Leons: A Real Estate Co. Masquerading as a Furniture Retailer
Leon’s Furniture Ltd. (LNF.TO) is a dominant Canadian furniture retailer with leading market share that appears reasonably priced on the surface at 10x earnings. However, when taking into account their hidden real estate value that will eventually be IPO’d into a REIT, the stock appears deeply mispriced. With stable margins, consistent profits, a net cash balance sheet and other excess land value, I estimate nearly 100% upside to the stock price and limited downside due to the hard real estate assets that are more valuable than the retail business.
Capital Structure
Business background
Leon’s is the largest furniture retailer in Canada operating in every province under their main brands Leon’s Furniture (52 stores), The Brick (118 stores) and other smaller brands. They are ranked #1 in furniture and appliances and #2 in mattresses at roughly 20% market share of the total overall market. On top of the stores they corporately own and manage, they also franchise 35 Leon stores and 66 Brick stores which generated $33 million of revenues in 2024 out of a total $2.4 billion. The business has been around for over 100 years and was started in 1909 in the small town of Welland, Ontario. It was, and still is, a family-owned and run business and went public in 1969, which was followed by introducing the “big box” concept to Canada a few years later.
As the largest furniture retailer in Canada, Leon’s has an enormous scale over competitors in terms of sourcing inventory, advertising/marketing dollars spent and a wider selection over their large store footprint. When you think about a small mom & pop furniture retailer, they don’t have access to large volume purchasing discounts, they’ll have tiny advertising budgets compared to the big players that can’t be spread across multiple stores and their store spaces are smaller which means there are smaller selections of furniture available. Most retailers compete on price because when you are purchasing a couch, bed or stove you want good quality but you also want to buy at a good price. The brand you are purchasing is not really a factor you think about when shopping which helps Leon’s because they can offer a greater selection at affordable prices. You usually don’t go into a retailer with a particular brand in mind but go into the retailer looking for the best quality at the best price.
For being a furniture retailer that’s tied to 1) a cyclical industry while dealing with 2) high inflation and interest rates the past few years, Leon’s has enjoyed incredibly stable gross margins of 44% while remaining profitable during significant volatile periods over the past decade plus, which speaks to the quality of the operations.
Leon’s has averaged 25% ROIC the past decade with EBIT nearly doubling while compounding revenues at 3.5%. One of the reasons of increased revenues and profitability has been their 2013 purchase of The Brick. Leon’s purchased The Brick for $700m after they underwent a recapitalization a few years prior. They levered their balance sheet to finance the acquisition using $500m of debt and were able to pay it down over 5 years due to the large cash generation of the combined entities. Recently because of COVID, their e-commerce side of the business has grown substantially and now represents 10% of their revenues.
The company obtains all of their supply from 500 different suppliers and is therefore not beholden to any one supplier. They have wholly-owned subsidiaries based in Asia that helps them source their goods. 15% of their inventory comes from the US and with the Trump administration imposing tariffs on Canada, their vendors are potentially going to take the product and produce it offshore to avoid these tariffs or just hold the inventory until more clarity is given.
While I’m not expecting this business to grow revenues and earnings at large rates barring a large acquisition, a nice boost to Leon’s business in the current year could be that a large swath of Canadians are taking pride in purchasing Canadian made products as opposed to US made products as a result of the Trump admins stance on Canada. Q1 2025 results were just released and revenues were up 3%.
Why does this opportunity exist?
There are many reasons why the stock is currently mispriced:
The Leon family owns about 70% of the shares outstanding. On a market cap of $1.5 billion, that means the total amount of publicly traded stock is really $450 million, hardly enough for large institutions to take a meaningful stake in the company or for any shareholder to gain any control.
Low trading volumes. The average daily volume is typically 20K shares, and when you factor in a stock price of low 20’s, it results in daily dollar trading volume of just under half a million.
The company is a furniture retailer. It doesn’t operate in the most exciting industry.
Real estate has been hidden on the balance sheet. The real estate value has been recorded at the cost on the balance sheet and until the IPO of the REIT occurs, it will continue to be hidden.
Limited investor outreach. There hasn’t been much outreach to the investment community in the past and the company doesn’t hold quarterly conferences calls.
It’s been 2 years since announcing the IPO of REIT. May 2023 to today May 2025 marks 2 years of announcing their intention to form a REIT. Some investors could be losing a bit of patience with no given timeline of when it will actually occur.
Industry
The furniture industry is extremely competitive with low barriers to entry and high fragmentation. At the end of 2024, there were 3,151 furniture stores in Canada according to Statista with just over half of them in Quebec and Ontario. The total size of the market is about $20 billion with Leon’s at the top at about 20% and IKEA Canada around there as well based on their $2.8 billion in sales for 2024 (although 5% of that is food). Then there are smaller players like Structube (75 stores), Ashley’s Canada (60 stores) and then smaller regional players (BMTC Group - which is also developing its real estate) with a few mom and pop stores.
The past decade has seen many players leave the industry: Target left in 2015, Sears Canada left completely in 2018 and even handed some of their leases to Leon’s in the process, Bad Boy Industry went bankrupt in 2024 and shut down their 50 Canadian locations and Hudson’s Bay recently entered a restructuring process, although they are more a clothing retailer with a small amount of furniture. The result of this is that Leon’s has consolidated market share from ten years ago pre-Brick acquisition from 5%-6% to 20% now. While a couple of years old, as of 2021 81% of purchases in the furniture industry were made in stores which has probably increased a bit since as Leon’s just did $265m of their sales online, up quite a bit pre-COVID. If customers purchasing online continues to grow and make up a larger percentage of total industry volume, it could remove the need for large retail stores to do business and just operate distribution centers to deliver the products. However, currently most customers will look up online what they like, go in store to test it out, and then purchase.
Management
I view the board and management as extremely shareholder friendly. The current CEO who started in 2021, Mike Walsh, is the first CEO in Leon’s history who’s last name is not Leon. He used to be the President of Leon’s Furniture and then the COO prior to becoming the CEO and is very familiar with the business and industry. He also used to work for Canadian Tire when they were undergoing their REIT transaction. The Leon family clearly trusts him because not only is he the CEO who is an “outsider” to the family, but right after being hired he authorized a Substantial Issuer Bid and bought back $200m worth of shares at about where the shares trade today.
Leon’s also authorizes normal course issuer bids to buy back their stock and currently has one outstanding to repurchase 5% of their shares. On top of the buybacks, they also pay a regular dividend that yields 3.5%. The Leon family also owns 70% of the shares aligning our interest with theirs.
History Rhymes: The Canadian Tire/Loblaws Blueprint
The current path that Leon’s is following has been done before in the Canadian markets. 10 years ago Canadian Tire and Loblaws decided to IPO their real estate into a separate REIT, while maintaining a large majority stake. Canadian Tire sold 15% and kept 85% ownership and Loblaws sold 17% and kept 83%. This allowed Canadian Tire and Loblaws to highlight their underlying real estate value while receiving some cash for selling a minority stake. From when Canadian Tire announced in May 2013 to October 2013 IPO, the stock price was up 28% and one year after the announcement was up 78%, not taking the REIT value into account. Loblaws announced their intention to create a REIT in December 2012 when their stock was at $32. In July 2013 when the IPO occurred, their stock was at 42 for a 31% gain. Two years after announcing their intention the stock was up 66%, without accounting for the REIT value. One of the reasons Loblaws wanted to highlight their real estate value was so they could get their stock price up to make a bid for Shoppers Drug Mart using their stock as currency, which they did in the summer of 2013.
One worry about when companies sell their real estate or engage in some type of sale lease back transaction is that, well now they are going to have to make rent payments which will decrease earnings significantly. While true if you’re selling 100%, but if you are keeping a majority ownership initially, the effect should be minimal as the rental income you receive is offset by the rental expense going out. In their initial REIT presentations, both Canadian Tire and Loblaws showed the projected impact of a pro forma REIT on their financials (Canadian Tire presentation and Loblaws presentation)
Because they kept a large initial stake, there was a minimal effect on the EPS, while not only getting access to cash from selling a small percentage but also putting a mark on the real estate that was hidden in the balance sheet. By forming a REIT, it puts in team a place with experience running real estate and developing properties as Leon’s executives have experience in running retail operations, not developing real estate.
Valuing the REIT
On Leon’s balance sheet, there is $268 million in land and buildings recorded at historical cost sitting on the books that is worth multiples of that which will be transferred into the REIT. Right now Leon’s owns 50 owned properties that consists of 5.5 million square feet on 430 acres of land.
Their plan is to transfer the income producing properties into the REIT, IPO a stake while keeping a majority of the shares, and develop some of the land that they have that can be vended in over time. Based on just the 5.5m square feet, we can try to derive some type of value for the income producing portion of the real estate. While the value won’t be exact as the industrial and retail properties are located in different provinces that have different retail and industrial rental rates, we can come to a general view of the value. By using 1.2m of industrial square feet, 3.7m of retail square feet and 0.6m of other real estate and looking at rents per square feet for these types of assets, we can calculate a conservative total rental income, net operating income and then total value of the REIT.
Based on my estimates, total rental income would amount to $103m. I looked at CT REIT (Canadian Tire’s REIT) to give me a guide as to what additional expenses the REIT will incur. Assuming 21% of total income goes to property expenses and 3% to G&A for being publicly listed and corporate overhead, net operating income would be $78m. Putting a cap rate of 6.5% on that equates to $1.2B of value for the REIT. By selling 15% upon IPO, Leon’s can pocket $180m of cash.
Excess Land Value
In addition to the REIT value, Leon’s also owns excess acreage on their owned properties that they are currently looking to develop now and more potentially in the future. The most immediate development is where their headquarters sits at the intersection of the 401 and 400 highway in Toronto. The plan is to partner with developers who will construct a master planned community consisting of 4,000 residential units and also reconfigure their headquarters.
Valuing this development can be a bit tricky as we don’t know the agreement that will be in place on a potential split with the developers, financing involved, margins or timeline. We do know that the total buildable square footage will be 4.6m for this property. If we use the average 2024 $123 pbsf in the GTA, the total value of the land could be $565m. Using the higher range of sales that occurred in 2024 at $202 pbsf, the value could be $929m. Leon’s in still in the process of getting approvals from the City of Toronto for this piece of land and plan on submitting a Secondary Plan in mid-2025.
Of the 430 acres that Leon’s owns across Canada (mainly in Ontario), Toronto is just 40 acres of that. They also have 32 acres in Burlington that they could redevelop due to the dual zoning structure of the land. As well as their Missisauga location off the 401 amongst many others. Because a lot of their stores are classified as an industrial node, they can take the retail portion of the store and reconstruct it into more of a retail node, determine what the “highest and best use of the land is” other land is, and redevelop it. Management has said that if they go from 22 warehouses to 1 or 2 distribution centers, it could free up a lot of real estate. Only the Toronto master planned community development is factored into my valuation. I would imagine the other portions of the land would be worth millions if not hundreds of millions of dollars.
Retail Value
Predicting the value of the retail division is slightly less difficult than the real estate parts. Because the business has been so durable over the years with consistent margins and profitability, the value should not swing by much year to year. Assuming $2.5 billion in sales with 44% gross margins, SG&A amounting to 37% of revenue and incremental rent expense that needs to flow through the P/L due to the REIT IPO, we can arrive at a net income amount of $139m.
What multiple should this business trade at? Fairfax just bought Sleep Country in 2024 for $1.7B at about 17x earnings or 8-10 times EV/EBITDA according to the Proxy Circular. And Canadian Tire trades at a forward 2025 P/E of 12x today. To be conservative, I’ll use 10x earnings even though Leon’s is a larger company than Sleep Country with more product diversity but smaller than Canadian Tire with Canadian Tire retailing more auto and outdoor goods. Using these numbers gets to $1.3 billion for the retail business.
Putting it All Together
If we sum up the value of 1) the independent retailer, 2) the REIT, 3) the Toronto land, 4) the REIT sale proceeds and 5) the net cash on the balance sheet, the total value is $49/share, about 100% upside. This also doesn’t take into account the other land value that Leon’s could potentially develop, making the company even more valuable.
Catalysts
Completion of the REIT IPO. While it has been two years since Leon’s announced their intention to complete their REIT transactions, we should be getting closer to when it actually comes to fruition. One thing to watch for is if they get approval to list on the Toronto Stock Exchange.
Potential acquisitions. Management has mentioned that, due to the strong balance sheet, they have numerous avenues to deploy capital by potentially taking on debt. An acquisition could be one method if the price was right.
Market share gains. Over the past decade the company has gone from single digit market share to about 20% and if current retailers keep going out of business, Leon’s would more than likely increase their market share.
Accelerated stock repurchases. The company has shown that they aren’t afraid of repurchasing large blocks of stock in one transaction and if the price languishes in the low 20’s for some time, we might see another SIB.
Canadian Gen Z FOMO. While this catalyst is a bit tongue in cheek, with the early Canadian generations of today effectively locked out of the real estate market due to rapid price appreciation the past few years, Leon’s stock could offer a way for Gen Z to buy Canadian real estate property at bargain prices and for them to realize that value via the REIT unlock.
Risks
While I believe the stock has minimal downside due to the stability of the retail business and hard real estate value, there are some risks to the idea not working out:
Delayed or failed IPO. It’s been two years since they announced they were going to IPO the real estate. It took Canadian Tire and Loblaws months to go from announcement to IPO. There is still no given timeline as of there most recent Q1 2025 earnings press release.
Downturn could delay retail purchases. If the Canadian consumer continues to get squeezed by higher inflation or higher rates, they could delay making furniture purchases until they have more disposable income. The nice thing about Leon’s is that they have survived and maintained profitability in pretty severe economic environments (COVID being one of the main ones).
Reversal of Canadian immigration boom. Canada has experienced a large population increase in the past decade going from 35m to 40m, which many commentators point to the the large real estate boom. Any reversal of this could potentially lead to a decrease in all items related to housing spend. Recent polls show Canadians would prefer a more sensible immigration policy than has been shown in the past 10 years.
Disclosure: Long LNF.TO