Is RioCan’s Latest Strategy Good for Investors?

Edward Sonshine wants to build apartments over retail stores.

| More on:
The Motley Fool

RioCan (TSX:REI.UN) CEO Edward Sonshine is known as “Darth Vader” in Toronto’s Kensington Market, a trendy downtown neighborhood. It’s where he planned to build a Walmart, before backing off last week. But Mr. Sonshine is also widely respected; he was recently named Canada’s Outstanding CEO of the year for 2013 by Bennett Jones, despite a declining share price for RioCan that year.

Over the past 10 years, the defining theme of Mr. Sonshine’s strategy has been urbanization. He has methodically been pulling the company out of smaller cities and into larger ones where the populations are growing much faster. Now he has a new plan, this one to build residential apartments on top of RioCan’s largest tenants.

There are strong arguments in favour of Mr. Sonshine’s latest idea. The growth of online retailers has put tremendous pressure on traditional retailers, including RioCan’s top two tenants, Walmart (NYSE:WMT) and Canadian Tire (TSX:CTC.A). For the apartment dwellers above its stores, these retailers could potentially eliminate the convenience edge that their online rivals currently enjoy – this would provide a boost to their sales. Likewise, apartment tenants may find the convenience of living next to major retailers very attractive, and may be willing to pay higher rents. Even without these synergies, RioCan would certainly be getting more use out of the land it currently owns.

Then again, there are certainly arguments against RioCan’s strategy. Many of Canada’s largest cities, such as Toronto and Vancouver, have seen tremendous growth in the supply of condominium units – if prices for these units suffer steep declines, then RioCan could feel a lot of pain. Furthermore, the company’s specialty is retail, which accounts for 95% of its revenue. On the other hand, other investors may want to lower that number by diversifying into other forms of revenue.

Foolish bottom line

With Mr. Sonshine’s track record, investors should hold off their judgements for now. A $70,000 investment in RioCan in 1994 would be worth $1 million today. So even if RioCan stumbles with its latest strategy, its shareholders should be in a forgiving mood.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

question marks written reminders tickets
Dividend Stocks

Dividend Investors: Is BCE Stock a Buy Now?

BCE now offers a 7.9% dividend yield.

Read more »

A bull outlined against a field
Tech Stocks

Is a Bull Market Here? 4 Reasons to Buy Celestica Stock Like There’s No Tomorrow 

Celestica (TSX:CLS) stock has been a huge winner for investors this year, but there could be even more in the…

Read more »

Retirement plan

1 Retirement Savings Hack That Has Created Many Millionaires

Investors can retirement with $1 million in savings by investing in index funds such as the S&P 500.

Read more »

edit Taxes CRA
Dividend Stocks

CRA Money: 2 More Days to Boost Your Tax Refund!

Dividend stocks like Toronto-Dominion Bank (TSX:TD) can be great RRSP holdings.

Read more »

close-up photo of investor Warren Buffett
Stocks for Beginners

The Best Warren Buffett Stocks to Buy With $300 Right Now

These Warren Buffett stocks have long histories of growth, each offering their own reasons for why investors need them today.

Read more »

grow money, wealth build
Dividend Stocks

3 TSX Dividend Stocks With Yields Above 7% (But Are They Safe?)

These three dividend stocks all have ultra-high yields, making them some of the best to buy if you're looking to…

Read more »

oil and natural gas
Energy Stocks

3 Energy Stocks Already Worth Your While

TSX energy stocks could shine for much longer. Here's why Canadian Natural Resources (TSX:CNQ), Parex Resources (TSX:PXT), and another oil…

Read more »

Light bulb with jester hat perched on top
Dividend Stocks

3 Canadian Dividend Stocks With Payouts That Are No Joke 

Here are three top Canadian dividend stocks long-term investors would be remiss to ignore, particularly at these current valuations.

Read more »