West Bowmanville Shopping Centre is one of four retail facilities in Durham Region, east of Toronto, which have been acquired by Strathallen. (Courtesy Strathallen)

Strathallen Capital has paid $88 million to acquire four shopping centres in Durham Region just east of Toronto for its recently closed Retail Property Fund LP No. 5.

The acquisition concludes a complicated 17-month process by which a private family divested a $202-million mixed portfolio of real estate assets in three tranches. Previous sales were an apartment portfolio purchased by CAPREIT and three self-storage properties which went to StorageVault, all handled by SVN Rock Advisors Inc., Brokerage.

Strathallen CEO and director Cathal O’Connor told RENX Retail Property Fund No. 5 has up to $800 million to invest in the sector. The four grocery- and convenience retail-anchored properties spread across Durham range from 50,000 to 100,000 square feet.

“Our sweet spot, quite frankly, is between $15 million and $45 million,” said O’Connor. “We don’t get over-weighted in any one asset.”

The four properties are:

– Amberlea Shopping Centre at 1822 Whites Rd. in Pickering;

– Kawartha Lakes Centre at 363 Kent St. W. in Lindsay;

– Townline Shopping Centre at 1414 King St. E. in Oshawa;

– and West Bowmanville Shopping Centre at 100 Clarington Blvd. in Bowmanville.

“They did a good job of managing them, but we hope to do a better job of managing, a little bit of development and really strong leasing,” said O’Connor.

“There is a little bit of a development opportunity in at least two, if not three, of the sites. My returns aren’t contingent on development activity, but there will be some activity.”

The transaction was brokered by Nick Obradovic and Derek Lobo of SVN Rock Advisors on behalf of the vendor. The Burlington brokerage and services firm handled the disposition of the entire family portfolio in what Lobo, the firm’s CEO, called a long and complicated process.

“While we were the brokers, I would say the brokerage part was relatively easy,” Lobo told RENX in a separate interview. “The quarterbacking was really the difficult part.”

Lobo said in addition to working through complex family ownership partnerships and the goals of a large group of disparate partners, COVID-19 pandemic restrictions added another set of unusual circumstances.

“Everything took longer. Everything was harder. Everything was more expensive. Everything was slower.”

Strathallen Retail Property Fund LP No. 5

O’Connor had a similar experience in getting Strathallen’s fund No. 5 closed. He said it took about 18 months, also delayed by the impacts of COVID-19 as well as the growth of e-commerce.

O’Connor, a partner at KPMG Canada for 12 years and then executive vice-president and chief financial officer of Cadillac Fairview for 11 years prior to joining Strathallen in 2019, said the firm spent much time educating people about different types of retail and its strategy for the fund.

The fund is a closed-ended, core-plus fund that attracted a balance of new and existing investors — primarily Canadian institutional investors, according to O’Connor.

“It will be buying properties that are well-located and income-producing in markets with populations of more than 100,000 people. They will be geographically spread and sized appropriately for the market.”

The strategy is to take advantage of market dislocation and not to focus on development, which carries more risks.

Toronto-headquartered Strathallen is most interested in convenience- and grocery-anchored strip centres with market rents, where a significant portion of the tenants were COVID-proof and remained open during the pandemic.

“We try and get grocery, but if we don’t we get a Shoppers Drug Mart or a liquor store, or they’re shadow-anchored by grocery where the neighbouring property has a grocery store,” said O’Connor.

He believes enclosed malls will be affected more by e-commerce and changing consumer preferences, so fund No. 5 won’t be used to acquire this type of asset.

“A lot of the tenants’ business models have been challenged and their ability to pay rents is less than it used to be. It’s going to take a lot longer for them to recover and may mean continued price adjustments by sellers. It will take time and innovation and changing the types of products or services being sold.”

Future growth for Strathallen

Strathallen was founded in 2003 and is an employee-owned private company providing asset management, property management and strategic advisory services. It works with institutional and high-net-worth investors in closed- and open-ended funds and also co-invests.

Strathallen had $1.4 billion in assets under management in Yukon, British Columbia, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador before the four recent acquisitions.

The plan is to move that past $2 billion as it deploys Strathallen Retail Property Fund LP No. 5 over the next 18 to 24 months.

“We continue to grow carefully,” said O’Connor. “We want to demonstrate to our investors that we can be responsible stewards of their money and generate superior returns.”

O’Connor and Strathallen CFO Arash Hesamy have also partnered with two former Agellan Commercial REIT executives, Frank Camenzuli and Terra Attard (who became Strathallen’s chief operating officer a year ago), to be the four principals of Salthill Capital Corp.

Salthill provides industrial investment and asset management services and is marketing a fund to acquire U.S. industrial properties. O’Connor hopes to close the fund before the end of the year and would like the ability to purchase $800 million worth of assets with it.

“We have a very competent team,” he said. “We know how to acquire and how to manage.”

SVN brokers portfolio divestment

Lobo said the other tranches of the sale portfolio fetched $103 million for the apartment buildings and $11 million for the storage properties. Although there turned out to be strong demand for all assets, the timing of the initial sale offering could hardly have been worse.

“We go out to market . . . our call for offers is the week of the shutdown,” Lobo said, referring to the first major pandemic lockdowns in March 2020. “We’d been working on this for a year, we finally go to get offers and it’s the week of the shutdown.”

However, after deciding to “put down the pens” for a couple of months to see what impact the health crisis would have, they got back to serious marketing in the summer of 2020. The apartment and self-storage deals came together quickly.

“The retail was way more complex,” Lobo said, noting that is the case even in good times. “Retail in the middle of a pandemic, where who knows where retail lands, is even more difficult.”

However, grocery- and needs-based retailers have continued to perform well and comprise significant portions of all four facilities.

Lobo said this portfolio is also representative of many situations currently faced by brokers as multi-generational owners divest assets. A big part of the task for he and Obradovic in this case was managing the many personalities and expectations of the vendors. (Lobo wrote a column and white paper on this issue recently, see Perspectives on multi-generational family-owned real estate)

“It’s a monstrously complex situation of assets, different ownerships, different percentages owned,” he said. However, despite all the challenges along the way, there was a successful conclusion.

“This was a harmonious resolution, this is what should happen.”

– With additional reporting and files from Don Wilcox