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Real Estate Watch: REITs with exposure to Future Shop

ANALYSIS: If you’re a REIT investor take note, analysts say the next few years are “likely to be challenging for retail landlords.”

That observation comes on the heels of yet another retailer shuttering its Canadian doors – this time Future Shop. While 65 stores will re-open as Best Buy locations (the parent company), 66 locations are closing for good.

Of course, Target is closing all its 133 locations. And smaller chains such as Mexx and Jacob are disappearing from these shores.

Mark Rothschild at Canaccord Genuity, the analyst behind the above mentioned observation on landlord challenges, further notes the “Canadian retail landscape has become increasingly competitive, especially for traditional bricks and mortar stores.”

That, as online retailers such as Amazon grow their sales.

So who’s most exposed among Canada’s landlords by Future Shop’s retreat?

Calloway REIT (CWT_u.TO) has 19 Future Shop stores in its portfolio, and Future Shop and Best Buys stores combined account for 3% of its rental revenue.

Still, Scotiabank points out three quarters of those 19 Future Shops will become Best Buy locations. Analyst Pammi Bir estimates the 4-5 stores that are closing permanently represent just 0.4% of rental revenue.

Other landlords with Future Shop locations include RioCan (REI_u.TO) with 10, Canadian REIT (REF_u.TO) with 6, and First Capital Realty (FCR.TO) with 6. Similar to Calloway, when you drill down to the actual locations that will be permanently closed, the revenue impact is minimal.

Still, Scotiabank says Future Shop’s demise only adds to “retail industry pressures from Target’s exit.”

Canaccord says “there likely will not be sufficient demand to backfill all of the sites” given that landlords are “managing through other store closures, Target in particular.”

That, Canaccord adds, could have a negative impact on growth prospects for some REITs – prospective tenants have more options for space.

Still, analysts say Canada’s commercial REITS and Real Estate Operating Companies are well diversified.

Last week, I attended CIBC’s annual real estate conference, where the rise of e-commerce was discussed by executives from some of Canada’s biggest REITs. My main takeaway: REITs that hold warehouses and processing centres in their portfolio, like Pure Industrial REIT (AAR_u.TO), are worth a look if you’re concerned about e-commerce.

After all, that pair of pants you order online have to go through someone’s warehouse before they arrive at your house.

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