of debt. At the same time, many investors have looked to bonds for income instead as REIT distributions, although often slightly higher fixed income, involve more risk in a higher rate environment.

Yet many REITs today have better prospects as rates have moved lower over the last year, and could go even lower if the Bank of Canada cuts interest rates more to stimulate a waning economy.

In the meantime, Canadian REITs offer strong dividend yields, often exceeding five per cent.

“We actually feel like the yield is too high,” Ballantyne says about RioCan’s 6.5 per cent plus annual yield.

He adds the higher payout metric reflects how RioCan’s share price is currently trading below the true value of its business and assets. “The retailers we deal with are really strong.”

Major Canadian retailers such as Canadian Tire and Loblaw have performed exceptionally over the last year, with their share prices up significantly.

Ballantyne further points to recently attending the International Shopping Centre Conference in Las Vegas, where he met with many major retailers from Canada and the United States.

“As far as the Canadian landscape goes, the conversation was about how they could increase their store count.”

That bodes well for retail real estate growth, and speaks to the overall strength of Canadian commercial real estate. What’s more, publicly traded REITs are a good way for investors to get exposure to the upside potential of commercial real estate.

They’re certainly a much more feasible way to participate than becoming a landlord yourself, Ballantyne adds. “With a REIT, you can passively invest money, enjoy growth over time and get a monthly distribution.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com