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

Good morning, everyone. I'm Rob, and I'll be serving as the conference operator for today's session. Right now, I'd like to extend a welcome to all of you joining the Choice Properties Real Estate Investment Trust fourth quarter 2025 earnings call. Every line has been muted so that background noise won't interfere. Once the speakers have finished their remarks, we'll open things up for a question-and-answer session. Should you wish to pose a question at that point, just press *, then the number 1 on your telephone keypad. And if you'd like to withdraw your question, simply press *1 once more. Thank you. I'll now hand the call over to Simone Cole, General Counsel and Secretary. Please go ahead.

Thanks, and good morning everyone. Welcome to the Choice Properties Q4 2025 conference call. With me this morning are Rael Diamond, our President and Chief Executive Officer; Erin Johnston, Chief Financial Officer; David Muallem, Senior Vice President, Leasing and Operations; and Niall Collins, Executive Vice President, Development and Construction. Rael and Erin will walk through a recap of our fourth quarter operational results and the annual highlights, and after that we'll open the lines for Q&A, with Niall and David joining to take your questions. Before we get started today, I want to remind everyone that in discussing our financial and operating performance, and in responding to your questions, we may make forward-looking statements — including statements about Choice Properties' objectives, the strategies to achieve those objectives, as well as statements regarding management's beliefs, plans, estimates, intentions, outlook, and similar statements about anticipated future events, results, circumstances, performance, or exceptions that are not historical facts. Such statements rest on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward-looking statements. You can find additional information on the material risks that can impact our financial results and estimates, and the assumptions we have made in applying and making these statements, in the recently filed Q4 2025 financial statements and management's discussion and analysis, which are available on our website and on SEDAR+.

Having said that, I'll now hand things to Rael.

Thanks, Simone, and good morning to all of you. Welcome to the Q4 conference call. Before I get into my remarks, I'd like to give you an exciting team update. I'm happy to report that David Muallem is back with Choice Properties in the role of SVP, Leasing and Operations. David returns to Choice with outstanding experience from his time at Loblaw, where he oversaw real estate leasing and new store development. Before that, David spent a decade with our organization, and we're thrilled to have him back. As David rejoins us, Niall Collins is moving back into his primary role of EVP, Development and Construction, where his focus will be on delivering our robust development pipeline. I'd like to thank Niall for his leadership and for the stability he brought while leading both our operational and development teams over the past two years. This transition highlights the depth of our leadership team as we keep executing on our strategy for unitholders. With that, I'll turn to our results. We're pleased to report another strong year of operational and financial results, with our team continuing to execute on our strategic priorities. Our full year performance in 2025 demonstrated the strength of our necessity-based retail portfolio, our well-located industrial portfolio, and our ability to create value through development.

All of that combined let us hit our earnings guidance once again, with same-asset cash NOI rising 2.2% and FFO per unit up 3.6%. We achieved this while making our industry-leading balance sheet even stronger, finishing the year at leverage of 7.0 times. Throughout the year we stayed very busy with capital recycling, closing $801 million in real estate transactions. That figure comprised $460 million of acquisitions along with $341 million of dispositions, giving us net acquisition activity of $119 million. Development also kept creating value for us, with 17 new commercial projects totalling 836,000 square feet transferred. Those projects came in at an average yield of 7.4% and generated $47 million of value creation. In light of how strong and stable our business is and our solid performance in 2025, our Board of Trustees has approved our fourth consecutive distribution increase, effective March 2026. That increase reflects our continued commitment to returning capital to unitholders. Now moving to our fourth quarter results. Momentum carried on across our business, and we ended the year in a strong position. Portfolio occupancy rose 20 basis points to 98.2% during the fourth quarter, driven mainly by new leasing in our industrial portfolio. Along with favorable renewal spreads of roughly 22%, this produced healthy same-asset NOI growth of 2.4%.

During the quarter, we completed leasing spreads on 1.6 million square feet, which reflects a really strong retention rate of 92.4%. On top of that, we finished 233,000 square feet of new leasing, with positive absorption in the Ontario retail and Alberta industrial portfolios standing out. In retail, demand for our necessity-based centers remains robust across the country. During the quarter, we completed 596,000 square feet of renewals along with 89,000 square feet of new leasing. That pushed retail occupancy up 20 basis points, so we ended the year at 98%. Renewal activity was especially strong, with leasing spreads of 16.8%, led by the Atlantic and Quebec regions and by tenants in the dollar store, liquor, and office supplies categories. Going forward, our team sees vacancies and potential backfills as chances to re-lease space both at higher rents and to higher covenant tenants. Outside our existing portfolio, we stayed active in advancing retail intensifications and new greenfield developments at attractive risk-adjusted yields. Erin will talk more about our development completions shortly. Our industrial portfolio has stayed remarkably resilient, with occupancy rising another 50 basis points in the quarter to finish the year at 98.8%. The leasing progress lines up with what we laid out at the start of the year.

For the quarter, retention came in quite strong at 93.8%, and we completed more than 1 million square feet of renewals at a 26% spread. Our leasing activity included 514,000 square feet of renewals in the GTA, where the tenant held a fixed rate option, which produced a 17% spread. If you take out that renewal, our spreads came in at 40% on average. The team also finished 138,000 square feet of new leasing at rents that were 31% above our average in-place rents. This activity really underscores the meaningful mark-to-market and embedded growth we have in our industrial portfolio. Broadly, we keep seeing the industrial market stabilize for high-quality generic assets in the right markets, and we stay focused on moving our industrial development pipeline forward at Choice Caledon Business Park. Last, in our mixed-use and residential portfolio, we posted stable performance in 2025, which speaks to the high quality of our office assets, which are mostly leased to affiliate entities. Although certain residential properties have felt some pressure from new supply, strong long-term fundamentals in urban markets continue to support them, and we remain dedicated to our pipeline of high-quality, transit-oriented residential developments. Finally, a word on transaction activity for the quarter. We stayed active with our capital recycling program, closing roughly $261 million of real estate transactions during the quarter.

That figure comprises $67 million in acquisitions plus $195 million in dispositions. The quarter's largest deal was a new 50/50 joint venture with Wittington covering two office towers at Yonge and St. Clair in Midtown Toronto. As part of that transaction, a third party acquired 2 St. Clair Avenue East for $43 million at Choice's 50% share, excluding costs, while at the same time a 50% interest in the Weston Centre was sold to Wittington for $76 million. Taken together, the deal amounts to a net $33 million office disposition for Choice. It was a strategic move, since the two buildings sit directly adjacent and function as one integrated complex with shared common areas, including a shared loading dock. Choice will manage both properties going forward. In the quarter we also sold a non-strategic industrial asset for $18 million, along with $101 million of retail assets that we disclosed last quarter. Every disposition closed above IFRS values. We also bought a retail center in Peterborough for $23 million, and after the quarter ended, we completed $28 million of additional retail acquisitions. All in all, 2025 was an active year of capital recycling, with our team staying focused on preserving the quality of our market-leading portfolio while using our balance sheet to grow the business through net acquisitions.

With that, I'll hand things over to Erin so she can walk us through the financial results and tell us about further capital allocation activity. Erin?

Thank you, Rael, and good morning to all of you. Our financial results this year leave us quite pleased. As Rael mentioned earlier, we finished the year strong, having met every one of our financial goals. When we established our 2025 outlook twelve months back, the economy was extremely uncertain. The fact that we hit each of our key financial targets highlights both how high-quality and resilient our portfolio is, and how well our team delivers steady results for unitholders. Now to our fourth quarter results. Reported funds from operations came in at $189.9 million, equal to 26.2 cents per unit on a diluted basis, up 0.8% from a year earlier. FFO for the quarter was powered by total cash NOI growth of 4.4% year-over-year, which reflected greater same-asset NOI along with contributions from transactions and developments we completed. Partly offsetting that were the timing of lease surrender revenue, increased interest expense stemming from refinancing activities, and reduced investment income. AFFO for the quarter was 20.1 cents per unit, which is 0.5 cents higher than a year ago. That gain came mostly from the timing of maintenance capital projects, which began earlier in the current year than they did in the prior period. Looking at the full year, our AFFO payout ratio of 88% matched prior years.

Now looking at how our properties performed. Same-asset cash NOI rose by $5.9 million, which is 2.4% higher than the prior year. Breaking that down by asset class, retail same-asset cash NOI went up $3.1 million, or 1.6%. Higher base rents and recovery revenue drove that result, and if you exclude bad debt expense, growth year-over-year came in at 2.1%. Industrial same-asset cash NOI grew by $2.9 million, or 6.2%, mainly because of stronger rental rates on renewals, new leasing, and contractual rent steps. Mixed-use and residential same-asset cash NOI fell by roughly $0.1 million, or 1.8%, largely due to lower rent at certain residential properties. Shifting to the balance sheet. IFRS net asset value, or NAV, came in at $14.43 per unit for the quarter, down $72 million, or about 0.7% versus the third quarter. That decline was mostly the result of an $87 million fair value loss on our investment in the units of Allied Properties, along with a net fair value loss on investment properties of $29 million. A net contribution from operations of $45 million partly offset this. As a reminder, IFRS rules require us to mark-to-market our investment in Allied to its trading price at each period end. The fair value changes on investment properties this quarter were mainly driven by adjustments to select mixed-use and residential developments, as well as certain existing residential assets, to reflect current market conditions.

Gains in the retail portfolio partly offset that. Those gains were helped by favorable leasing and cash flow assumptions tied to backfilling certain sites with higher-quality tenants, along with favorable cap rate adjustments, mainly in Ontario, which reflect ongoing demand for necessity-based retail centers. On a full year basis, we keep producing stable value across the portfolio, which led to year-over-year NAV growth of $263 million, or 2.6% on a per unit basis. We finished the year in a solid financial position, with strong debt metrics and ample access to capital, including $1.6 billion of available liquidity through our corporate facility and cash on hand, plus $13.8 billion of unencumbered properties. Our debt-to-EBITDA ratio came in at 7.0 times and stayed largely stable. We had no material financing or debt maturities during the quarter, and our next material maturity doesn't come up until our $350 million debenture in November. Moving to development activity. Our pipeline remains a dependable source of long-term cash flow growth and NAV creation for the REIT. During the quarter, development spend came to roughly $40 million, and our team delivered three new commercial projects totaling 601,000 square feet at a blended yield of 7.8%. Our biggest delivery this quarter was the latest phase of Choice Caledon Business Park, a project totaling 530,000 square feet at our ownership share, which we finished at a yield of 7.9% and where we expect rent commencement to start in April.

We also wrapped up two retail intensifications. One was a 54,000-square-foot Costco Gas Bar in Edmonton, finished through our 50% owned JV at a 6.1% yield, and the other was a 17,000-square-foot Shoppers Drug Mart in Ontario at a 6.9% yield. That leaves eight more Shoppers Drug Mart projects in our active pipeline, plus many others at various planning stages. For the full year, development spend came to roughly $237 million, and we successfully moved $222 million of assets into income-producing status, which represents 836,000 square feet of new commercial GLA. Those transfers generated about $47 million of value creation for Choice. Going forward, we're confident in our strategy and financial plan, and our focus stays the same. We'll keep prioritizing operational excellence, backed by strong leasing execution, while improving portfolio quality through disciplined capital recycling and delivering on our development pipeline to create value for unitholders. For the full year 2026, we expect stable occupancy and 2% to 3% year-over-year growth in same-asset cash NOI. Our business should deliver annual FFO per unit diluted of between $1.08 and $1.10 in 2026, supported by the strength of our core business, including strong same-asset NOI growth and contributions from transactions and development.

That strong result is going to be partly offset by the effect of the distribution cut at Allied. We'll keep using our industry-leading balance sheet to back both our transaction and development activity, while holding our debt-to-EBITDA beneath our long-term target of 7.5 times. Finally, because of how strong our business is and how we performed in '25, as Rael mentioned, we're raising our distribution to 78 cents per unit effective March 2026, which works out to a 1.3% increase from the prior year. With that, Rael, David, Niall, and I would be glad to answer your questions.

Right now, I'd like to remind all of you that if you want to ask a question, you should press *, followed by the number 1 on your phone's keypad. We'll take a brief pause to put together the Q&A roster. Today's first question is from Mark Rothschild at Canaccord Genuity. Your line is open.

Thanks, and good morning. From what I can tell, industrial is performing quite nicely given the kinds of properties in your portfolio, and you're making progress on those development projects. Do you see room to build on this and grow it during this year, and are you confident enough that you might begin further development projects?

Morning, Mark. As we've been saying all year, conditions had begun to settle, and on the leasing side we have clearly witnessed that. Last quarter we kicked off a spec development, which reflects the confidence we hold in this market. RFP activity has been plentiful. Before we think about launching another spec development, though, I believe we should see somewhat more momentum in that RFP activity. From a growth standpoint, we will keep capturing the mark-to-market we discussed. Our team is constantly on the lookout for fresh investment opportunities, and we are hopeful that we can expand along that path as well, though at present there is nothing we are actively underwriting. Niall, I don't know whether you would like to add anything?

Perhaps I could just add that our spec building will be delivered in early 2027, with our attention really on deliveries during that year or tenant inquiries for it. Inquiries around 2028 are beginning to come in, and once we sense they are gaining some traction, we will be in a position to go after those opportunities too.

Perfect. Perhaps I could squeeze in just one additional question. Yes.

Mark, apologies—just a quick item. This one's from Erin.

Mark, I just wanted to highlight that prospect activity at Caledon has picked up, echoing what Niall and Rael mentioned. And then, if we look ahead to industrial in 2026, we'd be thinking of same-asset growth landing nearer to that 4% range.

Thanks. All right, perhaps one final question about office. The deal you completed seems more strategic than anything. There have been some indications of an office recovery. Clearly, Allied hasn't taken part in that so far. Any views on office investment right now? Might the REIT return to it in a bigger way? Would you act if you felt confident about improvement, or is that a category Choice simply isn't aiming to be significantly engaged with going forward?

Mark, honestly, several years back we got out of office since we believed achieving genuine scale in that asset class would never be possible for us. Seeing that kind of opportunity is improbable on our end. Our attention is firmly on further expanding retail and industrial, and, as time goes on, purpose-built rental. Within those three asset classes there are sufficient investment opportunities that office would not be something we'd pursue as an asset class.

That’s excellent—thank you very much.

The following question is from Lorne Kalmar of Desjardins. Your line is open.

Thanks, and good morning. On the guidance front — Erin, apologies if I missed this. You folks are normally very precise, and it's not that 3 cents isn't precise, but I'm just curious what needs to happen for us to land at the low end as opposed to the high end. Is it mainly that lease term income you saw during 2025, or is there some other factor we ought to be considering?

Lorne, I'd view our plan as pretty much centered at this point. I realize we provided a slightly wider range on guidance, but I believe the feedback last year was that it felt extremely narrow, so we simply wanted to give ourselves some breathing room. To beat the plan, a few things need to happen: leasing on retail has to come in above what we expect, the same goes for industrial, and perhaps somewhat less downtime than the plan assumes. There's certainly flexibility there, and then sure, a bit more lease termination income would be a help, but I think our team has some room to outperform.

Then regarding what you mentioned about the SPNOI growth range for industrial — for retail, would that roughly fall in the 2% to 3% range?

Exactly right.

Thanks. And then just one final thing—regarding Building D at Caledon, I noticed the yield came in noticeably lower. Could you give us a bit of color on that, and on why you decided to proceed with it even though the yield is below what you were achieving on the earlier buildings?

Lorne, that really comes down to the fact that this is a spec building, and it has to meet a broad variety of tenant needs. We believe we've included suitable allowances so we can capture those needs. As we keep seeing costs moderate and get closer to a potential tenant, we think we'll be able to improve those yields.

That's reasonable. Thank you very much. I'll hand it back over.

Brad Sturges with Raymond James has the next question. Your line is open.

Morning, hi. I wanted to build on what you said regarding the industrial segment and RFPs. I suppose I'm hoping to get some clarity on that remark about wanting a bit more activity when it comes to RFPs. Has the market shifted compared with the prior quarter, or is it simply too soon to be considering 2028, since that activity is only now beginning to pick up?

The bigger factor is supply entering the market, and that is dropping off sharply. When it comes to Building D, it could be one of perhaps two 1-million-square-foot buildings in the GTA that would truly be ready for occupancy. At this point, we are the only spec building that is underway. What we've observed during the last couple of months comes down to, in my view, people acclimating to a certain degree of uncertainty and beginning to make choices based on it. As for 2028 deliveries, that will now depend on how we see the present conditions settling down, but it gives us encouragement.

All right, to build on that point: regarding market rents in industrial — for the kinds of assets you hold and throughout your markets — what are you anticipating for this year, in terms of timing for seeing somewhat more stabilization, or perhaps even a positive inflection point when it comes to market rent growth?

My view is that spreads in 2026 will come in line with those of '25, and I'd say '25 on its own was a really strong year.

I'll hand it back over. Thanks.

Himanshu Gupta with Scotiabank has the following question — your line is now open.

Thanks, and good morning. Regarding the same-asset NOI outlook, Erin, I believe you cited 4% for industrial. I'm just curious—given the occupancy improvement you've seen so far this year, plus the mark-to-market opportunity, would you say you're being conservative there?