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Dowdy mall REIT best left off resume of a potential PM

Prospective Liberal leadership candidate Bob Rae is betting that a decade out of politics is long enough to make everyone forget the five years he spent running Ontario. (Add "into the ground" here if you wish.)

The first and only New Democrat to rule Queen's Park has tried hard to shake off his image as a financial illiterate. He pitched his tent at a top Bay Street law firm, joined several public company boards and generally proclaimed himself no enemy of the capitalist hordes. Taking centre-stage with other aspiring Liberal leaders in Edmonton this month, Mr. Rae joked: "Thank you, I'm much more comfortable in the middle."

Laughs all around. But shareholders in one of Mr. Rae's ventures aren't getting many chuckles these days. Instead, they're watching a drama play out over how to recover some of their losses -- and the end result might not look good on a wannabe prime minister.

The company is Retrocom Mid-Market REIT, a real estate investment trust that owns a portfolio of Canadian shopping centres. Retrocom has achieved the unachievable: Despite a great market for retail properties, its unit price has fallen 32 per cent since its initial public offering, and it became one of the first REITs ever to cut distributions.

In December, the trust announced it had hired TD Securities to "assist with its review of strategies" -- Street code for selling the company. Two months later it replaced its chief executive officer, dropped the "review of strategies" pretence and openly put itself on the block.

Sadly, even in a terrific environment for real estate, there isn't a long list of people who want to buy malls in hot spots like Kindersley, Sask., and 100 Mile House, B.C. So, just in case anyone had forgotten that it's for sale, Retrocom last week launched a "marketing campaign" to find a buyer or merger partner -- or, for that matter, anyone "interested in contributing assets or otherwise making an equity investment." Retrocom has become the real estate world's equivalent of an aging divorcée who rents a billboard to advertise her availability to men. Yoo-hoo! Over here!

How did it come to this? If the trust's name is vaguely familiar to you, perhaps you've heard of Retrocom Growth Fund, which recently became the latest labour-sponsored fund to hit a liquidity crisis and suspend redemptions (that is, to refuse to let its unitholders cash out).

Before things got really ugly, the fund helped to create Retrocom REIT, through which it sold some of its fine properties to the unsuspecting, but real estate-obsessed, public. Having Mr. Rae as chairman didn't hurt the sales pitch, and the $110-million IPO closed in March, 2004.

Labour-sponsored funds are known for many things. Great returns aren't one of them. It didn't take long before the REIT's weaknesses were exposed. By early 2005, Retrocom was missing its financial projections by a mile, and Desjardins Securities' Frank Mayer -- the lone analyst to follow the company -- was warning that a distribution cut would be necessary. How it's possible to screw up real estate in this market is an open question, but most REIT-watchers point to the union ties as part of the problem. Some of the properties Retrocom acquired in the IPO are true dogs. (A 37-year-old mall in Terrace, B.C., that's 25-per-cent vacant? No thanks.)

Then, last spring, management decided to buy some castoff properties from RioCan REIT, including the Town 'N' Country Mall in Moose Jaw, Sask., and the Mountainview Mall in Midland, Ont. Management says the latter, anchored by a Zellers, is 89-per-cent occupied; one investor who visited it recently says it looks a lot emptier than that. "Essentially, it's bulldozer bait," he says.

And where was Mr. Rae as all this was going on? He and the other trustees were consenting to an external management contract that paid the former CEO and another insider $1.4-million last year in "advisory fees." (That doesn't count the $1.7-million in property and construction management fees, a portion of which went to those same insiders.) And as the REIT's troubles began to mount, Mr. Rae did what any Rhodes scholar would: He stepped aside as chairman. "I had too many other things on my plate," he explains. (He declined to comment further on Retrocom.)

Under a new chairman, things have started to happen. The distribution was cut 20 per cent in December to preserve cash, TD was hired and the external management contract was cancelled for a $750,000 penalty. But even if the REIT is sold, it's unlikely the original investors will get their money back. The Retrocom wreck is not of the same magnitude as, say, Greg Sorbara's involvement with Royal Group Technologies, which eventually forced him to quit as Ontario's finance minister. But it sure doesn't do much to burnish the reputation of the all-new Businessman Bob.

© 2007 The Globe and Mail. All rights reserved.

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