Loblaw Co. Ltd. is selling its sizeable real estate portfolio to parent company George Weston Ltd., turning the grocery chain into a pure-play investment on the retail sector and transforming George Weston into a more diversified holding company.
As part of a corporate reorganization, Loblaw will send its 62-per-cent stake in Choice Properties Real Estate Investment Trust to its parent company and largest shareholder in return for shares of George Weston. Because George Weston already owns 3 per cent of the REIT, its total stake in Choice will jump to 65 per cent.
For Loblaw, the move marks a final step in the evolution of its real estate strategy. In 2013, the grocer originally spun out its real estate holdings into Choice Properties, a publicly-traded REIT. Then, in early 2018, Choice struck a deal to acquire Canadian REIT for $3.9-billion, creating Canada’s largest publicly traded real estate trust. Loblaw is now selling its majority stake in this combined company to George Weston, in exchange for shares.
“The ownership of real estate is no longer core to our strategy,” Loblaw president Sarah Davis said on a conference call on Tuesday. Going forward, Loblaw will be solely focused on Canadian retail, a sector it doubled down on with its 2013 acquisition of Shoppers Drug Mart Corp.
Minority shareholders of Loblaw will receive about 26.7-million shares of George Weston, valued at about $2.67-billion, for their stake in Choice Properties. The transfer is structured as a corporate spinout for tax purposes. Had it been arranged in a different way, Loblaw could face a $640-million tax bill.
On a conference call on Tuesday, analysts asked several questions about the complex deal, including how the reorganization benefits the entities involved and how it shapes their strategies.
Following the deal, controlling Choice Properties will significantly change George Weston's asset mix. At the moment, 93 per cent of its asset value is tied to Loblaw, because it owns 50 per cent of the retailer. If shareholders approve the reorganization, that figure will fall to 61 per cent and 35 per cent of George Weston’s assets will come from its stake in Choice Properties.
Under George Weston’s ownership, Choice will continue to morph into a diversified real estate company. The acquisition of CREIT early this year has already changed Choice’s portfolio, adding 206 retail, industrial and office properties, and the REIT now has an enterprise value of around $16-billion and a market capitalization of $7.3-billion.
The next stage of its growth plan is to move away from its income-producing roots by redeveloping many properties, something that will transform the REIT into a riskier real estate owner.
“Loblaw’s and Choice’s strategies are on divergent paths and ultimately would need to be separated,” Galen Weston, chief executive of both George Weston and Loblaw, said on a conference call.
Mr. Weston said George Weston will also become a stronger company with what he called a three pillar portfolio of retail, food and real estate.
The reorganization must be approved by two-thirds of Loblaw shareholders, and because Loblaw and George Weston and interrelated, a simple majority of Loblaw’s minority shareholders must also approve the deal.
To entice these shareholders, Loblaw has promised to maintain its absolute annual dividend at $1.18 a share. These investors will also receive George Weston shares as part of the deal and they will pay a 28 cent per share dividend, boosting the total annual dividends received by 24 per cent.
Loblaw, meanwhile, argued the reorganization would simplify its investment thesis. Because its earnings combination from a mix of retail and real estate, Loblaw argued that it trades at a lower multiple than its peers because of a "holding company discount."
By shedding its real estate assets, Loblaw will be a pure retail play. “After this transaction, it will be very clear how we compare to our peers,” chief financial officer Darren Myers said on the call.