April 25, 2024
Choice Properties REIT In a good spot
Our view: In the context of a shaky macro backdrop, Choice remains in a good spot, underpinned by its defensive, grocery-anchored retail. While broader industrial fundamentals are normalizing, the slowdown in the segment's organic growth was admittedly more than we anticipated. Still, momentum should rebuild through the balance of the year, leaving our full year SP NOI and earnings outlook largely unchanged. Coupled with a solid balance sheet and disciplined capital allocation, we see CHP’s premium relative valuation as well-supported. Sector Perform, $15 PT intact.
Key points:
Operating metrics sound; 2024 guidance shouldn’t be a stretch. SP NOI was +2.4% YoY, led by industrial (+2.8% YoY), followed by retail (+2.5%) and mixed-use/residential (-1.3%). Notably, renewal leasing spreads were solid at +23%, including +67% in industrial and +10% in retail. Still, industrial SP NOI growth was markedly slower than last year (+8%), weighed down by fixturing/free rent periods and slight occupancy slippage. While CHP acknowledged leasing is taking longer, industrial organic growth should accelerate to the high-single-digit %-range from backfilling vacancy and marking rents to market. In retail, demand remains strong from necessity and value-focused tenants, particularly with minimal new supply. In short, we expect CHP to hit the mark on its +2.5-3% 2024 SP NOI guide.
Build, buy, and sell – a little of everything to start the year. CHP completed $75MM of projects in Q1 at a 5.1% unlevered yield, mostly tied to rental residential in Brampton (58% leased). Capital recycling was also active with the purchase of a $38MM retail property in Toronto from Loblaw at a ~6% cap rate and $23MM of industrial ($17MM; $146/sf) and retail ($7MM) dispositions. Of note, the retail acquisition has potential for long-term densification, while pricing on the industrial sale reflects a long-term lease at below market rents. Considering attractive ~7% unlevered yields, we expect capital to remain aimed at its ~$410MM of active developments (mostly industrial), along with select acquisitions from Loblaw, partially funded through dispositions. As for its Allied holdings, CHP reiterated that it remains patient, but would monetize it should a need for capital arise.
Steady growth outlook intact. Our 2024E-25E FFOPU are unchanged at $1.03 (vs. $1.02-1.03 guidance) and $1.06, with our 3% 2023A-25E CAGR in line with its retail peers and the sector. Our current and 1YR FWD NAVPU remain $14 and $15, respectively, with the latter implying 7% YoY growth.
Maintaining Sector Perform and $15 price target, with no change in our forward NAV or target multiple. CHP is trading at 7% below NAV (15x 2024E AFFO/6.7% implied cap rate), ahead of its retail peers (22% NAV discount) and our broader coverage (26% discount). From our vantage point, we see good support for current levels given its superior cash flow durability, steady growth profile, below average leverage, strong management, and sizeable pipeline of value-creation opportunities.