July 21, 2024
Choice Properties REIT
Hitting the mid-year mark in solid shape
Our view: On the back of an in-line Q2 print, CHP has hit the mid-way mark of the year in strong form. Operationally, we expect its defensive grocery anchored retail portfolio to demonstrate resilience amid rising consumer pressures, while marking rents to market in the industrial portfolio sets up for solid NOI upside, even in the face of some anticipated occupancy erosion. Coupled with below average leverage and disciplined capital deployment, we see valuation as well-supported. Sector Perform, $15 PT.
Key points:
Some moving parts, but overall operational outlook remains solid. SP NOI growth picked-up nicely to +4.4% YoY (+3.4% YTD) on leadership from industrial (+11.8% YoY, or +7.4% ex bad debts), followed by retail (+3%), and mixed-use/residential (+0.8%). Renewal leasing spreads were robust at +48%, including +106% in industrial and +13% in retail, while occupancy remains nearly full (98%). Despite some weakness among discretionary retailers (e.g., fashion, sit down restaurants, smaller CRU space), demand from its core necessity and value-based retail tenants remains resilient. Looking ahead, CHP expects ~$6MM of lease termination fees in 2H/24 as Loblaw (L) optimizes its footprint. However, the space is mostly already re- leased at higher rents. Industrial will likely see ~200K sf (0.3% of GLA) of small bay occupancy slippage in 2H/24 in Western Canada and ON, though CHP reiterated a confident outlook given the significant mark-to-market opportunity on in-place rents and strong demand. All said, we see CHP’s unchanged +2.5-3% 2024 SP NOI guidance as within reach.
An active capital recycling program. In Q2, CHP acquired $33MM ($72MM YTD) of retail assets and sold its non-managing interests in $80MM of retail ($104MM YTD). Of note, the purchases included a vacant 13K sf stand- alone retail property in Toronto, which was subsequently leased to Loblaw, providing another example of CHP’s ability to leverage its strategic ties. We expect portfolio high-grading to continue, with CHP citing ~$150MM of acquisitions from L through 2H/24 matched against a similar volume of dispositions. Development completions should pick-up over the N18M with $445MM of projects underway at attractive ~7% unlevered yields.
Forecasting healthy growth. Our 2024E-25E FFOPU are $1.03 and $1.07 (+$0.01), with our 2026E introduced at $1.11 (+4% YoY). Revisions mainly reflect transaction activity and lower net interest expense. Our 2024E is in line with CHP’s unchanged $1.02-1.03 guidance, with our 2023A-25E CAGR at a healthy 3%, consistent with its retail peers and a bit ahead of the sector (2%). Our current/1YR FWD NAVPU estimates are intact at $14/$15.
Sector Perform, $15 PT. CHP is trading at -1% P/NAV (15x 2025E AFFO/ 6.5% implied cap), above its retail comps (-18% P/NAV) and our universe (-23%). We believe its premium relative valuation remains well-supported by a steady growth outlook, superior cash flow durability, strong management, significant value-add opportunities, and below average leverage.