UPDATE 2-Loblaw to spin real estate into REIT, stock soars
* Loblaw to sell most of its real estate assets into REIT
* Move will allow Loblaw to reinvest in its core business
* Loblaw, George Weston shares surge on the TSX
(Adds details, share price move, analyst comment)
TORONTO, Dec 6 (Reuters) - Loblaw Companies Ltd, Canada's largest grocer, said on Thursday it plans to create a real estate investment trust to hold most of its property assets, sending its stock and that of its parent, George Weston Ltd, surging higher.
The company said it plans to spin off real estate worth more than C$7 billion ($7.05 billion) into the REIT and will sell units of the trust through an initial public offering.
The move, which will create one of Canada's biggest REITs, is a way to allow Loblaw to reinvest in its core business and boost shareholder value. Loblaw shares jumped more than 24 percent. George Weston rose 11 percent.
Canadian REITs have outperformed the broader stock market due to strong demand for commercial and retail real estate. Economic growth has boosted demand for office space in Canada, while U.S. retailers compete for prime retail space for their Canadian growth plans.
The S&P TSX Canadian REIT index has risen more than 9 percent in the past 12 months, while Canada's benchmark S&P TSX composite index has risen just 1.7 percent.
"We believe that this transaction will create substantial value as Loblaw's current multiple is at a historically low level due to poor operating performance," said BMO analyst Peter Sklar in a note to clients.
Loblaw said parent George Weston Ltd intends to retain a significant majority interest in the REIT.
"The creation of the REIT is expected to build long-term value both for Loblaw and the REIT," Galen Weston, Loblaw executive chairman, said in a statement.
He said the spin-off will allow Loblaw to pay down debt, buy back shares, and create a long-term source of capital to invest in its grocery business and expand it.
Loblaw and other Canadian grocers have been under pressure as Wal-Mart Stores, the world's largest retailer, expands its grocery business in Canada. No. 2 U.S. discount retailer Target Corp opens its first Canadian stores next spring in another threat.
Loblaw said it may expand the REIT venture in the future by adding more of its own real estate and investing elsewhere.
Analysts have long speculated that Loblaw and other Canadian retailers such as Hudson's Bay Co could move their vast real estate assets into such REIT structures.
The Loblaw announcement comes just a day after a consortium led by Canada's KingSett Capital offered about C$2.6 billion to acquire Primaris Retail REIT to bolster its portfolio of Canadian shopping malls.
Lowlaw shares surged 24.8 percent to C$41.93 and George Weston jumped 11.2 percent to C$70.50. Shares of the two companies were the biggest net gainers on the TSX and trading volumes in both were well above average levels early on Thursday.
Loblaw said its real estate portfolio spans an estimated 47 million square feet and has a current estimated market value of C$9 billion to C$10 billion.
As part of the transaction, Loblaw plans to contribute about 35 million square feet to the REIT, and it will enter into long-term lease arrangements with the REIT on those properties.
The contributed real estate portfolio will be largely retail-focused, comprising a geographically diverse mix of stores and shopping centers as well as warehouses and office buildings.
Loblaw expects the REIT will benefit from a lower cost of capital, which will support its development and expansion. The REIT will have a dedicated management team focused on overseeing the properties and expanding the portfolio, while Loblaw will provide support and various services.
Loblaw expects to consolidate the REIT's financial results for reporting purposes and expects minimal impact on its own profits and no impact on its investment grade credit rating.
The IPO is expected to be completed in mid-2013, subject to market conditions and regulatory approval, Loblaw said.
(Reporting by Euan Rocha; Editing by Gerald E. McCormick, Nick Zieminski, Janet Guttsman; and Peter Galloway)