Loblaw creates massive REIT
TORONTO — Loblaw Cos. Inc. began to look a lot more attractive to beleaguered investors on Thursday when Canada’s biggest grocery chain made a move to create one of the country’s biggest real estate investment trusts.
Loblaw’s shares hit their highest level in more than two years after the company said it intends to create a real estate investment trust for the bulk of its vast property holdings: 35 million square feet with a current value of more than $7 billion. The stock closed at $38.20, up almost 14 per cent with more than 17-million shares trading hands, far above its daily average.
The news comes as the retailer has been racing to shore up its performance in advance of U.S. mass merchant Target’s foray into Canada in March 2013 and as rival Walmart dramatically boosts its grocery space.
While Loblaw has been entering the final and most difficult phase of its sweeping IT overhaul, same-store sales in its retail operations, a key measure of performance, fell 0.2 per cent in the 40-week period ending Oct. 8. The company said prior to Thursday’s announcement that earnings will not grow significantly in the coming year because of the competitive onslaught.
“As we looked over the circumstances of the last six to eight months, we felt it was the right thing to do,” said Galen Weston, Loblaw’s executive chairman.
Creating the REIT will build value for both Loblaw and the REIT, and increase Loblaw’s financial capacity to pay down debt, buy back shares and, Weston said, give it “long-term access to funds to put against growth.”
Loblaw expects to sell units of the trust through an initial public offering l ikely to happen in mid- 2013. Lob law will retain a majority interest of more than 80 per cent of the REIT, executives said. Details on pricing and the number of units to be offered were not disclosed.
Chief financial officer Sarah Davis said the transaction will have a minimal impact on the retailer’s profitability in the near term. “Paying rent will reduce Loblaw retail EBITDA margins but we expect distributions and interest payments made by the REIT to Loblaw will reduce the drag on earnings substantially.” Davis said.
Loblaw’s real estate portfolio is 47-million square feet with an estimated market value of $9 billion to $10 billion, executives said. It owns 70 per cent of its retail footprint in Canada and leases about 30 per cent from other landlords. Loblaw will enter into long-term lease arrangements with its REIT on the properties it includes in the structure.
Asked whether the move was opportunistic Weston said, “We obviously believe we have an enormous amount of value in our real estate portfolio.”