Target will attract high-end customers that Zellers couldn't: landlords

TORONTO - Securing discount-chic retailer Target as an anchor store at Canadian malls would be a major retail feat -- boosting property values and driving sales for neighbouring shops, Canadian commercial landlords say.

Edward Sonshine, CEO of RioCan Investment Trust (TSX:REI.UN), Canada's largest owner of Zellers stores, said he's had talks with the U.S. retailer since October and is optimistic Target will aim to takeover leases at most of the trust's 34 Zellers locations.

"It's going to be really great for our shopping centres where we have Zellers as they convert into Target, it's going to elevate the whole profile of the centre," he said in an interview Friday.

"It really should help all of the other tenants in the centre because Target clearly is just going to attract more customers than Zellers did," he added.

Target Corp. (NYSE:TGT) announced Thursday it will spend $1.83 billion to take over the leases of as many as 220 Zellers stores. The U.S. retailer will spend the next 240 days to decide which of Zellers 279 locations are best suited to transform into its signature stores.

The cross-border move will involve negotiations with a slew of individual landlords, many of whom own small clusters of Zellers stores, to discuss transferring leases, renovations, and new lease agreements. Target plans to have between 100 to 150 stores up and running by 2014.

The agreement with the Hudson's Bay Company gives Target the right to pick which stores it wants from its Zellers portfolio and Canadian landlords are crossing their fingers the second-largest retailer in the U.S. will pick them.

One likely scenario would include Target buying up busy stores in urban and suburban areas, while HBC would maintain ownership of smaller locations in rural areas, including some northern communities.

Target tends to have very particular tastes when it comes to setting up shop. It's known for choosing locations that are larger than most big-box stores, central to bustling communities, clean and bright and often architecturally appealing.

The typical Zellers store is about 100,000 square feet, much smaller than the average Target location, but the company is looking to invest over $1 billion to renovate the locations it's buying and grow square footage in some stores.

Sonshine said he and Target have discussed at least one location in Toronto specifically. In addition to the stores Target plans to lease, Sonshine said RioCan could also cash in on some development opportunities as the chain looks to build new spaces.

"In Calgary, Zellers only has five stores ... and Calgary is one of the great retail markets in Canada and assuming they take all five, they'll probably still want another five," he said.

Target has long been exploring opportunities north of the border. However, it had hit several roadblocks including unattractive locations.

RioCan has long-term leases with Zellers stores across the country, under which the HBC subsidiary pays an average of $6 per square foot for rent, far cheaper than the industry standard of $14.

Sonshine said those cheap rents were a driving force that attracted Target to the deal. However, he doesn't expect he'll be able to raise Target's rent because some of the leases are locked in for as long as 18 years.

Although it has yet to identify which locations will become Targets, landlords appear confident their properties have what it takes.

Simon Nyilassy, president and chief executive of Calloway REIT (TSX:CWT.UN) said he's hasn't yet heard from Target, but he's sure Calloway's four Zellers locations -- two in metropolitan areas and two in small communities -- will be among those chosen to become Targets.

"Not to knock Zellers, but I think Target will be a breath of fresh air for the consumer and the whole retail industry," he said, adding that it would be difficult to negotiate higher rents because the benefits of adding Target stores to their portfolios are so obvious.

John Morrison, president and CEO of Primaris Real Estate Investment Trust (TSX: PMZ.UN) said he had been in conversation with Target about its eight Zellers locations before the announcement Thursday.

"Target, because of their product offering and the way they conduct their business, we believe that they will be a very strong draw of consumers to a retail property," he said.

However, he added that the retail real estate landscape won't look much different for at least the next two years because Zellers will continue to operate in the locations until the end of next year.

The fate of the 60-odd retail spots that won't be chosen has yet to be decided, but many could be sold to other retailers like Wal-Mart Stores Inc. (NYSE:WMT) or could remain in the hands of Hudson's Bay, said an HBC spokeswoman.

Shares in Canada's REITS were up slightly Friday, with RioCan adding 47 cents to $22.69 Calloway up 12 cents to $24.43 and Primaris gaining 26 cents to $19.92.