Safeway, the latest grocer to explore REIT
U.S. grocery chain Safeway is said to be exploring putting its Canadian assets into a real estate investment trust (REIT).
Safeway currently operates 223 Canadian stores, the majority of which are located in Alberta (93) and British Columbia (75). The Pleasanton, Calif.-based company also operates 12 manufacturing and food processing facilities.
A Safeway executive told analysts earlier this month that the company is exploring a REIT for its Canadian assets.
Safeway's media spokesperson Brian Dowling said, "We did not say we planned a REIT in Canada, only that we are in the midst of evaluating the possibility. We have made no commitments at all."
Establishing REITs has become a common practice in the grocery industry in recent years.
“You get big companies sitting on all this real estate, and that’s not a core competency, so they sell their buildings and free up a lot of working capital,” said Ross Moore, national director of research for the commercial real estate services firm CBRE Limited in Toronto. REITs, he added, are a “highly efficient” means of generating revenue with minimal risk.
In December, Loblaw Companies Limited announced that it plans to put some 35 million square feet of its approximately 47 million square feet of Canadian assets – with an estimated market value of between $9-10 billion – into a REIT.
Loblaw chairman Galen Weston said in a release that the REIT would enable the company to “unlock value” for shareholders and increase the company’s financial capacity to pay down debt, buy back shares and create a long-term source of capital to invest and grow.
Safeway has previously been mentioned as a possible acquisition target for Loblaw, which is projected to receive nearly $700 million from the REIT.
In 2006, Stellarton, N.S.-based Empire Company Ltd., which owns a majority interest in the Sobeys chain, spun out assets from its real estate division into the Crombie REIT. Empire retains a 44.3 per cent ownership stake of the Crombie REIT, which had a market value of $520.7 million at the end of fiscal 2012.
In a June 2012 letter to shareholders, Empire president and CEO Paul Sobey said that the creation of the Crombie REIT has supported Sobeys’ expansion and the value of its commercial real estate assets. In fiscal 2012, Crombie REIT purchased seven properties from Sobeys for $99 million, with Sobey saying that it had “additional planned development in the pipeline.”
CBRE’s Moore said that REITs make good sense for grocery retailers in the current economic climate. “In this low interest world we find ourselves in, anything that can demonstrate consistent cash-flow is highly attractive to investors,” he said. “A company like Safeway is pretty solid
It is a perfect time to pursue such a strategy, said Moore, since real estate is in high-demand by both retail and institutional investors. “If you’re going to do it, now’s a good time,” he said. “You’ve got a lot of investors out there that are absolutely desperate for yield, so anytime you can churn out a 5 per cent, 6 per cent, 7 per cent or 8 per cent cash return every year is highly attractive.”
The overbuilding that characterized the late 1980s and early 90s, and again during the tech boom of the early 2000s, has not been as prevalent in recent times said Moore, which means there’s “little danger” of landlords finding themselves with a vacant building.
“You’ve got buildings that are generally full and rents that are generally rising,” said Moore. “The fundamentals look good and everything out there suggests it will stay that way.”
REITs are attractive to investors because they provide a modest return without the volatility of the markets. “You don’t get the high returns you may get with equities, but you get good stable returns – and that’s attractive to a lot of people,” said Moore.
In a presentation to the last month, CBRE chairman John O’Bryan said that improving lender confidence combined with “more buoyant fundamentals” would see even more capital entering the commercial real estate sector this year.
O’Bryan cautioned, however, that not all REITs will thrive. “Those that will outperform the competition will have a proven track record of acquisitions and/or access to a development pipeline – sophisticated property management will be key to maintaining positive cash flow,” he said.