CHRISTIAN CHARLOT: Welcome, everybody to this episode of Hard Hats and Quick Chats, where we unpack investment topic within the private market world.
Today we have an interesting topic. We're going to talk about the retail sector, which is evolving faster than ever. I'm not saying it's going to Renaissance, but definitely a revival. And to unpack this, we're going to take a look at both sides of the coin. Our equity and lenders are looking at opportunities and risk and this evolving landscape. And for this with we brought with us two great minds. First, Myles Routly, vice president and director in the mortgage investment team. And Mark Cooksley, managing director in the global real estate development team. So let's start talking about grocery anchored, retail centers. There's a lot of interest from investors for this type of asset. I'd like to get your impression, especially with recession fears mounting. How do you guys see the sector? I'd like to start with you, Myles.
MYLES ROUTLY: Thank you. Christian. Grocery anchored retail has been a core investment strategy for our structure for a very long time. The reason behind that is any investment we look at starts from the underlying income that's going to support our investment. In this case, you have necessity based retail. You have products that are staples in everyone's homes, and you have a product that's being shopped on a regular basis in a physical format versus online. So when those incomes roll up to our tenants, to our landlords, our landlords, to our fund, it gives us really good comfort that we have that backbone that's going to diversify us and prove to be defensible in a downward recession potential market. As such, we continue to put capital in that space. A good example being our Loblaws investment, that we've done recently. This is a portfolio of Loblaws stores, including an industrial Loblaws space that has some cold storage to it. So we're really capturing the entire supply line that's going through to that end user of us being consumers and shopping for groceries. On top of that, these types of grocery based, anchored retail, those tenants drive people to the sites, allowing the sites to be stronger. So the non grocery based tenants of those sites, can pick up the foot traffic as well.
CHRISTIAN CHARLOT: Awesome. And from the equity perspective Mark.
MARK COOKSLEY: Yeah I would say very similar lens as Myles on the lending side. On the equity side, it's certainly like they're predictable nature of necessity based grocery, retail. When you think about grocery based retail, it's not just grocers who are locating on site. It's also pharmacies, liquor stores, all those types of tenants that produce that frequent shop. Which benefits, the center, the adjacent tenants. But those core necessity based, tenants as well. Across the strategy, almost 90% of our shopping centers are grocery anchored. So again, looking at that consistency, but also what we like about it is necessity based retailers often sign up for longer leases. So they'll have 15 to 20 year leases with multiple renewal options. So it really adds to that cash flow stability of the asset, which is ultimately what we're looking to achieve. Deer Foot City in Calgary is an example of such. It’s large open air center. It's anchored by Canadian Tire, Walmart Supercenter, Dollarama and Lena's Italian Market, which is a local grocery chain. It's located just off the Ring road, highway two that sees over 160,000 cars pass by every single day. Provides great visibility to the shopping center and all tenants. In addition, it’s just down the street seven minutes away from the airport. All of these locational attributes have attracted these tenants, but they've also helped retain them as well.
CHRISTIAN CHARLOT: Now, on the other side of the spectrum, when we take a look at destination retail since the pandemic, shoppers have a bit of change. So with this changing shopper habits, how has this reshaped the way we see opportunities in this type of segment in the retail sector?
MYLES ROUTLY: Absolutely. I couldn't agree more that shopping habits have changed. Destination retail is a bit of a unique, asset type. When we look, across Canada and certainly within our portfolio, it's something that we are seeking, sometimes harder to find. A good example would be Dartmouth Crossing, located in Dartmouth, just outside of Halifax. It's a destination retail center that brings people in from all the surrounding areas and really across the Maritimes. It provides all of your staple retailers as well as a mixture of higher street product. We have grocery anchored in there as well. So big, major brand name tenants and allows people when they come for, shopping experience to have the ability to buy everything that's on their list. What this does is it keeps people offline where they're constantly searching, brings them back in, and the center itself is organized in a manner to keep people engaged and give them an enjoyable experience. When you look at some other centers that may not be performing quite as well, the issues resolve really around that consumer experience and making sure that people have access to the brands that they're looking for and are able to do so in a comfortable manner.
CHRISTIAN CHARLOT: And from the equity side.
MARK COOKSLEY: Yeah. Well, we talked about grocery anchor at retail would certainly hold that in the strategy. We do like destination retail as well. We feel like in a large diversified strategy, you can have exposure to all types of retail. And you should just from a risk and diversification perspective. However, with that being said, with destination retail, you have to really understand it. You know the details. It is quite nuanced when you think about high street retail. One side of the street can drastically outperform the other side of the street. So if you're buying on the wrong side of the street, you may have challenges with respect to cash flows, tenancy, etc.. 50 Bloor, which has been a core holding flagship holding in the portfolio for coming on two decades, maybe longer. It's located in Yorkville and City of Toronto. It's anchored by Holt Renfrew and Aritzia. It's at the intersection of two subway lines. What we find with strong destination retail, high street retail, such as Bloor Street, is the traffic volumes are so significant tenants want to be in that location. They'll look to that high street as their entry way into that new market, because they just know the people are there. They can build that brand and they also know because of the traffic, they can drive sales.
CHRISTIAN CHARLOT: Awesome. Mixed use retail is becoming an increasing part of urban developments. So I'd like to get your perspective on the densification aspect, especially the growth optionality coming from the densification aspect. If you could share with us your perspective, and this follows and then Mark.
MYLES ROUTLY: Absolutely. So this is something Mark and I talk about all the time, the difference of the value that we can attribute to densification between the debt and the equity perspective on the debt side, because we are locked into a contractual relationship as we're lending on that asset. We don't get to experience the upside of the value. So when we are looking at our investment, we're basing our value off what's in place, looking at those underlying cash flows and flowing up like we talked about earlier. The advantage or one area that we do like about the densification strategy is that it gives us an opportunity to grow our relationship on that property. And with that borrowing group. So we've often seen opportunities where a property went from being an income producing retail property and that was what our investment was based on to us being able to make the decision to work with that borrower as they went through the densification. And that allowed us to increase our exposure, put more capital out, and continue to earn a strong investment for our underlying, clients.
CHRISTIAN CHARLOT: And what about you, Mark?
MARK COOKSLEY: Certainly like the idea of, intensification, densification. I would say initially when we're looking at a new property or an existing property, we'll look at it from a cashflow perspective. But then we're always trying to maximize value across shopping centers. So if we have the ability to densify, add residential uses, maybe add office uses, maybe add industrial uses that are adjacent. All those uses are symbiotic to the retail. They all support one another. And ultimately, as you add those different uses, it helps diversify the overall stream across the property. But it also reduces the risk. However, intensification is not easy. The municipal process is long, expensive, is arduous, and you think about existing shopping centers or services in the ground, so you have to navigate conflicts. Large tenants will have no build areas. Minimum parking ratios, the list goes on and on. However, currently today across the portfolio, we are entitling a number of properties. Waterloo Corporate Campus is an example. That's a mixed use property today located at the north end of Waterloo. It's primarily retail, but it has some office on site. The retail is anchored by Shoppers Drug Mart and Sobeys. So back to our earlier conversation, just that necessity based tenants that we like. And the office on site is fully leased as well. We're entitling it to add both residential and industrial uses. The site itself is in a great spot. It's adjacent to the recently completed LRT line, so there's a stop basically at the perimeter of the property, and it's in very close proximity to both Laurier University and the University of Waterloo.
CHRISTIAN CHARLOT: Awesome. Thank you guys. So the message is pretty clear when we talk about grocery anchored, it provides that stability or destination retail where you get that growing income, especially with shoppers wanting to have an experience at mixed use, provide that diversification. So all this is showing how retail is evolving, and right now in the real estate market, how it's becoming one of the most resilient property types. If you have any questions, please feel free to reach out to Relationship Manager. This is Christian Charlot from Hard Hats and Quick Chats.
Thank you.
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