Calloway REIT Making $1B Retail Buy

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CALGARY-Calloway REIT this week agreed to acquire 12 million sf in 46 Canada shopping centers from FirstPro Shopping Centres and Wal-Mart Canada Corp. for CA$1.2 billion (US$969 million), including CA$700 million of assumed debt. The blockbuster transaction, expected to close at the end of June, will double the company’s asset value to CA$2.4 billion, making Calloway the second largest public REIT in Canada behind RioCan REIT of Toronto.The deal calls for Calloway to relocate its headquarters from Calgary to Toronto; take on part of FirstPro’s leasing and development operations; hire a new executive management team that includes Simon Nyilassy, now an EVP at First Pro, as president and CEO; and retain FirstPro as property manager for all of its centers.In addition, First Pro owner Mitchell Goldhar–who holds interests in all 46 properties as well as a 16% interest in Calloway–gains significant additional control over Calloway as a result of the deal. In trade for his interest, Goldhar will increase his stake in the REIT to about 30% and will hold special voting rights that will increase his voting control to as much as 40% as long as he continues to push new developments to the REIT.The portfolio includes properties in eight of Canada’s 10 provinces, but is concentrated in Ontario, where 28 of the centers are located. Of the 46 properties in the transaction, 14 still have space being added and 10 have yet to break ground. More than half of the 36 operating centers exceed 300,000 sf and 25% exceed 500,000 sf. The operating centers generate net rents of over CA$80 million per annum (Calloway’s interest), will contain approximately 10.5 million sf of retail space on completion and currently have approximately 8.3 million sf leased, according to Calloway.Wal-Mart operates a department store in 33 of the 36 operating centers, occupying some four million sf under long-term leases with a weighed average remaining initial term of over 16 years. Calloway’s share of rents generated from Wal-Mart leases will represent approximately 32% of the rents from Calloway’s total portfolio after closing, compared to 34% today. In addition to Wal-Mart, 25 of the 36 centers operate with at least one of the following tenants as secondary anchors: Sam’s Club, Loblaws, Sobeys, Rona, Home Depot and Canadian Tire. The 10 vacant sites upon completion also will be anchored by Wal-Mart and/or other Canadian retailers. These properties are expected to achieve substantial completion within the next one to three years and will total 1.3 million sf on completion. The overall weighted average lease term for tenants in all of the operating properties is 11 years, and an average term to maturity for mortgages payable is about 10 years. Most of loans are locked in at today’s low interest rates, according to current Calloway president/CEO Michael Storey.Storey says the rental income from the 36 operating properties should provide sufficient cash flow to increase the company’s distributions for the second time this year. In March 2005, Calloway announced a $0.10 per unit annualized increase, to $1.36 per annum, as a result of its last acquisition.