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Canadian Tire REIT Spurs Speculation for Hudson’s Bay

Canadian Tire REIT Spurs Hudson’s Speculation
Hudson’s Bay, the country’s oldest retailer, jumped 9.1 percent to C$17.68, the most since it went public in November. Photographer: Norm Betts/Bloomberg

Investors are wagering Hudson’s Bay Co. will follow Canadian Tire Corp. in spinning off its property into a real estate investment trust.

Canadian Tire, the country’s largest sporting goods retailer, said yesterday it will create a C$3.5 billion ($3.48 billion) REIT in an initial public offering this fall, becoming the eighth company to either sell or propose a real estate IPO this year. Shares in the Toronto-based firm gained 11 percent to C$82.36 yesterday, the most since November 2008. Hudson’s Bay, the country’s oldest retailer, jumped 9.1 percent to C$17.68, the most since it went public in November.

“What this does is it really sets the precedent for other companies that have all this land, like Hudson’s Bay Company,” James Telfser, a fund manager with Caldwell Investment Management Ltd. in Toronto, said yesterday by phone. The firm manages about C$1 billion and Telfser said he sold shares in Canadian Tire in October. “It brings more to light that this is an option now for these companies trying to create value in a tough environment.”

Canadian Tire joins Loblaw Cos., the country’s biggest grocery chain by market value, which said it plans to file regulatory documents for a C$7 billion REIT this month. Retailers are using REITs to raise capital from yield-hungry investors amid increasing competition from U.S. companies such as Target Corp. and record consumer debt loads.

Hudson’s Bay is looking at creating a REIT “sometime in the future,” Chief Executive Officer Richard Baker said last month. Tiffany Bourre, a spokeswoman for Hudson’s Bay, didn’t immediately return a call seeking comment.

Cheap Capital

“Canadian Tire is a perfect example of giving the market what it wants right now, which is yield,” Michael O’Brien, a fund manager with TD Asset Management in Toronto who manages about C$3 billion, said on the phone yesterday. “In the case of both Canadian Tire and Loblaws, this is a really cheap and efficient source of capital.”

REITs, which receive preferential tax treatment from the government, are companies that invest in income-producing real estate and pay out most of their income to investors through unit distributions. They have raised $760 million from six Canadian IPOs this year, including Milestone Apartments REIT and Agellan Commercial REIT, to account for 74 percent of $1.02 billion raised from initial offerings this year in the country, data compiled by Bloomberg show.

Canadian REITs raised almost $500 million in seven IPOs last year, more than any other industry in Canada, the data show. The Standard & Poor’s/TSX Capped REIT Index soared 169 percent from a five-year low on March 9, 2009 and reached a record high on April 30. The benchmark S&P/TSX Composite index rose 66 percent over the same period.

Canadian Tire lost 0.5 percent to C$81.60 and Hudson’s Bay retreated 1 percent to C$17.50 at 9:41 a.m. in Toronto trading today.

Fund Buybacks

“The market is in a most perfect condition and I can’t see a better time to surface the value of the properties we have,” Stephen Wetmore, CEO of Canadian Tire, said in a conference call yesterday. “The market is right and this creates a vehicle we can access should we need funding.”

Dean McCann, chief financial officer at Canadian Tire, said on the call an IPO may raise C$350 million and plans to use the cash for potential acquisitions as well as share buybacks.

The rush to REITs and their rich yields is also accelerating in the U.S. Companies including Geo Group Inc., a prison operator, and American Tower Corp., which owns cellphone towers, have already converted to REIT structures while CBS Corp. said in January it’s planning a conversion for its billboard unit and casino owner Penn National Gaming Inc. has said it will also spin off some of its real estate.

More Coming

“Companies that have larger real-estate portfolios will definitely be looking at these types of structures and arrangements and opportunities to finance future growth,” Dean Braunsteiner, IPO services leader in Toronto for PwC Canada, a member of PricewaterhouseCoopers International Ltd., said in a phone interview. “Are there more to come? Probably.”

Loblaw, the Brampton, Ontario-based company said on May 1 it plans to file regulatory documents for a REIT IPO this month and close the sale by early to mid-July. The grocer plans to spin off about 35 million square feet of real estate.

“Just like Loblaw, we have the exact same opportunity,” Hudson’s Bay’s Baker said in a telephone interview with Bloomberg in April.

Not all retailers are interested in entering the REIT market at the moment.

Tim Hortons Inc., which posted continuing store sales declines in Canada for the first time since an initial offering in 2006 and faces pressure to create a REIT from activist investor Highfields Capital Management LP, said it’s not pursuing the strategy.

Crackdown Possible

“The establishment of a REIT structure would not create significant value,” Cynthia Devine, CFO of Tim Hortons, said in a conference call on May 8. The company leases some of its sites and some income would not qualify, she said.

It’s unclear how these REITs will be managed and how they will fit into the operations of Canadian Tire or Loblaws, which may scare away investors, Toronto-based Mark Rothschild, an analyst with Canaccord Genuity Corp., said yesterday. “These REITs are not structured properly and do not operate as real businesses. We do not believe there will be significant interest to most traditional REIT institutional investors.”

Bill Ackman, founder of Pershing Square Capital Management LP, said at an April 11 conference in New York that the glut of U.S. REIT conversions will lead to new restrictions that may harm the industry.

“If you push the envelope too much, there will be a crackdown on the REIT industry,” Ackman said.

Rising Rent

Canadian Tire’s REIT will acquire most of the company’s owned real estate, which includes about 250 properties comprised of mainly Canadian Tire retail stores and a distribution center, Canadian Tire said in a statement. The properties would represent about 18 million square feet.

Canadian Tire plans to keep 80 percent to 90 percent of the REIT, which will have a minimal effect on the company’s earnings, the company said.

As the REIT establishes itself, it will draw new revenue from rising rent, additional real estate sales from Canadian Tire’s existing portfolio, and the potential to buy more varied properties, McCann said.

“The idea is to get other tenants by acquiring other properties that Canadian Tire isn’t a part of, which would make the REIT a slightly more attractive investment,” said Bobby Hagedorn, an analyst with Edward Jones & Co. in St. Louis.

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