RioCan pondering US move

Garry Marr

RioCan, the largest real estate investment trust in the country, is getting closer to a major move into the United States, even getting RBC Dominion Securities’ opinion on a potential deal.

“We are looking around down in the United States”, Chief Executive of RioCan Edward Sonshine, said in an interview with the Financial Post. “There are just so many opportunities down there. There will be individual opportunities that we will ask one of the investment banking outfits to look into for us”.

It appears that’s exactly what RioCan did.

“We may have called up RBC and said ‘here’s this company that wants to sell us something. Can you look into these guys and tell us what you know about them”,

Sonshine, who wouldn’t name the company RioCan has looked at, said.

The time has never been better for RioCan, which has previously investigated a move into the United States, to make a deal south of border. The Canadian dollar is almost at par, the company’s shares are trading near a 52-week high and American retail property is still considered a bargain.

Sonshine emphasized his company has not ‘retained’ Dominion Securities as an exclusive agent but will use whatever investment banker is best suited for the transaction. But RBC leads most of RioCan’s financing deals, does business in the United States and Sonshine sits on the board of the Royal Bank of Canada.

“Obviously, they would be first guys we would talk to. We are not that close to a specific situation but that doesn’t mean one can’t be announced in the next month or two”, said Sonshine. “Why hire them (exclusively)? That means you have to pay them and I don’t want to cut myself out from opportunities other investment bankers want to bring us”.

Almost three years ago, RioCan agreed to create a US$1.45-billion joint venture with Farmington Hills, Mich.-based Ramco-Gershenson Properties Trust but the deal never got off the ground when the two couldn’t agree on what properties would go into their joint venture.

Any moves into the United States may have been stalled by proposed federal government rules that REITs have no more than 25 percent of their business outside of Canada. After a major lobbying effort from the sector, Ottawa backed down on that stipulation.

Sonshine says there are still some tax issues with expanding into the United States but that has to do with American withholding taxes. “It’s an issue of how well you structure something to avoid (tax) leakage”, he said, adding his REIT has retained tax lawyers to work on the issue.

A move into the United States is almost too tempting for Canadian REITs like RioCan with plenty of cash on hand.

“They are lot more available situations down there and priced a little better but you have to be a little careful”, said Sonshine, who adds his company would still look for an American partner to tackle what he consider a foreign market. “Money is a lot cheaper and available in Canada. If ever there was time to go into the United States it’s the next six to 12 months. You’ve got the arbitrage of the cost of capital, the level of the Canadian dollar and you add it together with the availability of product”.

Gail Mifsud, an analyst at Blackmont Capital, notes that REIT has almost $300 million in cash and an undrawn credit facility of $193 million. Add in additional debt capacity of $664 million, based on 60 percent leverage, and it leaves RioCan with ability to make a major move in the US

“Their balance sheet is flush with cash and (while it’s not invested) it is dilutive to their bottom line”, says Mifsud, adding the REIT’s continues to distribute more cash than it is pulling in from properties.

She thinks a US strategy could help solve that problem with higher returns. “It would be ideal but there are a lot of potholes in the US commercial market to watch out for”, says Mifsud.

Financial Post