Loblaw Cos. Ltd. is not the first retailer to spin off its real estate assets, and it won't be the last.
On Thursday, the Canadian grocer said it would establish a publicly traded real estate investment trust (or REIT) in 2013 to hold real estate now worth some $7-billion. Existing Loblaw stores would pay rent to the REIT.
"The creation of the REIT is expected to build long-term value both for Loblaw and the REIT," said Loblaw chairman Galen Weston, in a release.
But you can't ignore the immediate effect: Loblaw shares soared at the start of trading and were up more than 16 per cent in afternoon trading. That's not a bad gain given that very few details accompanied the announcement.
Of course, Loblaw didn't invent this manoeuvre, which is why financial types have been pestering the company for some time. Indeed, activist investors and others have been approaching a number of land-rich North American retailers with the idea that their vast real estate holdings haven't been reflected in their share prices, making spin-offs look like a natural step.
Hedge fund manager Bill Ackman of Pershing Square Capital Management tried to persuade retailer Target Corp. in 2008 to spin off its real estate holdings, which Mr. Ackman valued at $40-billion (U.S.) – equal to the company's enterprise value (or its market valuation and net debt). A spin-off, he argued would increase the value of the shares by 74 per cent.
Dillard's Inc., a U.S. department store that owns 87 per cent of its stores, announced plans in early 2011 to form a REIT subsidiary. The news sent Dillard's shares up 18 per cent on the day it was announced, though details of the plan have since been scarce.
If the Loblaw plan sounds good – and the market is giving it early approval – it isn't hard to find other candidates for potential real estate spinoffs as companies look for ways to shed assets and "unlock value." Home Depot Inc. and Lowe's Companies, for example, are also big land owners and their names are often associated with spinoff ideas. So is Sears Holdings, which is busily spinning off retail assets but also owns valuable buildings, whose valuations don't reflect their real worth.
David Berman