Choice Properties Real Estate Investment Trust (CHPUN) Earnings Call Transcript

Good morning, everyone. I'm Rob, the conference operator for today's session. Right now, I'd like to extend a welcome to all of you on behalf of Choice Properties Real Estate Investment Trust as we begin the third quarter 2025 earnings call. Every line has been muted so that background noise stays out. Following the speakers' remarks, we'll open things up for a question-and-answer session. Should you wish to pose a question at that point, just press star and then the number one on your telephone keypad. And if you'd like to retract your question, press star one once more. Thank you. At this point, I'll turn things over to Simone Cole, our General Counsel and Secretary. Please go ahead.

Thanks, and good morning everyone — welcome to the Choice Properties Q3 2025 conference call. With me this morning are Rael Diamond, our President and Chief Executive Officer; Niall Collins, our Chief Operating Officer; and Erin Johnston, our Chief Financial Officer. Rael will kick things off today with a short recap of how we performed in the third quarter, along with an update on our transaction activity. Niall will then take you through our operational results and our development pipeline, and Erin will wrap up the call with a review of our financial results before we open the line for Q&A. Before we get started today, I'd like to remind you that in discussing our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements regarding Choice Properties' objectives, strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, intentions, outlook, and similar statements concerning anticipated future events, results, circumstances, performance, and exceptions that are not historical facts. These statements are based on current estimates and assumptions and are subject to the risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the material risks that can impact our financial results and estimates and assumptions that were made in applying and making these statements can be found in the recently filed Q3 2025 financial statements and management discussion and analysis, which are available on our website and on SEDAR+.

And lastly, a first for this quarter: we’re adding presentation slides to today’s call. Those of you who joined through the webcast will see these slides shown on your screen. For anyone who dialed in by phone, the same slides will be posted on our website after the call ends. With that, I’ll hand things over to Rael.

Thanks, Simone, and good morning to all of you. Welcome to our Q3 conference call. We posted another strong quarter, powered by solid tenant demand in our national grocery-anchored retail portfolio as well as fresh leasing activity across our well-located industrial assets. Near full occupancy was maintained at 98%, which is up 20 basis points from last quarter. We achieved healthy overall rent spreads of 10.8% during the quarter, and that included a significant amount of Loblaw renewals that we'll speak more about shortly. Our Loblaw leases remain a stable source of cash flow growth, and we're equally encouraged by the robust leasing activity from our third-party tenants in the quarter. Excluding the Loblaw renewals, our average rent spread was approximately 23%. This leasing activity underscores the strength of our overall portfolio and our team's ability to manage through uncertainty. We delivered ever-proper unit growth of 7.8% this quarter, supported in part by lease surrender revenue from our ongoing Loblaw rightsizing initiative. These initiatives remain a part of our active asset management strategy as we support Loblaw in evaluating space requirements nationwide while creating opportunities to introduce other high-quality, strong-cover tenants that enhance the overall quality of our sites. Excluding lease surrender revenues and other non-recurring items in both comparative periods, FFO per unit growth was a very strong 3.5%.

Later on this call, Erin is going to walk through the numbers behind our financial results and give everyone an update on how we see 2025 shaping up. We put up a strong quarter even with plenty of macroeconomic uncertainty swirling around, coming from trade-related risks both in Canada and beyond our borders. Even so, our portfolio keeps showing how resilient it is, and because we stay committed to managing the balance sheet prudently, our teams have been able to push ahead on our growth initiatives. Now, on the portfolio side, retail markets remain tight right across the country, and that is driving robust demand for the grocery-anchored neighborhood centers we own. We are also seeing notable strength specifically among tenants in necessity-based and discount retail. Our portfolio, which spans the country, is positioned well to keep capturing that momentum and to gain from these favorable market dynamics. Our team stays busy with new leasing initiatives across our existing assets, and thanks to an industry-leading balance sheet plus our strategic partnership with Loblaw, we can keep bringing new retail space online via intensifications and greenfield development. With a strategic focus on growing our high-quality retail portfolio and a proven track record of execution, we have what we need to deliver sustained growth and maximize value. During the quarter, we completed seven new retail intensification projects at attractive yields, which further intensifies our neighborhood centers — something Niall will expand on shortly.

Beyond ramping up activity at properties we already own, we keep drawing on our balance sheet strength and our Loblaw relationship to chase fresh greenfield possibilities. In the quarter just reported, we closed a CAD 9 million purchase of a 50% stake in a greenfield parcel located in Ottawa. That 13-acre parcel is slated to hold a new shopping center of roughly 120,000 sq ft, with No Frills and a Shoppers Drug Mart as anchors, and we will handle development and management for our partner. Our industrial holdings stay in great shape, and the team posted yet another solid quarter of leasing, with occupancy climbing 30 basis points to 98.3%. Spreads on leasing came in strong at almost 38%, powered by renewals from third-party tenants. Even though the broader industrial market keeps normalizing, our portfolio is well set up to generate additional growth, thanks to the sizable gap between rents in place and market rents. We likewise hold a substantial pipeline for industrial development, among it roughly 220 acres of developable land still available at Choice Caledon Business Park. During the quarter, we signaled our plan to launch the following phase of the Caledon project on a speculative basis. That call rested on our confidence in the GTA industrial market, where our site sits, the edge we get from a low land cost basis, and the rising RFP activity we are seeing at the site.

Finally, our mixed-use and residential portfolio delivered a quarter of solid momentum. The office portfolio is mostly leased to affiliated entities, and occupancy during the quarter was largely stable. On the residential side, we're still seeing some pressure from new supply at certain assets. But going forward, we remain strongly convinced about the quality of our residential product and are optimistic regarding long-term residential fundamentals in major Canadian urban markets. Turning to transaction activity for the quarter, we continue to focus on preserving portfolio quality through capital recycling, completing roughly CAD 118 million in total real estate transactions during and after the quarter. That included the CAD 9 million retail land acquisition in Ottawa I mentioned earlier, plus CAD 109 million of non-core asset dispositions. On the disposition side, we sold our 50% interest in a non-grocery-anchored shopping center in Edmonton for about CAD 9 million. After quarter end, we completed three more dispositions, including a retail portfolio of four assets in Ontario for CAD 67 million, a 50% interest in a retail asset in Camrose, Alberta for CAD 23 million, and a Canadian Tire land lease at a retail site in Fort Saskatchewan, Alberta for roughly CAD 10 million.

Every deal we closed came in at fair value or better. For the remainder of the year, we anticipate staying approximately balanced, which would make us net acquirers this year, consistent with the transaction activity we've seen so far. Our balance sheet, which leads the industry, keeps supporting our ability to be net acquirers going forward, and that adds to the pillars we already have in cash flow growth and development growth. Maximizing value for unit holders will remain our focus. With that, I'll hand the call to Niall so he can walk through our operational results in greater detail. Niall.

Thank you, Rael, and good morning to all of you. As Rael noted, our portfolio turned in yet another quarter of solid operational performance, and across every one of our portfolio types we keep witnessing robust tenant demand along with healthy leasing spreads. On an overall basis, occupancy across the portfolio stayed strong, finishing the quarter at 98%. That marked a 20 basis point gain compared with the quarter before. Over the course of the quarter, lease expiries exceeded 3.7 million sq ft, and we renewed roughly 3.6 million sq ft, which produced a retention rate of 96%. All told, renewals across the portfolio were signed at an average rental spread of 10.8%. If you set aside the Loblaw renewals, our renewal spread came in at a very healthy 23.1%. On top of that, we finished 291,000 sq ft of new leasing, which generated positive absorption of 135,000 sq ft, driven in large part by our Ontario industrial portfolio and our Quebec retail portfolio. Now looking at each of our asset classes: within our necessity-based retail portfolio, occupancy held steady at 97.8%. Roughly 3.2 million sq ft of leases expired during the quarter, and 2.8 million of that related to Loblaw maturities. We renewed about 3.1 million sq ft, and 2.7 million sq ft of that came from the Loblaw tranche, giving us retention of 97%. With so little new retail supply coming to market, tenants vacating or terminating early have opened up chances to backfill space at elevated rental rates with stronger columns.

Renewal spreads on leases came in at an average of 9% over the rents that were expiring, and 12.9% when you set aside the Loblaw tranche, with trends that were broad-based right across every one of our regions and categories, led by value retailers. On top of that, we finished 148,000 sq ft of new leasing. Rents averaged across the lease term sit 42% above our average in-place rents. That goes a long way toward offsetting the 95,000 sq ft of expiries that did not renew during the quarter. A portion of that space has already been backfilled by our team at rents 49% above the previous rates, and we remain confident about the leasing activity on what's left. Moving to the industrial portfolio, occupancy rose 30 basis points versus our last quarter, reaching 98.3%. During this quarter, 491,000 sq ft expired, mainly in our Alberta and Atlantic portfolios, and we renewed 430,000 sq ft, giving us a healthy retention rate of 87.6%. Two vacancies came up in the quarter; one has already been backfilled for Q4, and negotiations are underway on the other property. Lease renewal spreads continue to be strong, averaging 38.3% above prior rents, driven by the Alberta and Ontario portfolios. In the Ontario portfolio, we completed a single renewal for 57,000 sq ft at a rent spread of 183%. If you exclude the 189,000 sq ft of Loblaw renewal, the portfolio's average renewal spread was approximately 62%.

Additionally, we finished 142,000 sq ft of fresh leasing activity, compared with 61,000 sq ft of space vacated, producing positive absorption of 81,000 sq ft. Rents on new leases, averaged across the lease term, run 32% above our average in-place rents. And our mixed-use and residential portfolio keeps performing strongly, with occupancy at 95.5%, an increase of 10 basis points versus last quarter and up 140 basis points year-to-date, driven mainly by robust results in our mixed-use assets. Now to our developments for the quarter: our team keeps moving our development pipeline forward across all of our strategic asset classes, with a near-term emphasis on commercial development. During this quarter, our team delivered 7 retail intensification projects totaling 107,000 sq ft at a blended yield of 6.3%. Deliveries included 2 Shoppers Drug Marts, in Ontario and Alberta, totaling 34,000 sq ft at yields in the mid 6%-7% range, and a further 7 Shoppers Drug Marts are in active development right now. A T&T in CRU in Mississauga totaling 44,000 sq ft, 2 CRU units in Alberta with an international cosmetic retailer totaling 7,000 sq ft at yields in the high 8% range. Lastly, 2 ground leases at a property in Ontario and Alberta totaling 22,000 sq ft at an average weighted yield of approximately 11%.

One of the ground leases involves Nautical, a partner with whom our relationship runs deep, while the remaining ground lease is held by a tenant operating in the automotive sector. As Rael noted earlier, this quarter demonstrates how our team can extract added value from the retail portfolio we already hold and from land-bound true intensifications within new development. Initiatives of this retail kind continue to serve as a foundation of our wider development strategy, and we'll keep actively seeking chances to deliver retail projects of high quality. Turning to the remainder of the year, our principal active development project remains the industrial pipeline at Choice Caledon Business Park. The NLS building, which comes to roughly 624,000 sq ft and in which we hold an 85% interest, was transferred to IPP on November 1st, and rent commencement stays on schedule for April 2026. With that delivery behind us, our team is now concentrating on the following phase of industrial development at Caledon. During this quarter, we announced our plan to start construction on a 1 million sq ft building on spec prior to year-end. Permits have been submitted, and delivery is slated for Q2 2027. All told, our active development pipeline comprises 12 projects spanning approximately 1 million sq ft, with an average forecasted yield of about 6.9%.

Our development pipeline remains a dependable contributor of long-term cash flow and portfolio growth. At this point I'll hand things over to Erin, who will walk us through our financial performance.

Thank you, Niall, and good morning to everyone. We're delighted to share results for yet another quarter of solid financial performance. Funds from operations as reported came in at CAD 201.4 million for the second quarter, equal to CAD 0.278 per unit on a diluted basis, which represents growth of 7.8% versus the third quarter of 2024. Within this quarter's results, we recorded roughly CAD 10 million in lease surrender revenue. In the prior year, lease surrender revenue was about CAD 5 million, along with CAD 3.3 million of non-recurring G&A expenses tied to outsourcing. As Rael noted, our lease surrender revenue stems largely from right-sizing work with Loblaw, through which we bring high-quality third-party tenants onto our sites while Loblaw can right-size its store to a smaller footprint. These efforts showcase the advantages of our strategic partnership with Loblaw, and they don't happen consistently across the year. Once these items are excluded, FFO per unit growth stays strong at 3.5%. The FFO increase came mainly from robust operational results plus contributions from net acquisitions and development transfers during the last 12 months, partly offset by greater net interest expense. AFFO for this quarter was CAD 0.192 per unit, which was affected by the earlier timing of executing on our maintenance capital projects.

Looking at the full year, we anticipate that maintenance capital and the AFFO payout ratio for 2025 will be fairly similar to what we saw the year before. Now to operational results: same asset cash NOI rose by CAD 7 million, or 2.8%, versus the third quarter of 2024, and the drivers were higher base rents coming from rent steps along with robust leasing activity. Breaking it down by asset class, retail same asset cash NOI was up by CAD 5.8 million, or 3.1%. That gain came mainly from leasing activity, which included the effect of our Loblaw lease renewals during the quarter as well as higher base rent on contractual rent steps. Retail growth also got a favorable boost from higher capital recovery revenue. Industrial same asset cash NOI grew by roughly CAD 0.8 million, or 1.6%. This increase was mostly attributable to higher base rent from contractual rent steps and leasing activity. Growth for the quarter was held back by prior-year property tax recoveries and other income items. If prior-year items were included, same asset cash NOI growth would have come in at about 3.3%. Mixed-use and residential same asset cash NOI was up by approximately CAD 0.4 million, or 4%. Switching to the balance sheet, our IFRS Net Asset Value, or NAV, for the quarter stood at CAD 14.53 per unit, which is a rise of CAD 111 million, or approximately 1%, versus the second quarter of 2025.

Net asset value growth came from operations contributing CAD 56 million net, a CAD 13 million net fair value gain on our investment properties, and a fair value gain on our investment in units of Allied Properties. As a reminder, IFRS requires us to mark the Allied investment to market at its trading price each period end. The fair value gain on investment properties for the quarter was mainly the result of cash flow growth, favorable leasing, and backfill initiatives in our retail segment. That more than offset a fair value decrease tied to certain asset-specific leasing adjustments in our industrial portfolio. During this quarter, we also closed several successful financings, most notably our CAD 500 million dual tranche unsecured debenture offering in August. That transaction comprised a CAD 350 million Series W unsecured debenture carrying a 4.628% coupon and a 10-year term, plus a CAD 150 million Series X debenture with a 5.369% coupon and a 30-year term. The dual tranche offering had a weighted average coupon of roughly 4.85% and an average term of 16 years, extending our debt maturity profile to 6.8 years. Our team took advantage of a very strong credit environment, and the issuances represented both the tightest-ever 10-year and 30-year spreads for Choice.

Demand for these issuances was outstanding, and the combined offering ended up more than nine times oversubscribed. This deal once again shows how firmly we sit in the market and how we can secure inexpensive capital while reaching the long end of the curve too, which gives us the flexibility to manage the balance sheet prudently and keep a well-structured debt ladder. The proceeds were mostly directed toward repaying maturing debt, including the redemption at par of our CAD 200 million Series F unsecured debenture in September and roughly CAD 100 million of mortgages that came due during the quarter. What was left went toward general purposes and to pay the rebalances on a revolving credit facility. As we look to the rest of the year, the team has for the most part taken care of the few maturities still outstanding, and our next significant debt maturity does not come until our unsecured debenture due in November 2026. We finished the quarter in a solid financial position, with strong debt metrics and ample liquidity, including approximately CAD 1.5 billion of available liquidity, including credit on our corporate facility and available cash, plus CAD 13.7 billion of unencumbered properties. Our debt-to-EBITDA ratio came in at 7.1x, down 0.1x from last quarter, as we captured earnings related to our acquisition activity earlier in the year.

Given the robust operating results we've posted so far this year—which reflect how well our team has carried out a transaction strategy and met the right-sizing goals we set with Loblaw—we've raised our 2025 guidance for FFO per unit to roughly CAD 1.06 to CAD 1.07, which works out to year-over-year growth of about 3% to 4%. On that note, Rael, Niall, and I would be happy to take your questions.

Right now, I'd like to remind everybody that if you want to ask a question, you press star and then the number one on your telephone keypad. We'll take a brief pause to put together the Q&A roster. Today's first question is from Mark Rothschild at Canaccord. Your line is open.

Thanks, Anne. Good morning, all. It seems you're now at ease moving forward with industrial development, and I'm simply wondering what you think about taking on new developments in bigger mixed-use projects at a moment when general residential development, particularly the condo market, has halted or is slowing. Projects require a fair amount of time. Are you considering pushing any of these projects ahead now, or do the numbers perhaps still just not work at present?

Hi, it's Rael — hope you're doing well. Look, the way I'd frame it is that we hold real estate for the long term, and if you kick off one of these projects today, delivery won't happen for three or four years, and by then you'll be leasing into conditions that look quite different from what we see now. Because we take that long-term view, our balance sheet is in strong shape. Right now there are a fair number of incentives available, and our team is working to capture them. We actually believe we'll be in a position to launch one of these in 2026, since we see it as the right long-term investment. I'm not sure whether you'd like to add anything else.

Yeah, to build on what Mark said, costs have been declining steadily—they're down roughly 15% across the past couple of years. That's genuinely making the economics better as we assess some of these performers. The market has plenty of appetite for new projects, so we expect the schedules to get better too. On the whole, we're seeing a shift in the dynamics that I believe could be accretive quite fast.

Well, Rael, I suppose we ought to hold off for a moment until you tell us which project this involves and what the plan looks like.

So our expectation is that we'll have something ready around the early part of 2026.

All right, that's fine—I'll hold for it. Thank you very much.

The following question is from Himanshu Gupta with Scotiabank. Your line is open.

Thanks, and good morning. Retail occupancy at your properties is still holding up well. From this point, should we be looking for that occupancy to hold steady, or might there be some improvement in the near term? And along those same lines, are there any areas within retail where leasing demand has gotten a bit softer?

Hey, Himanshu, this is Niall. To address that point, as we head into Q4 on the retail side, we anticipate some modest growth with occupancy getting better. And across our industrial portfolio, we're likewise seeing occupancy move higher.

All right, that's great. Regarding retail, I appreciate the response there. I mean, given this situation, population growth has decelerated and GDP growth has decelerated as well, so it sounds like you aren't seeing any area of weakness.

I'd say look, there's a lot of catching up to do because of the immigration that's occurred over the past several years, and retail, residential, and industrial are still working to catch up with it, especially in retail.

All right, all right, that's reasonable. Appreciate it. Perhaps my follow-up concerns that Caledon industrial asset. I mean, it seems as though you're moving forward there. 1 million sq ft of speculative development. Do you have any sense of the sort of tenant demand that will exist for that type of product?

Honestly, the feedback coming back on RFPs has been really encouraging. It spans both logistics and electronics. We're seeing considerable expansion in that area. Build-to-suit is showing up, and there's interest in our spec too. So for us, there's a nice range of options there.

What sort of yields are you going to underwrite for that project?

The yields we've been getting so far on our IPP portfolio are comparable. Our NLS project is moving over in the next quarter, and we anticipate comparable yields to that.

Understood. All right, thanks. Perhaps just one final question. I mean, regarding your Allied Properties — and I realize it represents a minor portion of NAV. Any views? Should there be a distribution cut, what might the effect be on your FFO cash?

Well, Himanshu, I'd say let's return to the position we've consistently held. Our long-standing view is that the underlying real estate is excellent over the long term. At the same time, we acknowledge that office fundamentals are beginning to strengthen. At present, we have no need for that capital. Look, we can't say precisely how large the distribution reduction will be until they make the official announcement. It won't have a significant effect on our business. Our business remains strong, and once we know how big the cut is, we'll give you an update.

Understood. That's reasonable. Thanks, everyone, and I'll hand it back.

The following question is from Sam Damiani at TD Cowen. Your line is live.

Thanks. Morning, everyone. I'm definitely keen to see that retail shopping center development get underway in Nepean. Niall, I was wondering whether you might give us a bit of your thinking on how you underwrote that opportunity, and on the expected rents relative to cost yields. Did this chance only come about over the recent year, say, as market rents went up? And could this kind of opportunity grow much further, on a larger scale, right across the country?

Look, I'd say there are quite a few opportunities for sites throughout Canada that we're pursuing for grocery stores and CRU. Rents are improving, in our view. As far as underwriting goes, look, they sit where they need to sit for underwriting, so they're in the 50s. We'll share more detail with you when we speak in Q4.

All right, that's useful. And maybe, Rael, since your team has spent the past few years buying up these industrial outdoor storage properties, that asset class has grown more popular. Do you still see chances to make acquisitions there as you move ahead?

Sam, no truly compelling new opportunities have come our way since we bought that portfolio. What I can say is that a lot of parties have contacted us wanting to pick up pieces of it, and the prices they've floated are well above what we originally paid — which I think ties into the point you raised about how much investor attention this asset class is drawing.

All right, that helps. And finally, on the residential construction point Mark raised — I’m looking forward to seeing specifics once that gets announced. Any early reaction from you to the federal budget that came out a couple of days ago, and how it affects your view of developing new rental residential in Canada?

Look, we've been taking it in as it's been released over these past couple of days. You can see a lot of focus on infrastructure, which in our view matters a great deal for some of our very large master plan projects. How the effect on DCs will trickle down to the provinces and the municipalities, we're not quite sure. I think we're waiting for additional details to emerge. As for Build Canada Homes, we're also waiting to see how that will operate. I think more details will come out as the budget gets discussed over the next couple of weeks.