Toronto: Loblaw Companies Ltd, Canada’s largest grocer, plans to spin off the vast majority of its property assets into a real estate investment trust. The move, which will create one of Canada’s biggest REITs, is a way to allow Loblaw to reinvest in its core business and boost shareholder value.
The company said it plans to spin off real estate worth more than 7 billion Canadian dollars (Dh26.1 billion, $7.05 billion) into the REIT and sell units of the trust through an initial public offering that it hopes to complete by mid-2013.
“We are announcing this because we feel the timing is right for both our business and the capital markets,” said Galen Weston, Loblaw’s executive chairman. “The size and quality of our real estate assets should be appealing to investors.”
Canadian REITs have outperformed the broader stock market due to strong demand for commercial and retail real estate. Economic growth has boosted demand for office space in Canada, while US retailers compete for prime retail space for their Canadian growth plans.
The S&P TSX Canadian REIT index has risen more than 9 per cent in the past 12 months, while Canada’s benchmark S&P TSX composite index has risen just 1.7 per cent.
“We believe that this transaction will create substantial value as Loblaw’s current multiple is at a historically low level due to poor operating performance,” said BMO analyst Peter Sklar in a note to clients.
Loblaw said it intends to retain a significant majority interest of over 80 per cent in the REIT. “While we expect to generate funds from the IPO, it is the anticipated long-term source of capital and the structural advantage of the REIT that are the real benefits,” chief financial officer Sarah Davis said.
Davis said the capital raised will allow Loblaw to pay down debt, reinvest in its business, fund strategic growth, and look at other options like buying back shares.
Scotiabank analyst Patricia Baker said Loblaw’s move is a positive for the company and allows it to crystallize the value of its “sacred cow.” In a note to clients, Baker however said Loblaw still needs to work on improving its operating results and cautioned that there is limited visibility on that front.
“The creation of the REIT is expected to build long-term value both for Loblaw and the REIT,” said Weston. “This proposed REIT is an important part of Loblaw’s strategic growth plan.”
Loblaw and other Canadian grocers have been under pressure as Wal-Mart Stores Inc, the world’s largest retailer, expands its grocery business in Canada. No. 2 US discount retailer Target Corp opens its first Canadian stores next spring, posing a new threat to Loblaw and its rivals.
Loblaw said it may expand the REIT venture in the future by adding more of its own real estate and investing elsewhere.
Loblaw said its real estate portfolio spans an estimated 47 million square feet and has a current estimated market value of C$9 billion to C$10 billion.
As part of the transaction, Loblaw plans to contribute about 35 million square feet to the REIT, and it will enter into long-term lease arrangements with the REIT on those properties.