Jonathan Gitlin, RioCan REIT's President and CEO, paints a rosy picture of the Canadian retail landscape. His recent earnings call transcript is brimming with optimism about leasing spreads, high occupancy rates, and the upcoming boom in residential NOI. But beneath the surface, a tantalizing detail emerges – one that suggests RioCan is sitting on a hidden treasure trove of value.

Gitlin repeatedly emphasizes RioCan's strategic focus on "customer centers" – improving the shopping experience for tenants and fostering a preference for RioCan properties. This seemingly innocuous comment hints at something much bigger: the potential for a brand premium.

Brand premiums are the holy grail of the business world. Think Apple, Nike, or Starbucks – companies whose strong brand identity commands a price premium and fuels customer loyalty. Could RioCan be on the cusp of achieving a similar phenomenon in the retail real estate sector?

The data certainly suggests it's possible. Consider these facts:

Historic high occupancy: RioCan boasts a retail committed occupancy of 98.4%. This indicates extremely high demand for their properties, giving them significant leverage in lease negotiations.

Soaring new leasing spreads: New leasing in 2023 generated an average net rent per square foot of $27.75, substantially higher than the portfolio average of $21.50. This demonstrates the willingness of tenants to pay premium rents for access to RioCan's locations.

Tenant preference: Gitlin explicitly states that tenants are expressing a preference for RioCan properties over competitors. This suggests a burgeoning brand reputation that could lead to sustained demand and pricing power.

These facts, taken together, paint a compelling picture. RioCan's strategic focus on "customer centers" may be laying the foundation for a brand premium – an intangible asset that could significantly enhance their valuation.

Here's the potential impact:

Hypothesis: If RioCan can solidify its brand reputation and cultivate a distinct preference among tenants, it could justify a cap rate compression of 25-50 basis points on its portfolio.

Impact: Applying a 50 basis point cap rate compression to RioCan's $13.8 billion IFRS value for investment properties (as of Q4 2023) translates to a $690 million increase in valuation. This represents a potential 5% boost to NAV.

This brand premium hypothesis is not explicitly reflected in RioCan's current valuation or their stated growth targets. However, if their "customer center" strategy continues to gain traction and tenant preference solidifies, RioCan's hidden treasure of brand value could unlock a wave of growth that surpasses even Gitlin's optimistic projections.

Growth in Average Net Rent for New Leases

The chart below shows the growth in average net rent for new leases at RioCan properties, indicating strong tenant demand and RioCan's pricing power. The orange bar represents Q1 2024, while the blue bar represents the overall portfolio average.

"Fun Fact: RioCan's name is a blend of "Rio," representing the vibrant and energetic nature of retail, and "Can," signifying their Canadian roots. This playful yet meaningful name embodies their unique approach to retail real estate."