Plaza Retail REIT (PLZ.UN-T) this month announced a $21-million, 14-property slate of development projects in Atlantic Canada, Quebec and Ontario.

The projects that range from newly acquired ground-up developments (1) to newly acquired redevelopments (1), redevelopments of existing properties (6) and expansions of existing properties (6) illustrate Plaza’s conservative and diverse, buy and improve development strategy.

“I believe we are taking a very conservative approach, we are not constructing buildings that we haven’t leased” said Michael Zakuta the president and chief executive of Plaza Retail REIT.  “Some people get all excited about development risk but if you have a good tenant signed and in place, or a solid strategy of how you are going to transform a property, you are controlling your risk very well.”

Zakuta was one of the panelists at the RealREIT conference in Toronto, speaking about development risk where he outlined the REIT’s successful strategy.

A mix of projects

Plaza’s projects range from early stage to completion Zakuta said. “We are expanding properties, adding additional phases, some of them are KFCs that we bought from Key REIT where we got control of the lease and we are tearing down and building new. So it is a whole combination of product.”

The Fredericton-based REIT expects that it will add approximately 97,000 square feet to its portfolio through these projects, three of which are being developed with joint venture partners.

In June this year RioCan REIT and Plaza formed a 50/50 joint venture focused on redeveloping three properties currently owned by RioCan.  In Ontario the East Court Mall in Cornwall, Timiskaming Square in New Liskeard and the Northumberland Square in Miramichi, N.B..  

The two REITs agreed that Plaza will manage the three assets and oversee redevelopment efforts for the joint venture.

The REIT chief said that the current pace of development has been pretty steady. “The pace has always been pretty steady for us and the pace is very much limited by our human resources capacity.”

Geographically, eight of the projects are in Atlantic Canada, three are in Quebec and three are in Ontario (two in the GTA and one in Ottawa).

State of retail

Though Plaza is a retail-focused REIT Zakuta noted that “We are absolutely not a proxy for the state of retail in Canada.” 

Given its Atlantic Canada focus the REIT has a concentration of the value category – food, pharmacy, dollar stores – “the real basics” as he describes it.  The trust has “zero fashion” exposure in its current expansion strategy said the Plaza CEO. Fashion “is really not doing very well.”  

Atlantic Canada’s economy has on the whole been steady, although there has been a cooling in Newfoundland, which has become more of a petro-economy given the rise of importance of energy extraction in that province’s economic mix.

The Key REIT opportunity

Plaza Retail acquired 190 KFC outlets in 2013 with its acquisition of Key REIT and has been whittling away at that property portfolio through sales and redevelopment.

“Some of those are under lease still and some of those we were able to take back and reorganize,” Zakuta said.

The 2013 acquisition will keep Plaza busy for years as leases expire and the REIT decides what to do with the freed up properties on a case by case basis. “That’s the idea.”

Currently, Plaza has about 130 KFC properties in its portfolio, the REIT’s CEO estimates. “We have sold quite a few of them. Some of them we are redeveloping. Most of them are under lease so we can’t necessarily redevelop it if it is under a lease agreement with KFC.”

Zakuta added that most of the KFC leases will expire over the next three years.

Plaza’s current portfolio includes interests in 297 properties totaling approximately 7.6 million square feet across Canada and additional lands held for development.  Plaza’s properties include a mix of strip plazas, stand-alone small box retail outlets and enclosed shopping centres, anchored by approximately 91% national tenants.