Investors back Loblaw move to REIT from grocery stores
Property funds pay two points above index
Loblaw Cos. maybe a better landlord than grocer. Investors signalled that last week by driving 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.
The Brampton, Ontariobased 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 9.8 per cent this year, compared with a 1.9 per cent gain for the S&P/TSX Composite Index. REITs invest in properties from seniors housing to warehouses, paying returns two percentage points more than the broad index.
The announcement follows Toronto-based KingSett Capital Inc.’ s unsolicited bid on Dec. 4 for Primaris Retail Real Estate Investment Trust in a deal valued at $4.4 billion to add shopping malls in Canada.
“It was an unloved stock before this announcement,” said Jason Hornett, who manages $384 million at Bissett Investment Management, including shares of George Weston Ltd., 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 Thursday the company would transfer about 3.3 million square metres of property with a current value of more than $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.
Loblaw soared on the spinoff announcement, rising 14 per cent to $38.69 Thursday, the biggest advance since October 1987, according to data compiled by Bloomberg. Before the rally, Loblaw shares had climbed 4.9 per cent over the last five years, compared with a 28 per cent gain for the S&P/Consumer Staples Index in Canada.
Loblaw will have an 80 per cent interest in the REIT, chief financial officer Sarah Davis said. 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.
“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?”
The company will do longerterm leases with favourable rates for Loblaw and free up “a ton” of cash that they can put toward upgrades, store developments and acquisitions, he said. Loblaw bought T&TSupermarket, 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.”
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 $2 billion in extra revenue by the end of next year, he said.
The IPO will bring a cash windfall of $670 million to the company which will be used to repay debt maturing in 2013, Michael Van Aelst, consumer analyst at Toronto-Dominion Bank 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 $46 from $37. He is one of three analysts who upgraded the shares since Thursday compared with one analyst who downgraded.