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Looking for a Contrarian Value Play? Consider Choice Properties Real Est Invstmnt Trst

Amid a sector-wide downturn, which has hit real estate investment trusts (REITs) that own properties that are leased by retailers, investors have largely eschewed such investments in favour of owning shares in REITs that have exposure to industrial real estate or other property segments that are more correlated with growth in e-commerce and other trends that are re-shaping the way Canadians (and those around the world) buy goods.

With the brick-and-mortar retail store still alive and well, REITs leasing properties to big-box retailers have seen market capitalizations drop (and yields rise), making specific niche picks within this segment appear to be attractive from a value perspective.

One company I like in this environment is Choice Properties Real Est Invstmnt Trst (TSX:CHP.UN) for a number of reasons.

This past week, the Weston family announced a move to create the largest REIT in Canada by merging Choice Properties with Canadian REIT (TSX:REF.UN) in a $3.9 billion transaction. This move will diversify the real estate portfolio of Choice Properties away from owning principally the real estate underpinning Loblaw Companies Ltd.’s business model to owning more than 750 properties across the country.

As I have stated in the past, Choice Properties is an interesting play on retail real estate, given its strong ties to the Loblaw brand and the relative lack of uncertainty with respect to lease renewals and cash flow long term. The REIT’s 3.8% dividend is strong and sustainable, with a payout ratio which is very low compared to its peers at ~56%, and a relatively strong balance sheet supported by gross and net margins of 64% and 55%, respectively.

The diversification effects of this merger should not be ignored by investors, as Choice Properties investors will now have exposure to approximately 60 properties which have the potential to be developed as mix-use, allowing for further diversification and increased growth potential long term from shorter lease terms, allowing for potential margin expansion. With a strong management team and corporate culture built on long-term fundamentals supporting the combined entity, I find little to dislike about this deal and will certainly keep my eye on how this acquisition impacts Choice’s earnings moving forward.

Bottom line

While I still believe other REIT sectors, such as industrial REITs, will outperform retail-focused REITs in the long term, as these trusts will be able to take advantage of stronger growth fundamentals from e-commerce and logistics services that rely on real estate that is within close proximity to major metropolitan areas, Choice Properties is a very intriguing value option for Canadian value/income-oriented investors to consider.

Stay Foolish, my friends.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

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