Faced with lower yields in the U.S., Beachwood, Ohio-based Developers Diversified Realty Corp. has entered a joint venture to develop a project in Toronto, fueling speculation that the REIT may be planning a larger push into Canada.

Its first foray into the country will be a 74-acre mixed-use center, undertaken in a 50-50 partnership with Toronto-based Rice Commercial Group. The project, with an estimated price tag of C$150 million (U.S. $152 million), will include 700,000 square feet of retail, plus office and residential space, when it is completed in 2011. The partners plan to break ground in 2009.

But there's talk that Developers Diversified's aspirations go well beyond building one property. For a firm of its size--Developers Diversified's implied market cap is $7.2 billion--a $150 million venture constitutes just one small step. The question, though, is what form Developers Diversfied's giant leap might take. For its part, Developers Diversified isn't talking. It issued a statement about the joint venture and published an 11-page overview of the Canadian market that it distributed to investors, but did not return calls seeking broader comment on its intentions.

One of the more intriguing rumors making the rounds is that Developers Diversified may be positioning itself to buy Canada's largest REIT, RioCan. Jeff Roberts, an analyst with Montreal-based Desjardins Securities, floated that idea in a recent research note. Roberts' suspicion arose after RioCan's CFO Robert Wolf and vice president of investments Katherine Ritcey resigned the day after Developers Diversified announced its foray into Canada. RioCan has a total market cap of C$8.4 billion and commands a 53-million-square-foot retail portfolio.

But other market observers think the news was mere coincidence and point to the fact that if a sale was pending, the execs would likely have stayed on board to receive a payout upon commencement of a deal. "This is just not something they are contemplating . . . we're very confident in our sources on this one," says Barry Vinocur, editor of Realty Stock Review. (Executives from RioCan did not return calls seeking comment).

Whether it has its eyes on RioCan or not, the move into Canada is in line with Developers Diversifieds' strategy of increasing its presence outside the continental United States. The firm, which commands a portfolio of 155 million square feet, already operates 15 properties in Puerto Rico and 9 properties in Brazil. Earlier this year it announced a deal that would bring it into the Russian Federation and Ukraine. In the past, it has also explored investing in China. Overall, it has its sights set on operating 25 percent of its assets outside the U.S.

And the move into Canada comes at an interesting time. The Canadian dollar has been on the ascent in comparison with the U.S. dollar for years and in September the two currencies reached parity for the first time since 1976. Today, the currencies remain near parity with a U.S. dollar worth C$1.015. Add to that the fact that the unemployment rate in Canada fell by 0.1 percentage point to 5.9 percent in September; the lowest rate in 33 years. Meanwhile, retail sales are projected to increase 6 percent this year, states a report from Toronto-based Cushman & Wakefield LePage.

Canada also boasts one of the highest per capita incomes among G8 countries (which include the United States, United Kingdom, France, Germany, Italy, Japan and Russia).
And, according to the market overview Developers Diversified released, it is enjoying the most rapidly expanding population growth of all G8 nations, with annual growth projected at 5.4 percent this year. Meanwhile, it continues to be under-served when it comes to retail space. Canada currently boasts 13.1 square feet of retail space per capita, compared to 20.5 square feet for the United States, according to Developers Diversified.

All that spells opportunity to build retail in Canada, in stark contrast to the challenges Developers Diversified faces at home. The REIT already noted a 100 basis point drop in development yields in the second quarter of this year, to 10 percent. Troubles in the housing market also continue to plague retailers' performance, wrote Citigroup analyst Jonathan Litt on Sept. 14.

Meanwhile, American retailers continue to flood the market, says Nick Fanizza, manager of market research with Ivanhoe Cambridge, a Montreal-based property owner and investor. Newcomers include big-box chains and lifestyle brands, including Abercrombie & Fitch and Crate & Barrel and Lowe's and Bed Bath & Beyond. And some of the U.S.-based chains that have expanded into Canada include Developers Diversified's biggest tenants. For example, Wal-Mart, which already accounts for up to 7.7 percent of Developers Diversified's total GLA and 4.5 percent of its total base rent, operates more than 278 locations in Canada. In 2006, it also opened its first three supercenters there.

Lowe's, which comprises 2.7 percent of Developers Diversified's GLA and 1.6 percent of its base rent, will open its first three Canadian stores the week of Dec. 10 in the Greater Toronto area. The company plans to eventually roll out up to 100 Canadian locations. Bed Bath & Beyond, which accounts for 1.5 percent of Developers Diversified's GLA and 1.6 percent of its base rent, will open its inaugural Canadian store in Richmond, Ontario in the fall.

Retail chains stepped-up their expansion plans around Toronto recently as a result of the city's booming condominium market, says John Crombie, senior managing director of national retail with Cushman & Wakefield LePage. Up to 100,000 people move to Toronto every year, contributing to near-record levels of condominium construction. In July, the city issued 945 building permits for residential construction, an increase of 67.6 percent from the same month in 2006, according to the Greater Toronto Marketing Alliance.

"We have high consumer confidence and the condos have been easily snapped up, primarily by younger people," Crombie says. "We are very conservative lenders, so we don't think we will have any fallout from the sub-prime mortgage market."

--Elaine Misonzhnik