Loblaw spins out Choice Properties REIT

Loblaw’s sale of its interest in Choice Properties Real Estate Investment Trust to its parent company George Weston Limited turns the grocery retailer into a pure-play retail stock and further diversifies parent holding company George Weston Limited. All three are ‘buys’.

Loblaw Companies Ltd. (TSX—L) has completed the spin out of its 62-per-cent interest in Choice Properties Real Estate Investment Trust (TSX—CHP.UN). As part of the spin out, George Weston Limited (TSX—WN) now owns about a 65-per-cent interest in Choice Properties directly, up from about four per cent before the reorganization. Loblaw now has no interest in Choice and is a pure-play Canadian food and drug retail stock.

Galen G. Weston, Chairman and Chief Executive Officer of both Loblaw and Weston, has said the reorganization will result in a more efficient group structure. That’s because the strategies of Loblaw and Choice Properties have diverged. Loblaw is more concerned with it core retail business and growing in areas such as digital, healthcare, payments and rewards. Choice Properties, meanwhile, concentrates on mixed-use development and investments in real estate.

Management, therefore, feels Choice Properties will do better under the Weston umbrella, which includes Loblaw (46-per-cent owned by Weston), Weston Foods, and now Choice Properties. Weston is considered to be better positioned to provide long-term support and capital to Choice’s growth and diversification plans. And Choice is expected to provide Weston with “a much stronger and more compelling investment thesis”.

Under the spin-out, Loblaw’s minority common shareholders have received 0.135 of a Weston common share for each Loblaw share they own. This allocation was considered to be equivalent to the market value of their interest in Choice Properties at the time of the spin-out.

Now what do you do with Weston?

What, then, should these shareholders do with the Weston shares now? We rate the company a buy. It currently faces challenges in its Weston Foods division because of a competitive operating environment. And its plans to reorganize the segment, which include dropping products that are not producing goods results, could take a few years to bear fruit. But the growth prospects for Loblaw and Choice Properties are encouraging. Weston, which yields 2.1 per cent, is a buy for growth and some income.

We regard Choice Properties as a buy too. The real estate investment trust acquired one of our former REITs, Canadian Real Estate Investment Trust, in May. Choice, therefore, has its work cut out for it while it integrates the two operations. But it still has interesting growth opportunities through its connections with Loblaw, which includes developing multi-use properties. It yields 6.0 per cent. Buy for long-term growth and income.

Finally, we still like blue chip stock Loblaw, especially now that management can focus on its core competencies. The company’s strong market share and ability to drive operating efficiencies and productivity in the face of rising costs, as it has done in the latest quarter, bodes well for long-term growth. Buy.

This is an edited version of an article that was originally published for subscribers in the December 14, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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