A planned joint venture between U.S. retail REIT Tanger Factory Outlet Centers and Canadian RioCan REIT will seek to capitalize on two major trends among North American real estate developers: the increasing popularity of outlet centers and the push to expand internationally.
The venture, if successful, might also become an instrument facilitating U.S. retailer expansion into Canada, industry sources say.
On Jan. 24, RioCan and Tanger, a Greensboro, N.C.-based outlet center developer, announced they signed a letter of intent to form an exclusive joint venture to allow the firms to lease, develop and redevelop outlet centers in major Canadian cities.
The firms plan to split the partnership on a 50/50 basis, with RioCan picking up development and property management responsibilities, while Tanger will be responsible for leasing and marketing. The centers will likely closely mirror existing Tanger properties in the U.S., especially the more recent developments in North Carolina, according to a Tanger spokesperson.
In November, for example, the company opened a new $65 million, 317,000-square-foot outlet center in Mebane, N.C. Tenants at the property include Banana Republic Factory Store, J.Crew Factory and Nine West Outlet, among others.
Bright outlook up North
Tanger and RioCan expect that their total investment in the joint venture might reach up to $1.01 billion, with a portfolio of 10 to 15 centers.
Over the past year, RioCan has put increasing emphasis on joint ventures with U.S.-based REITs as a growth strategy, including partnerships with Inland Western Retail Real Estate Trust and Cedar Shopping Centers. In the past, it has also done deals with Kimco Realty Corp., which focused on Canadian shopping centers.
“We definitely think someone should go up to Canada and do outlet centers” there, says Rich Moore, a REIT analyst with RBC Capital Markets. “The important thing is that Tanger is doing what they are doing with a partner that is Canadian and knows the landscape. It’s an excellent way for these guys to go.”
Canadian consumers love the outlet center format, but up until now, they’ve had to travel to the U.S. to do outlet shopping, adds Merrie Frankel, an analyst with Moody’s Investors Service whose coverage includes Canadian REITs. As of 2009, there were only 13 outlet or value centers in Canada, totaling roughly 4.6 million square feet, according to Value Retail News, an industry publication. In contrast, Tanger alone owns 32 outlet centers in the U.S., totaling 9.8 million square feet.
What makes the proposition even more enticing is that it could provide U.S. retailers another avenue for expansion into Canada. Tanger will be able to leverage its relationships with U.S. retailers that operate outlet concepts domestically and bring those North. This could be especially attractive to U.S. retailers that already operate full price stores in Canada that are looking to partner with the right developer, says Maria Maslovksy, a Moody’s Investors Service analyst who covers Tanger.
“That market is somewhat similar to the U.S., so Tanger can capitalize on [that] and expand its tenant reach into Canada,” Maslovsky says. “The outlet business is very dependent on strong relationships with tenants, which Tanger has, and I think a number of their tenants would be interested in expanding to Canada.”
In January, for instance, U.S. discounter Target bought the 75-year-old Canadian department store chain Zellers for $1.8 billion. Target plans to reopen up to a 150 of the chain’s stores under the Target banner over the next three years.
Most U.S. retailers have so far stayed away from opening outlet stores in Canada because there hasn’t been enough outlet center development to justify the investment, notes Linda Humphers, editor-in-chief of Value Retail News. Expansion would only make sense for them if they could open a portfolio of five to 15 stores at once.
Tanger executives say it’s too early in the game to discuss potential returns on investment from the venture, but Moore estimates they will be roughly equal to returns on similar developments in the U.S., averaging around 10 percent.