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 First Quarter 2026 Earnings Call. Every line has been muted so that background noise won't interfere. Once the speakers finish 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 * and then the number 1 on your telephone keypad. To take back your question, simply press *1 once more. Thank you. At this point, I'll turn the call over to Simone Cole, General Counsel and Secretary. Please go ahead.

Thanks. Good morning, everyone, and welcome to the Choice Properties Q1 2026 conference call. With me this morning are Rael Diamond, President and Chief Executive Officer; Erin Johnston, Chief Financial Officer; Niall Collins, EVP, Development and Construction; and David Muallim, SVP, Leasing and Operations. Rael and Erin will give a quick recap of our first quarter operational results and highlights, and then we'll open the line for Q&A, with Niall and David joining to take your questions. 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 about Choice Properties' objectives, strategies to achieve those objectives, as well as statements regarding management's beliefs, plans, estimates, intentions, outlook, and similar statements concerning anticipated future events, results, circumstances, performance, or exceptions that are not historical facts. These statements are based on our 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 the assumptions that were made in applying and making these statements, can be found in the recently filed Q1 2026 financial statements and management discussion and analysis, which are available on our website and on SEDAR+.

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

Thanks, Simone, and good morning to all of you. It's great to have everyone with us on our Q1 conference call. Before I share my comments about the strong results we posted for the first quarter, I want to take a moment to look back at the transformational deal we announced two weeks ago. On April 16th, we announced that Choice, working alongside our partner KingSett Capital, has agreed to acquire First Capital REIT for roughly $9.4 billion. When the deal closes, Choice will pick up about $5 billion of First Capital's high-quality retail assets, while KingSett takes the remaining assets. This transaction is highly compelling. Chances to buy assets of this quality and scale come along extremely rarely, particularly ones that fit so closely with our strategy. The acquisition makes our portfolio even stronger and cements Choice's position as Canada's leading REIT. We look forward to sharing updates on how this transaction is progressing as the year goes on. Now, turning to our first quarter results, we posted another healthy quarter of strong operating and financial results, as our team keeps executing on our strategic priorities. In Q1, portfolio occupancy stayed resilient at 98.1%, helped by exceptional renewal activity across our portfolio, with average leasing spreads of 21.8%, which drove same-asset NOI growth of 3%. We're encouraged by strong leasing momentum throughout the portfolio, with healthy activity in both retail and industrial.

We keep filling back in retail space, carrying out value-creation initiatives, and pushing industrial growth at occupancy that's near full. On the retail side, demand remains healthy across the portfolio from a range of necessity-based retailers. In the quarter, we finished 364,000 square feet of renewals along with 97,000 square feet of new leasing. Occupancy came in at 97.9%, essentially flat. Renewal spreads stayed very strong at 17.2%, with Atlantic and Ontario leading the way. That spread was mainly the result of a 28,000-square-foot renewal — the first market renewal in 15 years for this tenant, which had been paying rents well below market. Without that renewal, the average retail spread was still a strong 13.2%, in line with what we expected. Retail retention came to 75.8%. That figure was largely due to the early termination of two Toys "R" Us locations plus a strategic termination that's already been backfilled at higher rents, together roughly 50,000 square feet. Setting those terminations aside, retention was about 85%. That's broadly consistent with our historical rates and fits our strategy of capturing value from tenant turnover in a strong retail leasing environment. More than half of the space vacated this quarter already has committed deals. Those leases should commence later this year.

We're encouraged by the progress on backfilling at former Toys "R" Us sites, since we're now in advanced leasing talks with several retailers. During the quarter, we also moved forward on a number of value-creation initiatives in our retail portfolio, among them the revitalization of the retail space at Bloor and Dundas. In March of this year, Loblaw vacated 90,000 square feet of warehouse space in a former Zellers, and we're now repositioning that property to bring in a new Shoppers Drug Mart and a GoodLife, alongside Loblaw's investment in a No Frills conversion. At stabilization in the second half of 2027, this initiative is expected to generate roughly $2 million of incremental NOI, and it has created approximately $25 million in total incremental value. The revitalization adds no further lease encumbrances that would affect our longer-term redevelopment plans. Taken together, these initiatives underscore the strength of our assets and our team's capacity to spot and act on value-creation opportunities across our portfolio. In industrial, market conditions stayed resilient nationwide, with occupancy of 98.6% at quarter-end. Over the quarter, we completed 103,000 square feet of renewals at a spread of 46.2%, driven mainly by the Alberta and Atlantic portfolios. Retention for the quarter came in at 56.6%, largely the result of a 73,000-square-foot nonrenewal in Edmonton, where the tenant's growth requirements were more than we could accommodate.

We additionally finished 24,000 square feet of fresh leasing across Alberta and Ontario, with rents roughly 40% higher than our typical in-place rates. Within the GTA, supply of high-quality, large-bay industrial space kept getting tighter. As we move the next phase forward at Choice Caledon Business Park, we anticipate being among the few options for new space exceeding 750,000 square feet available in the market next year. Last, occupancy across our mixed-use and residential portfolio held steady, and we saw favorable leasing at certain residential assets. Turning to transaction activity, things were quiet during the quarter. As we mentioned on our Q4 call, we closed two retail acquisitions — one in Montreal and one in Edmonton — for a combined $28 million. Apart from that, nothing else was completed during the quarter. We're happy to share that Wittington Investments, Limited has bought our partner's 50% stake in our G2 purpose-built rental residential development in downtown Toronto, which we expect to break ground on this year. Through this partnership, Choice can move the project ahead alongside a strategically aligned equity partner while bringing meaningful affordable housing to the city of Toronto. Lastly, I'd like to recognize the release of our 2025 Environmental, Social, and Governance Report last night.

The report for this year puts a spotlight on a great deal that Choice accomplished across the past year — among those items, we finished the initial full year of our Climate Action Roadmap, which spans three years, we moved further along our route toward net-zero by 2050, and we grew our social impact and placemaking programs across the country. You'll find the report in the sustainability area of our website, and I'd really like everyone to give it a read. So with that, let me hand things over to Erin, who will go through our financial results as well as further capital allocation activity. Erin?

Thanks, Rael, and good morning to all of you. We're happy with how we performed financially during the first quarter. The fundamentals of our underlying business continue to look very strong. Reported funds from operations for the quarter came in at $196 million, equal to 27.1 cents per unit on a diluted basis, which is up 2.7% compared with a year earlier. Several factors drove this result: total cash NOI grew a robust 4.2%, reflecting solid same-asset cash NOI growth along with contributions from net acquisitions and new development, plus higher lease surrender revenue. Partly offsetting that were lower investment income, increased interest expense stemming from refinancing activity, greater G&A expense, and reduced fee income. Our results include some nonrecurring items: roughly $1.9 million in additional lease surrender revenue versus the prior year, and $3.2 million less investment income tied to Allied's distribution reduction. Once those items are excluded, FFO per-unit growth came to about 3.5%, which underscores the ongoing strength of our core operations. AFFO for the quarter was 24.7 cents per unit, down 0.8% from the prior year, since FFO growth was offset by greater maintenance capital spend this year, mostly a matter of timing. Our AFFO payout ratio for the quarter stood at 78%. Now let me move on to property performance.

On a same-asset basis, cash NOI performed well, rising $7.5 million, or 3%, versus the prior year. Breaking that down by asset class, retail same-asset cash NOI grew $6 million, or 3.2%, while industrial same-asset cash NOI was up $3 million, or 6.2%. Higher base rents stemming from new leasing activity and contractual rent steps drove both of those. Mixed-use and residential same-asset cash NOI fell by roughly $1.5 million, or 15.4%, largely because of a property tax incentive that was received in the prior year. Turning to the balance sheet. IFRS net asset value, or NAV, came in at $14.53 per unit for the quarter, an increase of about $67 million, or 0.7%, relative to year-end. That gain reflected a $51 million net contribution from operations along with a $66 million net fair value gain on investment properties, partly offset by a $49 million fair value loss on our investment in the units of Allied Properties. As a reminder, IFRS requires us to mark-to-market this investment in Allied to its trading price at the end of each period. The fair value gains on investment properties came mainly from our retail portfolio, which included cap rate adjustments in Ontario, Quebec, and BC, backed by external appraisals and favorable leasing outcomes, particularly from backfilling initiatives at higher rents.

That was supported by a small increase in our industrial portfolio. Our balance sheet remains the strongest in the industry, with excellent debt metrics and substantial access to capital — roughly $1.6 billion of available liquidity through our corporate facility and cash on hand, plus about $14 billion of unencumbered properties. Our debt-to-EBITDA ratio stood at 7.0 times, unchanged from year-end. In the quarter, we had no material financing activity and no debt maturities. Now to development activity. In the quarter, we finished two retail intensifications totaling 22,000 square feet, at a blended yield of 8.9%. Those projects comprised a 17,000-square-foot Shoppers Drug Mart in Renfrew, Ontario, at a 7.5% yield, and a 5,000-square-foot land lease to a QSR tenant in Ottawa, at a 42% yield. These completions show once again our capacity to produce attractive returns by intensifying land at our existing neighborhood retail centers. For the rest of the year, we will keep prioritizing operational excellence throughout the portfolio while also moving toward closing the announced First Capital portfolio acquisition. Since the closing timing is still uncertain at this stage, our outlook references exclude the financial impact of that transaction.

As a reminder, for this year we anticipate keeping occupancy steady and achieving same-asset cash NOI growth of 2% to 3%, along with FFO per unit diluted in the range of $1.08 to $1.10. Although we expect earnings growth to ease somewhat across the coming two quarters as acquisition-related favorability rolls off, given how lease surrender revenues are timed relative to the prior year, and because of the effect of Allied's distribution reduction, we are still on course to meet our full-year outlook. With that said, Rael, David, 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 * and then the number 1 on your phone's keypad. We'll take a brief pause while we put together the Q&A roster. Our first question is from Himanshu Gupta at Scotiabank. Your line is open.

Thanks, and good morning to everyone. Regarding that lease surrender revenue, is there anything we should anticipate in Q2 as well? And could you say a bit more — does it tie to Toys "R" Us, or has there been some rightsizing of Loblaw stores over the last year, or anything along those lines?

Morning, Himanshu — Erin here. If we examine the lease surrender revenue for this year, it's mainly tied to the rightsizings at Loblaw, just as in earlier years. In terms of the overall dollar figure, we anticipate it will be roughly unchanged from last year, though the bulk of it is going to fall across Q3 and Q4.

All right, thanks. Can you tell me the number of Loblaw stores currently slated for this rightsizing? Are these mainly urban sites? And what size reduction is typical, based on Loblaw store history?

Over the past two years or so, the count has ranged from 2 to 4 annually, depending on the site. Perhaps I'll ask Rael or David to say a little about the locations.

Yeah. Hey Himanshu, this is David. When it comes to locations, it's a mixed picture nationwide. Most of ours are larger stores — call them Superstores — or we have Provigo locations that convert to Maxi in Quebec. Basically, for this year, we're thinking roughly four locations will be rightsized.

All right, so it's four locations — precisely that. And then, apologies, when it comes to square footage, what does the usual decrease look like — something like 20,000 or 30,000? What size reduction is typical?

That varies with how a site is set up, though roughly 30,000 is pretty typical.

Alright, thank you. Appreciate it. Switching topics now to IFRS valuation — I believe the retail cap rate came down by just about two basis points. Once the First Capital transaction closes, do you expect that cap rate to decline further? My sense is that it ought to provide a favorable mark for retail market valuation.

Hi, Himanshu. Yeah, we're still seeing appraisals come in a bit tighter than the values carried on our books each quarter, and that accounted for most of our retail gains. As we bring in the First Capital acquisition, I know our team will examine the values of those assets alongside ours. We'll update you once we know more,

Fair enough. Perhaps the final question concerns leverage for next year. Ahead of that rise in leverage, are you planning capital recycling during this year, or would you rather wait until this transaction closes? Do you have any disposition targets once FCR has closed?