When RioCan Real Estate Investment Trust took the plunge last October to buy properties south of the border, its top executives laid out plans for a slow, methodical entry into the new market.
So far, they have stuck to that. But there was no way they could have been prepared for the onslaught of unsolicited deals that cash-starved U.S. real estate owners have thrown at them.
"If you're a cash buyer, it's amazing," RioCan chief executive officer Edward Sonshine said Monday after announcing the company's latest purchase, the acquisition of an 80-per-cent stake in five retail properties in Pennsylvania, New Jersey, and Virginia for $107-million (Canadian). "It just keeps coming at us."
The deal nearly doubles RioCan's U.S. holdings, to 1.94 million square feet, and there is more to come. The company is on the cusp of signing for two more properties that will add another 864,000 square feet, and Mr. Sonshine said he's keeping his eye on the U.S. because "the properties are in great shape but the owners are a bit stressed."
"We've been looking at the U.S. for probably about four years," he said in an interview. "Canada is a very small country and we've become a very large owner. There's only so many people here and they only need so much retail."
When RioCan first looked at the U.S. properties, prices were "quite crazy," Mr. Sonshine said. "Then as 2009 unfolded, we said 'Okay, it may be time to get serious now.' "
After doing some research, it signed a joint venture agreement with Cedar Shopping Centers Inc., a U.S. REIT focused on shopping centres anchored by supermarkets and drugstores. RioCan took a 15-per-cent equity position in the firm and bought an 80-per-cent interest in some of Cedar's properties. Cedar owns the other 20 per cent of the properties in Monday's deal.
One analyst noted that the Canadian market is much more competitive for acquisitions right now, and there is less to buy here. U.S. companies also have limited access to capital right now, whereas Canadian REITs have no trouble raising more equity, said Mark Rothschild, real estate analyst at Canaccord Genuity,
"[Capitalization]rates are higher in the United States for comparable types of properties, therefore it is more accretive to acquire assets in the U.S. where RioCan can grow their cash flow per unit faster," he said. The capitalization rate is the income a property generates divided by its market value; the higher the number, the less-expensive the property is.
RioCan is not limiting itself to the Northeastern U.S. In May, it bought eight retail properties in Dallas, Houston and Austin from Inland Western Retail Real Estate Trust Inc. "The population in Texas is almost all of Canada," Mr. Sonshine said.
It doesn't hurt that U.S. real estate owners treat RioCan as a "favoured buyer" because their acquisitions do not result in lost jobs. "We don't have our own infrastructure down there," Mr. Sonshine said. "At least not yet."
Once Monday's acquisition closes, RioCan will own 15 U.S. properties. Mr. Sonshine expects that tally to grow to about 25 properties by the end of 2010.
"We don't have to be active," he said. "We sort of put ourselves out there as an interested buyer and we're seeing, quite frankly, a lot of opportunities."
"By the way, the Canadian dollar hasn't been bad for us," he said, before chuckling.
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