A C$3.93b deal creates Canada's largest Reit to tap boom

[TORONTO] Choice Properties Real Estate Investment Trust, the real estate arm of Loblaw, agreed to buy Canadian Real Estate Investment Trust (Reit) for about C$3.93 billion (S$4.13 billion), the latest in a flurry of transactions in Canada's booming commercial-property market.

The deal will create the country's largest Reit, with an enterprise value of about C$16 billion, the Toronto-based companies said, and give Choice more industrial and office space to add to its retail portfolio. Choice will also get a seasoned management team to guide development.

"CReit, arguably, is one of most experienced development teams in terms of mixed-use development," said Johann Rodrigues, an analyst at Raymond James Securities, referring to spaces that include both retail and office.

Investors are seeking to get in on roaring demand for everything from warehouses to offices amid a strong Canadian economy and the shift to online sales. Blackstone Group agreed to buy Pure Industrial Real Estate Trust for about US$2 billion last month. Blackstone is also teaming up with Ivanhoe Cambridge on the purchase, according to people familiar with the matter.

Development Opportunities

Under the deal, Canadian Reit holders will get C$53.61 per unit in cash and stock, a 23 per cent premium to Wednesday's closing share price, according to a statement Thursday. 

Loblaw, Canada's biggest grocer, and George Weston, its biggest shareholder, will have joint ownership of about two-thirds of the combined portfolio which will span 69 million square feet of leasable space.

The transaction requires the approval of at least 66 votes from shareholders of Canadian Reit; the vote is expected in April. The cash portion of the offer will be capped at C$1.65 billion.

"This transformational combination creates immediate value for CReit and provides tremendous opportunity for Choice Properties to capitalise on Canada's leading development pipeline and create long term value," Canadian Reit chief executive officer Stephen Johnson said in the statement.

Canadian Reit jumped as much as 15 per cent to C$49.92 at 11.57am in Toronto, the most intraday since 2008, though less than the offer value. Choice fell 6 per cent to C$11.74, its lowest in two years. Choice and Canadian Reit had dropped at least 8 per cent in the 12 months through Wednesday, lagging the 2.6 per cent decline in the Bloomberg Canadian REIT Index.

In 2016, Choice CEO John Morrison had announced his plan to retire from the company. On closing of the deal, Mr Johnson will take over as CEO of the combined Reit while Mr Morrison will serve as non-executive vice chairman.  "Now, Choice gets a management team of one of the top Reit teams in Canada so it solves that problem, and it gives them a platform to build out all their mixed-use projects," Mr Rodrigues, the Raymond James analyst, said in a phone interview.

The transaction will also allow Choice to boost its development opportunities in a Canadian retail landscape that's been difficult to access, said Matt Kornack, an analyst with National Bank Financial.

"They want to become more than just a captive entity with their exposure," he said by phone. "They want to be more than an anchored real estate entity so this provides them with a platform to do that."

BLOOMBERG