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The conversion of retail store properties into real estate investment trusts (REITs) has become the drug of choice for sluggish Canadian retailers looking to get a fresh buzz from investors. But as bankers and big investors look to capitalize on the trend before they run out of Canadian names to deal to, Tim Hortons Inc. looks prepared to resist the peer pressure and just say no.
Canadian Tire Corp. Ltd. became the latest Canadian chain store operator to announce it would spin properties out into a REIT – an investment vehicle that has become extremely popular because it promises an ample income stream in an era where decent investment yields are hard to find. The Canadian Tire announcement follows news of a similar plan unveiled by grocery chain Loblaw Cos. Ltd. late last year. The next big name looking to jump on the bandwagon is department store Hudson's Bay Co. (Empire Co. Ltd. converted its Sobey's grocery-store properties into a REIT several years ago.)
There aren't a lot of serious possibilities left in the Canadian retail market after that; big chains such as Shoppers Drug Mart Corp. and Dollarama, for example, don't own much of their own real estate. But Tim Hortons would seem, on the surface, to be a candidate.
Highfields Capital Management, a U.S. activist hedge fund that holds 4 per cent of Tim Hortons' shares, has been clamouring for the coffee-and-doughnuts chain to make some big changes to deliver value to shareholders – including a REIT conversion of company-owned restaurants. You can bet Canadian Tire's announcement caught Highfields' attention and heightened its resolve.
But in Tim Hortons' quarterly conference call this week, chief financial officer Cynthia Devine said the company has kicked the REIT tires extensively, and it isn't sold. "Our conclusion is that the establishment of a REIT structure would not create significant value, for a number of reasons," she said.
For one thing, the majority of Tims locations are leased, not owned. And of the properties it outright owns, it collects a lot of "rent" from franchisees that, technically, isn't really rent.
CIBC World Markets analyst Perry Caicco noted in a research report that Tim Hortons collects a net rent of about $400-million – which works out to a massive $90 per square foot, roughly triple what the company itself pays in locations it leases. In reality, much of this is more like a monthly fee paid by franchisees over and above true rental. As such, it wouldn't qualify as rental income for REIT purposes.
What's left is not worthless, but it's not a lot. Mr. Caicco estimated that a REIT spinoff would add $1.50 to $2 of shareholder value – roughly 3 per cent of the current share price. "Probably not worth the trouble," he concluded.
Ms. Devine allowed that "it's always good to never close anything off" – leaving a tiny sliver of possibility that if Highfields were to really make life difficult for Tims management, the REIT idea could get new life. But for now, it looks like Tim Hortons won't be seduced by REITs' siren song.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe.
David Parkinson