Cedar Shopping Centers, RioCan Form JV to Acquire Assets in MD, VA, PA, MA
Cedar Shopping Centers Sells Seven MA, PA Properties into JV with REIT RioCan
TORONTO, ONTARIO-based RioCan Real Estate Investment Trust ("RioCan") (TSX:REI.UN) has signed a definitive agreement with Cedar Shopping Centers, Inc. ("Cedar") (NYSE:CDR), a REIT that focuses on supermarket-anchored shopping centres and drugstore anchored convenience centres located primarily in the Northeastern and Mid-Atlantic states, to form a joint venture for the acquisition of retail real estate to be owned 80 percent by RioCan and 20 percent by Cedar.
The first properties in the joint venture are seven grocery-anchored shopping centres in Massachusetts (MA), Pennsylvania (PA), and Connecticut (CT) currently owned by Cedar. As part of this transaction, RioCan will acquire on a fully diluted basis 15 percent of Cedar, with the acquisition of 6.7 million shares and 1.4 million warrants.
The total consideration to be paid by RioCan is approximately US$181 million resulting in a net equity investment of US$106 million after the assumption of US$75 million of property level mortgage debt (RioCan's share) on the Initial Portfolio. RioCan's equity investment will be funded from existing cash resources.
Initial Portfolio Acquisition
RioCan will acquire from Cedar an 80 percent interest in seven grocery-anchored shopping centres that comprises approximately 1.1 million square feet for a total purchase price of US$141 million (US$176 million at 100%) and will assume US$75 million of property level debt (US$94 million at 100%). The existing non-recourse first mortgage financing bears interest at a weighted average rate of 5.7 percent and has a weighted average term to maturity of approximately 3 years. Two of the assets will be unencumbered at closing and it is the intention of the joint venture to seek term financing on these assets.
Properties in the Initial Portfolio (at 100%)
- Loyal Plaza is a 293,825 square foot grocery-anchored shopping centre located in Williamsport PA, anchored by 66,935 square foot Giant Foods (lease expiry 2019). Other major tenants include, K-Mart, Staples, and Eckerd's Drugs. The property is currently encumbered by first mortgage financing of US$12.6 million bearing 7.2% interest maturing in June 2011.
- Blue Mountain Commons is a recently completed 123,354 square foot grocery-anchored shopping centre located in Harrisburg PA, anchored by a 97,707 square foot Giant Foods (lease expiry 2029). Other tenants include PNC Bank. The property will be unencumbered at closing.
- Sunset Crossing Shopping Center is a 74,142 square foot grocery-anchored shopping centre located in Scranton PA, and is anchored by 54,332 square foot Giant Foods (lease expiry 2022). The property will be unencumbered at closing.
- Columbus Crossing Shopping Center is a 142,167 square foot grocery-anchored shopping centre located in Philadelphia PA, anchored by a 61,506 square foot Super Fresh (lease expiry 2020). Other major tenants include Old Navy and AC Moore. The property is currently encumbered by first mortgage financing of US$16.8 million bearing 6.8% interest maturing in June 2014.
- Stop & Shop Plaza is a free-standing 54,511 square foot Stop & Shop supermarket (lease expiry 2026) located in Bridgeport CT. The property is currently encumbered by first mortgage financing of US$7.0 million bearing 6.2% interest maturing in April 2017.
- Shaw's Plaza is a 176,610 square foot grocery-anchored shopping centre located in Raynham MA, and is anchored by a 60,748 square foot Shaw's Supermarkets (lease expiry 2023). Other major tenants include, Marshalls (Marshalls is owned by TJX), and CVS. The property is currently encumbered by first mortgage financing of US$14.2 million bearing 5.6% interest maturing in March 2014.
- Franklin Village Plaza is a 306,213 square foot grocery-anchored shopping centre located in Franklin MA, anchored by a 75,000 square foot Stop & Shop (lease expiry 2026). Other major tenants include, Marshalls and Bath & Body Works and Bank of America. The property is currently encumbered by first mortgage financing of US$43.5 million bearing 4.8% interest maturing in 2011.
The Initial Portfolio currently has approximately 50,000 square feet of vacant space, or approximately 5%, which provides an opportunity for growth and enhanced returns. Additional growth is expected to be achieved through contractual rental increases.
The Initial Portfolio will continue to be managed by Cedar. Cedar will also receive customary fees for property level accounting, disposition and financing activities. A management committee will be established with two members from RioCan and one member from Cedar to decide upon any material decisions regarding the properties in the joint venture.
It is anticipated that RioCan will close on the two properties that are currently unencumbered by mid-November 2009 with the remaining five properties closing in stages during the first quarter of 2010. RioCan has completed and waived its conditions respecting conventional property level due diligence matters on six of the seven properties and anticipates waiving its conditions regarding the seventh property in the coming weeks.
Ongoing Joint Venture Acquisitions
A further component of the transaction is the agreement between RioCan and Cedar to acquire supermarket-anchored retail properties, on the same basis as the Initial Portfolio (i.e. RioCan 80%, Cedar 20%), over a two year period that will commence upon the closing of the Equity Investment. During this period, RioCan will benefit from a first right of refusal on certain Cedar acquisitions in New York, New Jersey, Pennsylvania, Massachusetts, Connecticut, Maryland and Virginia (subject to certain exceptions). Cedar in return will have a first right of refusal on RioCan's opportunities to acquire income producing properties that are located in the same states as above (subject to certain exceptions).
Equity Investment in Cedar
RioCan will purchase 6.7 million shares of Cedar common stock at a price of US$6.00 per share and receive 1.4 million common stock share purchase warrants that have an exercise price of US$7.00 per share and will be exercisable any time up to 2 years following the closing of the Equity Investment. RioCan expects to close on the Equity Investment as soon as New York Stock Exchange approval of the issuance has been received.
The Equity Investment will result in gross proceeds of US$40 million to Cedar, with an additional US$10 million of gross proceeds to Cedar upon exercise of the share purchase warrants. Following the share purchase RioCan's ownership in Cedar will be approximately 12% on a basic basis and approximately 15% on a fully diluted basis. RioCan will have the right to appoint one member to Cedar's Board of Directors so long as RioCan owns more than 9.9% of Cedar's common stock. RioCan has agreed that it will hold the shares for a minimum period of one year. Subject to certain pre-emptive rights, Cedar and RioCan have also entered into a "standstill" agreement for three years during which RioCan will not be able to acquire additional shares of Cedar.
Purpose of the transaction
"We believe that this transaction with Cedar presents an excellent opportunity for RioCan to make a cautious introduction into the United States and to build a defensive portfolio which includes the potential to achieve greater returns not only from organic rent growth but through the leasing of vacant space over the next 12-24 months. The combination of assets in Canada's fastest growing markets with a stabilized portfolio of high quality retail assets in the U.S. will give RioCan a greater presence as one of North America's leading retail landlords as well as providing another avenue for growth," said Mr. Sonshine.
"We believe that the U.S. market will yield a greater number of attractive opportunities than what we expect will be available in Canada in the near term. This venture creates a vehicle that will allow RioCan to tap into the U.S. market and ensures that the properties within the joint venture will be well managed. Cedar has developed a strong portfolio of retail properties focused in the Northeastern United States, which offers a complementary mix of tenants to our Canadian portfolio of largely nationally branded tenants. We look forward to expanding our relationship with Cedar, as well as considering other opportunities in the US."
Financial and Legal Advisors
RBC Capital Markets is acting as financial advisor to RioCan. Goodmans LLP and Sidley Austin LLP are acting as legal advisors to RioCan. Davies Ward Phillips & Vineberg LLP and Deloitte LLP are acting as tax advisors to RioCan.
Goldman, Sachs & Co. is acting as exclusive financial advisor to Cedar; Stroock & Stroock & Lavan LLP is acting as corporate, real estate and tax counsel to Cedar.
About Cedar
Cedar is a self-managed real estate investment trust focused on grocery-anchored shopping centres and drug store-anchored convenience centres located predominantly in the North-eastern and Mid-Atlantic states of the United States. Since the company's public offering in October 2003, Cedar has realized significant growth in assets and shareholder value primarily through selective acquisitions. Cedar presently owns and operates approximately 13.2 million square feet of gross leasable area at 124 shopping centre properties, of which more than 75% are anchored by supermarkets and/or drugstores with average remaining lease terms of approximately 11 years. Cedar had a total capitalization of US$1.5 billion as of September 30, 2009.
About RioCan
RioCan is Canada's largest real estate investment Trust with a total capitalization of approximately CDN$7.8 billion as at September 30, 2009. It owns and manages Canada's largest portfolio of shopping centres with ownership interests in a portfolio of 247 retail properties, including 13 under development, containing an aggregate of over 59 million square feet. For further information, please refer to RioCan's website at www.riocan.