Primaris Real Estate Investment Trust (“Primaris”) announced an agreement to acquire Les Galeries de la Capitale in Quebec City from Oxford Properties for a total consideration of $325 million. The transaction, which includes cash, trust units, and preferred units, is part of Primaris’ continued growth strategy of acquiring market-leading shopping centres across Canada.
The deal is structured with $170 million in cash, approximately 2.5 million series A units of the Trust (valued at $21.86 per unit), and $100 million of exchangeable preferred units. The series A units can be substituted with cash if Primaris elects to pay the contracted sum of $34.1 million, based on the unit price of $13.55. The transaction is expected to close on October 1, 2024, pending customary closing conditions.
Strategic importance of Les Galeries de la Capitale
Les Galeries de la Capitale is a super regional enclosed shopping centre located in Quebec City, which is Canada’s seventh-largest population centre. The property sits at the intersection of Highways 40, 73, and 740, providing accessibility and visibility with over 4,100 feet of frontage along Boulevards Lebourgneuf and des Galeries. Covering 91 acres of land with 1,015,000 square feet of leasable space, the shopping centre has a 26% site coverage, offering room for future development opportunities It’s a trend seen with mall landlords across the country who are adding density to unlock more asset value.
With an impressive 96.4% in-place occupancy, Les Galeries de la Capitale generates same-store sales of $761 per square foot and recorded total sales volume of $219 million as of May 31, 2024. The mall has benefited from a significant $165 million redevelopment over the past decade, which included the relocation of La Maison Simons and the renovation of the food court, as well as upgrades throughout the centre. A notable highlight is the fully renovated and redesigned Méga Parc, an indoor amusement park with 18 attractions located adjacent to the new food court.
Patrick Sullivan, President and COO of Primaris, stated, “Les Galeries de la Capitale exemplifies the type of property we are targeting in our growth strategy. Its strategic location, excellent accessibility, and strong tenant mix make it a valuable addition to our portfolio.” He added that the mall’s prominent location along major highways and proximity to one of the region’s busiest bus terminals, with over 400 buses per day, further enhances its attractiveness.
Potential for income growth and enhanced operations
Primaris says it sees significant potential for net operating income (NOI) growth at Les Galeries de la Capitale, which mirrors the REIT’s broader strategy of optimizing underperforming assets. This includes converting tenants from variable rent agreements to net rent deals, as well as leasing out approximately 110,000 square feet of vacant space. Key vacancies, including the former Sears department store, offer significant opportunities to attract strong tenants and drive higher market rents.
Primaris plans to integrate the property into its scalable, full-service management platform, leveraging cost management strategies and operational efficiencies to further increase income.
Financial and strategic implications
Rags Davloor, Primaris’ Chief Financial Officer, emphasized the financial prudence of the transaction. “This acquisition, our first in 2024, aligns with our commitment to maintaining industry-leading credit metrics and a well-capitalized balance sheet,” Davloor said. He also highlighted that Primaris remains a strong transaction counterparty in a market where many others face financing challenges. The deal is expected to be modestly accretive to the Trust’s funds from operations (FFO) on a per-unit basis.
Upon closing, Les Galeries de la Capitale will become the second-largest shopping centre in Primaris’ portfolio by sales volume, following Halifax Shopping Centre. It will rank ahead of other key properties like Conestoga Mall in Waterloo, and Orchard Park Shopping Centre in Kelowna.
Primaris anticipates same-property cash NOI growth of 3.0% to 4.0% in 2024, with expected total cash NOI for the fiscal year ranging between $273 million and $276 million, up from $227 million in 2023.
Quebec City’s economic strength
Quebec City’s economic landscape provides a strong foundation for the continued success of Les Galeries de la Capitale. With an anticipated population growth of 6.6% over the next decade, the city offers a stable environment for retail. Quebec City also boasts a low unemployment rate compared to the national average, supported by a diverse economy anchored in public administration, education, healthcare, and technology.
The presence of Université Laval, a major player in Quebec’s growing tech ecosystem, further contributes to the region’s economic resilience. Advancements in fields like artificial intelligence, software development, and digital media create additional opportunities for long-term growth in the area, according to Primaris.
Primaris’ portfolio expansion
With this acquisition, Primaris strengthens its position as a dominant player in the Canadian retail property landscape. CEO Alex Avery noted that the REIT’s ability to acquire high-quality assets, while maintaining a best-in-class capital structure, has attracted investment from five of Canada’s ten largest pension funds. These funds have sold market-leading shopping centres to Primaris and taken back equity and convertible preferred equity investments in the Trust.
The acquisition of Les Galeries de la Capitale aligns with Primaris’ strategy of focusing on large, enclosed shopping centres in mid-sized Canadian markets. Avery expressed confidence in the property’s potential, saying, “This acquisition enhances our value proposition with retailers and offers substantial income growth opportunities, consistent with the growth we anticipate across our portfolio.”
