Fresh off a deal to buy Quebec City's largest mall, Primaris Real Estate Investment Trust, likely is shopping for more centres, according to several analysts.
Last month, Toronto-based Primaris REIT said it paid $325 million to add Les Galeries de la Capitale, a mall with more than 1 million square feet of space, to its portfolio. Primaris President and Chief Operating Officer Patrick Sullivan said in a statement that Les Galeries de la Capitale, a major regional enclosed shopping centre, "exemplifies the type of property Primaris is targeting with its growth strategy."
CIBC Capital Market analysts Sumayya Syed and Zachary Zervo said in a report they expect the REIT to buy more retail properties. Other analysts said Primaris is emerging as a potential buyer when mall owners are looking to sell their properties because of the REIT's ability to access capital.
"We do expect Primaris to continue to be highly acquisitive, and the REIT is now one-third of the way to meeting its 2026 target of more than $1 billion in the acquisition," Syed and Zervo said. The analysts have picked the REIT as an outperformer with a 12-month target unit price of $18.
Primaris, the only REIT in Canada focused on owning enclosed shopping centres, has attracted the attention of sellers. Five of Canada's 10 biggest pension funds have sold shopping centres to the REIT and taken back equity and convertible preferred equity investments.
Primaris also closed a $74.7 million fundraising deal last week. The transaction included a treasury offering of 2,516,011 units by Primaris for gross proceeds of approximately $39.1 million, but there was also a secondary offering by the Canada Pension Plan Investment Board for $35.6 million.
Primaris received no money from the secondary offering, but the REIT used the net proceeds from the treasury offering to repay debt under its unsecured revolving credit facility and to partially fund the acquisition of Les Galeries de la Capitale. "The Trust intends to use the net proceeds from the Treasury Offering to repay a portion of the indebtedness incurred under the Trust’s unsecured revolving credit facility to partially fund the Trust’s acquisition of Les Galeries de la Capitale shopping mall in Quebec City, Quebec, which closed on October 1, 2024," Primaris said.
Deal structure creates buzz
Primaris' purchase of Les Galeries de la Capitale created some buzz at this week's Quebec City Real Estate Forum, where Mach Group President Vincent Chiara questioned the accuracy of the reported price of $325 million.
"I don't have the precise cap rate, but it wasn’t a real transaction in my opinion," Chiara said during a panel at the forum. "I call those camouflaged sales and camouflaged prices. They are structured in a way to exchange shares in a REIT that has very little liquidity. They pay 150 million units. I find they’re camouflaging the real price because if the vendor wants to convert those units into cash he’ll take a big loss. It is not a real sale."
Chiara said the deal's structure, with Primaris paying $170 million in cash, $55 million of trust units, and $100 million in preferred units, does not equal $325 million in cash.
"I find they’re camouflaging the real price because if the vendor wants to convert those units into cash he’ll take a big loss," he said. "I know that this is the current fashion, the sellers try to justify it."
He added that, "(The sellers) want to protect their assets. If Oxford has other malls and they sell one that (is under) the cap limit, they have to re-price the rest of their assets."
He said the structure of the sale needs to be examined with some skepticism. "The retail sector is stronger than it was in terms of performance, but the value of these properties is declining and will continue to do so for a while," said Chiara.
In response to Chiara's comments, Primaris CEO Alex Avery told CoStar News, "We’re very pleased with the addition of Galeries de la Capitale to our portfolio. Primaris is uniquely positioned as a buyer of large enclosed shopping centres, having the scaled platform to manage these complex properties, the scale of portfolio to be relevant with leading retailers, and a robust balance sheet to ensure they are properly capitalized and maintained."
“This unique profile positioned us as the preferred buyer of enclosed malls in Canada.”
Pension funds selling
A report from TD Cown suggests Primaris appears to be emerging as an ideal buyer for mall owners looking to unload their assets.
"For other mall owners considering the disposition of one or more properties to Primaris, the offering demonstrated the potential to generate immediate liquidity," said analysts Sam Damiani and Golden Nguyen-Halfyard in a report. "In the past three years, Primaris has acquired $1.8 billion of malls from pension funds, each including equity issued to the vendors. Primaris remains the main consolidator of Canada's mall sector, and management indicated at last month's investor day that five to six potential mall acquisitions were in pursuit."
Primaris was formed in 2003 as a publicly traded company, Borealis Retail REIT, and sponsored by the Ontario Municipal Employees Retirement System or OMERs. Management was internalized in 2009, and in 2013, H&R REIT acquired Primaris' operating platform and 25 properties owned and managed by Primaris.
In 2021, H&R decided to spin off Primaris REIT into a public company. Concurrent with the spin-off, the Healthcare of Ontario Pension Plan, or HOOPP, contributed six large-format shopping centres in exchange for approximately 26% of Primaris's units.
Canadian pension funds own about 34% of Primaris REIT's shares on a fully diluted basis, according to a report from Raymond James that said HOOPP's stake is down to 23%.
"As part of the REIT's October common equity issuance, all of Primaris' Canadian pension fund partners were allowed to participate in the offering and divest their respective common and preferred equity holdings," the Raymond James report noted. "However, except for CPPIB, all of Primaris' Canadian pension fund partners declined their respective opportunity to participate in a liquidity event as part of the REIT's common equity offering."