First Capital REIT acquired by Choice and KingSett for $5.2-billion after its turnaround

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Choice Properties REIT CHP-UN-T and KingSett Capital, a private real estate firm, are teaming up to buy First Capital REIT FCR-UN-T for $5.2-billion, pouncing on the chance to buy a retail-focused landlord that has turned its fortunes around.

Based in Toronto, First Capital’s real estate portfolio is largely made up of open-air shopping centres in major cities, and the vast majority of them are anchored by a grocery store. In total, First Capital’s portfolio value amounts to $9.4-billion, which includes debt.

Choice and KingSett are splitting this portfolio, with Choice buying $5-billion worth of properties and KingSett buying $4.4-billion worth of properties. Choice will largely take First Capital’s grocery-anchored real estate, while KingSett will acquire a mix of assets that include some enclosed shopping malls, development sites and high street retail, such as First Capital’s properties in Toronto’s tony Yorkville neighbourhood.

First Capital unitholders will receive $24.40 per unit, and the acquisition will largely be paid for with cash, amounting to 79 per cent of the purchase price. The remaining amount will be paid for in units of Choice Properties.

Choice’s units were mostly flat by midday on the Toronto Stock Exchange. First Capital’s were up 8 per cent.

The acquisition marks another loss of a large publicly traded REIT in Canada, though this deal is only a partial privatization. In January, Minto Apartment REIT went private after its acquisition by Crestpoint Real Estate Investments LP, a division of Connor, Clark & Lunn Financial Group Ltd.

The First Capital deal came together after KingSett approached the REIT “unexpectedly,” First Capital chief executive officer Adam Paul said in an interview. (There had been speculation on Bay Street that First Capital was ripe for a takeover.)

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Asked why First Capital is selling, he would only say that “it just comes down to the board’s fiduciary obligation to investors to do what’s best for them.” The takeover price is 50-per-cent higher than the level First Capital’s units were trading at one year ago.

The REIT is selling after fixing its balance sheet. First Capital got into trouble because it was burdened with too much debt, which attracted activist investors in 2024. To call a truce, First Capital reworked its board of trustees and also promised to focus on paying down debt by selling properties.

In the same interview, KingSett CEO Rob Kumer said his firm approached First Capital and added: “We love the sector. It’s a strong, resilient asset class.”

While many publicly traded Canadian REITs have watched their unit prices suffer over the last four years as rising interest rates made their yields look less attractive to investors and also raised their mortgage costs, grocery-anchored property owners have been a bright spot.

Occupancy remains high and there has been limited new supply of properties, which helps to support rents. In March, Bank of Nova Scotia held a retail estate conference and retail-focused REITs told investors that many anchor tenants are trying to add stores.

“Despite stalled population growth, REITs note tenants are still playing ‘catch-up’ post-COVID, with grocers, pharmacies, and discount stores (notably Empire, Shoppers, Loblaw, Canadian Tire, and Dollarama) expanding,” Scotiabank analysts wrote in a note to clients after the event.

Choice Properties is closely affiliated with Loblaw Cos. Ltd L-T and was spun out of the grocery giant in 2013 to trade on the TSX. At the time, Canadian REITs were coveted, often by retail investors, because they paid relatively dependable - and sizable - yields in an era of ultra-low interest rates.

By selling properties it had long owned to the REIT, Loblaw could get better value for them – and received some immediate cash in the process. These funds were used to help purchase Shoppers Drug Mart around the same time.

George Weston Ltd. WN-T, the Weston family’s holding company, continues to hold a 62-per-cent interest in Choice, but the REIT has diversified its revenue mix over the past decade. That effort includes its acquisition of Canadian REIT, another large retail property owner, in 2018.

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Choice has remained a buyer of Loblaw properties since it went public, but its new deal for First Capital will help with its diversification push. After the transaction, Choice will own 797 properties and its Loblaw stores will make up 54 per cent of its portfolio.

In the joint interview, Choice CEO Rael Diamond said his REIT is comfortable adding more retail exposure because the sector’s fundamentals remain strong.

Over the past decade, many people feared that e-commerce would hurt retail real estate. While there have been some blows, such as Hudson’s Bay Co.’s collapse, Choice’s tenant mix has remained strong and its occupancy has hovered around 98 per cent.

“People painted a broad brush over retail,” he said. “But if you think about neighbourhood shopping centres, it’s necessity items. Grocery, liquor. Doctor’s office.”

Choice’s top 10 tenants include Loblaw, Canadian Tire, Dollarama and the Liquor Control Board of Ontario (LCBO), which sells alcohol and wine in the province, according to regulatory filings.