Loblaw Cos. Ltd. has finally found a hidden weapon to lift its moribund share price: real estate.
The country's largest supermarket retailer will spin off most of its property assets into a real estate investment trust, ending years of resistance to the idea, in a measure designed to cash in on a surge in commercial property values. The announcement sent shares of Loblaw and its parent company, George Weston Ltd., up sharply. Loblaw closed at its highest level in nearly a year, up 13.7 per cent to $38.20.
The move to create one of Canada's largest REITs and unlock the value of its property holdings comes at a time of brisk deal-making in the real-estate business. This week, a consortium led by KingSett Capital launched a hostile $4.4-billion bid for shopping mall owner Primaris Retail REIT, with the aim of breaking up the company. RioCan REIT is involved in that deal, and is also a player in the proposed purchase of a large plot of land in downtown Toronto from the Thomson family.
Loblaw will keep a more than 80-per-cent stake in the real-estate company, which is expected to own about $7-billion worth of property – most of it housing the company's grocery stores.
"A REIT, as a subsidiary of Loblaw's retail company, gives us the ability over the long term and over the short term to control our real estate and unlock value the way the market is currently thinking about real estate assets," Galen G. Weston, executive chairman of Loblaw and a member of the wealthy Weston family which controls the retailer, told analysts. "So in our view it's the best of both worlds."
Since Mr. Weston stepped into the top job at Loblaw six years ago, his team has tried to revive its fortunes and overhaul its operations amid a lacklustre performance.
Now the company is betting that a spinoff of its property will give it the bounce that REITs are enjoying, before the shine lifts from real estate assets.
"We're seeing great performance of the REITS relative to virtually every other asset class," said John Andrew, a real estate professor at Queen's University in Kingston, Ont.
"Some of these people feel perhaps that they're a bit late to the party. But they've seen this has been a very successful structure, as opposed to a corporation … I think we're going to see a lot more of these kinds of announcements in the first six months of 2013."
The spinoff will generate substantial value, predicted Peter Sklar, retail analyst at BMO Nesbitt Burns. "Loblaw's current multiple is at a historically low level due to poor operating performance, while REITS are currently being valued at historically high levels."
The REIT sector has posted a total return of 14.7 per cent this year, compared with about 4.4 per cent for the S&P/TSX Composite index.
Real estate firms' growth has been fuelled by cheap debt, demand for income, distribution increases, foreign investment, mergers and acquisition activity and demand for real estate by pension plans and insurers, said Alex Avery, an analyst at CIBC World Markets.
REITs provide Loblaw and its parent Weston with significant tax advantages and an easy way to raise capital, said Prof. Andrew.
Still, the risk for Loblaw is that by the time it takes its REIT public by the middle of next year, the allure of real estate may fade, he warned. And interest rates could rise by then.
Loblaw estimates that it will initially contribute real estate with a current market value of more than $7-billion to the REIT. It plans to keep an 80-per-cent interest in the REIT.
"But we wouldn't be doing it if we didn't feel that it also represented a great opportunity to enhance the core strategic plan for Loblaw," Mr. Weston said. "And part of that is long-term access to funds that we could put against growth," either organic or through acquisitions.
With files from reporters Tara Perkins and Bertrand Marotte