Tuesday, March 6, 2018

Riocan and the Future of Shopping Malls

Not long time ago, shopping malls were thriving on a simple formula: bring two anchor department stores and that will drive consumers. It seems like this formula is now failing. Recently, after years of wondering if this kind of business still deserves a position in my PC fund, I believe reassessing the business and its value would be necessary. We've heard about shopping malls becoming less solicited and it is not news to me. In fact I have myself witnessed this drop in several cities. We could argue over many reasons as to why people are abandoning malls. I could blabber on and on about my personal reasons for avoiding malls but let's focus on few observations that experts have identified: Millennials and e-commerce.

PC fund owns one major Canadian REIT: RioCan. Is RioCan still a good name to keep for income purposes in the PC fund? With two major retail store chain closures, Target and Sears, is RioCan being under pressure? Well first, it is reassuring to see RioCan rent to only one Sears. Second RioCan has recouped from Target's departure. It could have been devastating, but it was reported like a mild hiccup for this REIT. Nonetheless the whole retail space is going through changes and is being transformed into a new format. RioCan has been transparent about it -see shared articles below. But i am still left with a question : "is it the end of shopping malls?". The potential of headwinds retailers may face in the future may jeopardize RioCan who is heavily invested in brick-and-mortar strip malls. That is unless RioCan has already undertaken some changes.

RioCan has been ''urbanizing'' its portfolio. Moving from commercial real estate to live/work/play lifestyle centers. Millennials, who is the coming major group of customers, appear to be more interested in using specific retail stores than department stores. Researches about the Millennials and their new shopping habits seem to point all in the same direction. Millennials still shop, but they expect a different experience. They want to feel they are special as individual and society will most likely change to cater and fulfill individualistic needs. It is not surprising that most researches suggest that Millennials need technology while experiencing shopping. That's right, cellphone in one hand and acting as the middleman in interaction needed between them and businesses: coupons, comparing prices, read reviews, order online when stores are closed, access inventories...

According to RioCan, Millennials are less interested in 'stuff' and more interested in experiences. To me, this mind shift is an important element when considering the future of shopping malls. The value of investing in this contemporary model seems futile and outdated if commercial spaces are not being revamped. RioCan's management team is aware of that and they are already recalibrating their real estate portfolio in order to adjust themselves to this new trend.

RioCan's transit-oriented 'urban portfolio' with residential should reach 10% as we are moving in to 2018. Cars are not going to disappear tomorrow but transit friendly cities will thrive. That's RioCan's vision and this new strategy is the focus for the next twenty years. They are planning to sell 100 retail properties in small Canadian cities and raise $1.5 billion. The proceed will be reinvested in buying back shares -increasing value for investors- and financing new projects in larger cities. RioCan believes to increase growth by attending to the 6 major markets (Edmonton, Calgary, Toronto, Ottawa, Montreal, and Vancouver) being mostly invested in GTA. People are still attracted to big cities for professional jobs, wages and what big cities have to bring. In order to mitigate the risk, RioCan creates association with other real estate developers that already are well-established in tight markets -GTA and Vancouver come to mind. In RioCan's strategy, they seems to entertain the idea of turning their shopping mall parking lots into residential. Since they own the lot already, would it be easier to turn this no-brainer idea into a condo tower? This quote from Andrew Evans of Colliers echoes the latter question 'To maximize financial return in an urban market, it is really about adding residential density''. All of a sudden, the game Simcity comes back to memory.

Increasing interest rate can be challenging for REITS who carry a lot of debt. Riocan is offsetting this with additional revenue from these projects. With interest rates hiking up in Canada -although we might only see one hike in 2018, Riocan needs to have its debt in order. Selling their U.S properties, which were acquired prior the 2009 financial crisis, helped reducing Riocan's debt. With the proceeds, Riocan repurchased or cancelled 3.9 million units at a price of $25.30 per unit. Riocan also announced a $0.03 increased in its dividend payout for January 2018 for a 5.9% annually. Tenancy remains good. Big projects are expected to start being reflected towards the end of 2018, so no rush in adding or no great gains foreseeable in 2018.

Recently, CBC Canada focused on the asian new-immigrants community in Richmond, BC. In one report, the analyst stated that new immigrants outlive native Canadians by 5 to 6 years. A healthy diet and physical activity were two reasons for living longer. In addition to these two reasons, they also found that this community remains socially engage and allows for a lot of interaction between individuals. Where does this community meet? You guessed. The future is not bleak. In my opinion, I believe human beings will always want to live longer and be entertained. That being said they will continue using marketplaces and areas where crowds can gather.   

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