# Loblaws to spin off $7 billion in real estate into a REIT



## andrewf (Mar 1, 2010)

Interesting to see Loblaw capitalizing on high REIT valuations. I had no idea that there was that much of a conglomerate discount on their real estate assets. Crazy to think that their real estate assets alone were greater than their market cap.

From CBC


> 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.
> 
> ...


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## FrugalTrader (Oct 13, 2008)

Congrats to the shareholders of L and WN !


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## phrenk (Mar 14, 2011)

This is when you know that Canadian REITS have reached a peak in terms of valuation. 

Also, side information, 2012 was the single largest year of both new REIT IPOs and M&A announcements in Canada. The last peak was in 2006, right around the time the US economy and the world fell apart.

I would be very cautious if i held shares in REITs and needed the money in the next 12 months.


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## andrewf (Mar 1, 2010)

To be fair, Loblaws will retain a majority stake. This seems more about having the stock price reflect the market value of the real estate and perhaps getting access to lower cost capital (REITs can finance less expensively).


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## Mall Guy (Sep 14, 2011)

Currently the market likes real estate, and not so much consumer staples (ie a grocery store lock in a battle with Wal-Mart, with Target on the horizon). They have to keep a major stake, so that Kingsett won't come in and take a controlling interest in their real estate (ie PMZ). They also need to keep a big block of units, because of the cash outflow in the form of rental payments that are otherwise internalized at the moment. Wal-mart Canada does this with CWT, Empire also did this in 2006 with a follow on in 2008 and a number of others since. Monetize the real estate, continue to develop, and keep feeding growth to a REIT (and grow at $.50 on the $1.00). Surprised G2 waited this long, would have been a good market signal when he first took the helm.


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## ddkay (Nov 20, 2010)

Hey Mall Guy, I just passed by that vacant Arcturus property we spoke about, there was a sign saying No Frills is opening December 7 (tomorrow). Great news for the area!


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## MrMatt (Dec 21, 2011)

Okay, I saw this, and it seems the market likes it, but I don't get why this is "so great".

Overly simplistic analysis.
L makes 700M in profit today.

They will transfer 7B in property to this new entity, and have to pay ? in rent for those long term leases, maybe $350 or $700M a year (5% or 10% of the value of the property in rent seems reasonable, but this is 50-100% of their earnings
Assuming they maintain the dividend (30% of earnings) it seems they'll basically be siphoning off all the earnings from the core business.

So why does this make sense? REIT tax advantages? They're done expanding?


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## andrewf (Mar 1, 2010)

They seem to say it's because of the lower cost of capital. The REIT would be able to develop/maintain sites that would not be economic given a retailer's higher cost of capital.

As far as the lease agreements go, it would seem to mostly be moving money back and forth. Retail pays to REIT rent, REIT pays distributions net of operating and financing expenses, primarily back to the parent (except the minority interest in the IPO).

If the REIT is valued similarly to Riocan on an price/assets basis, it should be worth in the neighbourhood of $5 billion, while taking ~$3.5 billion in debt off the parent company's balance sheet, for a $1.5 billion benefit (back of the envelope).


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## spirit (May 9, 2009)

Are REIT's going to show up on the finance minister's radar......they might be deemed tax avoiders like income trusts and be subject to the same rules. All it takes is for the government to think that REIT's are growing too large and start taxing them.


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## andrewf (Mar 1, 2010)

I doubt it.

REITs are also providing a useful service for the economy. They are an efficient structure for developing and operating real estate, meaning more investment can be made economically viable. They probably also make the market for real estate more liquid and efficient, given that without REITs you would be left with big pension funds.

Not to mention that when income trusts were kiboshed, REITs were specifically excluded, and for a reason.


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## CanadianCapitalist (Mar 31, 2009)

Adding to Anderw F's comment. REITs were specifically exempted from taxation measures introduced on publicly-traded flow-through entities. No guarantees but it is hard to see why the Govt. would want to tax REITs now.



> Certain trusts that would otherwise be SIFTs will be excluded from the SIFT definition. These are trusts (commonly known as real estate investment trusts or REITs) that meet a series of conditions relating to the nature of their income and investments. Those conditions are similar to the conditions that the United States applies to US real estate investment trusts, and like the US rules this exception from the SIFT measures recognizes the unique history and role of collective real estate investment vehicles.


http://www.fin.gc.ca/n06/data/2006-061e.pdf


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## hboy43 (May 10, 2009)

Hi:

Deja vu, see Hudson's Bay Company. Makes one wonder if there is any value in any retail stock that isn't sitting on a real estate gold mine. The more recent HBC owners got more out of HBC real estate than the past shareholders for the whole company circa the buy out. Looks like L is in the same position, really a RE company wearing a retailer's clothes.

hboy43


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> Interesting to see Loblaw capitalizing on high REIT valuations. I had no idea that there was that much of a conglomerate discount on their real estate assets. Crazy to think that their real estate assets alone were greater than their market cap...


This is similar to when I bought HBC shares years ago. 

I was wavering until I read in my investment newsletter that were HBC to close the next day, the real estate alone was worth $5 more per share than current market prices, never mind that management's changes/strategy was dealing with the retail issues and the retail had made a profit.

As I recall, the buyout to take it private paid something like double my cost, a couple of years later.


Cheers


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## financialuproar (Jan 26, 2010)

I remember taking a look at Loblaws back a few years ago, right when they were having all those distribution problems. Once I crunched the numbers it was obvious all the value of the company was in the real estate. 

They better keep the majority of that real estate, because without it there's nary a reason to buy the stock.


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## MrMatt (Dec 21, 2011)

financialuproar said:


> I remember taking a look at Loblaws back a few years ago, right when they were having all those distribution problems. Once I crunched the numbers it was obvious all the value of the company was in the real estate.
> 
> They better keep the majority of that real estate, because without it there's nary a reason to buy the stock.


That's basically what I was thinking with the simple thoughts I was having in my post.


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## kcowan (Jul 1, 2010)

I would stay away from any new REIT IPOs. I smell a repeat of the Income Trust fiasco.


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## Mall Guy (Sep 14, 2011)

kcowan said:


> I would stay away from any new REIT IPOs. I smell a repeat of the Income Trust fiasco.


Not sure I follow your logic. The SIFT rules, and the subsequent REIT rules have all been amended to allow REITs to exist. REIT rules prohibit certain activities at the property level ("bad" income and "bad" assets), the the margin of those activities will increase next year (from 5% to 10% of income). All the REITs that went through the stapled unit structure did so for no reason, as those rules changed too! REITs are accepted because there is a long history to this structure around the world, and Canada needed to remain competitive in this area.


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## Mall Guy (Sep 14, 2011)

hboy43 said:


> Makes one wonder if there is any value in any retail stock that isn't sitting on a real estate gold mine.


It's always about the real estate. Always! Just look at Canadian Tire as another example. Wonder when they will follow suit. Didn't work out so great for Scott's REIT (now Key REIT) or Priszm (or John Bitove for that matter, but hey, that's what makes a market).


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## Rysto (Nov 22, 2010)

andrewf said:


> To be fair, Loblaws will retain a majority stake. This seems more about having the stock price reflect the market value of the real estate and perhaps getting access to lower cost capital (REITs can finance less expensively).


I'm really not sure why I would want to buy a REIT where the majority owner is far and away the largest tenant. Feels like a pretty big conflict of interest to me.

I'm sure people will be lining up to buy this thing anyway.


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## doctrine (Sep 30, 2011)

This $7B Loblaws REIT smacks of trouble - what does happen when every major retailer in Canada spins off REITs.. and the government sees potentially billions in revenue disappearing? Remember when Bell and Telus announced they were going to become trusts? What would happen if the gov't decided to take away the tax exemption for REITs? I believe it would present an unbelievable buying opportunity after most REITs lose 50% or more of their value when their cost of capital doubles. As an aside, I don't own any REITs, but I do own real estate companies that pay taxes.


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## Mall Guy (Sep 14, 2011)

RECOs (real estate corps and retailer with lots of real estate on the books) enjoy huge amounts of amortization and depreciation, thus substantially reducing their taxable income. So the government isn't really loosing billions in revenue.


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## kcowan (Jul 1, 2010)

Mall Guy said:


> REITs are accepted because there is a long history to this structure around the world, and Canada needed to remain competitive in this area.


My gut says to beware these new IPOs as many jump on the REIT bandwagon. Can a Loblaws REIT outperform when it is still controlled by the grocer?


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## Mall Guy (Sep 14, 2011)

Does it need to outperform, or just pay a steady, fairly secure 6% yield (no idea if that is where they will price it . . . just a guess)? Mature sector, with predicable earning. We all gotta eat . . .


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## kcowan (Jul 1, 2010)

6% if it is not overpriced by the greedy issuer.


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## andrewf (Mar 1, 2010)

I would expect it to be price comparably to Riocan, or perhaps a slightly less.


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## Mall Guy (Sep 14, 2011)

Should likely yield a little more than Riocan. An investor will get geographic diversification but little in the way of tenant/covenant diversification. And while I think about it a little more, that geographic diversification could end up being in a lot of secondary and tertiary markets. Make sure you read the IPO and get a feel for the underlining assets. I'm sure Metro, Empire and Jimmy Pattison will each pick up a big block . . .:biggrin:


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## HaroldCrump (Jun 10, 2009)

hboy43 said:


> Deja vu, see Hudson's Bay Company. Makes one wonder if there is any value in any retail stock that isn't sitting on a real estate gold mine. The more recent HBC owners got more out of HBC real estate


Ha, good call hboy43.

_Hudson’s Bay Co., whose third-quarter loss widened, will consider spinning off its valuable real estate into a real estate investment trust, borrowing a page from the playbook of grocery giant Loblaw Cos. Ltd._

http://www.theglobeandmail.com/glob...noff-for-real-estate-holdings/article6189388/


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## CanadianCapitalist (Mar 31, 2009)

Except market reaction to the HBC announcement was "bleh". Stock down slightly today.


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## hboy43 (May 10, 2009)

HaroldCrump said:


> Ha, good call hboy43.
> 
> _Hudson’s Bay Co., whose third-quarter loss widened, will consider spinning off its valuable real estate into a real estate investment trust, borrowing a page from the playbook of grocery giant Loblaw Cos. Ltd._


It is more from the playbook of itself, that is all the RE leases that Target purchased (the Zellers sites) when HBC was still private a few years back. It is a vote for my off the cuff theory that the only value in retail stocks is whatever RE they are sitting on.

hboy43


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## rinoscar (Jan 26, 2010)

Hello,

When they announced the reit spinoff, the L stock price jumped. Now I am making about 16%, would you guys hold on to L? Can the price go higher?


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## Eclectic12 (Oct 20, 2010)

kcowan said:


> My gut says to beware these new IPOs as many jump on the REIT bandwagon.
> 
> Can a Loblaws REIT outperform when it is still controlled by the grocer?


Why would they change a winning strategy? They hired CIBC to run the operational side of their bank (PCF) so why wouldn't they hire a similar entity to run the REIT?

Granted ... the manager might have their hands a bit tied but then again, they don't have to be leader of the pack either.


Cheers


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## doctrine (Sep 30, 2011)

The yield (2.1%) is a little too low for me and the valuation (P/E 17) a little too high. The dividend growth last year was too small to justify the small yield. So, no for me right now.


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