Sector Analysis: Canadian Retail REITs

If you’re new around here (welcome!) don’t forget to check out the first edition of our sector analysis series, on Canadian telecom.

This week we’re going to take a closer look at the REIT world. Specifically, retail REITs. We’ll slowly cover other sectors as the year goes on.

What inspired this week’s post was the news that First Capital REIT (TSX:FCR.un) is being acquired by a combination of Choice Properties (TSX:CHP.un) and Kingsett, a private equity firm with an emphasis on real estate. I figured y’all might appreciate my analysis of the deal, and we’ll expand on it by taking a look at the entire sector. Or subsector, anyway. I’m not sure you can classify one kind of REIT as an entire sector.

We’ll start with that, pivot to the deal, and then do quick profiles on the rest of the names in the sector.

Retail REITs can take on a few different forms. They can own one or more types of retail real estate, including:

Some retail REITs focus on only one type of retail real estate, while others are happy to play in multiple different subsectors.

The sector really took a hit during the first part of COVID, and astute investors were lining up to buy. I was one of them; I worked in the grocery business and could see, first hand, just how busy these stores were. Sure, some of the smaller tenants were hurting, but the larger ones would be just fine.

And so I bought retail REITs with both hands, amassing large positions in both SmartCentres (TSX:SRU.un) and RioCan (TSX:REI.un). The SmartCentres position has been a screaming success — my total return has been in the 16% range annually — while RioCan hasn’t been quite as successful, but still solid enough.

I still own SmartCentres, but recently sold RioCan.

As the sector emerged from COVID, it had to wade through another issue. Government loose money policies and various shortages caused inflation to spike, bringing interest rates up at the same time as central banks did what they could to squash it. Every REIT got hit, and shares struggled as higher interest rates ate into their bottom lines. The market also worried about their ability to maintain future earnings amid a persistently higher rate world.

You can see the impact of higher interest rates in the middle part of the two charts above.

This hit REITs with a big development arm even harder than it hit the rest, since existing landlords were able to pass through some of their increased costs in the form of higher rent. Developers, meanwhile, were forced to pay higher prices for most everything — including the money needed to finance the project.

Canadian retail REITs then had to deal with another issue — a tepid economy. Even though immigration was strong and the population was increasing, the overall economy wasn’t really showing strong results. This wasn’t a big deal for anchor tenants — a weak economy is generally positive for grocers, which are the most common anchor tenants — with one big exception. Hudson’s Bay officially went bankrupt in 2025. It did hurt smaller tenants a bit.

This is a good time to pause and talk a little bit about how a typical retail real estate development makes money.

Anchor tenants pay the lowest rent on a square foot basis. They attract large amounts of foot traffic, which is attractive to smaller tenants who are happy to pay higher rents to get access to that traffic. That’s where the owner makes their money, but these tenants usually don’t have the stability as anchor tenants do.

Here’s a Choice Properties development in Edmonton that illustrates what I’m talking about. The Superstore is the anchor tenant, while smaller tenants like the Mark’s, Kal Tire, and Dollarama get a benefit from the traffic the anchors attract. You could argue Shoppers is a anchor tenant too.

It also shows a major reason why folks like the sector. Look at that massive parking lot. Does this type of development need all that parking? For a few days in December, it might. But for the other 360 days, not a chance. This gives the owner the potential to develop other buildings there, which tend to come with attractive rates of return since the land is already paid for. The new tenant loves it too, since it can already see how much traffic the existing development attracts.

Another thing that’s a little different is who pays for what. Renting out retail real estate is different than residential where the owner is responsible for pretty much all of the maintenance. Retail tenants are usually responsible for most of their real estate expenses. Here’s a quick breakdown of how these leases usually go.

Triple net leases are the most common form of lease. In those a tenant is responsible for virtually every expense, including insurance, taxes, and even building maintenance. All the landlord does is take their cheque to the bank each month and makes sure the tenant hasn’t burned the place down.

Let’s next take a look at individual retail REITs, starting with how the First Capital deal will impact Choice Properties.

Choice Properties joined forces with Kingsett to acquire First Capital REIT. The two combined to spend $9.4B on the deal, valuing First Capital at $24.40 per share.

Kingsett is buying $4.4B worth of First Capital assets, which it is paying cash for. Choice is paying for its part of the deal with a combination of cash and new shares, which muddies up the transaction a bit. Total consideration is $19.24 per share in cash and 0.3186 shares of Choice for every First Capital share.

(The share consideration is a big reason why First Capital is trading for more than $1 below the purchase price as I type this)

First Capital created a niche by investing in retail developments in high income neighborhoods in Canada’s largest cities. I’m very familiar with its Brewery District development in Edmonton, which is right smack dab in the middle of an affluent area, and a short drive from downtown. First Capital has a portfolio full of these; they’re good assets.

Choice is paying a premium so it can get the best assets here, and it has the advantage of having Weston family money behind it. George Weston (TSX:WN), the family’s holding company, will buy a big chunk of the newly issued Choice shares. That’s a massive advantage that Choice has over its competitors, and it’s a big reason why I’m an owner.

Even with the Weston family taking on a big role in financing Choice’s part of this deal, debt is still a concern. Choice’s debt-to-assets level was approximately 40% before the deal. After it closes it’ll be in the 45% range. That’s still reasonable, but I want to see it pay down some debt in the next 6-12 months. I suspect it’ll sell a few assets.

Choice will also take a small hit to FFO, but should be able to make it up as the underlying portfolio income grows.

I also believe Choice is making a bigger bet on increased rents than most realize. Choice’s part of First Captial’s portfolio has a weighted average lease term of just 4.3 years. It’s betting that the First Capital assets are good, and as the new owner it should have the ability to push through attractive rent increases.

Loblaw properties are the anchor tenants for a lot of First Capital’s assets, which is what Choice specializes in. At the same time, the deal allows it to diversify away from Loblaws a little bit — the Loblaws exposure falls from 59% to 54% of total rents.

I’ve long been a Choice fan. I like the Loblaws exposure, I think the portfolio is solid, and the Weston family ownership ensures long-term thinking. The First Capital deal is more of the same, and therefore I’m giving it my official seal of approval.

Let’s pivot to another REIT I’ve been known to like, SmartCentres. As mentioned above, I own this one.

SmartCentres is Walmart’s largest landlord in Canada. It owns 198 different properties, with 114 anchored by a Walmart. Approximately 25% of total rents come from the world’s largest retailer.

The relationship with Walmart goes deep here. Mitch Goldhar, SmartCentres' Executive Chairman, is one of the people responsible for Walmart coming to Canada 30 years ago. He approached the company with an offer to develop property for its then non-existent Canadian arm, and a long-term partnership was born.

Goldhar is a developer at heart, and so the REIT has moved onto other projects. It has built a diversified portfolio of mixed-use properties, including residential, self-storage, office, and industrial. The company is willing to build wherever attractive opportunities are.

As it stands today, the portfolio is a hair over 35M square feet. The company has 87M square feet of development in the pipeline, but those are long-term plans. It has about 5M square feet in developments that could be completed by the end of the decade, with some 2M square feet already under construction. You’ll notice there aren’t a lot of retail developments on the go, SmartCentres seems to have mostly moved on.

One issue the company could encounter as it diversifies more away from retail is how investors don’t seem to love diversified REITs any longer. In an era of zero-cost trades and shorter than ever holding periods, investors are less interested in owning one REIT that has multiple types of assets. That could hold shares back.

Some of you might like SmartCentres because it is growing through the development program. Others might not be fans because there’s a certain amount of risk in developing. It takes capital, which a REIT has to mostly borrow, and there’s always the chance the project costs more than anticipated. So it depends on what you’re looking for.

It’s interesting how RioCan has fallen from grace.

In the 2010s, it was probably the bluest of the Canadian REIT blue chips. It owned good assets, traded for a premium valuation, and was the must-own name in the sector.

Then COVID hit, and the company was forced to slash its dividend. It also jointly developed The Well with Allied Properties, a massive mixed-use retail/office/residential complex in Downtown Toronto which hasn’t really performed to either owner’s expectations.

Hudson Bay closing didn’t help RioCan, either. It had a joint-venture with HBC, and investors are still a little worried about how all that is going to shake down.

But there are good things happening here. The portfolio has been streamlined and assets outside of Canada’s six largest cities have been punted. The balance sheet is in good shape with a debt-to-assets ratio of right around 40%. And the company has been able to push through rent increases — which have helped it steadily increase its FFO on a per share basis.

RioCan expects to grow its FFO per share by about 5% annually over the long-term, which would be a pretty good result in REIT land.

And yet, despite these good things, your author sold. What was I thinking?

The first reason is I owned too many retail REITs in the first place, and needed to streamline things. Secondly, I’ve soured a bit on RioCan. I don’t think it’s necessarily a bad choice, but there are several other retail REITs I prefer. And finally, shares recently traded at a multi-year high. It was a good time to sell, so I moved on.

One of the reasons why Canada has so many retail REITs is because we have dominant retailers that decided to monetize a big chunk of their real estate portfolios. Canadian Tire did so back in 2013, and CT REIT (TSX:CRT.un) was born.

Canadian Tire retains a large ownership stake in its REIT; it owns about 70% of CT shares.

CT REIT is the most exposed to its owner tenant, with slightly more than 90% of rent coming from the various Canadian Tire banners. Some might recoil in horror at this point, but I don’t mind. When’s the last time a Canadian Tire store closed? It doesn’t happen very often.

Besides, Canadian Tire has steadily grown its earnings over the last decade, while competitors like Hudson’s Bay and Sears went to zero. These guys know what they’re doing.

CT REIT has been a consistent, albeit unspectacular, grower over the years. It does this by:

It has translated into one of the most consistent records in the Canadian REIT universe.

Such a consistent record meshes well with distribution increases, and CT delivers there. It has hiked the distribution every year since 2014, a 13-year streak.

Plaza Retail REIT (TSX:PLZ.un) is a small-cap Canadian retail REIT that doesn’t get a lot of attention. It has a market cap of just under $500M, which makes it less than 5% the size of Choice Properties.

Plaza operates mostly in the Atlantic part of Canada, with 64% of its net operating income (NOI) coming from the four maritime provinces. It also has exposure to Quebec (19% of NOI) and Ontario (16% of NOI), and a tiny amount from Alberta and Manitoba.

It owns some 8.8M square feet of retail real estate, mostly in the form of grocery/pharmacy properties. It also owns open-air centres and a shopping mall in St. John’s.

One of the things Plaza has going for it is a cheaper valuation compared to its peers. Many of Plaza’s peers are trading for 13-15x FFO, while Plaza only trades for 11× 2025’s FFO and closer to 10× 2026’s projected FFO. The company has a number of developments happening which should add to the bottom line this year, helped by rental increases.

Don’t believe your friendly neighbourhood Twitter doomer. Retail rents are strong, and the vast majority of tenants are happy to renew.

Plaza also offers a better dividend yield than a lot of its peers. It pays a $0.023 per month distribution, which is good enough for a 6.3% yield. Most of the other retail REITs on this list are paying in the 5-5.5% range as investors have bid up their shares lately. The payout ratio is reasonable too, checking in at right around 70% of FFO.

Plaza isn’t such a bad choice, and I own some. But I prefer another small-cap retail REIT, which we’ll talk about in a minute.

But first, Primaris REIT (TSX:PMZ.un), which is Canada’s only REIT dedicated to owning enclosed shopping centers.

Primaris was spun off H&R REIT in 2022 and partnered with HOOPP, the Healthcare of Ontario Pension Plan, to bolster the portfolio. It has since acquired other properties, including the largest malls in Halifax, Waterloo, and Hamilton, among others. These are quietly good assets.

The shopping mall is enjoying a renaissance. Properties have been transformed from endless stretches of stores to places that offer a myriad of dining, entertainment, and shopping options. Primaris focuses on malls with strong transit hubs, which also helps traffic, and opens up the shopping experience to those who don’t have cars or would rather take the bus.

We’re also not building any new enclosed malls, which makes the existing properties all the more valuable. The population is going up and the number of malls is slowly dropping as older properties are used for other things.

Primaris shares have ran up significantly, including a 20% move higher in 2026 alone and a 35%+ total return over the last year. But I’d argue the stock is still cheap. It’s trading for only marginally more than 10× 2026’s expected FFO, and the excellent balance sheet means there’s potential for additional acquisitions.

Primaris also offers a 4.8% dividend yield with a payout ratio slightly less than 50% of FFO. The distribution has been hiked for four consecutive years, too.

Crombie REIT (TSX:CRR.un) was Canada’s first retail REIT spun off a grocery store. The company debuted on the TSX in 2006 after Empire Company (TSX:EMP.A) spun off the majority of its real estate into the new entity. Empire continues to own about 40% of the REIT, giving it effective control.

For years Empire treated Crombie as a cash cow. It paid out virtually all of its dividends back to owners and didn’t grow its earnings or its dividend.

But that’s changed in the last five years. Crombie started redeveloping some of its extensive portfolio, building mixed-use spaces in dense parts of Canada’s largest cities with grocery stores on the bottom (Safeways and Sobeys, obvs) and apartments on top.

It’s also spending the cash needed to modernize some of its standalone grocery stores, and is passing through the costs to Empire’s tenants.

Put it all together, and Crombie has been growing both FFO and AFFO by about 5% per year over the last few years, and has improved its balance sheet at the same time. Not bad.

I believe a lot of investors still assume Crombie is Empire’s cash cow, but things have changed. It might be worth taking another look.

I’ve saved my favourite Canadian retail REIT for last. It’s tiny Canadian NET REIT (TSXV:NET.un), which trades on the TSX Venture exchange.

Canadian NET focuses exclusively on triple net real estate in Quebec, Atlantic Canada, and Ontario. It only has a market cap of just over $100M, so it doesn’t take very many acquisitions to move the needle. This allows the company to be selective and only pursue the best projects.

Focusing on triple net real estate has one big advantage. If the tenant is responsible for all the operating expenses, it frees up management’s time and attention to look for the next deal.

Canadian NET has been doing just that. It’s been a steady grower for more than a decade, growing FFO per share consistently throughout the 2010s and into the early part of this decade. Dividend growth followed, yet the payout ratio is still reasonable. Canadian NET offers a 5.5% distribution yield with a payout ratio right around 50% of FFO.

That’s right kids; Canadian NET is growing faster than most of its peers, and it trades for the lowest valuation in the sector. Shares trade hands at under 10× 2026’s estimated FFO.

The company stumbled a bit when rates went up in 2022-23, but has returned to growth. It recently released full-year 2025 results, which included:

Another reason I like Canadian NET is the Plaza factor. Plaza and Canadian NET have similar business plans, and Plaza founder Michael Zakuta sits on Canadian NET’s board. He’s also one of the REIT’s largest shareholders. Plaza’s CEO is also Canadian NET’s former CEO.

I’m on record saying that Plaza will eventually acquire Canadian NET, which will be a bittersweet moment for me.

This has been a much longer than normal edition of the newsletter, but I had a lot to say about retail REITs.

I think overall the sector is a nice place to look if you’re looking for strong current income, but it isn’t as good a place if you’re looking for that income to grow. Even the strongest growers only look likely to increase your annual income by 3-5%. That’s not bad — and it should beat inflation — but those of you who are looking for growth can likely do better somewhere else.

In addition, most of Canada’s retail REIT shares are up 20-40% in the last year. The time to buy was when nobody liked the sector. It’s just too loved for me today.

Nelson owns shares of SmartCentres, Primaris, Plaza, Choice Properties, CT REIT, and Canadian NET. He’s in the process of condensing his holdings, so his next step is likely to sell some, rather than buy.

I use the words dividend and distribution interchangeably when I write about REITs. REITs pay distributions, not dividends. The main difference between the two is how distributions are taxed.