Royal City Centre was originally developed as a multi-level mixed-use asset with predominately retail on the 1st floor, office on the upper floor and several levels of parking facilities. The asset is surrounded by high density residential properties. Strathallen purchased a 60% interest in this asset in 2010 on behalf of its value add fund: Strathallen Retail Property Fund 2 (SRPF2), and a segregated account pension Investor. The objective of this investment was to provide stable income to the Fund with upside potential from leasing initiatives that would improve the overall tenant mix. Shortly after acquisition, the Labels store started to underperform. At the same time, the mall experienced vacancies from large office tenants. Strathallen and its joint venture partner recognized this as an opportunity to significantly reconfigure the mall to improve leasing potential, net income and tenant profile.
Executing the Value Add Asset Plan
In 2012 Strathallen secured a 20 year lease for a new 2-level, 111,000 SF Walmart that would absorb a significant portion of the 2nd floor office space as well as the former Labels location. To accommodate the new Walmart store, Strathallen negotiated multiple relocation and termination strategies with tenants encompassing over 35,000 SF of gross leasable area. Strathallen repositioned the 2nd floor office area to become a medical and medical related service node. Three new leases with Fraser Health Authority were signed totaling approximately 28,000 SF. Other new tenants included general practitioners, clinics, optometry and insurance services. Strathallen also sought to improve the tenant mix with the addition of a fitness center that operated at a price point matching the demographics of the high density residential properties in the area. Starthallen utilized both traditional mortgage financing and construction financing throughout the redevelopment.
By 2015 Strathallen had completed the reconfiguration and repositioning of Royal City Centre. With the addition of Walmart and a newly developed medical service node, the asset experienced a significant increase in foot traffic. Vacancy was reduced from approximately 31% to less than the 7% with continued strong leasing interest. Strathallen increased Net Operating Income, extended the overall lease term and improved the quality of tenant covenants. In early 2016 the asset was sold providing Strathallen Retail Fund 2 investors with a realized IRR of approximately 17%
over a 5-year hold and a 1.9x equity multiple (pre-performance fees).