Choice Properties Real Estate Investment Trust (CHP.UN-T ) is making acquisitions and forming partnerships that will strengthen its growing property portfolio bolstered by news of strong earnings from its primary tenant, Loblaw Companies Limited.
Choice Properties announced this week that it has acquired a Pickering, Ont., warehouse from Loblaw and formed a strategic partnership with PenEquity Realty Corporation to develop three other Ontario sites.
“Our growth strategy includes expanding our footprint,” said Kim Lee, Choice Properties’ vice-president of investor relations and planning and analysis. “Key components of our strategy in this regard include acquisitions and development.
“With respect to acquisitions, we have the benefit of a dedicated pipeline of opportunities from Loblaw Companies Limited, our parent company and principal tenant. At the same time, we continually evaluate acquisition opportunities that meet our investment criteria and are well-aligned strategically and with our existing portfolio.
“From a development standpoint, we intend on leveraging the excess density in our existing portfolio, redevelopment potential stemming from our properties in primary markets and greenfield development on purchased land.”
A REIT and Canada’s largest retailer
Loblaw, Canada’s largest retailer, created Choice Properties REIT to spin off about 75 per cent of its real estate assets that have an estimated market value of $7.77 billion. Choice Properties’ portfolio spans approximately 38.9 million square feet of gross leasable area and consists of 474 properties, primarily focused on supermarket-anchored shopping centres and stand-alone supermarkets.
The REIT raised $400 million in July 2013 by selling 40 million trust units for $10 each in what was Canada’s largest REIT initial public offering. Loblaw continued as Choice Properties’ primary unit holder. It enjoys a secure revenue stream from long-term leases with Loblaw that generated net operating income of $118.6 million in its third quarter of 2014 ended Sept. 30.
Loblaw 2014 fourth-quarter results to be released at the end of February are expected to have a 45-per-cent year-over-year increase in adjusted earnings per share. The addition of Shoppers Drug Mart and its synergies, as well as positive external factors, are helping to fuel momentum that sees its share price trading within a dollar of its 52-week high of $63.40 and more than $20 above its 52-week low of $41.94.
Choice Properties’ cash purchase of the 921,000-square-foot Pickering warehouse in January was for approximately $81.2 million. The modern ambient temperature warehouse, constructed in 2005 and expanded in 2012, has a capitalization rate of 6.5 per cent. It’s fully occupied by Loblaw with a 20-year initial lease term and six five-year renewal options.
Joint venture with PenEquity
Choice Properties acquired a 70 per cent interest in a joint venture limited partnership with a subsidiary of PenEquity on Nov. 7 for approximately $18 million in cash. The limited partnership holds 21 acres of land in an emerging sector of Brampton and expects to start developing a Loblaw-bannered, grocery-anchored retail centre of approximately 200,000 square feet upon satisfaction of certain conditions.
PenEquity will act as development manager and provide various services, including planning/development approvals, leasing and construction management. Choice Properties has the option to acquire the remaining interest in the property upon completion of the retail centre.
Choice Properties acquired a 16-acre parcel of land in Barrie from Loblaw for approximately $11.5 million on Jan. 9. It intends to develop the property in conjunction with an adjacent 21-acre parcel of land owned by PenEquity to build an integrated retail centre spanning 37 acres at a site with easy access to Highway 400 at the major intersection of Duckworth Street and Cundles Road.
Choice Properties expects to have 350,000 square feet of retail space and to develop approximately 150,000 square feet, including the construction later this year of a 60,000-square-foot Loblaw-bannered grocery store. Choice Properties has the option to acquire the PenEquity parcel upon 85 per cent occupancy of the plaza.
Choice Properties entered into a co-ownership agreement with PenEquity and another partner to acquire nine acres of land in the Fernbank Road area of Kanata on Jan. 30. The purchase price was approximately $4 million, with Choice Properties contributing half and funding its partners’ collective 50-per-cent interest through a five-year mezzanine loan. This is a longer-term project, with construction of a grocery-anchored retail development expected to start in the second half of 2017.
Strategic partnership with PenEquity
PenEquity is a privately owned, full-service real estate investment adviser focused on Ontario-based retail development and asset/property management. Its portfolio of properties under development spans more than two million square feet, with another 1.6 million square feet of third-party properties under management.
“Our relationship with PenEquity is strategic in nature,” said Lee.
“Choice Properties believes strategic partnerships, including joint ventures, are a source of revenue and funding diversification, a means to accelerate the realization of economies of scale, and an avenue to expand investment opportunities, including development and acquisitions. We intend to continue to leverage collaborative and strategic relationships and announce them when appropriate.”
Retail turmoil, highlighted by Target Canada’s imminent closure of all 133 of its stores, has made headlines through the first month of the year. But Lee said she’s confident “the current Canadian retail and commercial real estate market is relatively stable and presents development, acquisition and leasing opportunities.”
Choice issues unsecured debenture
Choice Properties also issued $250 million in unsecured debentures the first week of February that bear an interest rate of 2.297 per cent per year and will mature on Sept. 14, 2020. The offering is expected to close this week and the net proceeds will be used to repay existing indebtedness and for general business purposes.