RioCan Redeveloping Malls

Across North American over the past several decades, large regional shopping malls were build in suburbs where land was once cheap.  Today, there is a growing crisis with those traditional shopping malls. Part of the problem is many shopping malls were built with a single purpose: retail. But today, we understand that urban environments work best with mixed-use formats. The idea follows the work of Jane Jacobs.  With less intensification in certain suburban locations, many malls are facing capacity problems.  Especially with traditional anchor tenants facing financial challenges that are calling to question the long-term viability of their retail format. In other locations, greater urban density of cities are reaching the suburbs of regional malls, and making the land much more valuable.

In both of these cases, it makes sense for shopping mall developers to consider re-development that increases the density of the real estate while at the same time diversifying the shopping malls use. Typically, a shopping mall is surrounded by large parking areas. and bordered by arterial roads and highways. The first choice to consider is whether pads can be added to the outskirts of the parking space bordering on the surrounding roadways. This only makes sense if the zoning can only be retail and the retail environment can absorb more competition and greater parking capacity is available.  Another option is adding residential and office and other use space to the core shopping mall.

There is a huge shift taking place in the shopping mall sector of retail real estate.  Companies such as RioCan seem to be taking the right initiatives to improve the situation as outlined by the story below.

RioCan unveils Silver City redevelopment plan

RioCan REIT is proposing to build a number of residential towers at the Silver City Gloucester retail complex. The country’s largest real estate investment trust has filed plans with the city for the first phase of a “multi-building residential development” at the property south of Ogilvie Road and north of Regional Road 174 near the Blair transitway stop.

Brookfield Buying Rouse

Brookfield Asset Management has made an offer to purchase the remaining interest in Rouse Properties it does not already own. Shares of Rouse have been trending lower over the past year and currently have a dividend yield of just over 4%. Rouse owns a portfolio of malls across America.  Rouse was spun out of General Growth Properties a few years ago and has been floundering ever since. It was only a matter of time before Brookfield made an offer as they held a 33% stake since the spinoff. Some of Rouse’s properties have potential for intensification and development because they are in growing communities, while others are stuck in terrible locations in shrinking communities. Maybe full ownership of Rouse will give Brookfield the flexibility to restructure the portfolio aggressively.

 

Morguard taking control of Temple Hotels

Happy to hear this week that Morguard will take over management of Temple Hotels, details listed in the press release below. This is positive news for Temple which is being hurt by the Western Canadian slump and a weak balance sheet. Hopefully Morguard will clean up Temple’s balance sheet, re position and further diversify its assets, and ultimately create new shareholder value.

Temple Hotels Inc. Announces Conditional Assignment of Asset Management from Shelter Canadian Properties Limited to… — WINNIPEG, Dec. 23, 2015

Dec. 23, 2015 /CNW/ – Temple Hotels Inc.

Ontario Securities Commission investigating Titan Equity

There were so many red flags for investors in Titan Equity, I don’t really feel sorry for them.  Here are some tips for investors in private equity, especially private placement real estate and hedge funds.

Pay attention to the promoter’s lifestyle.  What kind of car does the promoter drive? If they are driving Aston Martins and Bentley’s then beware. Why would they be asking you for an investment when they are already wasting funds on luxury items? Also, if someone is spending their personal money on luxury items, how careful would they be with investor’s resources? Is the promoter going on fancy vacations and living in a fancy house?  What does the promoter’s spouse do?  If they are a trophy wife who goes shopping all day, this may put pressure on the promoter to maintain a lifestyle for her and this might cloud his judgement. If you are investing in someone, make sure that person is living an average lifestyle and pouring all his time and money into the project as well.

Make sure you are being provided with adequate financial reports. Especially for private equity investments that involve more than just family and close friends, financial statements should be audited and provided on a regular basis. There is a significant cost to providing audited financial statements, but this cost goes along with a large project with numerous unrelated investors. The other benefit to audited financial statements is that in order for an accountant to sign off, an internal accounting process must meet certain standards. Its not easy to provide audited financial statements and requires a advanced level of management.  Smaller projects with a few related investors can get by without audited financials, but other checks and balances should be in place such as providing all investors with access to bank statements in order to keep everyone better informed.

Keep management on track. Sometimes privately funded investments get off track as the founders constantly pivot to new ideas.  These founders can’t stay focused long enough on one project and so they spread resources too thin and end up accomplishing nothing. In the case of Titan Equity, they had investments in a retirement home, but also in a townhouse development. These are different types of real estate and management should have been focused on a specific type of real estate such as just retirement homes or just townhouse developments, but not both.

Make sure management is communicating. Sometimes a business project does not always go as planned. There will be times when projects fail and its important that management is transparent and honest to investors. It can embarrassing for founders to admit they have failed, especially to close friends who have invested in their project. But hiding the truth is what ponzi schemes and fraud are made of.

Ontario Securities Commission investigating York Region real estate firm with ties to Toronto FC | Toronto Star

A real estate investment company that once ran a $1-Million Dream Home contest for Toronto FC is facing allegations that its chief executive officer misused investors’ money to buy luxury cars, an expensive home and pay himself “excessive” management fees. Titan Equity Group Ltd.

 

Casino REIT dominoes are falling

Last week MGM Resorts International announced they will carve out a REIT from their operations to be called MGM Growth Properties. This is the first major Las Vegas strip property owner to clearly give intentions on REIT creation. Caesars has a desire to convert to a REIT, but its still mired in a long bankruptcy battle with its creditors.  For MGM, 10 of their properties will be rolled into MGM Growth Properties including most of its Las Vegas strip properties with the Park development, but the REIT will exclude Bellagio and the MGM Grand.  The festival grounds on the corner of Sahara and the Strip as well as Circus Circus will also be excluded from the REIT. MGM Detroit and the gulf coast properties will be included, and MGM Springfield will likely be folded into the REIT once its operational.

The creation of an MGM REIT will have major impacts on the Las Vegas Strip, but at first, MGM Resorts International will retain a 70 percent stake in MGM Growth Properties. This means that MGM Resorts International will control the REIT and operate the two divisions with parallel business strategies.

RioCan Considering Selling US Portfolio

RioCan REIT announced today it is considering strategic alternatives for its US portfolio. I think this is good news for shareholders.  I have never wanted RioCan to stray from its Canadian base, especially now since cap rates in the US have moved lower and the Canadian urban market (particularly downtown Toronto) offers much more attractive returns and better scale for RioCan. Focusing on Toronto will focus RioCan’s expertise. Shareholders should be excited about the urban focus of investment RioCan is continuing on. A sale of US assets could also come at a time of favorable exchange rates and could also free up capital for RioCan, who has been pressured recently by Target Canada vacancies.