BUSINESS

Choice Properties makes TSX debut as rising bond yields push REIT sector lower

07/05/2013 04:09 EDT | Updated 09/04/2013 05:12 EDT
TORONTO - Loblaw's new real estate investment trust made its debut on the Toronto Stock Exchange on Friday, as expectations of rising bond yields pushed the trust sector lower.

REITs, which are sensitive to interest rates, have been under pressure in recent months amid predictions that the upward trend in interest rates is likely to continue after years of lingering near record lows.

But units of Choice Properties Real Estate Investment Trust (TSX:CHP.UN) traded near their initial offer price of $10 on Friday, which one analyst says is a sign that the stock was properly priced.

Shortly after markets opened, Choice Properties was trading at $9.90, down 10 cents. But the units fluctuated throughout the day, before ending Friday at $10.

"That means it was pretty well priced to reflect the current market conditions, which have been pretty weak," said Brendon Abrams, an analyst at M Partners Inc.

Rising interest rates hurt trusts by increasing their cost to borrow money and making their units a less attractive investment compared with bonds.

Given that the sector is down by about 1.5 per cent today, Choice Properties is actually outperforming the group, Abrams said.

He said the trust has a strong, geographically diversified portfolio with long leases.

The fact that Loblaw (TSX:L) is the main tenant can also be seen as a positive, said Abrams, because the grocery store business is generally quite stable, so defaults on the leases are unlikely.

But, Abrams added, some people prefer a more diversified tenant mix because even big, stable companies can experience problems and go under.

And Loblaw's large ownership stake — approximately 83.1 per cent on a fully diluted basis — could be a deterrent for some institutional investors, said Abrams.

"If you have a broad base of investors, where everyone feels they have an equal say, then the shareholders can exert more influence on the stock and make it perform better, push it when it needs to be pushed," he said.

"But when you have such a dominant shareholder it's almost like you're at their mercy and they control everything."

Loblaw's decision wasn't motivated by a need for cash, said Abrams.

"By separating the real estate into a REIT, Loblaw gets a higher valuation, because you can measure the standalone real estate value as opposed to when it's all mixed up into the same business," he said.

Choice said Friday it had completed its initial public offering of a minority stake of 40 million trust units at a price of $10 per unit for gross proceeds of $400 million.

The offering was underwritten by a syndicate of underwriters with CIBC, RBC Capital Markets and TD Securities Inc. acting as joint bookrunners. The underwriters also have an over-allotment option for up to an additional six million units at the same price.

Loblaw also holds all of the class B limited partnership units of the partnership, which are economically equivalent to and exchangeable for units. In addition, Loblaw holds all of the outstanding class C limited partnership units of the partnership.

Loblaw's majority owner, George Weston Ltd. (TSX:WN), indirectly purchased 20 million units for $200 million, representing a 5.6 per cent interest.

The trust portfolio includes 415 retail properties, one office complex and nine warehouse properties totalling 35.3 million square feet of gross leasable area.

The aggregate purchase price of the properties, which represented about 75 per cent of Loblaw's real estate assets, was about $7 billion.

Along with the IPO, Choice also said it had closed its offering of $600 million aggregate principal amount of senior unsecured debentures.