TORONTO — Choice Properties Real Estate Investment Trust (“Choice Properties” or the “Trust”) (TSX: CHP.UN) today announced its consolidated financial results for the three and six months ended June 30, 2021. The 2021 Second Quarter Report to Unitholders is available in the Investors section of the Trust’s website at www.choicereit.ca, and has been filed on SEDAR at www.sedar.com.
“We are pleased to report another strong quarter, with stable financial and operating results for Q2. Our high-quality portfolio continues to produce solid earnings and high levels of rent collections, despite an operating environment that was impacted by regional lockdowns across Canada,” said Rael Diamond, President and Chief Executive Officer of the Trust. “In addition to our solid results, we continued to advance our development initiatives and drive meaningful net asset value appreciation through our existing portfolio and improve our balance sheet. In the quarter we recognized a 3.6% increase in our net asset value per unit driven primarily by gains in our industrial portfolio, transferred 149,000 square feet of new GLA to income producing assets, and lowered our leverage ratio through the early repayment of $200 million of debentures.”
Summary of GAAP Basis Financial Results
($ thousands except where otherwise indicated)
June 30, 2021
June 30, 2020
June 30, 2021
June 30, 2020
Net income (loss)
Net income (loss) per unit diluted
Fair value gain (loss) on Exchangeable Units(1)
Fair value gains (losses) excluding Exchangeable Units(2)
Cash flows from operating activities
Weighted average Units outstanding – diluted
Exchangeable Units are recorded at their fair value based on the market trading price of the Trust Units, which results in a negative impact to the financial results when the Trust Unit price rises and a positive impact when the Trust Unit price declines.
Fair value gains (losses) excluding Exchangeable Units includes adjustments to fair value of investment properties and unit-based compensation.
Choice Properties recorded net income of $84.6 million for the second quarter of 2021 as compared to a net loss of $95.8 million in the second quarter of 2020. The quarterly increase compared to prior year was mainly due to a $511.7 million increase in the fair value of investment properties, including those held within equity accounted joint ventures, a decline in bad debt expense, and an increase in rental revenue mainly due to the net contribution from acquisitions and development transfers completed in the past 12 months. These increases were partially offset by a $359.1 million unfavourable change in the adjustment to fair value of the Trust’s Exchangeable Units. For the quarter, bad debt expense was $1.5 million on a GAAP basis ($1.8 million on a proportionate share basis) compared to bad debt expense of $14.1 million on a GAAP basis ($14.6 million on a proportionate share basis) in the second quarter of 2020.
The results in the second quarter of 2020 were impacted by a non-recurring $7.8 million allowance for expected credit losses on a specific mortgage receivable and $6.8 million in early redemption premiums paid in June 2020 for two senior unsecured debentures that would have matured in 2021.
Choice Properties reported net income for the six months ended June 30, 2021 of $22.4 million compared to net income of $236.9 million for the six months ended June 30, 2020. The year-to-date decrease compared to the prior year was mainly due to a $962.9 million unfavourable change in the adjustment to fair value of the Exchangeable Units, partially offset by a $720.8 million favourable change in the fair value of investment properties, including those held within equity accounted joint ventures, a decline in bad debt expense and an increase in rental revenue mainly due to the net contribution from acquisitions and development transfers completed in the past 12 months.
The year-to-date bad debt expense was $3.2 million on a GAAP basis ($3.7 million on a proportionate share basis) compared to bad debt expense of $15.0 million on a GAAP basis ($15.5 million on a proportionate share basis) for the six months ended June 30, 2020.
Summary of Proportionate Share(1) Financial Results
As at or for the period ended
($ thousands except where otherwise indicated)
June 30, 2021
June 30, 2020
June 30, 2021
June 30, 2020
Net Operating Income (“NOI”), cash basis(1)(3)
Same-Asset NOI, cash basis(1)(3)
Adjustment to fair value of investment properties(1)
Occupancy (% of GLA)
Funds from operations (“FFO”)(2)
FFO(2) per unit diluted
Adjusted funds from operations (“AFFO”)(2)
AFFO(2) per unit diluted
AFFO(2) payout ratio – diluted
Cash distributions declared
Weighted average number of Units outstanding – diluted
A non-GAAP measurement which includes amounts from directly held properties and equity accounted joint ventures.
A non-GAAP measurement.
Includes a provision for bad debts and rent abatements.
Quarterly and Year-to-Date Results
For the three months ended June 30, 2021, Funds from Operations (“FFO”, a non-GAAP measure) were $171.8 million or $0.238 per unit diluted compared to $140.6 million or $0.201 per unit diluted for the three months ended June 30, 2020. For the six months ended June 30, 2021, FFO were $342.5 million or $0.474 per unit diluted compared to $311.3 million or $0.444 per unit diluted for the six months ended June 30, 2020.
For the three months ended June 30, 2021, FFO increased by $31.2 million primarily due to a $12.7 million decline in bad debt expense and a $14.6 million decline attributable to non-recurring expense items. For the six months ended June 30, 2021, FFO increased by $31.0 million primarily due to a $11.7 million decline in bad debt expense and a $14.6 million decline attributable to non-recurring expense items. Non-recurring expense items in the three months ended June 30, 2020, included (i) a $7.8 million allowance for expected credit losses on a specific mortgage receivable, and (ii) $6.8 million in early redemption premiums paid for two senior unsecured debentures that would have matured in 2021.
On a per unit basis, the Trust had a higher weighted average number of units outstanding as at June 30, 2021, as a result of: (i) the Trust units issued as consideration for the acquisition of two assets from Wittington Properties Limited in July 2020 and (ii) the Exchangeable Units issued as consideration for the acquisition of six assets from Weston Foods (Canada) Inc., a wholly-owned subsidiary of George Weston Limited, in December 2020.
On June 21, 2021, Choice Properties Limited Partnership redeemed in full, at par, plus accrued and unpaid interest thereon, the $200.0 million aggregate principal amount of series 9 senior unsecured debentures bearing interest at 3.60% with an original maturity date of September 20, 2021.
On June 24, 2021, the Trust successfully extended the maturity of its $1.5 billion unsecured committed revolving credit facility by three years to June 24, 2026.
The Trust has also made ongoing investments in its development program, with $39.0 million of spending during the quarter on a proportionate share basis(1). During the quarter, the Trust also transferred $63.1 million of properties under development to income producing status, delivering 149,000 square feet of new GLA, on a proportionate share basis(1).
Choice Properties is a leading Real Estate Investment Trust that creates enduring value through the ownership, operation and development of high-quality commercial and residential properties. Our goal is to provide net asset value appreciation, stable net operating income growth and capital preservation, all with a long-term focus. Although there remains uncertainty on the longer-term impacts of the COVID-19 pandemic, Choice Properties remains confident that its business model and disciplined approach to financial management will continue to position it well.
Our diversified portfolio of retail, industrial and office properties is 96.9% occupied and leased to high-quality tenants across Canada. Our portfolio is primarily leased to grocery stores, pharmacies or other necessity-based tenants, and logistics providers, who continue to perform well in this environment and provide stability to our overall portfolio. This stability is evident by our rent collections over the last 12 months.
We continue to advance our development program, which provides us with the best opportunity to add high-quality real estate to our portfolio at a reasonable cost and drive net asset value appreciation over time. We have a mix of active development projects ranging in size, scale and complexity, including retail intensification projects, industrial greenfield development, and rental residential projects located in urban markets with a focus on transit accessibility. Our active development pipeline is focused on growing our rental residential portfolio. We have two residential projects underway in Toronto that we expect to complete later this year and have commenced construction on two additional high-rise residential projects. One project is in Brampton located next to the Mount Pleasant GO Station and the other is in the Westboro neighbourhood in Ottawa. We are also advancing a new greenfield industrial project with plans to construct a modern logistics facility with over 350,000 square feet, located in a prime industrial node in Surrey, British Columbia.
Beyond our active projects, we have a substantial pipeline of larger, more complex mixed-use developments, such as our Golden Mile Shopping Centre in Toronto, which collectively will drive meaningful net asset value growth in the future.
Underpinning all aspects of our business model is a strong balance sheet and a disciplined approach to financial management. We take a conservative approach to leverage and financing risk by maintaining strong leverage ratios and a staggered debt maturity profile. With the early redemption of our $200 million series 9 senior unsecured debentures this quarter, we have approximately $250 million of debt obligations coming due over the remainder of the year. We intend to refinance this debt with longer term debt or repay with excess cash on hand. From a liquidity perspective, the Trust has approximately $1.5 billion of available cash, comprised of $1.4 billion from the unused portion of the Trust’s revolving credit facility and $28.7 million in cash and cash equivalents, in addition to approximately $12.6 billion in unencumbered assets.
Update on Rent Collection
Rent collection for the second quarter remained high, reflecting the stability of the Trust’s necessity-based portfolio.
For the three months ended June 30, 2021, the Trust collected or expects to collect approximately 98% of contractual rents:
Second Quarter 2021
In determining the expected credit losses on rent receivables, the Trust takes into account the payment history and future expectations of likely default events (i.e. asking for rental concessions, applications for rental relief through government programs, or stating they will not be making rental payments on the due date) based on actual or expected insolvency filings or company voluntary arrangements and likely deferrals of payments due, and potential abatements to be granted by the landlord. These assessments are made on a tenant-by-tenant basis.
The Trust’s assessment of expected credit losses is inherently subjective due to the forward-looking nature of the assessments. As a result, the value of the expected credit loss is subject to a degree of uncertainty and is made on the basis of assumptions which may not prove to be accurate given the uncertainty caused by COVID-19. Based on its review, the Trust recorded bad debt expense of $1.8 million in property operating costs, on a proportionate share basis(1), during the six months ended June 30, 2021, with a corresponding amount recorded as an expected credit loss against its rent receivables.
Six months ended
June 30, 2021
As a %
Total recurring tenant billings
Less: Amounts received and deferrals repaid to date
Total rents expected to be collected pursuant to deferral arrangements
Total rents to be collected excluding collectible deferrals
Less: Provision recorded related to recurring tenant billings
Balance expected to be recovered in time
The Trust’s provision for recurring tenant billings for the six months ended June 30, 2021, is comprised of the following:
Six months ended
June 30, 2021
Provisions for tenants with negotiated rent abatements
Provisions for additional expected credit losses
Total provision recorded related to recurring tenant billings
Due to continued uncertainty surrounding the pandemic, it is not possible to reliably estimate the length and severity of COVID-19 related impacts on the financial results and operations of the Trust and its tenants, as well as on consumer behaviours and the economy in general. For more information on the risks presented to the Trust by the COVID-19 pandemic, please see Section 12, “Enterprise Risks and Risk Management” of the Trust’s MD&A for the year ended December 31, 2020 and its Annual Information Form for the year ended December 31, 2020.
Non-GAAP Financial Measures and Additional Financial Information
In addition to using performance measures determined in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”), Choice Properties also measures its performance using certain non-GAAP measures, and provides these measures in this news release so that investors may do the same. Such measures and related per-unit amounts are not defined by IFRS and therefore should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Furthermore, the supplemental measures used by management may not be comparable to similar measures presented by other real estate investment trusts or enterprises. These terms, which include the proportionate share basis of accounting as it relates to “equity accounted joint ventures”, net operating income (“NOI”), funds from operations (“FFO”) and adjusted funds from operations (“AFFO”), are defined in Section 13, “Non-GAAP Financial Measures”, of the Choice Properties MD&A for the three and six months ended June 30, 2021, and are reconciled to the most comparable GAAP measure.
Choice Properties’ unaudited interim period condensed consolidated financial statements and MD&A for the three and six months ended June 30, 2021 are available on Choice Properties’ website at www.choicereit.ca and on SEDAR at www.sedar.com. Readers are directed to these documents for financial details and a fulsome discussion on Choice Properties’ results.
Management’s Discussion and Analysis and Consolidated Financial Statements and Notes
Information appearing in this news release is a select summary of results. This news release should be read in conjunction with the Choice Properties 2021 Second Quarter Report to Unitholders, which includes the unaudited interim period condensed consolidated financial statements and MD&A for the Trust, and is available at www.choicereit.ca and on SEDAR at www.sedar.com.
Conference Call and Webcast
Management will host a conference call on Thursday, July 22, 2021 at 9:00AM (ET) with a simultaneous audio webcast. To access via teleconference, please dial (236) 389-2653 or (833) 921-1643. A playback will be made available two hours after the event at (236) 389-2653 or (833) 921-1643, access code: 1276758. The link to the audio webcast will be available on www.choicereit.ca in the “Investors” section under “Events & Webcasts”.
About Choice Properties Real Estate Investment Trust
Choice Properties is a leading Real Estate Investment Trust that creates enduring value through the ownership, operation and development of high-quality commercial and residential properties.
We believe that value comes from creating spaces that improve how our tenants and communities come together to live, work, and connect. We strive to understand the needs of our tenants and manage our properties to the highest standard. We aspire to develop healthy, resilient communities through our dedication to social, economic, and environmental sustainability. In everything we do, we are guided by a shared set of values grounded in Care, Ownership, Respect and Excellence. For more information, visit Choice Properties’ website at www.choicereit.ca and Choice Properties’ issuer profile at www.sedar.com.
This news release contains forward-looking statements relating to Choice Properties’ operations and the environment in which the Trust operates, which are based on management’s expectations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. Therefore, actual outcomes and results may differ materially from those expressed in these forward-looking statements. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made. Management undertakes no obligation to publicly update any such statement, to reflect new information or the occurrence of future events or circumstances, except as required by law.
Numerous risks and uncertainties could cause the Trust’s actual results to differ materially from those expressed, implied or projected in the forward-looking statements, including those described in Section 12, “Enterprise Risks and Risk Management” of the Trust’s MD&A for the year ended December 31, 2020, which includes detailed risks and disclosure regarding COVID-19 and its impact on the Trust, and those described in the Trust’s Annual Information Form for the year ended December 31, 2020.
Congratulations on your successful retirement! At a stage when most people are focussed on decumulation, you’re asking about establishing an approach for long-term, tax-efficient investing inside your corporation. Let’s walk through these important considerations:
Investment decisions: robo-advisor or DIY—and ETFs or bank stocks?
A robo-advisor is a great choice for automated, tax-efficient and low-cost investing. A robo-advisor will be able to set you up with a portfolio of low-cost, widely diversified ETFs. Regular rebalancing, quarterly reporting and ease of use will make this option attractive if you are looking for a hands-off approach. Most of the leading robo-advisor platforms in Canada will help you set up a corporate account.
If you’re comfortable being a little bit more hands-on, you might consider implementing a multi-ETF model portfolio. This approach will require you to open an account at a brokerage and do some regular investment maintenance, including allocating cash, reinvesting dividends and rebalancing.
Alternatively, you could also consider implementing an asset-allocation ETF solution. These “all-in-one” ETFs are available in different stock/bond allocations to suit your risk preferences, and they are globally diversified.
You mention tax-efficiency being important to you. Broad index-based ETFs track an underlying market index. The stocks and bonds in these indices do not change often, so there isn’t a lot of buying and selling of stocks—also known as “turnover”—happening inside of your ETFs. A portfolio with low turnover will not stir up a lot of unwanted capital gains in years that you don’t want to take money out of your accounts, and less turnover means less tax payable year-to-year, leaving more of your money working for you. All in all, tax efficiency is a huge benefit of an index fund ETF approach to investing, especially if you’re investing inside of a corporation.
You also mentioned bank stocks as an alternative. I can understand the appeal of this approach, as buying stocks of Canada’s large financial institutions has proven to be an effective strategy over the past several years. Unfortunately, the past performance of any investment strategy does not tell us much about its performance in the future. And, in the case of bank stocks, your investment will be very concentrated on a single sector, in a single country. This approach to investing carries risks that can be easily diversified away by using broad, globally diversified index-based ETFs. (In fact, Nobel Prize laureate Harry Markowitz famously called diversification “the only free lunch in investing.”)
Understanding the ins and outs of corporate investing
Investing inside of a corporation can be complicated. A corporation is taxed differently than an individual in Canada. As individuals, we are taxed based on a progressive income tax system, meaning higher amounts of income are taxed at higher rates. In your case, if you are earning (or realizing) a lower income in retirement, your last dollar of income is likely taxed at a lower rate than it was while you were working. When you combine lower tax rates with other benefits that the tax system provides to seniors—such as pension income splitting and age credits—it is possible that you will not be taxed at the high end of the marginal tax table in retirement.
Passive investment income generated inside a corporation, on the other hand, is taxed at a single flat rate of around 50% in Ontario, or close to the highest marginal tax rate. Passive income tax rates are so high because the Canada Revenue Agency (CRA) doesn’t want us to have an unfair tax advantage by investing our portfolios inside corporations.
(Bloomberg) — Poland played down the impact of a draft law ousting U.S.-based Discovery Inc. as a senior Washington official warned that a perceived erosion in media freedom could hit investment sentiment toward the nation.
The ruling party wants to pass legislation that will force Discovery to sell control of its Polish unit TVN, the largest privately owned television group in the country. The media regulator has also for more than a year not extended the broadcasting license for TVN24, the group’s news channel whose award-winning investigative reports have unveiled corruption at various government levels.
The draft law proposes to ban companies from outside the European Union, as well as the associated economic areas of Iceland, Liechtenstein and Norway, from directly or indirectly controlling television and radio stations. That would only impact Discovery, one of the biggest U.S. investors in Poland.
“This law only imposes the obligation to find a capital partner in the European Economic Area, and does not infringe anyone’s freedom of expression,” Marek Suski, a ruling party lawmaker and promoter of the TVN bill, told public radio on Friday. “I think that great American lawyers will find a way to do this.”
The legislation — which the ruling party wants to approve in parliament next month — has already prompted concern from the U.S. and the EU.
U.S. companies have invested more than $62 billion in Poland, second only to Germany, and provide employment for 267,000 people, according to the American Chamber of Commerce.
”This is a very significant American investment here in Poland,” Derek Chollet, a counselor at the State Department, told TVN24 in an interview during his visit to Warsaw on Thursday.
Failure to extend the Discovery unit’s broadcasting permit “will have implications for future U.S. investments. But it’s also a question of values” as “media freedom is absolutely crucial — a free press is important to empowering society,” he said.
Equity markets appear to be taking a breather as we move from early to mid-cycle in the post-COVID recovery, with market participants trying to figure out what that means and where we go from here. Many are wondering if we have seen peak earnings and peak growth, and if the rise of the variant will cause another shutdown.
You can see this in the muted reaction to some recent impressive quarterly earnings reports in the United States, with some high expectations already priced into share prices. And then investors hit the panic button on Monday, taking the S&P 500 and S&P TSX down to 3.5 per cent from its recent high, while the Canadian dollar has now lost all of its gains and is now flat on the year.
During these times its important to remember that markets don’t always go up and near-term volatility doesn’t necessarily imply that a looming meltdown is on the horizon. For example, did you know that we’ve counted that the S&P 500 has fallen more than two per cent eight times this year alone?
However, market corrections are quite common and can actually be quite healthy as they flush out those participants on the margin (excuse the pun) without the wherewithal to stand by their longer-term convictions. In that regard, looking ahead there are three main factors worth watching, not only as to the sustainability of this post-COVID recovery but also overreactions allowing for the opportunity to rebalance portfolios.
The bond market
We continue to believe that this very much is still a central bank-driven market environment. Macro policy will weigh heavily as markets react to indications of where the Fed and other central banks are positioning. For example, markets corrected more than 15 per cent when Bernanke signalled tapering back in 2010, and some argue that the tech bubble was burst when Greenspan indicated hikes were coming in early 2000.
That said, this time around central banks are in a bit of a pickle with rising inflationary pressures offset by the need to keep debt servicing costs down for massive government fiscal programs currently being funded by printing money. In addition, we’ve read that there are a record amount of job openings, but wages aren’t high enough to entice those unemployed going off government assistance.
This is where the bond market can be a good indicator and worth keeping a close eye on, but at the same time recognizing they don’t always get it right. More recently, long-term U.S. Treasuries (20 year +) have rocketed nearly 12 per cent from their May lows, nearly recouping all of their losses this year-to-date. For those overweight bonds, especially longer-dated ones, we wonder if they’re being given a rare second chance?
Don’t kid yourself. Despite the plethora of talk around the transition to clean energy, high oil prices still have a material impact on the economic recovery in the U.S. Five of the last six recessions have been preceded by a spike in the price of crude oil, with the only exception being the recession in 2020 caused by the COVID lockdowns.
The good news is that WTI oil prices have fallen from last week’s highs of nearly $75.50, down more than 11 per cent to below $67 a barrel on Monday. This couldn’t come at a better time as main street is in the midst of struggling with supply chain shortages causing inflationary pressures in key household staples such as food, clothing and gasoline.
Household spending & anti-vaxxers
We received some good news out of U.S. retail sales last Friday, showing a rebound month-over-month in consumer spending, which is a primary driver of GDP growth. People are tired of being locked up and have now been given a taste of what it’s like to experience a pre-COVID world again. This also appears to be in its early stages, as U.S. households are still sitting on quite the nest egg, having accumulated trillions in excess savings during the pandemic.
Looking forward, the trillion-dollar question, therefore, is if the stupidity of those choosing not to get vaccinated is greater than many expect, resulting in the rise of the variant this fall and forcing another lockdown. We hate to position portfolios around stupidity, but it is a risk nonetheless and worth keeping a very close eye on.
In conclusion, pullbacks are signs of a healthy market and more so, given they present a great chance to reposition and rebalance portfolios. This can be a rather difficult thing to do in today’s headline-grabbing environment, but it helps to strip out the noise, have a long-term plan and deploy some form of near-term active risk-management.
Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.
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