* 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 comments from chairman, analysts; updates share move)
By Euan Rocha
TORONTO, Dec 6 Loblaw Companies Ltd, Canada's largest grocer, said on Thursday it plans to spin off the vast majority of its property assets into a real estate investment trust, sending its stock and that of its parent, George Weston, surging higher.
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 in early trading, while George Weston rose 11 percent.
The company said it plans to spin off real estate worth more than C$7 billion ($7.05 billion) into the REIT and sell units of the trust through an initial public offering that it hopes to complete by mid-2013.
"We are announcing this today because we feel the timing is right for both our business and the capital markets," said Galen Weston, Loblaw's executive chairman, on a conference call. "The size and quality of our real estate assets should be appealing to investors."
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 it intends to retain a significant majority interest of over 80 percent in the REIT.
"While we expect to generate funds from the IPO, it is the anticipated long-term source of capital and the structural advantage of the REIT that are the real benefits," Chief Financial Officer Sarah Davis said on the Loblaw conference call.
Davis said the capital raised will allow Loblaw to pay down debt, reinvest in its business, fund strategic growth, and look at other options like buying back shares.
Scotiabank analyst Patricia Baker said Loblaw's move is a positive for the company and allows it to crystallize the value of its "sacred cow."
In a note to clients, Baker however said Loblaw still needs to work on improving its operating results and cautioned that there is limited visibility on that front.
"The creation of the REIT is expected to build long-term value both for Loblaw and the REIT," said Weston. "This proposed REIT is an important part of Loblaw's strategic growth plan."
He said the spinoff will allow Loblaw to invest in its core grocery business and expand it.
Loblaw and other Canadian grocers have been under pressure as Wal-Mart Stores Inc, 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, posing a new threat to Loblaw and its rivals.
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.
Lowblaw shares surged 16 percent to C$38.99 and George Weston jumped 8 percent to C$68.46. Shares of the two companies were the biggest net gainers on the TSX and trading volumes in both were well above average levels 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.
Canadian rating agency DBRS confirmed its debt ratings on both Loblaw and its parent George Weston following the news.
($1=$0.9930 Canadian) (Reporting by Euan Rocha; Editing by Gerald E. McCormick, Nick Zieminski, Janet Guttsman, Peter Galloway and M.D. Golan)