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Loblaw REIT IPO Offered at Bargain Amid Dividend Slump

Loblaw Cos.’ real estate investment trust, poised to be Canada’s largest REIT initial public offering, is pitching itself as a bargain amid a slumping market for the high-yield trusts.

Choice Properties REIT, created by Canada’s biggest grocery chain, is targeting a yield of 6 percent to 6.5 percent in its C$400 million ($392 million) IPO this month. That’s a higher payout than peers including RioCan REIT, and will be cheaper than similar REITs, sale documents show.

Choice Properties is trying to build interest as rising bond yields draw investors away from dividend-paying equity instruments. The 14-company Standard & Poor’s/TSX Capped REIT Index plunged 13 percent from an April 30 peak, mirroring the 10 percent drop of the 299-member S&P Global REIT Index.

“On first blush and all else being equal, this looks like a fairly attractive REIT,” Brian Huen, managing partner at Toronto-based Red Sky Capital Management Ltd., which oversees about C$220 million and is considering the IPO, said in a June 10 telephone interview. “Despite the current challenging environment we’re in, I think they’re pricing this properly.”

With a C$10 unit price and yield of 6.25 percent, Choice Properties would trade at 11.4 times funds from operations, or cash flow, based on estimates for the next 12 months. That’s lower than the estimated 17.3 multiple for RioCan, Canada’s largest REIT by assets, below the 15.4 for Calloway REIT and 13.8 for Crombie REIT, according to sale documents.

‘Tougher Sell’

“It will certainly be a tougher sell than it would have been six months ago,” Dennis Mitchell, chief investment officer of Toronto-based Sentry Investments Inc., which manages C$10 billion and is considering the IPO, said in a June 11 interview. “Having said that, the quality of the real estate in the proposed REIT is much better than what we’ve seen in previous or recent IPOs.”

REITs, which receive preferential tax treatment from the government and pay out most of their income to investors through unit distributions, invest in income-producing real estate such as shopping malls and nursing homes.

Loblaw created the REIT to spin off about 75 percent of its real estate. Choice Properties will use the proceeds of the IPO to acquire 415 stores, one office complex and nine warehouses from Brampton, Ontario-based Loblaw.

Concentration Risk

“Loblaw has been accumulating this real estate portfolio for over 30 years, and management believes that it would be extremely difficult to replicate this portfolio, given the current real estate market dynamics in Canada,” according to sale documents.

Two telephone messages with Kim Lee, vice president of investor relations and financial planning and analysis for Choice Properties, weren’t immediately returned.

The properties, spread across Canada, total about 35.3 million square feet of leasable area. In comparison, RioCan has about 84 million square feet in Canadian and U.S. shopping centers, while Calloway has 26 million square feet in retail properties, and Crombie has 14.5 million square feet in shopping centers and office buildings, according to company websites.

Crombie was created in 2006 when Empire Co., parent of grocery chain Sobeys Inc., spun off properties into a REIT and raised C$204.8 million in an IPO. Sobeys agreed yesterday to buy Safeway Inc.’s Canadian stores for about C$5.8 billion, with Crombie getting the rights of first offer for real estate sales that come out of the transaction.

‘One-Trick Pony’

The reliance on Loblaw as both the main tenant and dominant owner of Choice Properties may give investors reason to pause. Loblaw will occupy 88 percent of the REIT’s gross leasable area, according to sale documents. Other tenants include Staples Inc., Dollarama Inc. and Toronto-Dominion Bank, the documents show.

“Loblaw is really just a one-trick pony,” John Kinsey, who helps manage about C$1 billion at Caldwell Securities Ltd. in Toronto, said in a June 10 interview. “You’re looking at one entity as opposed to a diversified portfolio like RioCan has.”

Choice Properties sites include 267 stand-alone stores operating under Loblaw names including Real Canadian Superstore, Extra Foods, No Frills, Maxi and Zehrs Markets, according to sale documents. An additional 143 sites are anchored by a Loblaw brand store and five other properties have only third-party tenants.

Ontario has the most properties, with 165 sites, followed by Quebec, with 100, and Alberta, with 45 locations, according to the documents. About 57 percent of the properties are in large cities including Toronto, Montreal and Vancouver, while almost 17 percent are in medium-sized cities and 26 percent are in rural locations, the sale documents said.


RioCan owns and manages Canada’s largest portfolio of shopping centers in cities including Vancouver, Calgary, Winnipeg, Toronto, Montreal and Halifax, with tenants ranging from Wal-Mart Stores Inc. and Canadian Tire Corp., a sporting goods and automotive retailer, to Target Corp. and grocery chain Metro Inc. The Toronto-based REIT had 344 properties, including 50 grocery-anchored retail centers in U.S. cities including Houston, Richmond, Virginia and Bridgeport, Connecticut as of the end of March, the company said in a June 5 statement.

Still, the Loblaw name and the grocery chain’s geographic diversification appeals to REIT investors such as Kinsey.

“Loblaw is pretty much across Canada and they’ve been around a long time, so they’ve got good properties,” Kinsey said. “We’ll certainly take a look at it.”

Less Liquid

Choice Properties may also be a less liquid stock, say investors, given that Loblaw and parent George Weston Ltd. may hold as much as a 90 percent stake in the REIT, which will have an initial market value of C$3.6 billion to C$3.9 billion, according to documents. Janet Craig, a spokeswoman for Loblaw, didn’t immediately return a telephone message seeking comment.

Choice Properties plans to sell 40 million trust units to the public in its IPO, according to sale documents. George Weston will acquire an additional C$200 million of the REIT units when the sale closes next month. The REIT is also selling senior unsecured debentures.

Canada has had six REIT IPOs this year that raised about $783 million, representing 58 percent of the $1.36 billion in initial sales in the country in 2013, according to data compiled by Bloomberg. Milestone Apartments REIT’s C$200 million sale in February and Agellan Commercial REIT’s C$134.6 million offering in January were the biggest.

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