LobLaws: A Potential Real Estate Player?

by: Hao Jin, CFA

The current recession might be end soon. However, the general direction won't be certain for quite a while. Some people sense that their countries are headed in the wrong direction, and the current financial and monetary policies are unsustainable.

Worrying about inflation, civil unrest, martial law, various forms of capital controls and confiscation, a growing number of investors are moving their money overseas, according to an article titled "Outward Bound" in CFA Institute Magazine, July/August 2009 issue. More than half of the world's personal wealth, or $40 trillion, currently resides in about 60 "tax havens" worldwide. More than a third is in Switzerland.

Real estate is generally sensitive to the direction of long-term interest rates. Housing is typically counter-cyclical relative to stock markets. According to Yves Courtois, a corporate partner at KPMG, there is an 18-year real estate cycle, which was discovered by Homer Hoyt in 1933. The current bust in real estate market is happing precisely 18 years after the last major real estate bust of 1990. The current cycle was fueled by an unprecedented flow of capital into real estate: a combination of lower rate, the relaxing of lending standard and financial innovation.

The following table shows the main U.S. REIT ETFs. As you can see, the UltraShort Real Estate ProShares (NYSEARCA:SRS) has more than double the net assets than Ultra Real Estate ProShares(NYSEARCA:URE). They are all from ProShares Trust fund family.

Fund Name Ticker Net Assets
iShares Cohen & Steers Realty Majors ICF 1.10B
iShares Dow Jones US Real Estate IYR 1.40B
SPDR Dow Jones REIT RWR 0.9B
Ultra Real Estate ProShares URE .5B
UltraShort Real Estate ProShares SRS 1.25B
Vanguard REIT Index ETF VNQ 2.18B

If you don't want to move assets physically out of country, you can always play with internationally REITs. The main ETF is SPDR Dow Jones International Real Estate (NYSEARCA:RWX). The more risky REITs might be found in emerging counties such as Claymore/AlphaShares China Real Estate (NYSEARCA:TAO) and WisdomTree Dreyfus Brazilian Real (NYSEARCA:BZF). The less risky real estate can be found in Canada.

However, there are no direct ETFs traded in the U.S marker for Canadian REITs. As an alternative, you can buy companies instead. Loblaw Companies Limited (OTCPK:LBLCF) is Canada's largest food distributor. With over 139,000 employees in more than 1,000 corporate and franchised stores from coast to coast. It offers Canada's strongest control (private) label program, including the unique President’s Choice, no name and Joe Fresh Style brands. In addition, the company makes available to consumers President’s Choice Financial services.

On July 24, Loblaw reported same-store sales up 2.5% in 2nd quarter of 2009. It also announced acquiring T&T Supermarket Inc. with $225 million . T&T is Canada’s largest Asian food retailer with headquarter in Richmond, B.C., and has 17 stores across Canada with annual sales of $514 million. T&T’s Price/Annual Sales=0.44 ($225/$514), which is much higher than Loblaws’s 0.32. In other words, the T&T acquiring premium is about 37%.

According to the Financial Post, while immigration accounts for 70% of Canada's population growth, by 2017 about half of all visible minorities in Canada will be South Asian or Chinese. By that time, visible minorities will make up 51% of the population of Toronto, 49% of Vancouver and 19% of Montreal, while the rest of Canada is projected to stand at 9%.

For a supermarket company with PE of 17, Loblaw is expensive. T&T’s annual sales is less than 2% of Loblaws so it will not make material contributions to LobLaws’ bottom line in the near future. However, Loblaw has one of the biggest property portfolios in Canada. Given its ownership of retail, industrial and office properties, as well as its experience assembling and developing land, it is estimated that its real estate alone worth Can $34 per share. In addition, Loblaw’s net debt to equity ratio is 0.48:1. I am willing to bet a small potion of my portfolio on it.

Disclosuree: I have a long position on LBLCF.PK.