Choice Properties Real Estate Investment Trust CHP-UN-T hasn’t been dazzling anyone with rising cash distributions in recent years, which raises the question of whether its reputation as a steady performer is enough to hold investor interest.
The grocery-store-anchored REIT – which was spun out from Loblaw Cos. Ltd. in 2013 and derives more than half of its rent from the grocery giant – is easily dismissed if you focus on a couple of its sluggish metrics.
Funds from operations – essentially the cash flow from tenants – increased only slightly in 2022, to 96.4 cents per unit from 95.4 cents in 2021. That’s a 1-per-cent increase.
More important to investors, and equally unenticing, the REIT has been slow to raise distributions.
On Feb. 15, when Choice Properties reported its fourth-quarter financial results, it announced a mere one-cent increase to the annualized payout, bringing the total to 75 cents per unit from 74 cents previously. Even that was big news: Before then, the REIT hadn’t raised its regular monthly payout since 2017.
For anyone looking for exposure to more dynamic real estate plays – perhaps with a bet on office towers, seniors’ homes or family apartments – Choice Properties can look about as exciting as a guaranteed investment certificate. Well, a GIC with no guarantee.
That may explain why Choice Properties’s unit price is languishing with a gain of less than 1 per cent so far this year, trailing most of its peers and the S&P/TSX real estate sector’s 10.8-per-cent gain over the same period.
There is a case for investing in Choice Properties, and that’s stability: With its reliance upon a solid grocery-store tenant, there isn’t a lot of turnover within the REIT. Nor is there angst over online sales, rising inflation and looming recessions.
What’s more, Choice enjoys a strong investment-grade credit rating and a debt-to-EBITDA ratio (earnings before interest, taxes, depreciation and amortization) that has been declining, bolstering its reputation as a safe bet during uncertain times.
Dean Wilkinson, an analyst at CIBC World Markets, in a recent note said that Choice Properties is “the de facto ‘safety’ trade” among REITs.
This profile served investors well in 2022, when the broader mix of Canadian REITs was hammered as central banks confronted soaring inflation by raising interest rates aggressively.
The real estate sector within the S&P/TSX Composite Index slumped 17 per cent last year, including distributions, amid concerns about occupancy levels as economic activity wavered. As well, higher interest rates raised the allure of fixed-income investments, including bonds, where yields rose to multiyear highs and offered meaningful competition to REITs.
Choice Properties, though, gained 2.3 per cent over this tumultuous period, underscoring the REIT’s reputation for stability – and making it a compelling choice for anyone worried about the economy and its potential impact on the broader stock market.
In National Bank of Canada’s 2023 Dividend All-Stars, a list of 16 top ideas for yield-seeking investors released earlier this month, analyst Tal Woolley singled out Choice Properties for operating “one of the most defensive portfolios in retail.”
Still, Choice Properties appears to be sensing that investors may need to see more than stability, especially if it translates to a GIC-like yield and uninspiring distribution increases.
At an investor day event last week, the REIT added growth aspirations to its list of longer-term objectives – through implied potential rent increases in urban areas where Choice rental rates lag market averages; through population growth that drives demand for grocery stores and other tenants; and a development pipeline of 18.1 million square feet.
While growth in funds from operations growth has lagged in past five years, Bank of Nova Scotia analyst Himanshu Gupta said in a note, “we expect an uptick in the next two years driven by development completions and growth” in the REIT’s industrial portfolio.
Investors shouldn’t expect fireworks, though. Mr. Gupta estimates that Choice Properties will deliver funds from operations of 99 cents per unit in 2023, up 3.1 per cent from last year.
Mix in a bleak outlook for the economy, though, and investors could be delighted.
David Berman