Following in Loblaw Companies Ltd.'s footsteps, Canadian Tire Corp. announced Thursday that it will start spinning off its properties into a newly created real estate investment trust that could be worth $3.5-billion.
The decision not only adds another retail REIT to the Canadian landscape, but also extends the fast growing list of REITs of all stripes who have already gone public in the past year, or are planning to come to market in the near future.
Not to be a Debbie Downer, but these REITs can't all be quality investments. Maybe they're worth buying in the short-term while the sector is scorching, but definitely not long-term. No sector stays hot forever. Just ask the gold bugs.
I'm not alone in thinking this. The investment bankers themselves raised the caution flag in the past few months. But the big question is whether anyone cares enough to do something about it, especially the retail brokers who get a cut of the IPO fees for putting their clients into the deals.
Now, Canadian Tire certainly is a cut above. REITs rely on quality tenants, and the chain is gold-plated, just like Loblaw. Canadian Tire is also being prudent by keeping some troubled stores in-house so that investors won't have to take risks on them as part of the REIT.
But investors need to remember why these companies are spinning their real estate assets out now. Clearly, management thinks peak valuations are near. If Canadian Tire, or Loblaw, or Hudson's Bay Co., which is also considering a REIT, thought that they could grab more cash from spinning out their properties in a year's time, they would wait. But they're not.
Much of this stems from the way IPOs are priced. When you go public, your valuation is based on 'comps,' or how comparable companies are valued. And guess what? REITS are scorching right now. After cooling off last fall, they're back on a tear, and the S&P/TSX Capped REIT Index set a new record high just over a week ago.
For Canadian Tire and its investors, this is good news. Should the IPO go through, the company will get a solid cash injection that can be put toward whatever management so chooses. That's why you saw the stock pop 14 per cent today. (On the downside, management will have to deal with a public REIT that will soon demand higher rents for its shareholders.)
So let's not get gung-ho just because we've got a new REIT on the table. These things aren't bulletproof.
(Tim Kiladze is a Globe and Mail Reporter.)
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