The REIT I am going to talk about today has a clear goal of generating long-term value by owning, managing, and developing a diversified portfolio of high-quality properties. There are quite a few real estate investment trusts (REITs) that Canadian investors can choose from, but I am going to talk about Choice Properties REIT (TSX:CHP.UN) as an ideal REIT to build your portfolio around.
Choice Properties is a diversified Canadian REIT with a high-quality portfolio of 756 properties totaling 68 million square feet of gross leasable area, one of the largest in Canada.
The most important piece of information to know about Choice Properties is its major strategic advantage in the form of its alliance with Loblaw, the country’s leading retailer. This partnership is a key strategic advantage as Choice Properties grows whenever a new Loblaw or Shoppers Drug Mart opens anywhere in Canada.
Long-term leases provide stability
One critical thing to consider when buying stock in a REIT is when tenant leases expire; it’s called a “lease maturity ladder.” The less lumpy the ladder, the better it is, which means there are not a lot of leases expiring in any one given year.
The next three years are really good on the lease expiry front, with only 5% of total leases expiring in each of these three years. This means that the risk of losing too many key tenants is almost non-existent.
What’s more, Loblaw represents almost 60% of the leases outstanding, and given their strategic partnership, there is a negligible possibility of Choice Properties ever getting into a situation where a lot of key tenants are departing in any one given year.
Strengthening the balance sheet
Choice Properties was in the news recently, because of its 30-property sale to an unnamed buyer for $426 million. All of these properties did not fit the strict core criteria that the company has set for itself.
This sale was smart for multiple reasons. First, any property that doesn’t fit the long-term business strategy just takes time and energy away from properties that are absolutely mission-critical to generating shareholder value creation.
Second, this sale frees up a significant amount of cash to repay some debt to improve its balance sheet profile. Keeping debt at very manageable levels is critical to a REIT’s business strategy because a manageable debt load that is well covered by funds from operations is the key to maintaining a healthy credit rating.
A healthy credit rating from DBRS and other rating agencies allows the company to continue to borrow at cheap levels, which directly results in greater funds from operations, all else being equal.
Choice Properties has shown that it knows how to manage its liquidity while continuing to invest in growing the portfolio responsibly.
Foolish bottom line
The shares are currently trading at around $14 per share, which is not that different from the price at which the company raised money in May of this year when it completed a $395 million equity offering at $13.15 per unit. In my opinion, this equity offering represents a floor for the stock price, which means investors who start nibbling at the stock now would be buying at the absolute bottom.
The company has not increased its unit distributions since mid-2017, which is a little bit of a turn-off to most income-oriented investors, but the company has used its cash way more efficiently than distributions by making its monster acquisition of Canadian REIT in 2018.
This strategic acquisition hasn’t started bearing fruit yet, because the company is understandably in the integration period. However, that integration period should more or less be done by the end of this year, which means I am looking for a distribution increase in 2020. This potential increase will definitely be a catalyst for meaningful stock price growth in a few months.
In the meantime, smart investors will do well to remember that the stock price has stalled a bit for the last few months and can only go up from here. My advice is to take a hard look at the stock below $14 and consider nibbling hard around $13.50 to lock in a very successful return in 2020.
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 Rahim Bhayani has no position in any of the stocks mentioned.