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Westons create Canada's largest REIT with $3.9-billion deal
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Family-controlled real estate trust moves to diversify property holdings beyond retail
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By RACHELLE YOUNGLAI, MARINA STRAUSS
  
  

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Friday, February 16, 2018 – Page B1

The family behind the Loblaw grocery empire has struck a $3.9-billion deal to create Canada's biggest real estate trust in a bid to expand beyond its core retail holdings amid a rapid shift in consumer habits.

Through its Choice Properties Real Estate Investment Trust, the Weston family plans to acquire Canadian Real Estate Investment Trust (CREIT) and its suite of 206 industrial, office and retail properties across Canada. The combined entity will boast 752 properties.

The takeover comes as retailers race to overhaul their business strategies and, in many cases, shrink retail footprints amid threats from e-commerce and discount rivals.

"We have always had an ambition to really establish Choice Properties as a real estate entity on its own," Galen G. Weston, chairman and chief executive of Loblaw Cos. Ltd. and George Weston Ltd., told an analyst conference call.

The Weston family controls grocery giant Loblaw Cos., which is Choice Properties' main tenant and the country's largest grocer. It also owns Shoppers Drug Mart, the top drugstore retailer, through parent George Weston Ltd.

In a fast-changing retail landscape, ailing players such as Sears Canada Inc. have been forced to shut their doors and others, including Hudson's Bay Co., are trying to reinvent the traditional retail space and find new ways to retain consumers as e-commerce powerhouses such as Amazon.com Inc. steal away business.

Last year, Amazon acquired Whole Foods Markets Inc., signalling its bigger push into online grocery selling and forcing rivals such as Loblaw to shore up their e-commerce and shut underperforming stores.

The CREIT deal would give the Westons the opportunity to expand into industrial and warehouse space, which has become the hottest type of commercial real estate as Amazon and other online retailers look for places to store their goods. The Westons plan to redevelop some of the properties into ones that have a combination of retail, residential and office space, known as "mixed use."

"Clearly, Canada's largest retailer sees lots of value in real estate," said Ed Sonshine, chief executive of RioCan Real Estate Investment Trust, which is also retooling its portfolio to focus on major markets.

Choice Properties chief executive, John Morrison, called it "strategic" to move into other geographies and other types of real estate. He said that when the so-called mixed-use properties were developed, retail would occupy the smallest amount of space and residential the largest.

The move by the Weston family to diversify its real estate portfolio and rely less on retail is part of a growing trend in the industry. It's often referred to as "intensification," "densification," "re-positioning," "simplification" or sometimes even "demalling."

Major shopping-centre companies are increasingly looking for new uses for their traditional retail space, ranging from restaurants and gyms to residential and seniors developments.

These initiatives became more urgent in the past few years after the troubled Target Corp., and more recently Sears, closed hundreds of stores, leaving in their wake an oversupply of retail space.

At the same time, established retailers were increasingly shrinking their stores or closing some of them as more consumers shopped online. Retailers ranging from Staples to Walmart have scaled back the size of their stores and stopped adding new ones, apart from replacing some with better locations. Some retailers have expanded, but generally with modest plans.

"What we've seen over the last two years is a shakeup but also a transformation," Mr. Sonshine told analysts this week.

"Is everybody repositioning themselves and considering what their optimum sizes are? Absolutely. And is there a major transformation going on as to the types of tenants that we are getting our revenue from? For sure."

As an example of "intensification," Mr. Sonshine pointed to RioCan's midtown Toronto Sunnybrook Plaza.

RioCan plans to slash in half its current 50,000 square feet of retailing space and convert the other half to residential with a new partner. "And you're seeing that repeated all over the place in the major markets."

RioCan is focusing on Canada's six biggest cities and selling off malls in secondary and tertiary markets, where retail demand is weakening.

Shopping-centre firms such as RioCan and SmartCentres REIT, which is known for its open-air power centres anchored by discount Walmart stores, are teaming up with residential and other partners to expand into new types of uses.

This week, SmartCentres announced it is partnering with retirement centre specialist Revera Inc. to build retirement homes at the developer's properties. SmartCentres has been developing more office and residential properties as well.

Underscoring the shift from retail, SmartCentres' chief executive officer, Huw Thomas, who was previously an executive at retailer Canadian Tire Corp., is stepping down in June and being replaced by Peter Forde, a veteran trustee of the REIT. As well, Mitchell Goldhar, founder of the real estate firm that brought Walmart to Canada 24 years ago and SmartCentre's largest unit holder, is taking the more active role of executive chairman at SmartCentres. Previously, he was non-executive chairman.

"Retailers [are] going through change, both positive and negative," Mr. Thomas said this week. "And like any good business, we are actively working to adjust to these and to move forward. Despite market conditions being somewhat challenging with the closure of Sears operations across the country, adding significant vacant space to an already large vacancy pool in certain markets, we remain very optimistic about our longterm ability to maintain strong and competitive occupancy in our principally Walmart-anchored centres." He added that retailers "are certainly being more cautious in their store location decisions."

In another nod to the shifting landscape, SmartCentres a few years ago launched Penguin Pick-Up, e-commerce delivery depots at its malls and other locations.

"Most shopping centres have less people coming, less traffic," said John Crombie, a senior vice-president at brokerage Triovest Realty Advisors. Choice's effort to diversify its real estate is part of a wider trend, he added. "It's hard to be a one-trick pony."

CHOICE PROPERTIES REIT (CHP.UN) CLOSE: $12.04, DOWN 45¢ CANADIAN REIT (REF.UN) CLOSE: $50.49, UP $6.95


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