Monday 11 December 2017

Ireland's wealthiest woman set to gain in €3bn property deal

Hilary and Galen Weston's Canadian business Loblaw is spinning off it's vast property portfolio, says Doug Alexander

Hilary Weston
Hilary Weston

Doug alexander

IRELAND'S richest woman, Hilary Weston, and her Canadian retail tycoon husband Galen are poised to become much, much richer.

The Brown Thomas-owning Westons also control Canadian supermarket and retail business Loblaw, which is spinning off its vast property footprint into a real estate investment trust (REIT) worth close to €3bn.

The Weston group may hold a 90 per cent stake in the venture. The new entity, set to become Canada's biggest REIT initial public offering (IPO), is pitching itself as a bargain amid a slumping market for the high-yield trusts.

Choice Properties REIT, created by Canada's biggest grocery chain, is targeting a yield of six per cent to 6.5 per cent in its €300m IPO this month. That's a higher payout than peers including RioCan REIT, and will be cheaper than similar REITs.

Choice Properties is trying to build interest as rising bond yields draw investors away from dividend-paying equity instruments. The 14-company Standard & Poor's/TSX Capped REIT Index plunged 13 per cent from an April 30 peak, mirroring the 10 per cent drop of the 299-member S&P Global REIT Index.

"On first blush and all else being equal, this looks like a fairly attractive REIT," Brian Huen, managing partner at Toronto-based Red Sky Capital Management, which oversees about €180m and is considering the IPO, said last week. "Despite the current challenging environment we're in, I think they're pricing this properly."

With a C$10 (€7) unit price and yield of 6.25 per cent, Choice Properties would trade at 11.4 times funds from operations, or cash flow, based on estimates for the next 12 months. That's lower than the estimated 17.3 multiple for RioCan, Canada's largest REIT by assets, below the 15.4 for Calloway REIT and 13.8 for Crombie REIT, according to sale documents.

"It will certainly be a tougher sell than it would have been six months ago," Dennis Mitchell, chief investment officer of Toronto-based Sentry Investments, which manages €7.4bn and is considering the IPO, said.

"Having said that, the quality of the real estate in the proposed REIT is much better than what we've seen in previous or recent IPOs."

REITs, which receive preferential tax treatment and pay out most of their income to investors through unit distributions, invest in income-producing real estate such as shopping malls and nursing homes.

Loblaw created the REIT to spin off about 75 per cent of its real estate. Choice Properties will use the proceeds of the IPO to acquire 415 stores, one office complex and nine warehouses from Ontario-based Loblaw.

"Loblaw has been accumulating this real- estate portfolio for over 30 years, and management believes that it would be extremely difficult to replicate this portfolio, given the current real-estate market dynamics in Canada," according to sale documents.

Two telephone messages with Kim Lee, vice president of investor relations and financial planning and analysis for Choice Properties, weren't immediately returned.

The properties, spread across Canada, total about 35.3 million square feet of leasable area. In comparison, RioCan has about 84 million square feet in Canadian and US shopping centres, while Calloway has 26 million square feet in retail properties, and Crombie has 14.5 million square feet in shopping centres and office buildings.

Crombie was created in 2006 when Empire Co, parent of grocery chain Sobeys Inc, spun off properties into a REIT and raised €151m in an IPO. Sobeys agreed yesterday to buy Safeway Inc's Canadian stores for about €4.3bn, with Crombie getting the rights of first offer for real- estate sales that come out of the transaction.

The reliance on Loblaw as both the main tenant and dominant owner of Choice Properties may give investors reason to pause.

Loblaw will occupy 88 per cent of the REIT's gross leasable area. Other tenants include Staples Inc, Dollarama Inc and Toronto-Dominion Bank.

"Loblaw is really just a one-trick pony," John Kinsey, who helps manage about €750m at Caldwell Securities Ltd in Toronto, said last week. "You're looking at one entity as opposed to a diversified portfolio like RioCan has."

Choice Properties sites include 267 standalone stores operating under Loblaw names including Real Canadian Superstore, Extra Foods, No Frills, Maxi and Zehrs Markets. An additional 143 sites are anchored by a Loblaw brand store and five other properties have only third-party tenants.

Ontario has the most properties, with 165 sites, followed by Quebec, with 100, and Alberta, with 45 locations. About 57 per cent of the properties are in large cities including Toronto, Montreal and Vancouver, while almost 17 per cent are in medium-sized cities and 26 per cent are in rural locations, the sale documents said.

RioCan owns and manages Canada's largest portfolio of shopping centres in cities including Vancouver, Calgary, Winnipeg, Toronto, Montreal and Halifax.

The Toronto-based REIT had 344 properties, including 50 grocery-anchored retail centres in US cities including Houston, Richmond, Virginia and Bridgeport, Connecticut.

Still, the Loblaw name and the grocery chain's geographic diversification appeals to REIT investors such as Mr Kinsey.

"Loblaw is pretty much across Canada and they've been around a long time, so they've got good properties," Kinsey said. "We'll certainly take a look at it."

Choice Properties may also be a less liquid stock, say investors, given that Loblaw and parent George Weston Ltd may hold as much as a 90 per cent stake in the REIT, which will have an initial market value of €2.66bn to €2.88bn.

Janet Craig, a spokeswoman for Loblaw, didn't immediately return a telephone message seeking comment.

(© Bloomberg, with additional reporting by Nick Webb)

Irish Independent

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