Choice Properties (CHP.UN) is a real estate investment trust (REIT) focused on high-quality commercial, and residential, properties.
The company is a product of Loblaw Companies Limited (L) spinning out its real estate properties into a publicly listed real estate investment trust in 2012.
In November of 2018, Loblaws announced that it would spin out its remaining 61.6% interest in the REIT to George Weston Limited (WN).
Currently, the total number of properties is 717, backed by 66.4 million square feet of GLA (Gross Leasable Area), and a 96.9% occupancy rate. The portfolio is diversified, with a focus on retail properties. In terms of net operating income (NOI), it has 76%, 15%, 8%, and 1% in retail, industrial, office, and residential, respectively.
The top tenants include Loblaws and Shoppers Drug Mart, making up 55.5% of rental revenue, then Canadian Tire (CTC.A) at 2.1%, and TJX Companies (TJX) (under the Winners and HomeSense banners) at 1%. Choice also provides a fairly attractive dividend yield of approximately 5%.
I am bullish on Choice Properties. (See Analysts’ Top Stocks on TipRanks)
High Quality Retail Tenant Base
The retail portfolio is comprised of 575 properties of 45.2 million square feet of GLA, with 97.4% occupancy.
For investors with concerns about further lockdowns due to the pandemic, a REIT with 76% of NOI generated via retail properties may be concerning.
However, Choice Properties has a diversified and strategic retail tenant mix focused on necessity-based tenants.
Management takes the view that retail is important for recurring cash flows. The REIT has stability with its strategic and long-term relationship with Loblaws, and having its geographic footprint in large Canadian markets.
Grocery stores (Loblaws, Sobeys, Metro), pharmacies (Shoppers Drug Mart, Rexall), value retailers (Walmart, Costco, Dollarama), and essential personal service retailers (LCBO, TD, RBC) make up a combined 81% of retail NOI.
Diversified Portfolio Mix
Besides retail, Choice Properties also has interests in industrial, office, and residential assets. The industrial portfolio is focused on warehouses, distribution, and light manufacturing for a broad array of tenants.
Management’s focus for this sector is on large distribution assets for Loblaws, and other generic industrial assets. The REIT has 122 industrial properties, with a 97.2% occupancy and 17.3 million square feet in GLA.
The office portfolio is based on properties in the downtown core of the largest Canadian cities. For these assets, management seeks to partner with institutional clients to reduce risk. The REIT owns 16 office properties, supported by 90% occupancy and 3.6 million square feet in GLA.
The residential portfolio is a recent addition to Choice Properties. It provides further diversification, and more opportunities for investment in the future.
Most of these opportunities to develop are by densifying the current existing retail sites with residential buildings. The residential portfolio has only four properties currently, with 0.3 million square feet GLA.
Robust Development Pipeline
Choice has plans to continue its development pipeline and build on the program. During the height of the pandemic in 2020, the company demonstrated its ability to execute by completing 15 large-scale projects worth $190 million. This includes 13 projects in retail properties, one in industrial, and one mixed-use project.
The current development program is focused on intensification, mixed-use, residential, and greenfield. Intensifications are adding retail density to existing properties.
The purpose of these projects is to add new tenants and enhance the tenant mix. Four projects currently are underway in this area, as well as seven mixed-use projects planned in major markets.
These include residential, mixed-use communities close to the public transportation system. Another four residential projects are under construction in Ontario in well-established communities.
Finally, greenfield activities include industrial parks and strip malls. The total active development pipeline will be a $409-million investment in retail, industrial, and residential assets. This program and strategy are attractive as it is focused on creating pandemic proof assets with long-term potential to drive Net Asset Value (NAV) growth.
Prudent Capital Structure
Choice has an industry-leading balance sheet to ensure growth while providing stability. It also gives the company additional capacity to fund its development pipeline and program.
Roughly 41% of the capital structure is made up of leverage with the rest in equity. The company has $12.6 billion of unencumbered assets, and its 7.3x debt-to-EBITDA ratio supports an investment-grade BBB+ rating from DBRS.
Long-Term Leases
The WALT (Weighted Average Lease Term) for Choice Properties is 6.3 years for the total portfolio, 7.0 for Loblaws, and 5.4 years for others.
In 2021, a very conservative 2% of the total portfolio is up for expiry. In addition, 62% of the expirations will occur 2026 and beyond. The stable expiry rate and high WALT from its most critical tenant (Loblaw) provide a good level of stability.
Bottom Line
Choice Properties REIT makes an excellent choice for investors seeking an opportunistic, growing real estate portfolio.
The development program and pipeline are focused on pandemic-proof industries.
The REIT’s current portfolio has a high-quality tenant base with necessity-based tenants, a strong relationship with Loblaws, and other hot real estate sectors like industrial and residential.
Wall Street’s Take
From Wall Street analysts, CHP.UN earns a Hold consensus rating, based on one Buy rating and five Hold ratings. Additionally, the average Choice Properties price target of C$15.49 implies 3% upside.
Disclosure: The author works as a manager at National Bank Financial and did not have a position in any of the securities mentioned in this article.
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