CIBCEQUITY RESEARCH
November 21, 2024 Industry Update
CIBC Retail REITs And Intensification GTA Tour
Something To Build On
Our Conclusion
On November 21, CIBC had the opportunity to host a retail REITs and
intensification tour within the GTA, sporting a fantastic turnout. This year’s
tour began at the Village at Bronte Harbour in Oakville and finished in
Toronto East, touring a number of properties owned by SmartCentres,
Choice and Crombie REIT. With acquisition spreads narrowing materially
over the past few years (largely a reflection of declining cap rates and
increasing interest rates), internal growth opportunities such as development,
re-development and intensification have taken centre stage for many
Canadian REITs. We expect development activity to be particularly topical
(albeit perhaps muted) for the retail asset class in 2025 (and thereafter), as
many REITs within this subsector have made such initiatives a strategic
focus. Further, we believe that many retail REITs, especially those with
portfolios in core urban areas, are well positioned to deliver; lowdensity
retail properties can be re-developed/intensified into higher-value, mixed-use
properties at a substantially lower cost than many competing developers, as
the land is already owned by the REIT (note that raw land prices have
increased substantially over the past decade). Herein, we provide a
summary of each asset, as well as some key development themes.
Key Points
Value Creation Opportunity: While development and intensification may be
viewed as value-creation activities, we note that a significant portion of the
value “created” through these activities can be more accurately described as
value that is being surfaced, as these development sites have seen their
values rise substantially on a highest- and best-use basis. This, in a sense,
means that while Canadian REITs are well positioned to benefit from rising
values for developable sites, capital gains recognition constrains (but does
not preclude) these REITs’ ability to surface, crystalize and benefit from this
rising value.
Pipeline Potential: We expect that demonstrating the value of pipelines and
value created through development will, in time, gain recognition from
unitholders and analysts alike; however, it will perhaps require a sharper
pencil and a keener eye on the ever-improving development disclosures the
REITs are providing.
Challenges To Overcome: While we believe this growth strategy offers
attractive and significant value-creation opportunities for many Canadian
REITs, it is also more complicated and difficult to execute than other
strategies. This includes the rising cost of construction (note that many retail
REITs are increasingly focused on building out residential density) and
increased financing costs (shrinking achievable development spreads).
Should interest rates continue to decline, we foresee the possibility for an
increase in development spending.
Choice Properties Real Estate Investment Trust
Mount Pleasant Village
Three of our stops throughout the tour brought us to Choice’s sites, with the first one being Mount Pleasant Village, which includes a six-storey condominium building, 36 stacked townhomes and a 26-storey rental apartment. Located in Brampton, the property spans ~300k sq. ft., and consists of 302 rental units and 142 condominium units. As the
development was completed in Q1/24, advanced and stable financial results have yet to be seen; however, the rental units are expected to yield ~4.7%. The development of the property was done alongside the Daniels Corporation, with Choice’s investment totalling ~$57MM. As of Q1/24, the REIT sold 36 condominium units; however, no updated figures have been
disclosed
Bathurst & St. Clair Loblaw Store
Our second Choice stop was the recently acquired grocery store at Bathurst and St. Clair, which totals ~75k sq. ft. and is positioned well for future residential mixed-use intensification. The Toronto Loblaw-anchored property is located in close proximity to the St. Clair West TTC subway station, and was acquired by the REIT in March of this year for ~$38.4MM. The REIT
currently has a 15-year lease term with the Loblaw tenant, with annual 2.25% rent increases built in.
Woodbine & Danforth Redevelopment
The final Choice stop brought us to the REIT’s 985 Woodbine Avenue site, which includes a Valu-Mart grocery store. The site totals 1.7 acres, and is located on the Woodbine subway station and is close to the Danforth GO Train station. Choice’s proposed redevelopment consists of two mixed-use residential buildings (10-storey and 35-storey) with 646 units, as well as at-grade grocery retail, and upgraded TTC access. The REIT’s investment to date totals ~$7.7MM, and its redevelopment plans were officially approved by Toronto Council in mid-November.