Earlier this morning RioCan REIT announced that it has agreed to form a joint venture with Hudson’s Bay Company focused on real estate growth opportunities in Canada. The joint venture will enable RioCan and HBC to build on the strength of existing real estate assets through potential future redevelopment, as well as identify new real estate acquisition and redevelopment opportunities.
“As part of this transaction we have been able to secure one of Canada’s leading retailers in two key properties, being Georgian Mall and Oakville Place, for an additional twenty years, solidifying the strength of these shopping centres for years to come,” said Edward Sonshine, CEO of RioCan. “This joint venture represents an exciting opportunity for RioCan and HBC to combine our collective retail real estate acumen, and a strong collection of banners which serve as highly desirable anchor tenants in order to create a one-of-a-kind real estate portfolio with excellent potential for future urban mixed use redevelopment.”
Canadian Joint Venture Agreement
RioCan has committed to contribute $325 million to the newly established joint venture entity for an eventual pro forma equity stake of 20.2 per cent. RioCan’s equity contribution will be comprised of three components. The first component is a $144.3 million equity contribution by way of the sale of a 50 per cent interest in two enclosed mall properties as described below. The second component is by way of a $52.5 million capital commitment for tenant and capital improvements to certain properties in the JV Entity. The final component is a capital commitment by RioCan by way of an equity contribution of $128.1 million to be funded over the next three years for future acquisitions by the JV Entity.
The transaction values RioCan’s contribution of a 50 per cent interest in two enclosed mall properties in Ontario (Oakville Place and Georgian Mall described below) at $296.6 million based on a capitalization rate of 5.15 per cent. RioCan’s initial equity contribution to the JV Entity will be $144.3 million in the form of a 50 per cent interest in the two mall properties, net of the existing debt of $142.2 million (at 50 per cent), which carries a weighted average interest rate of 3.7 per cent and maturing in 2018 and 2021, and net of a capital lease obligation related to a ground lease of $10.1 million at RioCan Georgian Mall for an initial equity stake in the JV Entity of 10.1 per cent. RioCan will continue to act as manager for the enclosed malls that it will contribute to the JV Entity’s portfolio. RioCan will also contribute an additional $52.5M to the JV Entity, part of which is to be utilized for improvements to certain properties contributed to the JV Entity.
RioCan has also committed to an additional equity contribution to the JV Entity of approximately $128.1 million over the next three years to fund future property acquisitions to increase the value and diversify the tenant base of the JV Entity. RioCan’s contributions will be made by the third anniversary of the closing date. The joint venture will be entitled to exclusivity on select enclosed regional mall acquisition opportunities in Canada identified by RioCan, and all retail property acquisition opportunities identified by HBC.
RioCan’s Property Contributions to the JV Entity
With more than 150 stores and the potential to add further retail and residential spaces on the adjacent 6.6 acres of land, this property is the dominant regional mall servicing the areas north of the GTA. Georgian Mall is located near Highway 400 along Bayfield Street, a major commercial corridor through Barrie, and is the largest shopping centre in the Barrie-Huronia area. Barrie is located along the shores of Lake Simcoe, approximately 90 kms north of Toronto. It is one of Canada’s fastest growing metropolitan areas. The mall is anchored by The Bay and shadow anchored by Sears department stores. Major fashion tenants at Georgian Mall include H&M, American Eagle, Michael Hill, The Garage Clothing Co., Melanie Lyne and Town Shoes. Other national tenants include Disney Store, SportChek, HomeSense and Shoppers Drug Mart. The site encompasses 61.9 acres (including 6.57 acres of excess lands), and has parking for 3,105 vehicles.
Oakville Place is located directly off of the Queen Elizabeth Way, the major highway running through Ontario’s “Golden Horseshoe”, in Oakville, Ontario. Oakville Place also has the potential for additional mixed use opportunities on the 21.9 acre site. Oakville is a fast growing community with a strong, diversified economic base, and possesses one of Canada’s highest income demographics with an average household income statistic that is well above the national average. Oakville Place is a fashion focused, two level regional mall containing approximately 455,000 square feet of gross leasable area. The property was built in 1981 and has undergone significant renovations in 2004 and 2008. Oakville Place is is anchored by The Bay and Sears. Other major retail tenants at Oakville Place include American Eagle, H&M, Jacob, Birks, Roots, Laura, Mexx and Shoppers Drug Mart. Pusateri’s, a local high end grocery and food retailer is scheduled to open an 18,000 square foot location at Oakville Place in late 2015.
In connection with the overall transaction, HBC has agreed to renegotiate the terms of the leases at Georgian Mall and Oakville Place. The revisions include the entering into a new twenty year lease from the closing date of the transaction, with six, five year renewal options, revisions to the rent and a commitment by the JV Entity to improve the stores.
HBC’s Property Contributions to the JV Entity
Under the agreement with RioCan, HBC will contribute ten owned or ground-leased properties to the JV Entity with an estimated 3.3 million square feet. The transaction values the HBC real estate contribution at approximately C$1.7 billion based on a capitalization rate of 5.08 per cent. In addition to an eventual pro forma 79.8 per cent equity stake in the JV, HBC is expected to receive approximately C$352 million in cash proceeds from third-party debt to be arranged in advance by HBC and assumed by the JV Entity, and the JV Entity is expected to assume approximately $48 million of existing debt secured against one of the properties contributed by HBC. As a result, HBC will have an initial equity stake in the JV Entity of C$1.3 billion, representing an initial 89.9 per cent interest in the JV Entity. The JV Entity will enter into a new lease with HBC for each of the ten store locations with a lease term of twenty years that provides for moderate annual rental increases during the term of the lease and any extensions.