Loblaw Investors Back Move to REIT From Grocer: Corporate Canada

Loblaw Cos. (L) may be a better landlord than grocer. Investors signaled that yesterday by driving the shares to the biggest gain in 25 years after the company announced plans to spin off its real estate into one of Canada’s largest investment trusts.

“It was an unloved stock before this announcement,” said Jason Hornett, who manages C$384 million ($387 million) at Bissett Investment Management, including shares of George Weston Ltd. (WN), the majority owner of Canada’s biggest grocery chain. “It’s a brilliant move for them to take this real estate and issue this REIT where they can control the value of those assets.”

Loblaw said yesterday the company would transfer about 35 million square feet (3.3 million square meters) of property with a current value of more than C$7 billion to a real estate investment trust it plans to take public next year. It would be the second-largest retail REIT in Canada, according to company disclosures.

The Brampton, Ontario-based company is joining a booming REIT market that has raised about $440 million in five initial public offerings this year, more than any other industry in Canada, according to data compiled by Bloomberg. The Standard & Poor’s/TSX Capped REIT Index has jumped 9.6 percent this year, compared with a 1.7 percent gain for the S&P/TSX Composite Index. REITs invest in properties from seniors housing to warehouses, and are paying returns two percentage points more than the broad index.

Weston Surges

Loblaw, facing growing competition in its food business from Wal-Mart Stores Inc. and Target Corp. (TGT), soared on the spinoff announcement, rising 14 percent to C$38.69 yesterday, the biggest advance since October 1987, according to data compiled by Bloomberg. Before the rally, Loblaw shares had climbed 4.9 percent over the last five years, compared with a 28 percent gain for the S&P/Consumer Staples Index in Canada.

The announcement follows Toronto-based KingSett Capital Inc.’s unsolicited bid on Dec. 4 for Primaris Retail Real Estate Investment Trust (PMZ-U) in a deal valued at C$4.4 billion to add shopping malls in Canada.

The increase gave George Weston Ltd. a one-day gain of about C$771.4 million from its 60 percent stake yesterday, according to data compiled by Bloomberg. George Weston, 63 percent owned by W.G. Galen Weston, rose 0.1 percent to C$67.79 at market close in Toronto today. Loblaw added 1.3 percent to C$38.71.

W.G. Galen Weston, 72, chairman of George Weston, is Canada’s second-richest person with a net worth of about C$8 billion before the spinoff announcement, according to the Canadian Business 2011 list of the country’s wealthiest.

U.S. Competition

Loblaw will have an 80 percent interest in the REIT, Chief Financial Officer Sarah Davis said on a conference call yesterday. The company won’t “sit on its hands” with the extra cash from the IPO, which will be priced midway through next year, she said.

Loblaw faces increased competition from U.S. chains, including Target, which is opening in Canada next year, Hornett at Bissett said. The REIT deal could translate into C$2 billion in extra revenue by the end of next year, he said.

The IPO will bring a cash windfall of C$670 million to the company which will be used to repay debt maturing in 2013, Michael Van Aelst, consumer analyst at Toronto-Dominion Bank (TD) in Montreal, said in a note to clients today.

Van Aelst raised his rating on the stock to buy from hold and his price target to C$46 from $37. He is one of three analysts who upgraded the shares since yesterday compared with one analyst who downgraded.

RioCan is Canada’s largest REIT with 79 million square feet of retail space. Its tenants include Wal-Mart Stores Inc., Canadian Tire Corp., and Metro Inc. grocery stores according to its latest quarterly report.

Hidden Value

Canada had one REIT initial public offering last year, up from none in 2009, according to Bloomberg data. Canada may see an additional two REITs this month. Agellan Commercial REIT plans to raise C$154 million in its IPO next week to buy commercial properties in the U.S. and Canada. FAM Real Estate Investment Trust filed documents with regulators on Nov. 14 to do an IPO to buy Canadian commercial properties.

“If the company wants to free up their hidden value of real estate, the timing is perfect because we’re hitting a high watermark for real estate prices,” John Crombie, national director of retail real estate at Cushman & Wakefield, said in a phone interview from Toronto. “At the end of the day, who doesn’t like Loblaw?”

More Acquisitions

The company will do longer-term leases with favorable rates for Loblaw and free up “a ton” of cash that they can put towards upgrades, store developments and acquisitions, he said. Loblaw bought T&T Supermarket, Canada’s largest Asian food retailer, in 2009.

“Over time if this REIT diversifies, acquires other properties, and generates more income that flows back to Loblaw, that’s a positive,” Brian Yarbrough, an Edward Jones analyst, said in a phone interview from St. Louis.

Yarbrough rates the stock a buy.

“You do wonder if Loblaw is aiming to acquire another retailer,” he said. “The extra cash flow can potentially buy a retail chain in the middle of next year. They made it very clear that they won’t be sitting on this new cash. that’s why people are excited about this -- it’s positive across the board.”

To contact the reporter on this story: Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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