Images By Tang Ming Tung/DigitalVision via Getty Images George Weston Limited ( TSX: WN:CA ) ( OTCPK:WNGRF ), or ‘GWL’, was founded in 1882 , and it has traded on the Toronto Stock Exchange since 1928. During the 1930s and 40s the company experienced rapid growth, both organically and through acquisitions, in both Canada and the UK, and the company was dubbed “Britain’s Biggest Baker” by the Canadian press. In 1944, the company started to purchase grocers, and this accelerated in 1947, when it started to buy shares in Loblaw Groceterias.
By 1953, GWL had acquired a controlling stake in Loblaw, which became its leading asset, eventually being re-named Loblaws. Successive generations of the Weston family have played a significant role in the management and operations of both GWL and Loblaws. Until his resignation at the start of 2024, Galen G Weston, was the President of Loblaws.
He currently remains the Chair of both GWL and Loblaws, and he is also the controlling shareholder of Wittington Investments, Limited, GWL's parent. The assets of GWL are easy to identify, and easy to value. They consist of; i) the majority of the shares of Loblaws Companies Ltd ( L:CA )( OTCPK:LBLCF ), Canada’s largest processor and distributor of food, ii) the majority of the shares of Choice Properties Real Estate Investment Trust, ( CHP.
UN:CA ) ( OTC:PPRQF ) Canada’s largest REIT, and, iii) “Other Stuff”. In my opinion, GWL is a BUY , because; Loblaws should be a core holding for any investor looking for exposure to Canada. REITs in general have been abysmal investments over the past five years.
However, with; i) a 97% occupancy rate, ii) a high quality portfolio of properties, many of which are let at below market rates, and, iii) a strong balance sheet, Choice REIT has performed well. Further, I believe that a soft landing has been achieved, and both inflation and interest rates will continue fall, leading to a turn in the cycle and a supportive environment for REITs as a whole. GWL's minority discount has widened in recent years, and in my opinion it is now at a level that represents value for buy and hold investors.
I also believe that there is a material chance that it will start to narrow, even absent a catalyst such as a takeover bid from GWL's controlling shareholder, which has recently cashed up. I. George Weston Limited's Corporate Structure There are two holding companies that use the name Wittington which the Weston family is associated with.
In 1958, the Garfield Weston Foundation was established with a grant of 79.2% of the shares of Wittington Investments Limited, ( note the lack of a comma ) the Weston family's private holding company for UK Assets. Its primary holding and source of income is its controlling stake in the publicly traded UK company, Associated British Foods.
The remaining 20.8% of Wittington Investments continues to be owned by the Weston family. Wittington Investments, Limited ( note the comma ) was founded in 1952, and it is located in Toronto Canada.
Galen G. Weston, the Chairman of Loblaws and George Weston Limited is Wittington Canada's controlling shareholder. As well as owning a controlling stake in GWL, Wittington Canada has traditionally owned a number of other companies in the food or retail sectors.
However, recently it has been divesting these. In December 2021, it sold the UK retailer Selfridges Department stores for GBP 4 billion. It retains ownership of Holt Renfrews, a small high end clothing brand in Canada, which has five stores.
GWL also sold a legacy business at this time. Weston Foods , the fresh and frozen bakery business established in 1882 was sold for CAD 1.1 billion in December 2021.
Figure 1: Corporate Structure and Ownership Positions* George Weston Limited Second Quarter 2024 Financial Statement * As at 31 March, 2024 As per Figure 1, the intrinsic value of GWL consists of 61.7% of Choice REIT's Market Cap, 52.6% of Loblaws' Market Cap, and "Other Stuff".
In recent years, “Other Stuff” has been nominal, and all other things being equal, GWL’s Market Cap should be equal, within a few percentage points, to the value of its holdings of Choice and Loblaws equity. All other things, however, are not equal because GWL is controlled by the Weston family though its ownership of Wittington Canada, and a minority discount has been applied to its valuation. II.
Overview of Loblaws Readers who want a more in depth analysis of Loblaws should refer to this article . In brief, investors seeking exposure to the Canadian Economy should make Loblaws a core holding because; With a 29% market share, it is Canada's largest processor and distributor of food and groceries. It benefits from scarcity value.
The five biggest retailers in Canada control 80% of the market. Sobeys, with a 21% market share is Loblaws' closest competitor. It is also privately held and therefore not available for investment.
Metro's business is concentrated in the province of Quebec, and CostCo and Walmart are not pure Canada plays. Loblaws has a number of competitive advantages that competitors will struggle to replicate. These include; The fact that 16 million Canadians (roughly 40% of the population) pay a subscription of $119 per year for access to PC Optimum.
Revenue is not the only benefit of this program. The data Loblaws collects regarding consumer behaviour is valuable in its own right, and it has helped to drive the growth of PC Financial , as PC Mastercard, and PC Money Account are linked to PC Optimum. In 2013, Loblaws purchased Shoppers Drug Mart , which at the time was Canada's largest pharmacy chain and retailer of beauty products.
This has given it a large footprint in the centres of many urban areas, the fastest growing areas of Canada. Further, as many pharmacies are open 24/7, 365 days a year, Loblaws can now offer many high margin products through Shopper Drug Mart stores at an increased premium, due to the convenience of being able to buy toilet paper at 3:00 AM, or a prepared meal on Christmas Day. Loblaws is well run and its equity is priced in line when compared to its peers.
Over the past 10 years, Revenue has grown at a CAGR of 6.35%, while the CAGR of Net Income has been 8.6%.
Over the past 10 years, Loblaws' total return in Canadian dollars is approximately 390 percent, versus the TSX which has returned 100%. This outperformance has accelerated in 2024. As a result, and due to the fact that it is trading at a record high, I have rated Loblaws as a Hold and not as a Buy.
I believe that there may be better entry points, either through the wider market catching up, or, due to profit taking and / or rotation to other sectors. However, purchasing GWL gives investors exposure to Loblaws at a 16% discount. III.
Overview of Choice Properties Real Estate Investment Trust 1) History: On July 15, 2013, Loblaws transferred 426 properties, representing 75% of its real estate holdings, into Choice Properties Real Estate Investment Trust, a newly form entity, for CAD 7 Billion of consideration. Consideration was in the form of units of the REIT, and Loblaws retained 83.1% of the new entity, while GWL owned 5.
6% of Choice's units. In February 2018, Choice announced that, subject to shareholder approval, and Competition Commission approval, it would purchase 100% of the units of Canadian Real Estate Investment Trust, or CREIT , and that it would also assume CREIT's debt. Choice would pay CREIT shareholders a combination of cash and Choice units.
CREIT's implied Enterprise value (based on the price of Choice's units at the time) was CAD 6 billion, and CREIT's implied market cap was CAD 3.6 billion. The new entity had a diversified portfolio comprising 752 properties with 69 million square feet of gross leasable area, and an Enterprise Value of approximately CAD 16 billion.
The transaction closed in the second half of 2018, and on November 1, 2018, Loblaws sold its entire 61.8% stake in Choice to GWL, which combined with GWL's existing stake of Choice, meant that GWL owned approximately 65% of Choice's units. CREIT's previous units holders owned approximately 22% of the new entity.
Over the next few years, the proportion of Choice units owned by GWL gradually declined. As of December 31, 2020, GWL owned 446,447,940 Choice units, or 61.7% of the total issuance.
Those figures have remained constant and were unchanged on March 31, 2024. 2) Recent Results and Current Composition of Portfolio: Choice reported that its 2023 Funds From Operations (FFO) were CAD 726.1 million, an increase of 4.
1% versus 2022. FFO per unit increased to $1.00, an increase of 4.
0% versus 2022. The difference (4.1% versus 4%) was due to a higher weighted average of units in 2023 versus 2022, due to an Employee Stock Option Plan.
As at December 31, 2024, its occupancy rate was 98.0%, slightly better than 2022's end of year rate of 97.9%.
As a result, Choice increased its dividend to $0.76 per unit, which implies a payout ratio of 74.4% of FFO (as reported on Q2 2024's Financial Statements), and a yield of 5.
47% based on July 19th's closing price. The first half of 2024 has been similar to 2023. Occupancy has remained at the 98% level.
Loblaws continues to be its largest tenant (56.3%), followed by other retailers, Canadian Tire (1.9%), TJX (1.
2%), Dollarama (1.1%), and Pet Smart (1.0%).
FFO, AFFO and same store net cash income have increased. In Q1 these figures increased by circa 5% - 6%. Q2's increases were lower - 0.
4% for FFO, 3.8% for AFFO, and 4.4% for same store net cash income.
The reduced growth rates were due to several exceptional positive gains that were realized in Q2 2023. Debt has been renewed at similar rates, and maturities have been extended. At the end of Q2 2024, the average interest rate was 4.
2% and the average maturity was 6.0 years. There remains plenty of liquidity available.
Choice's $1.5 billion credit line is undrawn and there are $12.8 billion of properties that are unencumbered.
Leases are being renewed at higher Cap Rates. The Overall Cap Rate on June 30, 2024 was 6.08% versus 6.
04% on December 31, 2023. And, per the Q2 Financial Statements, " Subsequent to the quarter end, Choice and Loblaw renewed 46 of a tranche of 48 leases expiring in 2025, comprising 3.08 million of 3.
20 million square feet, at a weighted average spread of 8.4% and a weighted average extension term of 5.0 years.
The 46 renewals included one industrial lease ." There continues to be a relatively small portfolio of development properties, and it is being funded organically without new capital being raised. Per Figure 2, the composition of assets remains similar to 2023.
I note that for the most part, the percentage of NOI derived from each geographic region is broadly consistent with every region's contribution to Canada's GDP. However, Quebec (19% of GDP) and British Columbia (14% of GDP) are underrepresented, while Ontario (37% of GDP) is overrepresented. Figure 2 - Choice REIT's Portfolio as at June 30, 2024 Choice Properties REIT Second Quarter 2024 Financial Statement 3) Performance History REITs have been poor performers over the past five years and Choice has marginally underperformed the broader TSX Index's return of 37%.
However, as per Graph 1, it has done much better than the REIT sector as a whole. It should be noted too, that as XRE's largest holding, if Choice were stripped out of this index, it's outperformance to the remaining REITs would be even greater than what is shown in Graph 1. Graph 1: Total Return Choice Properties REIT vs.
XRE.TO Data by YCharts In general, REITs have been hurt more by rising inflation rates and interest rates than other asset classes have been. Rising interest rates dampen consumption, which decreases the revenue of tenants, and their credit quality.
Increased interest rates increase the financing costs of tenants and decreases their credit quality. Interest rates typically increase faster than rents do, and this lag has a negative effect on the earnings of REITs. This is especially true of REITs with variable rate debt, or a maturity profile of debt that is less than that of expiring leases.
In some ways, REITs can be valued like a bond. There is a stream of positive cash flows which are the result of the overall Cap Rate the REIT has achieved, minus its cost of debt, and minus the REIT's overhead. Even if there is no lag effect between increased interest rates and increased rents, in other words the REIT's leases all mature on the exact same dates as their associated loans, rising interest rates increase the discount rates used to value a REIT's cash flows.
Rather than using discount rates of circa 4% as was often the case five years ago, discount rates of 6% to 8% are now common. Choice Properties, for example, used a discount rate of 7.11% when performing its own internal valuation of its assets on June 30, 2024, compared to a discount rate of 7.
06% on December 31, 2023. A discussion regarding the future direction of interest rates is beyond the scope of this article. I note however, that on June 5, the Bank of Canada cut its overnight financing rate from 5% to 4.
75%, the first decrease since 2022. And, June's Canadian CPI number of 2.7% was below market consensus.
As a result , " Financial markets on Tuesday advanced their bets for a rate cut at the central bank’s July 24 rate announcement to 88 per cent from 82 per cent previously ...
" Irrespective of if there is a rate cut next week or not, in my opinion, the long term direction of interest rates is downward, and rather than being a head wind, the trajectory of interest rates will become a tail wind for REITs in general, and for Choice in particular. IV. GWL's Discount to Net Asset Value For most of its history, GWL has been a holding company who's intrinsic value was primarily dependent upon its ownership of two operating companies, Loblaws and Weston Foods, the legacy fresh and frozen bakery business established in 1882.
However, this correlation has started to decrease in recent years, and the discount of GWL's market cap to the intrinsic value of its holdings of Loblaws and Choice has started to increase. One other development is that the proportion of GWL's market cap that is derived from its holdings of Loblaws has increased from 66% to 83%. This is due to the fact that GWL has held its ownership percentage in both entities constant, but, Loblaws has outperformed Choice.
Graph 2: Value of GWL's Holdings of Choice & Loblaws versus GWL's Market Cap Analyst's Chart Derived From 2020 - 2024 Financial Statements George Weston Limited It would be perfectly reasonable for the market to assign a minority discount to both Choice's and Loblaws' valuations based upon the control positions that GWL has in both entities. In fact, that doesn't appear to be happening, perhaps because the Choice spinout appears to have been in the best interests of both entities. The lion's share of the value created from Loblaws' 2013 purchase of Shoppers Drug Mart appears to have accrued to Loblaws shareholders, of which the majority shareholder was GWL.
Choice was created to finance this transaction, and its units, which were 83% owned by Loblaws at its inception, have also done well. Between July 2013 and the announcement of Choice's takeover of CREIT in 2018, its units had a total return of approximately 65%. In the first five months after the transaction closed, Choice's units rose in price by 25%.
It's unlikely that the CREIT transaction would ever have taken place without Loblaws spinning out it real estate assets into Choice. The main beneficiaries of this were GWL shareholders. Currently, 56% of Choice's leases have Loblaws as their tenant.
Any below market rent charged that adversely affects Choice, also adversely affects GWL, because GWL owns 61% of Choice. And any above market rent that adversely affects Loblaws, adversely affects GWL, because GWL owns 56% of Loblaws. So there is an alignment of interest between the shareholders of GWL, Loblaws, and Choice.
Overtime, Choice's dependence on Loblaws is lessening, first with the purchase of CREIT, and second, through organic growth. Amazon is now Choice's second largest tenant for Industrial properties, something that never would have happened if Loblaws' stores and distribution centres were still internally owned. So arguably, based upon the past ten years, any minority discount assigned to each entity should be minimal.
Graph 3: Market Cap - GWL, Loblaws and Choice Properties REIT Y-Charts All of the above discussion is well and good, and helpful to understand how Choice and Loblaws are being managed, and the strategic direction that George Weston Limited has for them. However, stepping back to look at the forest instead of the trees, it becomes apparent that it is also somewhat irrelevant. If the market says that businesses like Loblaws should trade at a multiple of 10X, and Loblaws trades at 8X, then the value of Loblaws shares owed by GWL is derived from an 8X multiple.
If Choice should be valued at 9X, but for some reason the market assigns a value of 11X, then if GWL wants to sell its holdings in Choice, it can do so at a multiple of 11X. What's relevant, is that as per Graph 2, over the past four and a half years, the market has applied a discount GWL's Market Cap to the value of its holdings of Choice and Loblaws in a range of 21% to 5%, and the current discount is 17%. However; On December 31, 2017, GWL had debt in its own name of $908 million.
This has been gradually retired, and currently GWL has no debt outstanding. In November 2021, GWL sold its legacy baking business for $1.1 billion in cash.
If anything, GWL's correlation to Loblaws and Choice should have increased. There is a minimal amount of "Other Stuff". Off balance sheet assets such as Goodwill are in the names of Loblaws and Choice, not GWL, and off balance sheet hedging contacts / interest swaps etc.
have had a fair value of circa plus or minus $50 million during the years of 2020 - 2024, for all three entities combined. At the end of Q1 2024, the fair value of derivatives contracts on GWL's consolidated balance sheet was positive $28 million. For the past two years, GWL has had a normal course issuer bid ("NCIB") equal to 5% of the total of all issued and outstanding shares.
GWL's parent, Wittington Canada, has been allowed to participate in the NCIB on a proportionate basis equal to its approximately 58% stake in GWL. In the past year, insiders have purchased 201,000 GWL shares while selling only 17,310 shares. Notably, on June 11, 2024 Galen Weston purchased $25 million worth of shares at an average price of $195.
This increased his personal holdings in GWL by 27%. V. Conclusion George Weston Limited owns controlling stakes in Loblaws, Canada's largest processor and retailer of foods, and in Choice Properties, Canada's largest REIT, which is a spinout of Loblaws.
GWL is in turn owned by Wittington Investments, Limited, the private holding company of the Weston family, the founder of Loblaws. Loblaws and Choice are well run, and both have significantly outperformed their respective indices. Due to its leadership position in the Canadian retail space, and its scarcity value, Loblaws should be a core holding for those who want exposure to Canada.
The macro environment for Choice REIT, in the form of lower interest rates, appears to be becoming more favourable. Purchasing George Weston Limited offers exposure to both businesses at an attractive discount. There have been several transformational transactions over the past 10 years that have created significant value for the shareholders of GWL.
Despite this, the current 17% discount of GWL's shares to the value of its holdings in Loblaws and Choice is at the wide end of the historic range. In the past three years, GWL and Wittington have simplified their holdings by selling legacy businesses. Wittington's sale of Selfridges alone (GBP 4 billion), equates to approximately 25% of GWL's current market cap.
Insiders, as well as Wittington, have started to purchase GWL's shares. They clearly believe that there is value, they aren't buying Choice or Loblaws in their personal names, they're buying GWL. I rate George Weston Limited as a BUY .
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