Calloway Real Estate Investment Trust (TSX:CWT.UN) is one of Canada’s leading retail real estate investment trusts (REITs). At the end of 2014 it had 27.3 million square feet of gross leasable area (GLA), $7 billion of total assets, and 128 retail centres with 99% of occupancy.
Undergoing transformational acquisition of SmartCentres
Calloway focuses on value-oriented retailers, including strong brands like Wal-Mart. Calloway is undergoing a transformational $1.2 billion acquisition of SmartCentres which will position Calloway for growth.
The transaction includes interests in 24 properties, of which, 22 are shopping centres that are mostly anchored by Wal-Mart, one grocery-anchored shopping centre, and 25% interest in Montreal Premium Outlet. These properties have 99.7% occupancy with 12.6 year weighted average lease term to maturity.
Additionally, there are two development properties with 3.6 million square feet of income-producing GLA, with another 1.9 million square feet of GLA expected for future development.
The transaction is supported by the board. The funding for the transaction is in place, and what’s left is the unitholder vote that is scheduled for May 26, 2015.
Transformation of Calloway into SmartREIT
Calloway will rebrand to SmartREIT and trade under the ticker SRU.UN to leverage off of SmartCentres’ brand equity. Here’s a comparison of Calloway before and after the transformation.
| Calloway Today | SmartREIT |
| 27.3 million square feet of GLA | 31 million square feet of GLA |
| 128 properties | 149 properties |
| 99% occupancy | ~99% occupancy |
| weighted average lease term 6.8 years | weighted average lease term 7.5 years |
| 2.7 million square feet of potential retail development | 4.6 million square feet of potential retail development |
| $7.1 billion of total assets | $8.3 billion of total assets |
| best in class internal property and asset management capabilities | fully-integrated property asset development and leasing management capability |
How the proposed transaction is financed
The proposed transaction is being financed in multiple ways. First, there’s about $644 million of assumed debt with an average interest rate of 2.6%. Second, there’s an issuance of $180 million in Class B Limited Partnership units of Calloway subsidiary partnerships to certain vendors. Those units are exchangeable for REIT units on a one-for-one basis. Third, subscription receipts in a bought deal financing generated net proceeds of $200 million. The final $176 million will be financed by cash on hand, as well as drawing on existing credit facility.
Top 10 tenants for Calloway’s Portfolio after the proposed transaction
The acquisition portfolio is consistent with Calloway’s current portfolio. After the transaction, the top 10 tenants based on percentage of gross rental revenues will look like this:
| Tenant | % of Gross Rental Revenues |
| Wal-Mart | 26.9% |
| Canadian Tire, Mark’s, The Forzani Group | 4.7% |
| Winners | 3.5% |
| BestBuy | 2.6% |
| Reitmans | 2.5% |
| Loblaws, Shoppers Drug Mart | 2.4% |
| Sobeys | 2.2% |
| Rona | 2% |
| Michaels | 1.5% |
| Staples | 1.5% |
| Total | 49.8% |
Dividend and valuation
Currently, Calloway yields 5.2% with a conservative payout ratio of 80%. It ranged from 80-94% in the last decade. Recent history shows it typically traded at a P/FFO of 14.4. It currently trades at 15.4 at $30.52 per unit. The higher multiple is not too far off from its historical norm.
With the growth from the SmartCentres acquisition, Calloway’s units maybe reasonably priced today and its above-average yield is attractive compared with iShares S&P/TSX 60 Index Fund’s yield of 2.6%.
Conclusion
Calloway is a high-quality retail REIT with a high yield of 5.2%. Its units can be bought today at a reasonable price. The company sounds sure of the acquisition of SmartCentres shopping centres, which should close at the end of May. This should ultimately lead Calloway, or should I say SmartREIT, to more growth.
