Analyst prefers Established Calloway Reit Over New Loblaw Reit Offering

There are better choices in the real estate investment trust world than the new REIT from Loblaw Cos. Ltd., says one portfolio manager. Choice Properties REIT, the name for the entity that will own 35 million square feet of space mostly occupied by Loblaw, looked like a good deal when the initial public offering was announced, but the sector’s downturn is making some competitors a better pricing bet. “The REIT market has dramatically changed since May 24, 2013. The REIT market aggressively corrected to the point where the IPO price is no longer interesting,” said Charles Marleau, senior portfolio manager at Palos Investment Funds, in a note. He pointed out the REIT was priced at a 6% to 6.5% yield with a 90% payout ratio, making it very attractive compared to competitors such as Calloway REIT, RioCan REIT and Crombie REIT. He maintains the “whisper on the street” is the IPO was oversubscribed by two times. The problem is that with a 14.3% decline since May 24, Calloway is now priced for a 6.19% yield and Mr. Marleau would rather own the more established REIT. He added Calloway has a better balance sheet, proven management and is not as tied to one tenant. Wal-Mart Stores Inc. accounts for 24.8% of Calloway’s rental income, but Loblaw will contribute 91.2% of Choice’s rental income. “Choice is no longer a compelling investment when compared to Calloway,” said Mr. Marleau, who noted Palos is building a core position in Calloway.