The Yonge Sheppard Centre in Toronto. (Courtesy RioCan)

RioCan REIT (REI.UN-T) is paying KingSett Capital $331 million to buy out its non-managing, 50 per cent interest in the Yonge Sheppard Centre in Toronto.

The two firms entered into a firm purchase and sale agreement in June, subject to customary closing conditions, RioCan said. As part of the transaction, KingSett will invest $100 million in RioCan shares with a one-year lock-up agreement. (EDITOR’S NOTE: This transaction has now closed, as of Sept. 3).

KingSett holds the Yonge Sheppard Centre as part of its Canadian Real Estate Income Fund.

When the transaction closes, Riocan will own 100 per cent of the mixed-use, transit-oriented property. Located at the busy intersection of Yonge Street and Sheppard Avenue in Toronto, the Yonge Sheppard Centre is a nearly one million square foot property, consisting of 299,000 square feet of retail, 401,000 square feet of office, and 257,000 square feet of residential rental space.

The residential rental component is a 361-unit, 36-storey tower known as Pivot, which is currently under construction.

“The acquisition of the remaining 50 per cent interest in Yonge Sheppard Centre is an important step forward in our continuous transformation to a major market, mixed-use focused REIT,” said RioCan CEO Ed Sonshine in the release. “KingSett’s investment of $100 million in RioCan units positions them amongst RioCan’s larger institutional unitholders, and we are pleased at this demonstration of confidence in the long-term value of RioCan.”

“Transformative” renovations at centre

A “transformative” overhaul of the centre’s retail and office space is near completion, which consists of recladding the facade of both the office tower and shopping centre, as well as interior improvements to modernize the property.

It repositions the centre with tenant mix including LA Fitness, Longo’s food market (scheduled to open this summer), Cactus Club Café (scheduled to open in 2020) and other new food and beverage tenants. The centre also contains a daycare, a Montessori school and a community centre.

Construction for the residential rental tower Pivot commenced in July 2018 with substantial completion expected in July 2020. Given its prominent location, subway access, forward thinking design and amenity package, RioCan Living calls Pivot “an integral component” of its residential portfolio.

The acquisition will result in RioCan owning significant assets at two of the three intersections along the Yonge Street corridor in Toronto; Yonge and Sheppard, and Yonge and Eglinton.

Yonge Sheppard Centre growth potential

RioCan believes the Yonge Sheppard Centre has significant income and value growth potential over the longer term similar to its Yonge Eglinton Centre.

Since its acquisition in 2007, Yonge Eglinton Centre has achieved an 8.2 per cent compound annual growth rate in net operating income and an estimated $315 million, or 95 per cent, in value creation.

As part of the transaction, RioCan will assume KingSett’s share, approximately $128 million, of existing property debt. It will also issue $100 million of RioCan shares to KingSett at $26.25 per unit.

“We are pleased to have worked with the exceptional team at RioCan over the last eight years to plan and execute the re-imagining of Yonge Sheppard Centre,” said Jon Love, CEO of KingSett Capital, in the release. “We look forward to our continued partnership and are pleased to have the opportunity to expand our relationship in the role of equity investors where we see deep value.”

The transaction is expected to close by the end of August 2019.

About RioCan

RioCan is one of Canada’s largest real estate investment trusts with a total enterprise value of approximately $14.1 billion at March 31, 2019.

RioCan owns, manages and develops retail-focused, increasingly mixed-use properties located in prime, high-density transit-oriented areas. RioCan’s holdings are focused on the six largest cities in Canada.

The portfolio is comprised of 230 properties, including 14 development properties, with an aggregate net leasable area of approximately 38.3 million square feet including residential rental properties.