Loblaws to create $7B real estate trust

Loblaw Companies Ltd. plans to create one of the largest real estate investment trusts in Canada to unlock value for shareholders.

Units of REIT are expected to be sold in initial public offering by mid-2013

Loblaw Companies Ltd. and CEO Galen Weston Jr. offered few details of the REIT plan in a release Thursday. (Mark Blinch/Reuters)

Loblaw Companies Ltd. plans to create one of the largest real estate investment trusts in Canada to unlock value for shareholders.

The grocery chain operator says it plans to contribute a significant portion of its real estate assets with a current market value of more than $7 billion to the planned REIT.

REITs are generally perceived to be stable publicly traded securities that income investors prize for their ability to pay out steady and hefty dividends.

Distributions prized

"The main advantage over a corporation is it has significant tax advantages," John Andrew, a Queen's University real estate professor in Kingston, Ont., told CBC News in an interview. "It pays out the vast majority of its income to unitholders" and that allows it to not have to pay as much corporate tax.

Loblaws currently owns about 47 million square feet of retail space across Canada, worth some $9 billion to $10 billion. The company says it will initially put 35 million square feet of that into the REIT, valuing the trust at about $7 billion.

"It's a very good strategy when rates are low," Andrew said. "It's very easy for a REIT to go to the market and raise money."

Units of the REIT are expected to be sold in an initial public offering expected to be completed in mid-2013, subject to regulatory approvals.

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

Investors cheered the news, pushing Loblaws shares up 23 per cent to $41.46 on the TSX, it's highest level since 2010.

Details on pricing and the number of units to be offered were not disclosed. However, Loblaw said it will retain a significant majority interest in the new entity.

Cash payout

The only real question is what Loblaws plans to do with the cash.

"We expect the REIT to not only unlock value for our shareholders, but also increase our financial capacity to pay down debt, buy back shares, and create a long-term source of capital to invest and grow," Weston said.

But the venerable grocer has struggled for the better part of a decade to adapt to a shifting grocery landscape. The industry's notoriously thin margins are being squeezed by discount U.S. chains like Wal-Mart and Target Corp., which is about to set up shop in Canada.

"For the consumer, the benefit of this plan depends on what Loblaws does with it," Andrew said.

"Does Loblaws think we're at the top of the cycle here and that this is a good time to capture the most value form these properties?" he asked. "Or is it just a way to raise capital now and inject the funds into its core operations?"

"That's the main question," Andrew said.