As Canada’s largest publicly traded real estate investment trust, RioCan REIT (OTC: RIOCF, TSX: REI-U) will naturally face challenges from the country’s slowing economy.

But in the near term, Canada’s lackluster gross domestic product growth is the least of RioCan’s problems.

Indeed, even as financial pundits were fretting over the economic shock from crude oil’s collapse, the shopping mall REIT’s units continued their steady ascent, hitting an all-time high in Canadian dollars in late April.

Since then, however, RioCan’s unit price has declined 15% in Canadian dollars and 22% in U.S. dollars.

In fact, RioCan has fallen so hard so fast that its trailing-year loss among the five REITs in our legacy holdings is now second only to that of hold-rated Northern Property REIT (TSX: NPR-U, OTC: NPRUF).

As we discussed last month, a substantial portion of Northern Property’s real estate holdings are domiciled in Alberta, the resource-rich province that’s suffering from the turmoil in the oil-and-gas sector. By contrast, RioCan’s property portfolio has significantly less exposure to Alberta.

A Targeted Headache

So what’s roiling RioCan? The biggest culprit by far is Target, the U.S.-based retailer whose once-promising foray into Canada was marred by both strategic and tactical blunders.

Target decided to abandon its Canadian venture earlier this year, leaving a number of disgruntled landlords in its wake, particularly RioCan, its largest landlord in Canada.

At the time of Target’s fateful decision last January, RioCan had 26 locations leased to Target, representing 1.9% of total annualized rental revenue, with an average remaining lease term of approximately 12.7 years.

The vacancies resulting from Target’s departure were enough to shave a substantial 2.7 percentage points off the occupancy rate for RioCan’s overall portfolio, bringing it down to 93.9% at the end of the second quarter.

Fortunately, RioCan managed to find new tenants to take over seven of these leases under their existing terms.

But that still leaves 19 leases covering about 2 million square feet. Although these leases were guaranteed by Target Canada’s U.S. parent, in a liquidation scenario everything’s up for negotiation, and Target is playing hardball: The company has stopped paying rent on these properties as of July 1.

In RioCan’s quarterly earnings call, the REIT’s characteristically blunt CEO Edward Sonshine observed, “I wouldn’t [pay rent] if I were them either. I mean, why give away a negotiating strength?”

The two companies are indeed negotiating furiously. And rest assured, RioCan will get paid. As Sonshine noted, “But at the risk of being bold, the discussions are really about how much and how [to pay], as opposed to whether they will pay. So there doesn’t seem to be much controversy over the issue of liability.”

If the two companies can’t reach an agreement, RioCan will sue, though litigation would mean an even more protracted timetable for recovering lost rental revenue.

But it sounds like it’s only a matter of time until this issue is resolved without resorting to the courts. As Sonshine told The Globe and Mail, “They’ve made offers—just none that has tickled our fancy yet.”

How much is Target’s potential liability? Sonshine says these properties generate C$18.5 million in gross rental revenue per year.

That along with the duration of the lease terms means Target could owe RioCan as much as C$250 million.

Part of that amount also includes the redevelopment of each property. At more than 100,000 square feet per location, Target’s stores are so huge that most of these properties will end up needing to be redesigned and subdivided among smaller tenants.

Given the time involved in both redevelopment and finding suitable tenants, RioCan’s management believes it will take between 18 and 24 months before new tenants are in place and paying rent on these properties.

The lost rental revenue won’t affect RioCan’s results until the third quarter. But it will eventually be offset by some sort of payment from Target, as well as the potentially greater rents RioCan can earn from leasing each space at a higher rate to multiple tenants.

Steady Eddie

Aside from the ongoing drama with Target, RioCan’s second-quarter results were largely steady. Funds from operations (FFO), RioCan’s preferred profit metric, grew 2.4% year-over-year, to $0.43 per unit.

The increase in FFO was driven by contributions from acquisitions, higher rents from redeveloping exiting properties, and a foreign currency gain from U.S. properties.

The latter brings us to the other big news from RioCan’s latest earnings release: The REIT is undertaking a strategic review of its U.S. portfolio, which is composed of 48 properties that account for 16% of annualized rental revenue.

As Sonshine said during the earnings call, this review could result in any number of possibilities, ranging from selling the entire $1.2 billion portfolio to simply maintaining the status quo.

Other options discussed during the earnings call include selling holdings in one U.S. region to concentrate on another, or even spinning off these assets as a separately traded REIT.

RioCan decided to enter the U.S. market in 2009, taking advantage of the historic downturn in real estate to scoop up top properties on the cheap. Now, of course, prices are sharply higher, making it difficult to find new opportunities at a compelling value.

Additionally, as Sonshine noted, RioCan doesn’t have sufficient infrastructure in the United States to drive future growth at these properties via redevelopment.

To be sure, one of RioCan’s most attractive qualities has been its diversification across tenants and geographies, especially once it expanded into the United States. Although RioCan would lose some of that diversification if it cashes out of the country, we trust Sonshine’s approach to capital allocation.

During his time in the sector, Sonshine has successfully navigated two generational declines in the real estate market. In fact, RioCan was launched in 1994 while Canada was still picking up the pieces from the real estate crash that followed the speculative excess of the late 1980s.

If Sonshine gets the timing right again, then that could ultimately lead to stronger growth than analysts currently expect.

For now, analysts forecast fairly tepid growth, with FFO per share rising just 1%, to C$1.70, in full-year 2015, then accelerating 3%, to C$1.75, in 2016.

Although RioCan’s units currently yield an attractive 5.6%, distribution growth has been minimal in recent years, and Sonshine has said that the dividend is unlikely to get a boost this year.

Even so, he’s well aware of the sanctity of the REIT’s monthly payout. In an interview with the Financial Post in 2013, Sonshine acknowledged that during the global financial crisis the firm was under-earning its distribution, and he was facing tremendous pressure to cut it.

But he made a deal with the board to maintain the payout and then review it again in two years if the company didn’t experience a turnaround.

Defending that action, he said, “I just felt a lot of people were relying on [the distribution]. I felt we have this covenant with those people.”

Buy RioCan below US$27.