TORONTO – Loblaw Companies Ltd. is creating a real estate investment trust that will be one of the country’s largest commercial landlords, an announcement that sent it shares soaring Thursday.
The REIT, which would operate as a subsidiary of Loblaw (TSX:L), would see Canada’s biggest supermarket operator contribute real estate assets with a current market value of more than $7 billion to the venture.
Units of the REIT would then be sold in an initial public offering expected to be completed in mid-2013, subject to regulatory approvals.
“However, it is our intention to retain a significant majority interest in the REIT — over 80 per cent,” Loblaw chief financial officer Sarah Davis told a conference call with analysts.
“While we expect to generate funds from the IPO, it is anticipated that the long-term source of capital and the structural advantage of the REIT are the real benefits,” Davis added.
Details on pricing and the number of units to be offered in the IPO were not disclosed. Those details typically are determined after a preliminary prospectus is issued and underwriters gauge investor interest.
Loblaw executive chairman Galen G. Weston called Thursday’s announcement an exciting development for Loblaw.
“The creation of the REIT is expected to build long-term value both for Loblaw and the REIT,” Weston said in the statement.
“This strategic initiative positions Loblaw’s core businesses well for the future. We expect the REIT to not only unlock value for our shareholders, but also increase our financial capacity to pay down debt, buy back shares and create a long-term source of capital to invest and grow.”
Loblaw isn’t the first such chain to make the move. Empire Co. Ltd. (TSX:EMP.A), operator of the Sobey’s supermarket chain, spun off a number of properties into Crombie Real Estate Investment Trust (TSX:CRR.UN) in 2006.
The Weston family controls Loblaw through its stake in George Weston Ltd. (TSX:WN), where Weston’s father W. Galen Weston is executive chairman of the board.
The younger Weston told analysts Thursday that Loblaw was making the move now “because we feel the timing is right for both our business and the capital markets.”
“REITs are recognized as an optimal vehicle to acquire and develop real estate and the size and quality of our real estate assets should be appealing to investors,” he said.
Loblaw shares were up $5.39 to $38.99 at midafternoon Thursday on the Toronto Stock Exchange on heavy volume of more than nine million shares. George Weston (TSX:WN) also saw a boost, rising $5.04, or 7.97 per cent, to $68.45.
Weston said the REIT, which the company expects to be one of Canada’s largest, “builds on our long-standing commitment to owning and developing quality real estate.”
He called the business model for the REIT “fairly straightforward.”
“We will use the initial Loblaw real estate assets as a base and then drive growth in two ways — through vending in the remaining Loblaw real estate assets over time and investing to build a diversified portfolio of non-Loblaw properties,” he said.
As part of the transaction, Loblaw intends to contribute approximately 35 million square feet to the REIT and will enter into long-term lease arrangements with the REIT on those properties.
The contributed real estate portfolio will be largely retail focused and comprise a geographically diverse mix of stores and shopping centres, and will also include warehouses and office buildings.
Loblaw’s real estate portfolio spans an estimated 47 million square feet and has a current estimated market value of $9 billion to $10 billion.
Loblaw expects that as a stand-alone entity, the REIT will benefit from a lower cost of capital, which will support its development and expansion.
The REIT will have a dedicated management team — with candidates being sought from both within and outside the company — focused on overseeing the contributed properties and growing the portfolio, while Loblaw will provide support and various services.
Meanwhile, Davis said she expects the move will have a “minimal impact” on Loblaw’s consolidated results 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 to reduce the drag on earnings substantially,” she said.
Loblaw president Vicente Trius said creation of the REIT was a “very positive event” for the whole company.
“I am confident that this development will facilitate our ability to deliver our plan to strengthen our competition for the long term.”
Trius said he expects the REIT to help drive retail store development and create a more attractive shopping experience for customers.