What are your views on Choice Properties REIT (CHP.UN)?
I will be honest: My investment approach is based on the principle that it is difficult to reliably choose winners over time. With one or two painful exceptions – as a confirmed evangelist for the Macintosh cause, I unsuccessfully lobbied my father to buy Apple shares in 1996 (hi, Dad!) – this has worked in my favour.
In a study a few years ago, a team led by Professor Hendrik Bessembinder at Arizona State University found that over three decades from 1990, 48.8 per cent of Canadian stocks posted negative total returns in U.S.-dollar terms. We can be proud that this was actually better than the global average.
Looking at it another way, most market gains over time can be attributed to a small number of high-performing companies. Investors are therefore likely to be served best by a low-maintenance, low-cost, low-stress, diversified index investing strategy.
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Allow me now to put my soapbox away and answer your question directly.
In a mid-March report following a conference on retail real estate investment trusts (REITs), Scotia Capital Inc. analysts Mario Saric and Himanshu Gupta named Choice as a top pick in the sector alongside Crombie REIT (CRR.UN).
Retail property “remains a landlords’ market,” they wrote, with little new supply and tenants relatively unconcerned about U.S. tariffs, the coming review of the USMCA agreement or the lack of population growth. But while the analysts expect retail property to do better than apartments and offices, they said they have a neutral view of the retail REIT sector overall.
That view echoed a February research report, in which Mr. Gupta and associate Dennis Halim raised their target price for Choice to $16.50 from $16 and maintained a rating of “sector outperform” after the company met earnings expectations in its fiscal fourth quarter.
The revised target reflects their expectation that growth in Choice’s funds from operations per unit (FFOPU) – a measure of cash flow from a REIT’s operations – will pick up next year after a slow 2026.
In any case, if you’re investing in REITs you’re probably more interested in steady income than the possibility of significant capital gains (the Scotia target is about 3 per cent above Choice’s current price). The trust’s most recent annual report opens with a reaffirmation of a “long-term value creation strategy anchored in capital preservation, generating stable and growing cash flows, and delivering long term appreciation in net asset value and distributions.”
Based on the Scotia analysts’ view, there is a reasonable argument to be made that it’s delivering on that strategy. They noted that Choice’s ratio of net-debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) shows it has a lower level of leverage than other traditional retail REITs.
Its higher exposure to supermarkets – Choice’s annual report poetically refers to “necessity-based grocery-focused assets” – also boosts the sustainability of its distributions as long as grocery-focused Canadians keep buying nutritional assets, also known as food. The trust raised its distribution by 1.3 per cent in March, its fourth straight annual increase.
Notably, given significant geopolitical and economic uncertainty at the moment, the Scotia analysts found that a basket of Choice, Crombie and CT Real Estate Investment Trust (CRT.UN) outperformed a broader REIT Index during slower GDP growth and uncertain times. They estimate that Choice “offers a high-single-digit total return profile” based on a distribution yield of around 5 per cent.
Is it a winner? Well, it’s no 1996-era Apple, but for an income-generating investment it seems you could do a lot worse. An important question is whether it provides the kind of income you want.
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According to the investor relations section of Choice’s website, distributions have mostly consisted of regular income (96 per cent last year), followed by capital gains and some return of capital. Three times since 2013, the distributions have had a sprinkling of foreign income.
This isn’t relevant if you hold Choice in a registered account where distributions aren’t taxable, but it’s something to be aware of if you’re using a non-registered account.
In that case you may want to consider whether you’re better off looking for a different kind of investment offering eligible dividends, which qualify for the dividend tax credit, or a REIT with more favourable tax treatment. Crombie, for instance, consistently distributes more as capital gains and return of capital.
E-mail your questions to agalbraith@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.