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Loblaw set to create one of Canada's largest REITs

A Loblaws store in Ottawa.


Loblaw Cos. Ltd. is preparing to create what it says will be one of Canada's largest real estate investment trusts.

The Toronto-based grocery giant says it wants to unlock value for shareholders and maximize the value of its real estate portfolio by establishing a REIT that will go public by the middle of 2013.

Loblaw estimates that it will initially contribute real estate with a current market value exceeding $7-billion to the REIT and wants to keep a significant majority interest in the REIT.

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"The creation of the REIT is expected to build long-term value both for Loblaw and the REIT," Loblaw chairman Galen Weston said in a news release Thursday.

"This strategic initiative positions Loblaw's core businesses well for the future."

The REIT will help Loblaw increase its financial capacity to pay down debt, buy back shares and create a long-term source of capital to invest and expand operations, he added.

Loblaw also intends to use the REIT as a vehicle to manage and expand its real estate portfolio through incremental vending in of its own real estate as well as outside investment opportunities, Mr. Weston said.

Loblaw's real estate portfolio adds up to about 47 million square feet and its current estimated market value is between $9-billion and $10-billion, the company said.

The proposed transaction will see Loblaw contribute about 35 million square feet of mostly retail space to the REIT and then sign long-term leases with the REIT on those properties.

The REIT portfolio will consist of a geographically diverse mix of stores and shopping centres, with some warehouses and office buildings as well, the company said.

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The REIT should benefit from a lower cost of capital, which will be of help in future development and expansion, the company said.

Mr . Weston told an analysts' conference that the initiative is partly to try to recognize the underlying value in Loblaw's real estate, given the softness in the retailer's share price, as well as a way to access cash to finance new efforts in the future. "It was a little of both," he said in reply to a question.

He said Loblaw had looked in the past into spinning off its real estate "many times" over the years when financial investment firms had pitched the idea to the retailer.

"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," he said. "And part of that is long-term access to funds that we could put against growth. And that growth could be organic growth; it could be growth through acquisition."

There will be a cost tied to setting up a separate REIT, including putting a separate management team in place, Loblaw executives said. It will be looking for the appropriate talent from both within and outside of Loblaw, Mr. Weston said.

He cited an example in which the proposed REIT could benefit Loblaw. The company has owned for about eight years a prime downtown Toronto property at Bathurst Street and Lakeshore Boulevard West which has been "quite difficult and quite uneconomical for a retail company looking to build a 50,000 square foot store," Mr. Weston said.

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Under the capital structure of a REIT, the development of the store and the entire site as a shopping centre could make much more sense, said Jane Marshall, executive vice-president of properties at Loblaw. The REIT could find other retailers as tenants at the site, she said.

John Andrew, a professor and real estate expert at Queen's University, said Loblaw is the latest large Canadian company to jump on the REIT bandwagon.

"Given the significant tax advantages and ease of raising capital that REITs enjoy, this could make a lot of sense for Loblaws and its majority owner, George Weston Ltd," said Prof. Andrew, the director of the Queen's Real Estate Roundtable and professor in the School of Urban and Regional Planning.

"Spinning off its real estate assets should complement its core grocery business well, especially as it faces increased competition from recent new entrants into this space, such as Wal-Mart. REITs have attracted a great deal of capital over the past year, primarily because they have significantly outperformed nearly every other investment asset class."

Peter Sklar, retail analyst at BMO Nesbitt Burns, agreed that Loblaw's proposed spinoff could create "substantial value." He said in a note on Thursday morning that 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."

Analysts who cover the REIT sector said they expect there will be significant interest in the new spinoff, but that they'll be keeping a close eye on the numbers.

With related party transactions like this it's difficult to ensure that the rents that are being charged and other metrics correspond to market rates, they said.

That said, this REIT will have a broad portfolio of good properties with a solid tenant, and will benefit from its size, analysts said.

"I think it will be an IPO that will be well received as long as the pricing is reasonable," said Macquarie Securities analyst Michael Smith. "It's a good size REIT and that would be a welcome addition to the Canadian sector because in my opinion there's a shortage of REITs.

"This has been talked about for many years," Mr. Smith added. "I know for a lot of investors who have bought Loblaw stock or been interested in it, one of the key questions they've always wanted to figure out was how much was the real estate worth."

Analysts noted that Loblaw appears to be taking a page out of Empire Company Ltd., which gave birth to Crombie REIT in 2006 by spinning off a number of properties with flagship Sobeys stores. A short time later Empire privatized Sobeys.

With a file from Tara Perkins

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About the Authors
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More


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