05/09/2013 08:08 EDT | Updated 07/09/2013 05:12 EDT

Canadian Tires plans $3.5B REIT with IPO later this year; Q1 profit up

TORONTO - Canadian Tire Corp. Ltd. (TSX:CTC.A) announced Thursday that it will create a $3.5-billion real estate investment trust to unlock the value of its property holdings, with an initial public offering expected later this year.

The move, which helped send Canadian Tire shares up more than 10 per cent, follows on the heels of a similar plan by grocer Loblaw Companies Ltd. (TSX:L).

It came as the high-profile retailer of general merchandise, sporting goods, financial services and automotive products and services announced a 2.9 per cent increase in first-quarter earnings amid a 1.7 per cent increase in total revenue.

The proposed new REIT would acquire a majority of the company's real estate, including a geographically diverse portfolio of some 250 properties comprised largely of Canadian Tire Retail stores, Canadian Tire anchored retail developments and one distribution centre.

Canadian Tire says the properties, totalling about 18 million square feet, have an approximate market value of $3.5 billion.

"We are executing a strategy that reinforces the strength of our company while pursuing new growth opportunities organically and through acquisition," president and CEO Stephen Wetmore said in a statement.

"Today's announcement regarding a REIT would increase CTC's financial flexibility, providing us with the ability to access funds at an attractive cost of capital as we continue to invest in and grow our business."

Canadian Tire owned properties currently comprise a total of about 25 million square feet and the company said that retail stores that are being considered for replacement, relocation, or further development would initially be retained and not be part of the REIT.

Canadian Tire would retain a significant ownership interest of 80 to 90 per cent of the REIT with the remainder of the REIT's units offered to the public via an initial public offering anticipated in the fall.

The company said the REIT's financial statements would be consolidated with the entire company's statements and that it expected there would be only a minimal impact on consolidated net earnings, cash flow and debt metrics.

RBC Capital Markets analyst Irene Nattel said Canadian Tire had considered a trust in the past, but not pursued it.

"The growth in investor appetite for single-tenant REIT's has opened the door for Canadian Tire to surface value and retain control," Nattel wrote in a note to clients.

On the earnings front, Canadian Tire reported net income in the first quarter increase to $73 million or 90 cents peer share from $71 million or 87 cents in the same 2012 period.

Total revenue was up 1.7 per cent to $2.48 billion from $2.44 billion, while retail sales increase 0.8 per cent to $2.44 billion from $2.42 billion.

Canadian Tire stores saw same store sales fall 2.4 per cent form a year ago, while its FGL Sports same store sales were up 8.8 per cent from a year ago due to liquidation sales at stores that were closed during the quarter as part of a store rationalization.

Mark's same store sales were up 1.5 per cent.

Nattel noted that the first quarter is traditionally a weak period for the company and normally accounts for a fraction of its earnings for the year.

"Canadian Tire confirmed that all weakness was weather-related, and negative comps occurred in March due to cold, winter weather this year versus the early spring in the first quarter of 2012," she wrote.

Canadian Tire has over 1,700 retail and gasoline outlets across the country including almost 500 locally run Canadian Tire stores as well as Mark's and various corporate and franchised banners under FGL sports, including Sport Chek, Hockey Experts, Sports Experts, National Sports, Intersport and Atmosphere.

Shares in the company ended 11.2 per cent higher at $8.32 at $82.36 on the Toronto Stock Exchange on Thursday.