Choice Properties: This 5.5% Yielder Collects Almost 100% Of The Rent And Launches A Buyback Program (OTCMKTS:PPRQF)

Introduction

After checking up on the Q2 results of Choice Properties (OTC:PPRQF) I decided to maintain my long position although the payout ratio based on the AFFO came close to 100%. Now, three months later, Choice reported excellent rent collection rates and the payout ratio based on the AFFO has dropped to less than 90%. With a specific focus on retail and having the related Loblaw group as main tenant, the majority of the stores in the Choice asset base were qualified as essential services and remained open during the pandemic.

Data by YCharts

Choice Properties has a more liquid listing on the TSX where it’s trading with CHP.UN as ticker symbol. The average daily volume in Canada is almost half a million shares per day.

Almost 100% of the rent was collected and the dividend is covered by the FFO and AFFO

In 2020 (and perhaps well into 2021) the focus of REIT investors should be on rent collection levels: What percentage of the rent billed is actually being paid. Fortunately most REITs provide detailed rent collection results, and Choice Properties is not an exception.

Whereas the REIT ended up collecting just 89% of the rent billed in Q2 2020, this already increased to 98% in the third quarter as virtually every tenant has started to make rent payments again.

Source: press release

A good achievement, and this immediately has a positive impact on both the FFO and AFFO generated in the third quarter. The FFO per unit increased to C$0.238. That’s still a little bit lower than the C$0.25 in Q3 2019 but the gap is being closed (also keep in mind the share count has increased by more than 1.5%). The AFFO per unit came in at C$0.207.

Source: Q3 financial report/press release

This means the dividend of C$0.185 per quarter is now clearly fully covered by both the FFO and the AFFO as the respective payout ratios are 78.4% and 89.9%. An additional bonus is the frequency of the dividend: Choice Properties is paying a monthly dividend of C$0.06166 and this works out to the aforementioned C$0.185/quarter and C$0.74 per year. Based on the current unit price of approximately C$13.50, this works out to a dividend yield of 5.5%.

Source: quarterly report

With an LTV ratio of less than 44% (based on the book value of the properties as well as the almost C$565M in equity accounted joint ventures), I was curious to see the capitalization rates used by Choice to determine the book value of the assets. While I’m still not particularly impressed with the relatively low capitalization rate for the office division, it’s important to know offices account for just 7% of the net operating income. The weighted average capitalization rate in Q3 came in at 5.92% (based on the net operating income) compared to 5.84% as of the end of last year.

Source: quarterly report

This means Choice is a bit more cautious now as its independent appraisers used a slightly higher capitalization rate, which reduces the book value of the assets. This makes the balance sheet more robust as the risk for inflated asset values is decreasing.

Source: quarterly report

A substantial buyback program has been announced, but it remains to be seen how much will actually be repurchased

On the back of publishing these excellent quarterly results, Choice Properties has announced a substantial share buyback program. Choice has received approval to repurchase up to 25.85 million units, and this represents approximately 10% of the public float of the units. While this is an interesting development, we shouldn’t get too excited as this basically is the extension of last year’s buyback allowance.

This doesn’t mean Choice is effectively buying back the stock as under last year’s program it repurchased just over 160,000 shares. However, should the share price again dip to the low levels we have experienced earlier this year, I hope Choice will be able to take swift action buy back stock for cancellation.

It’s useful to see Choice’s quarterly reports also contain the calculations to judge if there’s an excess cash generation or a shortfall. According to this metric, there was an excess cash generation of C$36.7M in Q3 and a total excess cash generation of almost C$160M in the first nine months of the year.

Source: quarterly report

That sounds great and it indicates Choice definitely has a budget available for the buybacks, but readers should be warned the starting point of the equation is the FFO. As we noticed earlier in this article the difference between FFO and AFFO in Q3 was approximately C$22M and C$50M in the first nine months of the year.

So if we would base the “excess” cash flow based on the AFFO instead of the FFO, we would see an excess cash flow of C$15M in Q3 and almost C$110M in 9M 2020. And that obviously still is plenty of cash to rapidly buy back stock.

Investment thesis

Choice Properties is not trading at extremely cheap levels as the current price of around C$13.50 represents a multiple of approximately 16 on the annualized Q3 AFFO. However, I dare to say the risk level of an investment in Choice Properties is relatively low as the main tenant is related to the REIT (the REIT was actually spun off from the grocery chain representing the vast majority of the rental income and leasable area).

I have a long position in Choice Properties and may continue to add on weakness. I’m pleased with the Q3 update and the payout ratio of less than 90% of the AFFO should convince investors the dividend is safe.

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Disclosure: I am/we are long PPRQF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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