CIBC Capital Markets upgraded its rating on the units of Choice Properties REIT (CHP-UN.TO) to outperformer while maintaining a $16.50 price targets.
Since its deal to acquire $5.0 billion of First Capital REIT (FCR-UN.TO) assets was announced about two weeks ago, Choice units have declined 6% vs. the Retail REITs +2% and all REITs flat, writes analyst Tal Woolley.
"While the deal is -3% dilutive to annualized FFO/u, the combined portfolio quality is higher, with an expected improvement in the overall organic growth rate, so the pullback relative to peers seems overdone," he adds, noting that Choice earnings remain predictable.
The First Capital deal raises leverage, but it can be reduced and Choice Properties has a track record of successfully deleveraging. Woolley therefore believes a slightly higher multiple on slightly lower earnings is justified. "The projected total return of ~15% has gone from average to the high end of our Retail REIT coverage universe (range: 0%-15%, mean 8%), so we are raising our rating."
The $16.50 price target is based on 15.1x 2027E FFO/unit (14.5x before), equal to a 10% premium to the NAV estimate one year out (+8% premium before). "This is at the high end of its peer group, but warranted, in our view, given CHP's lower leverage, attractive growth and stable operating performance."
CIBC is assuming a fourth quarter close for the First Capital deal.