Choice Properties REIT Raises Distribution on Stable Earnings

Choice Properties is a blue-chip stock for income in the retail real estate space, but don’t expect too much growth.

Kay Ng

Author Bio

Kay graduated from the University of British Columbia with a Bachelor of Science in Computer Science and furthered her studies in financial markets, finance, and financial accounting. She began investing in dividend stocks in 2008, turning an early interest into a lasting passion. Over the years, Kay has refined her investment approach to focus on high-quality businesses, using fundamental analysis and valuation to identify long-term investment opportunities. Her investment research and articles have been featured in The Motley Fool, Sure Dividend, and Seeking Alpha. Outside of investing, Kay enjoys playing the piano, from popular songs learned by ear to challenging classical compositions. Her favourites include Fantaisie-Impromptu by Frédéric Chopin and La Campanella by Franz Liszt.

Education

Bachelor of Science (BSc) in Computer Science, University of British Columbia Further studies in financial markets, finance, and financial accounting

Areas of Expertise

Dividend stocks, fundamental analysis, company valuation, quality investing, long-term investing, business fundamentals, and identifying investment opportunities in high-quality companies.

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Favorite Investment Quotes

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” — Benjamin Graham “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett

Published February 16, 2024 4:20 pm EST

You might recall Choice Properties REIT (TSX: CHP.UN) acquiring the quality assets of Canadian REIT back in 2018. The company remains resilient in a higher interest rate environment. Let’s investigate its recent earnings results and explore the Canadian real estate investment trust (REIT) as a potential income idea.

Choice Properties REIT: The business

Choice Properties is Canada’s largest REIT, with over 700 properties in its portfolio. It is categorized as a retail REIT because it makes about 79% of its net operating income (NOI) from retail properties. However, it also earns 17% of its NOI from industrial properties and 4% from mixed-use and residential properties.

It has 573 retail properties across 44.7 million square feet of gross leasable area (GLA), 122 industrial properties across 19.7 million square feet of GLA, and 10 mixed-use and residential properties across 1.7 million square feet of GLA.

Its retail portfolio is the most defensive in the space, with a high percentage (83%) of its retail business segment gross rental revenue from necessity-based retail. One of its competitive advantages comes from its strategic relationship with Canada’s leading grocery store company, Loblaw, which makes up approximately 57% of its tenancy based on gross rental revenue.

Choice Properties’s earnings results by the numbers

Choice Properties maintains an investment-grade S&P credit rating of BBB. It reported its fourth-quarter (Q4) and full-year 2023 on Valentine’s Day. To observe a REIT’s earnings power, investors can zoom in on the funds from operations (FFO) metrics, which adjust for non-cash expenses like depreciation.

For the quarter, year over year, the FFO rose 6.0% to $184.6 million, with the FFO per unit climbing 5.8% to $0.26. It was good to see that it experienced same-asset NOI growth of 4.2%. Choice Properties ended Q4 with a reasonable leverage ratio of 40.4%. Its weighted average interest rate of 4.03% was also manageable.

For 2023, the Canadian REIT increased its FFO by 4.1% to $726.1 million and FFO per unit by 4.0% to $1.00 versus 2022. The per-unit metric was weighed a tad by a tiny increase in the weighted average outstanding unit count. The REIT improved its occupancy to 98.0% versus a year ago’s 97.9%. Notably, in its development pipeline, it has over 16 million square feet of projects to provide additional growth in the future.

Get good income from Choice Properties

Choice Properties raised its monthly cash distribution by 1.3%, equating to an annual payout of $0.76 per unit. At the recent quotation of $13.71 per unit, it is good for a cash distribution yield of 5.5%. Its payout ratio is estimated to be approximately 75% of FFO this year, which is a sustainable payout ratio.

Outlook and stock valuation

Choice Properties REIT provided an initial guidance for 2024, including the following:

FFO per unit of $1.02 to $1.03 (i.e., a growth rate of 2-3%)
Same-asset NOI growth of 2.5% to 3%

So, management expects stable results for this year. At the recent quotation, the value stock trades at about 13.6 times FFO, which is essentially fairly valued.

Overall, Choice Properties is a blue-chip stock to own for income if you’re looking for an income stock in the retail real estate space, but don’t expect too much growth.