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Woolies sitting on $1.1 billion land bank

Supermarket retailer Woolworths (ASX: WOW) and its US partner Lowe’s are holding more than  $1 billion in property, as they rollout their joint venture hardware chain, Masters.

Masters is estimated to be planning, excavating and building on around 100 active sites, to add to the 31 stores already opened. The retailer had set itself a target of reaching 150 stores nationwide by 2015. Woolies has also acquired a substantial number of independent hardware stores, and the Masters business now includes brands such as Home Timber & Hardware, Thrifty Link and Plants Plus.

Masters recently paid $21 million to acquire the Hardings Hardware business, giving it six hardware stores, with three in Victoria, two in Queensland and one in South Australia.

According to The Age, financial documents lodged with the corporate regulator, the Australian Securities and Investment Commission (ASIC), show that the joint venture held $502 million worth of development properties, as well as an extra $595 million in freehold land, warehouses, retail and other sites. The Age also reports that despite posting a $98 million loss in fiscal 2013, Masters was sitting on assets of $2.2 billion, with virtually no debt.

Woolworths owns 66% of Masters, with Lowe’s holding the other 34%. The hardware chain has Wesfarmers’ (ASX: WES) Bunnings and Metcash’s (ASX: MTS) Mitre 10 stores in its sights, and we could see the big two dominate the hardware market, much like they do with supermarkets, liquor stores and service stations. Metcash’s Mitre 10 stores are likely to play a similar role to its IGA supermarkets, with a small but important share of the market.

Bunnings itself has ramped up plans to increase its number of stores, investing around $1.5 billion to launch 78 new stores over the next three years, as it tries to defend its market dominant position in the hardware sector.

Foolish takeaway

Woolworths chief executive Gran O’Brien expects Masters to break even in 2015/2016, as the stores reach maturity, and economies of scale start to have a positive effect.  We could also see Woolworths offload the property backing its Masters stores into a listed trust, much like Bunnings has done with BWP Trust (ASX: BWP).

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Motley Fool writer/analyst Mike King owns shares in Woolworths and BWP Trust. You can follow Mike on Twitter @TMFKinga

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