No Storm at the Polls… Yet Preparing for the Unknown
I have to say, I was pleasantly surprised by how smoothly the U.S. elections came and went. Despite fearing the worst—clashes at the polls, riots, looting—it was a relatively peaceful event. But while the elections passed without major incident, it doesn’t mean we’re free of uncertainty. With the transition to a new administration ahead, unexpected disruptions may still arise—the kinds of events often described as “black swans.”
For centuries, it was thought that only white swans existed—until European explorers stumbled upon black swans in Australia. It was a reminder that the improbable can happen, even when it feels impossible. Author Nassim Nicholas Taleb later used the term to describe rare, unpredictable events that reshape the world in ways no one saw coming. These days, a “black swan” could be anything—a geopolitical shakeup, an economic crisis, or even a headline that catches the world off guard.
As we approach the end of 2024 and look ahead to 2025, the air feels heavy with the potential for surprises. Just recently, Canada confirmed its first human case of avian flu, while in the U.S., there’s talk of mass deportations that could impact millions. Europe is dealing with growing unrest, too. Any one of these stories could snowball into something bigger, creating ripple effects we’re not yet prepared for.
As someone who loves history, I can’t help but watch the world with curiosity, wondering what’s coming next. I’ve learned that staying prepared is the only way to deal with uncertainty. For me, that means focusing on increasing the income my portfolio generates. With one-year GIC yields now down to around 3.5%, I’ve started looking for better options to put my cash to work. In this issue, I’m writing about an income-generating investment I recently added to my portfolio—one I think could be a steady performer in the years ahead.
Screening for High-quality Names
Right now, my portfolio is heavy in cash. Ideally, I’d like to see a significant market drop that lets me scoop up great stocks at bargain prices. But with markets heading higher and higher, I’m shifting my focus to building a watchlist of high-quality, income-generating names with growth potential—companies I can hold well into retirement. One of my key goals for 2025 is to deploy capital into names that pay consistent monthly income, combining stability with steady returns.
I’ve been running detailed stock screeners to refine this list. My recent screener focused on strict criteria: Free Cash Flow (FCF) margins above 35%, a Forward PE ratio under 15, gross margins over 50%, and a five-year average Return on Equity (ROE) above 14%. These filters helped me narrow down 11 Canadian companies that met my requirements.
Of the 11 names, the following three caught my attention right away. Not only did they pass the screener, but they’ve also been highlighted in some of the trusted research reports I follow—a solid second layer of validation:
Among these, Choice Properties has been at the top of my wishlist for a while—and for good reason. It offers a monthly dividend, boasts a low P/E ratio, high gross margins, and would bring quality diversification to my portfolio beyond resources and tech. Plus, I’m a regular shopper at several of the businesses that rent from Choice, so there’s a personal connection to this investment.
Choice Properties: A Strategic Spinoff
Choice Properties started as a spin-off from Loblaws and George Weston back in 2013. The move was straightforward: separating the grocery operations from the real estate allowed both companies to focus on their core businesses and unlock the value of their assets. By forming a standalone real estate investment trust (REIT), they could take advantage of tax benefits. Unlike a traditional corporation, where profits are taxed twice, REIT income is only taxed when distributed to investors.
This spin-off also opened up new avenues for Choice. Initially, it was mainly a retail landlord for Loblaw, but now it could operate more like a diverse REIT, exploring industrial, residential, and mixed-use developments. Choice took that opportunity and has steadily expanded its footprint across Canada.
Expanding the Portfolio: From Retail to Mixed-Use and Industrial
Choice didn’t waste time in broadening its horizons. When the REIT launched, most of its properties were retail, with over 90% of its income coming from Loblaw locations. Over time, though, Choice has worked hard to diversify. Today, Loblaw still plays a major role, but it now represents just over 56% of the revenue—significantly more balanced than at the start.
Choice now has one of the largest REIT portfolios in Canada, covering over 66 million square feet across 705 properties. Its diversified holdings include industrial buildings, warehouses, and residential and mixed-use developments, making it less dependent on one tenant or property type and giving it a broader, more stable income stream.
Choice Properties’ portfolio spans across Canada, with 46% in Ontario and 19% in Alberta, and an average lease term of 5.9 years. Its well-located, necessity-based retail, expanding industrial footprint, and smart mixed-use residential developments set Choice up for future growth. With an adjusted debt-to-assets ratio of 40%, Choice maintains a strong balance sheet, and most of its debt is unsecured, backed by the trust rather than specific properties.
Let's take a look at a breakdown of their portfolio by sector.
Revenue by Geography
Necessity-Based Retail
Choice’s retail portfolio is solid, with 572 properties that are 82% necessity-based, meaning they’re anchored by essential businesses like grocery stores. Around 57% of its portfolio is leased to Loblaw, which gives Choice a unique competitive advantage and steady income stream. This necessity-driven approach helps keep occupancy high, currently at 97.6%, and is a key reason I find this REIT attractive. The grocery-anchored portfolio alone spans 38 million square feet, creating a stable foundation in volatile times.
Industrial
The industrial side of Choice’s portfolio is also strong, with 122 properties and an impressive 98.1% occupancy rate. Right now, Choice’s average rent per square foot in this category is $9.68, while the market average in Canada is around $15.67. This gap gives Choice a clear path for growth: as leases come up for renewal, the company has an opportunity to raise rents, aligning them with market rates. Beyond rental increases, Choice has 6 million square feet of high-quality industrial developments in the pipeline, focused on core markets.
Top 10 Industrial Tenants
| 1 | Loblaw |
| 2 | Amazon |
| 3 | Canada Cartage |
| 4 | Wonderbrands |
| 5 | Pet Valu |
| 6 | NFI IPD |
| 7 | Uline Canada |
| 8 | Canadian Tire |
| 9 | Kimberly-Clark |
| 10 | Alberta Gaming, Liquor and Cannabis |
Mixed-Use and Residential
Choice’s mixed-use and residential portfolio is smaller but growing, with 11 properties and 923 residential units at 94.7% occupancy. The REIT is targeting transit-oriented developments, mostly in urban centers like Toronto, Ottawa, and Brampton, with future plans to expand to Vancouver and Montreal. This strategic shift towards mixed-use spaces offers diversification and adds a valuable residential component to its portfolio.
Where's the growth?
Choice is actively growing with 47 projects in development, covering a total of 19.2 million square feet. This breaks down into 12.6 million square feet for mixed-use residential, 6.0 million in industrial, and 0.6 million in retail. These projects span retail, industrial, and residential developments, strengthening Choice's diversified portfolio.
Another growth avenue for Choice is retail intensification. Here, Choice converts underused parking lot areas on existing properties into small, revenue-generating units like bank branches or fast-food outlets. These low-cost retail projects boost income without heavy investment.
Choice Properties is expanding its industrial footprint with two major projects currently under development, both located within the strategically positioned Choice Caledon Business Park. This massive site will eventually bring around 6 million square feet of industrial space to the Caledon (Ontario) area, making it a vital hub for businesses needing flexible, high-quality industrial properties with easy access to major highways and multimodal transport options.
As these buildings come online, they will further solidify Choice’s presence in the industrial sector, catering to tenants seeking state-of-the-art facilities in a highly accessible location. The addition of this space is anticipated to contribute significantly to Choice’s growth trajectory, with long-term leasing potential that capitalizes on the ongoing demand for high-quality industrial assets in Canada’s core markets.
Lessons Learned: A Mixed Result from the Allied REIT Sale
You'll notice one asset class missing from Choice’s portfolio: office space. Before COVID-19, I considered office space a decent investment, but the pandemic and the shift to remote work changed my outlook entirely. The demand for office space has taken a hit, and it’s not an area I see much potential in these days. Choice seems to agree—they made a strategic decision to scale back on office holdings, which aligns with my own thoughts on this segment.
On March 31, 2022, Choice sold six office properties to Allied REIT for $794 million. Allied paid $594 million in stock at $50.30 per unit, giving Choice around 11.8 million shares, and provided a $200 million promissory note set to mature on December 31, 2023. Unfortunately, since the sale, Allied’s shares have dropped significantly, now trading below $19. While shedding the office properties was the right strategic move, taking payment in shares rather than cash hasn’t worked out as planned. On the upside, Allied REIT offers a solid yield, so holding onto these shares still provides some income while Choice focuses on more promising areas for growth.
Financials
Annual Financial Information
| In CAD$ | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|
| Sales | $1,430M | $1,336M | $1,339M | $1,320M |
| Gross Profit | $1,040M | $972M | $961M | $928M |
| Gross Margin | 73% | 73% | 72% | 70% |
| Net Income(loss) | $797 | $744 | $23 | $451 |
| EPS | $2.4 | $2.3 | $0.1 | $1.4 |
| Units Outstanding | 723.6M | 723.6M | 723.1M | 707.7M |
| Cash | $260M | $78M | $88M | $208M |
| Debt | $11.3B | $11.7B | $11.7B | $11.3B |
| FCF Margins | 45% | 50% | 50% | 47% |
| Free Cash Flows (outflows) | $642M | $668M | $669M | $621M |
| ROE | 19.4% | 20.9% | 0.7% | 13.6% |
| Payout Ratio | 31% | 33% | 1,053% | 54% |
2024 Year-to-Date Financial Results
Choice Properties reported a net loss of $7.5 million for the first nine months of 2024, compared to a net income of $1,242.4 million during the same period last year. This sharp decline is largely due to non-cash fair value adjustments, which can heavily impact net income but don’t necessarily reflect the REIT’s ongoing cash-generating ability.
When it comes to REITs, a clearer metric for performance is Funds from Operations (FFO), which removes the noise of non-cash items like property revaluations. By focusing on FFO, investors can get a better sense of the actual cash generated from core operations, which is especially useful in assessing a REIT's capacity to support distributions.
In the first nine months of 2024, Choice Properties achieved FFO of $558 million, up from $542 million in the same period of 2023. Adjusted Funds from Operations (AFFO), which accounts for recurring capital expenditures, was $515 million, an increase from $471 million in 2023. This growth in AFFO allowed Choice to declare or pay out $411 million in distributions, resulting in a payout ratio of 79.8% based on AFFO—a level that suggests the REIT’s distributions are well-supported by its cash-generating operations.
Management's Outlook
Looking ahead, Choice Properties’ management is committed to a strategy centered on capital preservation, stable cash flows, and net asset value growth, with a focus on long-term stability. With a high-quality portfolio primarily leased to necessity-based tenants and logistics providers, the REIT expects resilience even in volatile economic conditions. Management highlights continued positive leasing momentum and successful 2024 lease renewals as signs of a steady outlook.
In terms of growth, the company’s near-term focus will be on commercial developments, seen as an efficient way to add valuable real estate at reasonable costs while enhancing net asset value over time.
Management is optimistic that Choice’s business model—anchored by a stable tenant base, a strong balance sheet, and disciplined financial practices—will continue to support its long-term success. The REIT is aiming for the following targets in 2024:
In essence, Choice Properties remains focused on its core areas—essential retail, industrial, and residential—as well as a robust development pipeline that should help the REIT continue delivering stable income and growth well into the future.
Final Thoughts
Choice Properties checks a lot of boxes for me. As a diversified landlord of necessity-based retail businesses—think grocery stores, drugstores, and banks—it’s a REIT with built-in stability. There’s something reassuring about investing in a company that supports businesses I’m already a customer of, and knowing that its tenants provide essential services gives me confidence in the long-term resilience of this investment.
The monthly dividend is another strong point, along with Choice’s low P/E ratio, high free cash flow margins, and solid gross margins. Overall, it seems to be a well-run company with a steady foundation. Over the past five years, the units have traded within a range of $11 to $15. From a returns perspective, I’m looking at a 5.4% dividend yield plus an estimated 2% growth, which could result in an annual return around 7%. I intend to hold Choice Properties well into my retirement, viewing it as a GIC-like investment that not only pays a solid income but also has the potential for appreciation over time.
There’s also the possibility of further upside if office trends shift and more people return to physical workspaces. If that happens, Choice might decide to offload some of its Allied REIT shares and use the proceeds to pay down debt. I’ll be starting with an initial investment at $13.85 , and if the units dip significantly, I’ll be ready to add more to this position, seizing any chance to lock in a quality income-generating asset at a discount.
The Trump 2.0 Era Begins
The Trump 2.0 era is shaping up to be all about trimming the fat from bloated government agencies. It seems likely that his second term will focus on significant layoffs across federal departments. Cutting waste makes sense on paper, but as history shows, it’s rarely a pain-free process.
There’s also talk of mass deportations. If this gains traction, the ripple effects could be huge. Hotels housing migrants and companies providing services like food and shelter will take a hit. It’s hard to predict the economic fallout, but it’s something worth keeping an eye on.
Are We in a Recession Already?
Central banks began cutting rates in the second half of this year, a clear sign they’re trying to stimulate a global economy showing signs of strain. In my city, restaurants are shutting their doors for good. Volkswagen recently announced layoffs, and 570 large U.S. companies have filed for bankruptcy in 2024—the highest number since the fallout from the Global Financial Crisis.
Meanwhile, U.S. consumer debt has reached eye-watering levels: $1.1 trillion in credit card debt, $1.6 trillion in auto loans, and $1.8 trillion in student loans—all at record highs.
Governments aren’t doing much better. U.S. national debt is now above $35 trillion, while Canada is approaching $1.4 trillion in federal debt. Neither country seems interested in slowing down spending.
The Canadian real estate market has slowed significantly. Homes are sitting on the market longer, listings are piling up, and major players are showing signs of strain. Kingsett Capital, one of Canada’s largest private mortgage firms, recently announced it would suspend redemptions and distributions from its $4.9 billion Canadian Real Estate Income Fund for a year—a telling sign of trouble in the sector.
Stock valuations are nearing historic extremes. The S&P 500’s Shiller CAPE Ratio hit 37 this month, edging closer to the dot-com bubble’s peak of 44. Meanwhile, Bitcoin is approaching $100,000 USD, and gold remains at all-time highs. Markets seem determined to defy gravity—but for how much longer?
To prepare for an eventual market correction or crash, I’m sticking with a defensive strategy as we close out 2024 and head into 2025. My portfolio is 86% in cash, earning around 4%, but falling yields with each central bank rate cut are making GIC renewals less rewarding. To counter this, I’ve started adding names like this month’s pick, Choice Properties—stocks with low P/E ratios, yields above 5% (ideally monthly), and, most importantly, valuations that aren’t stretched to 52-week highs.
On the U.S. cash side, I’m shifting funds into the SPDR Bloomberg 1-3 Month T-Bill ETF (NYSE: BIL), offering a safe 5.19% annual yield paid monthly. It’s not the most exciting strategy, but it’s a prudent move to preserve capital and generate some income while waiting for better opportunities.
I won’t lie—I’d love to see a serious market correction. My portfolio is primed for it, sitting lock and loaded, ready to act when valuations drop to attractive levels. What I’d hate to see is another year of stocks climbing even higher, further untethered from their fundamentals. For now, I’m content earning between 3.4% and 5% on cash, knowing patience is my best tool as I wait for the markets to make sense again.
Portfolio Composition
| As of November 22, 2024 | |
|---|---|
| Category | Portfolio Weight |
| Cash and GICs | 86.47% |
| Speculative Picks | 1.85% |
| Defensive Picks | 10.83% |
| Crypto | 0.85% |
| TOTAL | 100% |
Remember that the content of this newsletter is neither a stock recommendation nor investment advice. This is just something to consider. You can access my watchlist and portfolio through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.