Choice Properties REIT is a manager, developer, and owner of retail and other commercial Canadian properties, and has started to diversify into mixed-use commercial/residential properties. Most of its revenue stems from tenant leases. Choice is principally owned by Loblaw Companies, the country’s largest grocery retailer, which in turn is controlled by the Weston family. Loblaw-bannered stores anchor most of Choice’s mall and shopping center properties. On February 15, 2017, Choice announced the acquisition of the Canadian Real Estate Investment Trust for $3.9 billion. The combined REIT will be Canada’s largest.
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Choice Properties acquired 12 properties in 2017 and 3 land parcels for future development for a total cost of $126M. The REIT delivered positive financial and operational results for 2017 and met its target to complete 347K square feet of new gross leasable area. It has had good success at retaining long-term tenants, as seen by its 99% occupancy rate across the entire portfolio of properties.
Choice completed development of more than 1M square feet of new retail space in the last four years. 2017 saw the REIT move past the planning phase into the development of mixed-use properties in downtown Toronto and Coquitlam BC.
Choice Properties REIT’s strategic plan is focused on three primary goals:
- Predictable, stable and growing monthly cash distributions to shareholders
- Increasing funds from operations (FFO) per share while expanding the REIT’s asset base through acquisitions and site intensification
- Asset enhancement to maximize long-term share value
Strategy components include:
- Acquisitions: The 2018 acquisition of Canadian REIT will provide 9M square feet of retail space, 10M of industrial and 3M of office space. Canadian adds a dozen properties ready for mixed-use development to the 48 already owned by Choice. The Canadian REIT acquisition meets strategic goals for geographic and tenant diversification.
- Development: Choice Properties drives growth through property development and redevelopment. The development strategy leverages the Loblaw-anchored asset base with a focus on mixed-use and retail properties. The REIT sees opportunities in intensifying excess density properties, redevelopment for mixed use in key markets, and development of greenfield (undeveloped) land for mixed-use and retail projects.
- Active management: The REIT is actively managed by expert staff with a regional focus. It expects to enhance operating performance and cash flow through effective capital investment in its properties.
As of year-end 2017, 546 investment properties with 44.1M square feet were valued at $9.6B, of which $42M was properties under development. Properties were mostly shopping centers anchored by Loblaw-branded supermarkets and drug stores. About 64 percent of the portfolio’s base rent income came from medium and large urban markets. A total of 12 properties were acquired in 2017 with a GLA of 517K square feet. Development GLA constructed in 2017 was 267K sq. ft., with 963K sq. ft. of remaining development that will cost an additional $288M to complete. Leasing occupancy at year-end was 98.9 percent (100 percent of Loblaw-anchored properties) with an average base rent per square foot of $13.51.
Almost half of base rent stemmed from large urban markets, the three biggest being Toronto (13.5 percent), Vancouver (7.5 percent), and Montreal (7.1 percent).
2017 net operating income was $585M, up from $547M in 2016. Rental revenue increased from $764M to $830M, and funds from operations (FFO) per share rose from $1.00 to $1.07.
For the trailing 12 months as of the end of 2017, Choice Properties REIT had the following financial statistics:
|Return on Assets||4.18%|
|Return on Equity||54.01%|
|Operating Income Growth||7.77%|
|Earnings per Share||$4.29|
|Dividend per Share||$0.67|
|Free Cash Flow||$504M|
|Free Cash Flow/Sales||60.70%|
|Free Cash Flow/Net Income||1.25%|
As of February 14, 2018, Choice Property REIT had the following statistics:
Loblaw, the REIT’s largest tenant, and principal shareholder, is Canada’s largest retailer. Its alliance with Choice Properties bodes well for future growth and stability. The acquisition of Canadian REIT will create a portfolio of 752 properties. It will diversify the portfolio beyond retail, which continues to experience disruption from e-commerce, and into office and industrial properties. Following consummation of the deal, Loblaw Companies will own 62 percent of the combined REIT, with shareholders owning 27 percent and the Weston family owning 4 percent. Canadian REIT management will lead the combined REIT. Choice Properties REIT’s portfolio of properties ready for mixed-use development will grow by 25 percent following the combination, and the pace of development should go a little faster.
With a revenue growth rate approaching 6 percent and diversification into different property sectors, Choice Properties REIT has taken strategic steps to reduce its exposure to the volatile retail sector. Higher cash flows, combined with operational cost savings from the acquisition of Canadian REIT, creates a good opportunity for investors looking for solid income not directly tied to the equity and bond markets.