CREIT deal set to make Weston family largest property player

$3.9B bid will forge grocery giant into ‘a true competitor,’ with 752 properties NAOMI POWELL TORONTO

The Weston family, already in control of Canada’s biggest grocery chain, is moving to become one of the country’s largest property players with a $3.9-billion bid for Canadian Real Estate Investment Trust.

Choice Properties REIT, the real estate division of the Weston empire, agreed Thursday to buy Canada’s oldest real estate investment trust, creating a portfolio of 752 properties with one the country’s largest pipelines of commercial land for future development.

The combined entity will have an enterprise value of $16 billion, topping RioCan REIT — long the largest player in the sector — with a current enterprise value of $13.5 billion.

“What this does is it makes Choice a true competitor,” said Heather Kirk, managing director at BMO Capital Markets. “It’s a signal that Choice is looking to be much more competitive and is looking to unlock a lot of opportunities in its portfolio.”

The deal will enrich Choice Properties’ largely retail holdings with industrial space, which has quickly become one of the hottest commercial property types as e-commerce players like Amazon.com Inc. seek warehouses close to their customers. It will also add to Choice Properties’ store of assets suitable for “intensification” or redevelopment into mixed-use properties that combine residential, retail and office uses.

REITs have increasingly embraced redevelopment to offset slowing rental growth from traditional brick-and-mortar retailers.

“A lot of REITs will have big power centres with a lot of land but the building occupies only 25 per cent of the space,” said Jenny Ma, REIT analyst with Canaccord Genuity in Toronto. “So there’s a lot of space not being utilized at all where they can put up townhouses or condos. That’s where everyone’s looking for growth now because there’s limited rental growth in their portfolios.”

The combined REIT will include more than 60 sites suitable for redevelopment into mixed-use communities, many in urban centres close to public transportation. Choice will contribute 48 of those properties with the balance coming from CREIT — though the latter assets are more prepared for redevelopment.

The combined portfolio — consisting of 78 per cent retail property, 14 per cent industrial assets and eight per cent office space — will also benefit from reliable cash flows from anchor tenants Loblaws and George Weston Ltd. Loblaws is already Choice Properties’ primary tenant and in addition to its grocery stores, the Weston family controls fashion retailer Joe Fresh and Shoppers Drug Mart, Canada’s largest drugstore retailer.

“We have always had an ambition to really establish Choice Properties as a real estate entity on its own,” Galen Weston, chairman and CEO of Loblaw and George Weston said on a call with analysts. “We’re energized by the transformative next step that this deal represents for both of our organizations.”

For Loblaw the deal extends its control over its retail outlets, said Ma of Canaccord Genuity.

“Strategically, having control allows them to shuffle their business between properties,” she said. “It enhances your vertical integration by allowing you to not just have control of the supply chain but also the retail units themselves.”

Under the terms of the deal, much of CREIT’s existing management team will remain, with Stephen Johnson, CREIT’s current CEO, becoming president and chief executive of the new entity. Choice Properties CEO John Morrison will become vice chairman of the board of trustees.

Five year-old Choice Properties — which lists Loblaws as its principal tenant and largest unitholder — will pay 42 per cent of the purchase price in cash, to a maximum of $1.65 billion. The remainder will be paid in Choice Properties Units. Under the agreement, CREIT unitholders will have the choice of $53.75 in cash — a 23 per cent premium — or 4.2835 Choice Properties units for each CREIT unit held.

Though a competing offer for CREIT is not out of the question it would be subject to a $95 million break fee payable to Choice Properties, adding $1.30 per unit to the purchase price, Ma said.

“I think the likelihood is very low for a few reasons,” she said. “First, I don’t think other public REITs can afford that valuation. Second, private equity players would find CREITs portfolio, while solid, a little too diverse to fit into their playbook and finally, large pension funds have been more interested in looking globally for marquee assets.”

There’s a lot of space not being utilized at all where they can put up townhouses or condos.