Canadian Tire eyes $3.5-billion IPO to spin off properties in new REIT

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Canadian Tire Corp. is spinning off most of its property holdings into a $3.5-billion real estate investment trust as it looks to expand amid soft sales at its established namesake stores.

Borrowing from the playbook of grocer Loblaw Cos. Ltd., Canadian Tire said on Thursday it plans to launch an initial public offering for the REIT in the fall while at the same time unexpectedly replacing the executive responsible for its core Canadian Tire outlets.

The retailer's shares soared more than 11 per cent on the Toronto Stock Exchange, closing at $82.36, underlining the appeal of the merchant's real estate in ultra-competitive times, with new foreign retailers rushing in.

The REIT initiative also highlights the pressures on Canadian Tire to bolster its core business.

"We believe we can grow this business through organic and inorganic means substantially over the coming years," said Stephen Wetmore, chief executive officer of Canadian Tire. "This gives us financial flexibility to execute that."

Canadian Tire, whose namesake stores sell everything from tires to tools and tents, has already branched out into new areas, acquiring the company that runs Sport Chek and other sporting good chains two years ago, as well as apparel specialist Mark's Work Wearhouse more than a decade ago.

Now it's betting that by spinning off most of its valuable real estate and using the estimated $175-million to $300-million in proceeds to expand further, it can generate even better returns.

In its first quarter, Canadian Tire reported a 3-per-cent profit rise to $73-million, or 90 cents a share, meeting analyst's targets, while revenue increased 1.7 per cent to $2.48-billion, also hitting analysts' estimates.

However, sales at its namesake outlets open a year or more dropped 2.4 per cent. Mr. Wetmore told reporters after the annual meeting that Canadian Tire stores should achieve a 3-per-cent annual same-store sales increase."No, it's not where I want it to be," he said. "I believe that we should be hitting 3 per cent … Our sales are off so we have to make some changes …

"In the end the shareholders require performance across the board and not excuses about weather and other competitors coming into the market. So let's up our game and let's start beating them."

Last year, Canadian Tire's same-store sales, a key retail measure at established outlets, rose just 0.3 per cent and, the year before, 1.1 per cent and, in 2010, 0.7 per cent.

On Thursday, it announced that Allan MacDonald, who headed the auto division and marketing, would replace Marco Marrone, who is leaving the company, as chief operating officer of its retail unit. Mr. Marrone, a 27-year company veteran, had been COO for just over a year.

Under Mr. Wetmore, Canadian Tire has focused on its areas of strength, including auto parts and services – which enjoyed signs of a turnaround in the first quarter – and home products and hunting, fishing, recreation and sporting goods.

The company has one of the largest commercial real estate portfolios in Canada. It said it would retain 80 to 90 per cent of the REIT after the offering.

"Canadian real estate has been one of the safest havens for investors for the last five-plus years," PricewaterhouseCoopers said in a report on the capital markets Thursday. "When the financial markets collapsed in 2008, Canadian real estate did not, and the resulting confidence has paid off for the sector in spades, with investors flooding to it for its unique combination of yield and stability."

If most of the established REITs want to go to market to raise a few hundred million dollars, they can do so very quickly, said Don Fitzpatrick, president of PwC's deals real estate practice. "The sector is poised for a sustained run of activity, with the main challenge for investors being that of identifying suitable high-quality assets to buy," the report said.