Look out landlords, this tenant is going to be looking for a deal.
Loblaw Cos. Ltd.’s $12.4-billion offer for Shoppers Drug Mart Corp. could make for a more powerful tenant, said Pammi Bir, an analyst at Scotiabank.
“The deal may also strengthen [Loblaw’s] negotiating position with landlords, which could modestly impact growth,” he said in a note to clients.
But overall, the analyst said the deal should be good for real estate investment trusts that own retail space.
“With [Loblaw] noting the deal is partly motivated by a desire to expand its small-urban store footprint, we view it as further support for retail REITs with more urban focused portfolios and growth strategies going forward,” Mr.Bir said, noting he is currently restricted on writing on Choice Properties REIT, which Loblaw controls.
Cost synergies are estimated to be $300-million annually by year three after the merger, but the savings are not dependent on store closures.
He notes Crombie REIT First Capital Realty with 6.7% and 6.3%, respectively, of their rents from Shoppers have the largest exposure to the deal.
“That said, we would expect strong demand for better quality locations, with lease termination payments likely offsetting any negative cash flow impact (may even realize higher rents on re-leasing),” Mr. Bir said.
He said retail REITs that have higher-quality tenants will stand out in a further shake-out in the retail sector and noted First Capital is a leader in that regard.
“We believe retail REITs with higher quality portfolios are better positioned to navigate an evolving retail scene and rising interest rates,” Mr. Bir said.
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