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RioCan REIT Sticking With Multifamily

CEO Ed Sonshine Says New Rent Control Rules Will Not Change Plans at Canada's Largest REIT
December 5, 2017
The chief executive of Canada's largest real estate investment trust, now in the midst of a major makeover that will see it jump into multifamily investments, says stricter rental rules in the REIT's home base of Ontario will not discourage the plan.

Ed Sonshine, who founded RioCan REIT in 1993, said in an interview with CoStar News that market watchers are probably reading too much into the REIT's decision in the fall to sell off a 133-unit rental project at King and Portland streets in Toronto as a condominium play.

"I think, ultimately, we will have in the neighbourhood of 40 or 45 (rental buildings) in seven or eight years. We'll get there, people were quite skeptical of this three years ago when I started talking about it," said Sonshine about a plan that according to a securities filing under management's discussion and analysis would see the REIT create 15,234,000 square feet of residential space across 48 projects.

The more immediate goal is to build a portfolio of "at least" 10,000 apartment rental units despite rumours otherwise in the marketplace. "It will absolutely not change. I would never be black and white (and say RioCan will never sell) but to the contrary, we are still trying to do rental buildings," said Sonshine.

The company's MD&A filing shows 9,761,000 square feet of residential development is in the active construction phase at 26 projects. The REIT's continued presence in the space comes in the face of a change announced in April 2017 by Ontario that extended rules on rent control to all buildings in the province, after previously exempting those built after 1991. The rules mean annual rent increases are tied to inflation and capped at 2.5%, though landlords can reset rent to market levels after a tenant moves out.

A report from Toronto research firm Urbanation Inc., sponsored by the Federation of Rental-Housing Providers of Ontario (FRPO), has suggested Ontario will face a supply shortfall of more than 10,000 units within a decade and from July to September alone builders had already cancelled or converted 1,000 units to condominiums.

"People are still reviewing their projects, and some are proceeding," said Jim Murphy, president and CEO of FRPO. "(The projects) may make sense because they've already invested a lot in the proposal and the planning process. Rent control is not the only issue that determines an investment; there are other issues like interest rates and market rates."

But Murphy says rent control is an "intangible" and wonders whether Ontario may tighten the screws even more, depending on who wins the next election in June 2018. "I would be more concerned about what happens next," he said, pointing out the province could change the rules that allow a landlord to reset the rent when a new tenant moves out.

Sonshine is pushing ahead for now. "Despite the rent control legislation," the company said in its securities filing, "RioCan remains committed to its residential program while we assess the impact on individual properties and observe the broader market reactions."

Canada Mortgage and Housing Corp., the federal Crown corp. that advises Ottawa on housing policy, said in November that the vacancy rate in purpose-built rental apartments, which does not include individually rented condominiums, had decreased from 3.7% in October 2016 to 3% a year later for centres with populations above 10,000. The decline reversed a trend seen the previous two years.

In the Greater Toronto Area, where RioCan hopes to soon derive 50% of its net operating income for the entire REIT, the vacancy rate hit a 16-year low of 1% in October.

"While developers had responded to growing demand for rental properties and benefited from favourable lending conditions in recent years, increases in rental supply were not enough to meet the growing demand and avert a decline in the average vacancy rate," CMHC noted in a report on the Toronto market.

Sonshine says rising prices in the housing market have driven people into rental properties and made them a good bet for developers looking for income plays.

"I've always been concerned about affordability," said Sonshine. "You look at models like New York or London, cities that have gotten really big, most people rent. It's only rich people that own anything."

Because of its holdings, which now include nine million square feet under development, Sonshine said his REIT has had a chance to look at its holdings and take advantage of rising land values by putting more density on existing sites, a process it began almost four years ago.

One example is the REIT's rezoning of the Colossus Centre in Vaughan, north of Toronto, which previously had only about 700,000 square feet of retail space, including the movie theatre.

"We are about to start a rezoning - we are going to rip down part of the retail and build rental apartment buildings," said Sonshine, noting an extension of an existing subway down the street from the development. "It's all going to get built out over the next seven to 10 years. I sometimes think we should call ourselves Sites R Us."

Is RioCan en route to becoming an apartment REIT? The CEO says it is really more about diversification. "We will never be all apartments," he says. "People have asked me, 'Eddie what are you trying to do?' What we want to be is a mixed-use bit city REIT, that is where we are going. Retail will probably dominate, but it will be a different kind of retail."

RioCan is actively paring down its portfolio, even as it maintains its status as the country's largest REIT. In November, it announced it had sold $200 million in assets, part of a plan to sell $2 billion in assets with a goal of having 90 percent of its assets in Canada's six biggest cities.

Sonshine agrees the company's unit price has been "soft" but is adamant investors are not taking into account the transformation of the REIT. He expects in five or six years that 65% of the REIT's net operating income will come from retail with the other 35% from rental apartments and office. That compares with 95% of the REIT's portfolio coming from retail today.

The chief executive is not dismissing the threat of tighter rules for landlords regarding tenant. "Rent control, it has (created some caution), but as we got more into it we decided to (go ahead)," said Sonshine. "You never know, a new government may soften the rules. They'll realize as they roll out a few years down the road that nobody is building rental anymore."

In the meantime, he figures the REIT's portfolio will make people notice it in the marketplace. "At the end of the day, we will have the only portfolio in Canada that is all brand new, that's a differentiating factor," Sonshine said. "For at least a decade, you won’t have any major maintenance or repair issues. REIT's are in the cash flow business. If you don't have cash flow, you're nobody. To talk about selling everything off is silly."

Garry Marr, Toronto Market Reporter  CoStar Group   

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