Leon's Furniture (LNF.TO)

Unlocking value via REIT spin-off

Leon’s (LNF.TO) is a family-owned Canadian furniture retailer with a 115-year track record. The Leon family owns roughly 68% of the business and has compounded earnings per share by 8.8% over the last decade. The company has expanded throughout Canada, growing to 300 stores nationwide, and has amassed a 5.6 million sq. ft. real estate portfolio + 40 acres of land near downtown Toronto. These assets are worth $285 million at cost but are worth far more today. Management is focused on unlocking this value and will spin off its real estate assets into a REIT, and earlier this year, received approval to build a master-planned community on its 40-acre land. This strategy isn’t novel; In 2013, Canadian Tire spun off a minority stake in its real estate asset for $250 million, yielding a 6.5% cap rate. It currently trades at a 6.9% implied cap rate.

If applying a conservative $15/sq ft x 5.6 million sq. ft. = $84 million, then a +$1 billion valuation is reasonable. As for the 40 acres, Leon will submit a secondary plan to Toronto in mid-2025 and wants to build 4,000 residential units + a new corporate headquarters, and a flagship store. This development could be worth another $500+ million.

The probability of a successful spin-off is high and should occur later this year. The new CEO, Michael Walsh, became CEO in 2021 and worked with Canadian Tire from 2012-2015. He is the first non-family member appointed CEO and helped launch Canadian Tire REIT. Past annual report cover page themes have enlisted titles such as “Committed to Excellence” and “Reimagining Retail.” The last annual report is titled “Unlocking Value.”

Walsh, in their most recent annual report, said, “LFL Group has always been managed for the long term. We can withstand some volatility if we know we are creating value. That mindset is deeply ingrained in this Company thanks to the ongoing involvement of the founding Leon family. I believe other shareholders also benefit from this approach”.

CEO Walsh in a Bloomberg interview (Jan 2024):

Most of their assets are retail in Ontario and Alberta (retail rents are +$25/sq ft).

Most of their assets are retail in Ontario and Alberta (retail rents are +$25/sq ft).

Leon’s Furniture is a good business (five-year return on equity is ~18%) with modest earnings growth and a clean balance sheet, trading at an 11% free cash flow yield. At a $1.3 billion market cap, the real estate is thrown in for free. Investors stand to make a decent return even if the spin-off doesn’t materialize.

I highly recommend reading BrotherCostanza’s VIC post and the comment section. I learned about Leon’s via Smoak Capital’s 2024 mid-year letter; I always enjoy reading his work.

Links – 

https://www.valueinvestorsclub.com/idea/LEONS_FURNITURE_LTD/2942996063#description

https://drive.google.com/file/d/1WiXJhKH5a5F2ObTRGJQvaCijC17pVKAh/view