Woolies to Set Up Property Fund

SYDNEY -- Speculation in the media has intensified over Woolworths' (ASX: WOW.AX) plans to hive off around 70 of its shopping centers into a property trust worth around $1.4 billion.

Woolworths' usual modus operandi is to buy the land, build the supermarket, and then sell off the property and lease it back. Woolworths has had issues in the past off-loading property once it has built the supermarket, as it's harder to find investors for smaller properties. The new property trust provides the perfect vehicle for the company to remove properties from its books.

Many of Woolies' hotels and liquor stores are held by ALE Property Group (ASX: LEP.AX), another property trust, so this moves makes sense. It will also free up capital, reduce Woolworths' debt, and increase the company's return on equity.

The company is also expected to announce a capital-raising of up to $500 million for the trust. According to The Australian Financial Review, fund managers have given the plan their thumbs-up, as they are hungry for high-quality retail assets in which to invest.

Office trusts have lost their appeal amid concerns about low rental growth, and the retail nondiscretionary sector is seen as a safe haven. While rental growth in the Woolworths leases may be low, that should be offset by the high quality and security of having one of Australia's largest supermarkets anchoring the property.

Woolworths' main competitor, Wesfarmers (ASX: WES.AX), rolls it Bunnings hardware stores into the BWP Trust (ASX: BWP.AX), and Woolworths may do something similar with its Masters stores in future.

Shareholders in Woolworths will receive an in-specie distribution in the new trust, and the fund is expected to pay a yield of about 8%. The capital-raising is likely to be marketed to retail investors first, and the balance offered to institutional investors, although it's unlikely there will be anything left for institutions; a hybrid security offering to retail investors late last year by Woolworths was oversubscribed by more than four times.

The Foolish bottom line
This looks to be a good move for both the company and Woolworths shareholders. It allows Woolworths to concentrate on its core retail business, and shareholders get to participate in growth in Woolworths itself while receiving an 8% dividend yield from the property trust. It's a win-win-win situation!

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