There is a lot of potential M&A that could be done in the Canadian REIT sector for companies to realize greater diversification and scale. There is also a rule in Canadian REIT laws that allows for a REIT to own up to 20% of its assets in shares of other REITs. RioCan & Canadian Apartment Properties are two of the largest REITs in Canada and both are based in midtown Toronto. They operate in different REIT sectors. RioCan is mostly focused on retail, while CAP is exclusively focused on multi-unit residential. With the liquidity for the traditional plazas that RioCan has historically been targeting drying up, and opportunities for growth in core urban markets remaining strong, RioCan has been developing its urban portfolio. This is particularly true in Toronto, Calgary, and Ottawa with announcements being made recently.
RioCan has a few large projects coming down the pipe including the Well in Toronto and a mixed use development at its head office at Yonge & Eglington in Toronto. But RioCan doesn’t have much expertise in residential management in house, and with a powerful balance sheet (and flush with cash from the upcoming sale of its US portfolio), it has now been confirmed by an analyst at RBC that RioCan owns more than $300 million worth of CAP units, making RioCan Canadian Apartment Properties largest shareholder.
Could this mean an eventual merger between the two large REITs? As a unitholder in both companies, I think this would be a great idea. It would provide the combined entity with more scale and diversification. RioCan has a market cap of $9 billion and CAP has a market cap of $4 billion. The combined entity would have a better chance of collecting minority investment from some of Canada’s pension funds because of its combined size. The combined entity would also be able to fund larger development projects in Toronto without pushing up against various legal REIT tax caps.
Based on the estimates from RBC, RioCan is getting close to owning 10% of CAP REIT. Anything over 10% and they would have to formally disclose their position and report any additional purchases of CAP REIT shares. I think its less likely they will do this. I think its more likely that they make an offer for the remaining shares, but at the current valuation of CAP (distribution yield of only 4%) RioCan shareholders will be paying a high price.
According to Neil Downey, a managing director and real estate analyst at RBC Capital markets, the evidence is beyond a reasonable doubt. What’s less clear is the motives behind the news that one real estate investment trust is the largest shareholder in another real estate investment trust.