It is fair to say that Desjardins Securities analyst Lorne Kalmar is enthusiastic about Canadian retail-related real estate investment trusts (REITs) in the months ahead.

Kalmar ended the first quarter of the year by initiating coverage of three REITs with a buy rating — First Capital REIT (CA:FCR.UN), Primaris REIT (CA:PMZ), and RioCan REIT (CA:REI.UN) — while also upgrading two grocery-store anchored REITs — Choice Properties REIT (CA:CHP.UN) and Crombie REIT (CA:CRR.UN) — to buy from hold.

“Even as we look down the barrel of a potential recession, retail REITs have emerged as a safe haven within the real estate sector, owing to their resilient tenant mixes and defensive portfolios located in densely populated nodes within Canada’s largest markets,” Kalmar told clients in a March 31 note, The Globe and Mail reported.

Inflation Blame

While all five names should be on Canadian real estate investors’ watchlist, the grocery store-anchored REITs hold the most appeal. Between Q1 2020 and Q1 2022, Canadians have seen inflation increase three-fold, causing many to blame the grocery store chains for higher prices.  

In early March, the CEOs of Canada’s three largest grocery store chains —  Loblaw Companies (CA:L), Empire Company (CA:EMP.A), the owner of Sobeys, and Metro (CA:MRU) — appeared before a parliamentary committee to answer questions about possible profiteering. All three argued that food costs were higher, reducing their margins, offset by higher profits on non-food-related items.

Walmart Canada CEO Gonzalo Gebara last week told MPs the same story.

“While customers only see the final price on the shelf, the reality of food inflation is that there are multiple touch points along the way where inflation has taken hold,” Gebrara said.

Whoever is to blame for higher prices, Choice Properties, and Crombie still get their rent, making them somewhat immune from recession and inflation pressures.

Biggest REIT

Choice Properties is Canada’s largest REIT, with 702 properties and 63.9 million square feet of gross leasable area. Loblaw accounts for nearly 48% of its total gross rental revenue. Loblaw spun out its 61.6% interest in Choice in 2018, shifting the controlling stake to its parent, George Weston (CA:WN). It now owns 61.7% of Choice and 52.6% of Loblaws.

In addition to upgrading Choice stock to buy, Kalmar raised his target price by 50 cents to $16, 10% higher than its current share price [All figures in Canadian dollars, unless otherwise specified].

“We view CHP as a beacon of stability within the Canadian REIT sector from which investors can expect consistent low- to mid-single-digit earnings growth on top of the current 5.3-per-cent distribution yield,” Kalmar wrote in his note to clients. “In an increasingly uncertain environment, we believe CHP’s portfolio is very well-insulated from an economic slowdown owing to its large size, asset composition and tenant mix.”

With almost 50% of its rent from Canada’s largest grocery store chain, Choice has a considerable advantage over most retail REITs.

Higher Risk

Crombie REIT owns 301 properties (five in joint ventures) with 27 projects in its development pipeline. Approximately 58% of its annual minimum rent (AMR) is from Empire and its various banners, including Sobeys. Crombie’s occupancy rate is 96.9%, 90 basis points less than Choice’s, so almost identical.

The risk-to-reward for Crombie is higher. Its development pipeline has 27 projects (3 near-term, 24 medium to long-term) valued at upwards of $6.5 billion. Eighteen of those will be anchored by Empire banners.

By comparison, Choice has 18 projects under active development, with another 27 in the planning stages. It’s invested a little more than $1 billion in those 45 projects. Of the 18 in active development, the cost is estimated to be $388 million.

“We also like the REIT’s measured approach to development and we see meaningful growth opportunities in its retail, industrial and residential portfolios, although the latter is more of a medium- to longer-term catalyst,” Kalmar wrote.

The analyst has a Buy rating for Crombie and an $18 target price, 20% higher than its current price.

If you’re an aggressive investor, Crombie is the buy. If you’re more risk-averse, Choice makes more sense. Both are excellent REITs.

This article originally appeared on Fintel

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