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

Thanks. At this point I'll pass things along to Simone Cole, our General Counsel and Secretary. Simone, over to you.

Thanks, and good morning everyone. Welcome to the conference call for Choice Properties' Q2 2026. With me this morning are Rael Diamond, our President and Chief Executive Officer; Erin Johnston, Chief Financial Officer; Niall Collins, Executive Vice President, Development and Construction; and David Muallim, Senior Vice President, Leasing and Operations. Rael and Erin are going to walk through a recap of the operational results and highlights from our second quarter, and after that we'll open the line for Q&A, with Niall and David joining us to take your questions. Before we get started today, I'd like 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 for achieving those objectives, and statements regarding management's beliefs, plans, estimates, intentions, outlook, and similar statements about anticipated future events, results, circumstances, performance, or expectations that aren't 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 drawn in these forward-looking statements. Further information on the material risks that can impact our financial results and estimates, and on the assumptions we made in applying and making these statements, can be found in our recently filed Q2 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.

Thank you, Simone, and good morning, everyone. We're happy with how the second quarter turned out — those results show both the strength of what we hold and how carefully we've been carrying out our strategy. Throughout the quarter, we kept finding ways to create value by making strategic leases across our necessity-based retail portfolio. We also took advantage of tenant demand to push rental rates higher in our well-positioned industrial portfolio. Fundamentals stayed firm throughout what we own. Occupancy is still close to full, leasing activity and spreads came in robust, and same-asset NOI growth was solid. Portfolio occupancy came to 97.7%, which is 40 basis points lower than the prior quarter. That mostly mirrors vacancies we planned as part of strategic repositioning efforts, which I'll get into shortly. Setting those efforts aside, operating performance was solid. Average leasing spreads came in robust at 19%, which supports same-asset NOI growth of 2.8%. Within our retail portfolio, demand stayed resilient across our core necessity-based tenant categories. Retail occupancy finished the quarter at 97.4%. Over the quarter, we closed 643,000 square feet of renewals along with 83,000 square feet of new leasing. Renewal spreads reached 12.4%, with gains across categories including liquor, restaurants, and dollar stores. That figure includes 318,000 square feet of fixed-rate option renewals. Leaving out those fixed-rate renewals, the average retail renewal spread was very strong at approximately 20%.

Retention came in at 66%, and that mostly mirrors non-renewals we had already anticipated involving two big spaces that Loblaw used to lease, which together add up to 172,000 square feet. Those two spaces had been used for storage or short-term purposes, and their gross rents sat in the single digits, which speaks to how flexible those leases were. The first one is the 90,000-square-foot strategic repositioning at Bloor and Dundas that we flagged last quarter, where the plan is a multi-tenant configuration with commitments signed from Shoppers Drug Mart and GoodLife. We handed that space over to Shoppers Drug Mart during the quarter so it can start fixturing, and the goal is an opening later this year. For GoodLife, possession is targeted for early 2027. The second is an 82,000-square-foot space over in Laval, where we're running a similar backfill playbook and will share progress in the quarters ahead. Once you set aside those two non-renewals, retention landed at roughly 80%, which is broadly consistent with where we've historically been. Backfilling of the vacancies from Q2 is already moving along nicely, with about 50% of that space having been re-leased at rents well above the expiring rates. We've also moved forward on backfilling our three former Toys "R" Us locations. No Frills has taken possession at Dartmouth Crossing and is fixturing now, and with our JV partner we're in active talks on the two locations that remain.

We anticipate sharing additional updates about the remaining sites on our upcoming conference call. Also, after the quarter ended, we finished renewing the 2027 tranche of Loblaw leases, which covers 50 locations and 3.6 million square feet. Every lease renewed was a retail site, and they were signed at an average spread of 8.8% with an average term of 5 years. These renewals deliver steady cash flow growth and take care of roughly 67% of our 2027 retail lease maturities. Our industrial portfolio likewise posted healthy operating results for the quarter, with occupancy holding steady at 98.6%. We signed 353,000 square feet of renewals during the quarter, posting a retention rate of 80.6%. The activity was concentrated in Ontario and Alberta, with an average renewal spread of 20.2%. In the GTA, rent began in April at our recently finished NLS building in Choice Caledon Business Park. Construction is also moving along well on Building D, with completion and occupancy targeted for the second half of 2027. Our team stays active in the market and keeps responding to RFPs from single and multi-tenant users who are interested in the site. Going forward, our industrial portfolio remains well-positioned, backed by high-quality assets, a strong tenant base, and locations in core urban markets across the country.

We anticipate that leasing momentum will drive strong organic growth for the rest of the year. Although renewal spreads should ease during the second half as the mix of expiring leases shifts, the embedded mark-to-market opportunity stays a significant contributor to growth ahead. Finally, we observed favorable momentum in our mixed-use and residential portfolio as well. Occupancy in mixed-use rose 50 basis points, and leasing across our residential assets improved, helped by our emphasis on retaining tenants. Now moving to transaction activity. Deal activity was fairly modest this quarter, since our attention stayed on progressing the proposed First Capital transaction and preserving balance sheet flexibility. We closed $14 million of transactions in Q2 in total, plus $30 million subsequent to quarter-end, which brings our total year-to-date capital recycling activity to roughly $55 million. In the quarter, we purchased a retail property in Waterloo, Ontario for $7.4 million. That site sits next to one of our existing grocery-anchored retail properties that performs well. Combined, these properties form a substantial land assembly along a major commercial corridor in a neighborhood that benefits from growth in student housing. Holding both properties opens up an appealing intensification opportunity, improving the transaction's overall economics. We are seeking early-stage approvals for additional retail density to boost the site's long-term value.

During the quarter, we finished $6.8 million in dispositions, and after the quarter closed, we sold the remaining 50% stake we held in a retail property located in Alberta for $13.2 million. In addition, we keep moving forward with the acquisition of First Capital that we announced earlier. Last month, unitholders of First Capital cast an overwhelmingly supportive vote for the proposed transaction, and afterward the Ontario Superior Court approved the plan of arrangement. Our work through the regulatory process continues in a constructive manner, and closing is still on schedule. As the process moves ahead, we will share additional updates. With that, I will now hand the call to Erin, who will cover our financial results and capital allocation activity. Erin?

Thank you, Rael, and good morning to all of you. Choice's core business delivered another solid quarter in Q2. Reported funds from operations, or FFO, for the quarter came in at $192.9 million, equal to 26.7 cents per unit on a diluted basis, which represents a 0.8% increase year-over-year. The drivers behind this result were same-asset cash NOI growth of 2.8% along with higher lease surrender revenue totaling $1.6 million. Acquisitions and development transfers contributed, though dispositions offset those gains. FFO growth was also held back by higher interest expense from refinancing, increased G&A, and lower investment income. When adjusting for non-recurring items, including lease surrender revenues of $1.6 million and the $3.2 million reduction in Allied distributions, FFO growth came to 1.5%. AFFO for the quarter was 21.7 cents per unit, a decline of 6.1% from the prior year, largely tied to the timing of maintenance capital and tenant improvements. Going forward, we anticipate 2026 capital spend will be broadly in line with the prior year. Now to our property performance. Same-asset cash NOI was healthy, rising $6.9 million, or 2.8%, over the prior year. Retail same-asset cash NOI grew by $3.7 million, or 1.9%. Excluding bad debt expense primarily tied to the Toys "R" Us termination, growth was 2.4%.

On the industrial side, same-asset cash NOI rose by $2.9 million, which works out to 5.8%. If you set aside the bad debt reversals booked this year, the growth rate comes in at 5.2%. Both asset classes turned in a solid quarter, helped along by strong renewal spreads, higher base rents coming from new leasing activity, and contractual rent steps. For mixed-use and residential, same-asset cash NOI was up by roughly $0.3 million, or 4.1%, and that was mainly because operating costs came down. Now turning to the balance sheet. IFRS net asset value, or NAV, stood at $14.73 per unit, which is a gain of about $145 million, or 1.4%, over the previous quarter. That improvement came from a $46 million net contribution from operations, a $105 million net fair value gain on investment properties, and an $8 million fair value gain on our investment in Allied Properties units. Just as a reminder, IFRS requires us to mark-to-market that investment using Allied's trading price at the close of each period. The fair value gains on investment properties were mostly driven by our retail portfolio, which includes the effect of the 2027 Loblaw renewals along with cap rate adjustments backed by external appraisals. In our industrial portfolio, we booked a gain, mainly supported by an external appraisal at our Ajax property. We also took a modest write-down in our mixed-use and residential portfolio, tied largely to cap rate adjustments at certain Ontario residential assets.

Our balance sheet is still in great shape, with solid debt metrics and substantial access to capital before the anticipated close of the FCR transaction. Through our corporate facility and cash on hand, we have roughly $2 billion in available liquidity. That figure reflects the recent $500 million bump to our credit facility, which gives us extra liquidity to support the larger scale we'll have once the transaction closes. On top of that, we hold about $14.1 billion of unencumbered properties, and our debt-to-EBITDA ratio came in at 7.0 times, matching the previous quarter. Financing activity was light this quarter. It consisted of paying off two mortgages amounting to $64 million and arranging a new construction facility for Building D at Choice Caledon. As we look forward, the unsecured market still gives us confidence, and we're well positioned both to refinance our next unsecured maturity in November and to secure the financing needed to support the FCR transaction. Now to development activity. This quarter we finished two retail land lease intensifications totaling 66,000 square feet, generating a blended yield of 27.2%. Those projects were a 65,000-square-foot land lease with Nautica in Kingston, Ontario at a 28% yield, plus a 1,000-square-foot land lease at a 50% owned site in Winnipeg to a QSR tenant at a 23% yield.

Altogether, those handovers show once more how we can generate value from surplus land throughout our retail holdings. Moving forward with our retail intensification program and pushing ahead on the upcoming stages of Choice Caledon remain central priorities for the rest of the year. As we look toward the latter half of 2026, our focus is on operational excellence throughout the portfolio while we keep delivering on our commercial development pipeline and value creation efforts. We will likewise keep working toward completing the FCR transaction. That said, since the timing of that closing is still uncertain, we continue to frame our outlook without factoring in the transaction's effect. We are reaffirming that outlook and anticipate stable occupancy, same-asset cash NOI growth of 2% to 3%, and diluted FFO per unit of between $1.08 and $1.10 for the year. With that, Rael, David, Niall, and I would be happy to take your questions.

Right now, a quick reminder for everybody: if you want to pose a question, just hit star and then the number 1 on your phone's keypad. We're going to take a brief pause while we put together the Q&A list. Our first question is from Himanshu Gupta at Scotiabank. Your line is open.

Thanks, and good morning. Strong quarter overall — perhaps I'll spend a little time on the FCR deal that's still pending. Where does things stand with the Competition Bureau at this point, and what's your expected timing for getting the required approvals from them?

Hi, Himanshu — this is Simone. Things are moving along quite nicely. During our previous call, we mentioned that we'd put substantial effort in before the announcement of the deal, so right now everything remains on schedule. We continue to expect the closing to occur in the latter half of the year, and specifically during Q4. Okay.

And when it comes to completion, is that the biggest obstacle at this point, or are there other approvals—or major approvals—that we still need?

That's the key approval. As you saw during the quarter just ended, First Capital's unitholder vote passed by an overwhelming margin, and the court gave its approval to the plan of arrangement — at this point it is simply working through the regulatory process.

Understood, thanks. So Erin, on the debt financing needed to complete that deal, how has the financing cost moved since you announced it? Do you still anticipate roughly a mid-4 interest rate at closing, as I believe you said?

Yes. Since the deal closed, Himanshu, things have been pretty volatile in the underlying rates, though luckily spreads have stayed fairly stable and remain near 10-year lows, which is encouraging, and we're hearing that demand is still there, especially for our name and our BBB (high) rating. If I look at 10-year financing right now, over the past couple of weeks it's been ranging between 4.7 and 4.8.

All right. Is there any hedging you've put in place to lock in the interest rate, given that a sizable debt financing is coming near the end of the year? I believe Choice also has some debt maturing, and then FCR has some maturity in January. Have you set up any hedging?

We do have the capacity to hedge, Himanshu, around the time of our refinancing. At present, nothing is in place. What I would note is that one factor behind our raising the line is that this flexibility exists for us, and we are also taking a very considered approach regarding when we approach the market between now and closing and how we intend to spread that out.

All right, that's quite useful. So staying on the balance sheet, your debt rating is clearly BBB (high), which is very, very strong. For that rating, is there some leverage threshold you have to keep? And does this transaction alter anything when it comes to the debt rating?

Right after the deal, our credit ratings were affirmed. The way we're looking at this — and the way DBRS in particular is looking at it — is that as long as the transaction plays out the way we've described, meaning the NOI comes online, we're fine, and then deleveraging will also help as we keep working toward a higher rating.

Right, yeah, that's a fair point. Thanks. Maybe just one final question, and it's not about FCR, by the way. On Caledon Building D, is there any news on the lease-up? And also, I believe your expected yield got bumped up a little — what's behind that?

Hi, Himanshu — this is Niall. As Rael said, the market has good buoyancy right now, and that's genuinely encouraging to us. Second, Building D is currently the sole 1 million-square-foot project that is under construction, and we feel really good about that. A number of offers are going back and forth, and we're encouraged that we'll be able to land one of these offers as soon as we can.

Appreciate it,

Niall, what about the yield?

That figure has risen too.

The yield hasn't been revised — it's still at the same level.

Roughly six, in the low-6% area.