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Choice Properties Buying CREIT in $6 Billion Deal to Create Canada's Largest REIT

Combined Firms Will Have Enterprise Value of $16 Billion with 752 Properties Totaling 69 Million SF
February 15, 2018
Choice Properties Real Estate Investment Trust has agreed to buy Canadian Real Estate Investment Trust in a $6 billion transaction they say will create the largest REIT in Canada with a combined enterprise value of $16 billion.

Toronto-based Choice Properties REIT said it would acquire all CREIT's assets and assume all of its liabilities, including long-term debt for $22.50 in cash and 2.4904 Choice Properties units per CREIT unit, on a fully pro-rated basis.

"We are excited to be creating Canada's leading diversified REIT. Choice Properties' expanded, diversified real estate portfolio, anchored by Canada's largest retailer, will provide unitholders of both Choice Properties and CREIT the opportunity to capitalize on the future growth and value creation opportunities of this strategic transaction," said John Morrison, president and chief executive of Choice Properties, in a statement.

He told analysts he sees "tremendous opportunity" in the Choice REIT development pipeline.

"We believe there is meaningful value creation in the portfolio," Morrison said during a conference call to discuss the merger. He pointed to 75 sites that have the potential for additional development. "The combined REIT has more than 60 sites primed for creating exciting residential-focused mixed use development."

The combined entity will have a portfolio of 752 properties made up of 69 million square feet of gross leasable area. Loblaw Companies Ltd. and George Weston Ltd. will have combined proforma ownership of 65%.

"This transformational acquisition leads to the creation of a real estate investment trust with resilient characteristics and adds value creation opportunities to Choice Properties' existing strong portfolio of retail assets," added Galen G. Weston, chairman and chief executive of Loblaw and GWL, in a statement.

The companies say the combined entity will be Canada's preeminent diversified REIT. The retail portfolio, which will make up 78% of net operating income and is focused on what the pair call "necessity-based retailers" that makeup 85% of the retail assets. Industrial assets will contribute 14% of NOI of the combined REIT with office assets making up the remaining 8%.

Stephen Johnson, chief executive of REIT, said the combination also provides tremendous opportunity for Choice Properties to capitalize on the firms' combined development pipeline to create long-term value.

"Together, the combined REIT is uniquely positioned to deliver results for unitholders as the owner, manager and developer of a high-quality portfolio of diversified assets," Johnson said in a statement.

In the new combined REIT, Morrison becomes the vice-chairman of the board of trustees while Johnson will become president and chief executive.

Using the Choice Properties closing unit price on February 14, 2018, of $12.49, the deal equates to a price of $53.61 per CREIT unit, a 23.1% premium to the CREIT closing unit price on February 14, 2018.

The total consideration consists of about 58% in Choice Properties units and 42% in cash. CREIT unitholders will have the ability to choose whether to receive $53.75 in cash or 4.2835 Choice Properties units for each CREIT unit held, subject to proration. The maximum amount of cash to be paid by Choice Properties will be approximately $1.65 billion, and approximately 183 million units will be issued, based on the fully diluted number of CREIT units outstanding.

CREIT's board of trustees has recommended unitholders vote in favour of the transaction. Choice Properties' board has unanimously determined that the deal is in the best interests of Choice Properties.

Michael Markidis, an analyst with Desjardins Capital Markets, said Choice REIT wasn’t really on the radar of institutional buyers, but with the combined entity having a $2 billion public float it will become a viable investment vehicle.

"It’s only a matter of time it goes on the index. CREIT is an index entity and Choice is not because it did not have enough of a float," said Markidis, referring to S&P/TSX composite.

Markidis said while the new REIT will be more diversified, the aggregate investment in retail is increasing.

"But this will give them a platform to grow the other segments (of the business)," he said, referring to office and industrial classes.
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