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

Melissa, thank you. Morning, everybody, and glad to have you on Choice Properties' Q3 2026 Conference Call. Joining me today are President and Chief Executive Officer Rael Diamond; Erin Johnston, Chief Financial Officer; Niall Collins, EVP, Development and Construction; and David Muallim, SVP, Leasing and Operations. Rael and Erin will walk through a short summary of our operational results and highlights for the third quarter, and afterward we'll take questions by phone, with Niall and David on hand to respond. Ahead of beginning today's call, please note that while covering our financial and operating results and answering your questions, we might deliver forward-looking statements. These include remarks about Choice Properties' objectives and the strategies for reaching them, along with statements reflecting management's beliefs, plans, estimates, intentions, outlook and comparable comments about anticipated future events, results, circumstances, performance or expectations that aren't historical facts. Statements of this kind rely on our present estimates and assumptions and carry risks and uncertainties that might make actual results diverge materially from the conclusions contained in those forward-looking statements. Details about the key risks that might affect our financial results and estimates—along with the assumptions behind how we applied and made these statements—are available in the Q3 2026 financial statements and management discussion and analysis we recently filed, which you can find on our website and on SEDAR+. Before turning things over to Rael, I'd like to briefly address our transaction involving First Capital and Kingsstet; progress on the FCR acquisition we announced earlier remains solid, and we're working constructively through the regulatory process. We're still optimistic that it closes in the fourth quarter of this year. That said, there's a possibility the closing slips into Q1. We'll share more news as the regulatory review gets closer to wrapping up. With that said, I'll hand things over to Rael.

Thank you, Simone, and good morning, everyone. Choice Properties delivered yet another solid quarter. Our core business continues to generate healthy organic growth. Our development program is creating value, and our balance sheet—which leads the industry—remains in excellent shape. A healthy retail market, along with ongoing tenant demand for high-quality, well-located industrial space, continues to benefit our portfolio. Operating fundamentals remained strong across our core retail and industrial segments during the quarter; we maintained near full occupancy and recorded healthy leasing activity and renewal spreads, which helped drive another quarter of strong same-asset NOI and FFO growth. Portfolio occupancy reached 97.8%, up 10 basis points from the prior quarter. Leasing spreads came in at 11.2% on average, and that figure reflects our yearly renewal tranche of Loblaw leases at 8.7%. If you take out the Loblaw renewals, average leasing spreads would be 17.7%, and that helped push same-asset NOI growth to 3.1%. Our retail portfolio continues to perform exceptionally well, and it's supported by a favorable environment for both operations and leasing. Demand for well-located grocery-anchored retail space still exceeds supply, which supports high occupancy and strong growth in rental rates. That keeps opening up opportunities for us to strengthen our tenant mix and capture higher rents. Retail occupancy moved up 10 basis points from the prior quarter to 97.5%; our strong leasing activity included 148,000 square feet of new leasing and exceptionally high tenant retention of 96%, and we had no major vacancies during the quarter. We finished 3.1 million square feet of renewals, and that figure includes 2.4 million square feet of annual Loblaw renewals. Retail renewal spreads came in at an average of 9.6%, while overall renewals represented roughly 80% of the activity, posting an average spread of 8.7%; among third-party tenants, renewal spreads averaged a healthy 12.8%. Within that, we had 165,000 square feet of fixed rate deals at an average spread of 4.4%, plus 334,000 square feet of market rate renewals with a strong spread of 16.2%. Importantly, the strength in our leasing was broad-based. Big box renewals worth noting included an 80,000 square foot home improvement tenant in Mississauga and a 50,000 square foot furniture tenancy in Victoria BC. Both of those got done for roughly 25% less, compared with about 15% on the low end spread over multiple categories such as restaurants, beauty, pests and medical; these outcomes underscore how demand for a necessity-based retail portfolio remains deep. Going forward, we anticipate positive absorption during the fourth quarter as leasing signed recently begins. That covers a new set of roles at Dagwo Crossing that backfills one of the three Toys"R"Us sites we previously had, and we've also moved forward on the other two Toys"R"Us sites, with one lease going to Maxi Montreal while the last site is in advanced talks. To wrap up, Glu and Dane's retail revitalization is moving forward. We were innovative, and the renovated store opened last week, with Shoppers Drug Mart set to open later this quarter. Our team's efforts make us proud as we aim to farm out the project next year, with a good life targeted position in Q1. Now to our industrial portfolio: occupancy finished the quarter at 98.6%, the same as the prior quarter. That shows continued demand for well-located space in major markets. During the quarter, we completed 505,000 square feet of renewals, and our retention ratio was 83.2%. Renewal spreads averaged 30.8%. Onera put up a strong performance, with spreads averaging 46.2% over roughly 252,000 square feet of renewals; these fundamentals strengthen our confidence in selectively moving forward with our industrial development pipeline in the GTA, where construction is advancing nicely at our 1 million square foot building de and Choice Calliden Business Park. We still aim for completion in the second half of 2027, and our team continues to be active in RFP discussions with prospective single and multiuser tenants. We are also happy to report that we have begun development on a new build-to-suit industrial project on excess land at our Ajax property, which we acquired from Loblaw early last year. This multi-stage project is set to deliver 255,000 square feet, generating a development yield in the mid-6% range, and it should be finished in Q1 2028. On a separate note, we've shifted the NLS expansion building H1 from active development back into planning. That site is shovel ready, though we won't move it forward any further until NLS makes its decision regarding its option, which it has until April to exercise. If NLS chooses not to exercise, we'll then determine whether to proceed on a speculative basis. Going forward, we anticipate positive absorption in the fourth quarter will push industrial occupancy to higher levels by year-end, which speaks to the quality of our portfolio and ongoing demand for our well-located assets. We anticipate renewal spreads will ease during Q4, driven by a different blend of leases coming up for expiration, not by any change in market fundamentals. Finally, same-asset NOI in our mixed-use portfolio gained from contractual steps, though occupancy dipped for a time because we chose to terminate a lease early at our head office to make room for greater dosing requirements tied to the first capital transaction; in our residential portfolio, operating performance held steady, and tenant retention continues to be produced. Now shifting to transaction activity. During the quarter and afterward, we closed roughly $107 million in transactions. That included one acquisition for $39 million and three dispositions adding up to $68 million. With that, capital recycling activity so far this year comes to about $149 million, made up of $75 million in dispositions and $74 million in acquisitions. Among the acquisitions was a retail property in Burnaby, British Columbia, purchased for approximately $39 million. It sits on Kingsway in the Metrotown area, a high-traffic retail node that benefits from substantial residential densification and rising retail demand. Wholesale Club anchors the property, and a new 15-year lease with Loblaw provides healthy contractual growth over the lease term. Those sites had earlier been earmarked for mixed-use redevelopment, and this was done in view of a residential land market that had softened. This purchase illustrates Choice's capacity to pick up top-tier real estate while collaborating with Loblaw so that Loblaw can lock in tenant fees over the long term. In addition, we finished three dispositions during the quarter and afterward, among them our 50% stake in Slavet Alberta for $13.2 million. We disposed of Park 61 in Calgary, together with a noncore industrial portfolio consisting of four buildings, for $35.9 million, and we sold 120 Suzi Lake and Halifax — an older, unanchored retail property carrying near-term capital requirements — for $19 million, with that deal closing after the quarter ended. Those sales demonstrate our continued emphasis on enhancing the quality of the portfolio and freeing up capital from assets outside our core holdings. Looking ahead, aside from the portfolio acquisition we expect from First Capital, we anticipate that net capital recycling will be approximately balanced, and on that note, I'll turn the call over to Erin, who will walk through our financial results and capital allocation activity. Erin?

Thank you, Rael, and good morning to all of you. We're happy to share that this was yet another steady and robust quarter. Our results were fueled by solid organic growth, backed by occupancy that was nearly full along with healthy leasing spreads across our core business. Meanwhile, we keep reinforcing our balance sheet thanks to a disciplined method of allocating capital. During the quarter, reported funds from operations, or FFO, came in at $205.2 million, equal to $0.284 per unit on a diluted basis, which is a 2.2% rise compared with the prior year. That growth came from strong same-asset cash NOI growth of 3.1%. Contributions from acquisitions and developments mostly offset dispositions, higher refinancing costs and lower investment income, which partly held back FFO growth. Lease surrender revenue totaled $10.6 million and stayed fairly flat versus the prior year. In this quarter, that figure covered both amounts tied to our ongoing rightsizing program and other lease termination income. The third quarter marks the conclusion of our rightsizing program for 2026. After adjusting for the year-over-year effect of nonrecurring items, including the $0.7 million increase in lease surrender revenue and the $3.2 million reduction in Allied distribution, FFO growth stood at 3.5%. For the quarter it was $0.214 per unit, 11.5% higher than the prior year, which mostly stemmed from the timing of tenant improvements in maintenance capital. We still expect capital spend for full year 2026 and our AFFO payout ratio to be broadly consistent with the prior year. Now to property performance. Same asset cash NOI rose $7.8 million, or 3.1%, over the prior year. Broken out by asset class, retail same asset cash NOI grew by $4.8 million, or 2.5%, while industrial same asset cash NOI grew by $2.7 million, or 5.5%, including roughly 50 basis points of growth from bad debt recoveries. Increased base rents powered improvements across both asset classes, supported by robust renewal spreads, fresh leasing volume, contractual rent escalations, and greater recovery income. Same-asset cash NOI for mixed-use and residential climbed roughly $0.2 million, or 2.1%, largely on the strength of higher base rents within our mixed-use portfolio. Turning to the balance sheet: IFRS net asset value, or NAV, came in at $15.04 per unit, a rise of approximately $229 million, or 2.1%, versus the previous quarter. That number reflected a $139 million fair value gain on derivative financial assets connected to the unit consideration for the SCR transaction. Under IFRS, we have to book a derivative that captures the difference between Choice's unit price as envisioned at the time the deal was announced and Choice's unit price at quarter-end. Excluding that derivative asset, NAV would have been $14.86 per unit, which is 0.8% above the previous quarter. NAV also benefited from operations contributing $61 million net and a $60 million net fair value gain on investment properties, which was partly offset by a $33 million fair value loss on our investment in online properties. IFRS calls for marking this investment to market based on Allied's trading price at each period's close. In the quarter, fair value gains on investment properties came mainly from our retail portfolio, which reflected favorable cap rate and leasing adjustments backed by external appraisals. We posted a modest gain in our industrial portfolio tied to a disposition. We also recorded a write-down on properties under development connected to our residential development pipeline, largely in response to market conditions. Our balance sheet is still in excellent shape, with strong debt metrics plus significant liquidity and access to capital as we head toward the expected closing of the SDR transaction. We have roughly $2.4 billion of available liquidity through our corporate facility and cash on hand. We additionally possess roughly $4.1 billion in unencumbered properties; meanwhile, our ratio of debt to EBITDA, after netting out cash, remained steady versus the previous quarter at 6.9x. During the quarter, we closed a successful financing via our new Series Y unsecured debenture offering, raising $300 million in September. That 7-year offering carried a 4.836% coupon. The proceeds are earmarked to partly redeem our Series 2 unsecured debenture when it matures on November 30; having prefunded our November maturity, we have now taken care of the rest of our 2026 maturities. That leaves us able to concentrate for the remainder of the year on finishing the financing needed to close the FCR transaction. Even though financing costs are still above what we originally assumed for the deal, we have room to improve both returns and the cost of the financing we still need. We've also used the recent drop in rates to start hedging part of our expected financing needs for the transaction in a strategic way. On the total debt financing for the deal, we now anticipate a weighted average cost of roughly 4.5%, up from 4.2% in our original underwriting. As we look to next year, refinancing costs should stay a headwind as cheaper debt matures. Our next major maturity is $500 million in May. On development, spend for the quarter came to about $54 million. We handed off six retail development projects — 91,000 square feet in total, about $42 million invested, with a blended yield of 7%. Among them were four Shoppers Drug Mart locations, one QSR tenant and one automotive services tenant. Taken as a group, they show how solid our relationship with Loblaw is — we've been helping with its national pharmacy growth program — and they demonstrate our capacity to unlock value by intensifying surplus land throughout our current retail portfolio. We stay disciplined as we move our commercial development pipeline forward, putting priority on retail and industrial opportunities that deliver appealing risk-adjusted returns and build value over the long term. So far this year, we've invested roughly $100 million in development, and we anticipate that figure reaching about $150 million by year-end, with most of it going toward our retail and industrial pipeline. Looking ahead to the rest of the year, we're staying focused on three things: strong operating results in our core business, moving our commercial development pipeline forward, and making continued progress toward the expected close of the FCR transaction. In Q4, we expect robust growth in total NOI thanks to contributions from development deliveries completed over the past year, while same method NOI growth will likely land somewhat below Q3, reflecting the strong leasing results from the prior period, particularly in industrial. We're reaffirming the bulk of what we laid out for 2026. Our expectation is to keep occupancy steady and generate same asset cash NOI growth of 2% to 3%, with diluted FFO per unit landing between $1.08 and $1.10 for the year, and that figure leaves out any effect from the FCR transaction. Looking at the full year, we've revised our adjusted debt to EBITDA outlook to roughly 7x, down from 7.5x. That improved balance sheet projection reflects our deliberate move to even out capital recycling ahead of the FCR transaction, and it also benefits from reduced development spending. If the First Capital transaction closes in Q4 as we anticipate, we would expect adjusted debt to EBITDA of about 8.5x on an annualized basis once closing occurs. Everything else in our guidance ranges stays as it was. We plan to share the complete 2027 outlook, along with Q4 results, in February. With that said, Rael, David Nieall and I are happy to take your questions.

Rael, could you give us an update on how you're thinking about moving development projects forward in general, and perhaps Callison specifically? And does the slower pace have anything to do with the First Capital transaction, or are the two unrelated?

The two are unrelated. What we've consistently said, Mark, is that we'll move forward with a building on spec. Once we've leased it up or gained momentum, we'd begin another one in Caledon. And I'll tell you, as we mentioned in the script, there's solid RFP activity; so we're quite hopeful. And as soon as we have greater clarity on leasing timing, we'll be glad to move another one forward.

All right, great. Perhaps only one more; regarding the Allied investments, clearly, the unit price has dropped dramatically. Is there any strategic reason, or any reason, why you would still view that as something to hold? Do you think that may simply be going to — there could be a recovery there? And also tied to that, is this something Choice would consider getting more involved with. Obviously, you have more liquidity and financial capacity than allied itself does?

Yes. Look, as you said, Mark, we're clearly disappointed with the performance. That said, we think the Board has made some hard but truly necessary decisions, and we're supportive of all the steps they've recently taken, including the reduction in the distribution; and I think as far as our long-term hold, I would say everything is on the table, however, this could be a great turnaround story as you said, there could be upside and we believe there will likely be upside as more changes are implemented.

Thanks, and good morning. First, on the lease surrender revenue, which was sizable this quarter. Could you give more detail on the number of Loblaw assets that were rightsized? And is there anything we should expect in Q4?

This is Erin. The lease surrender revenue took in two Loblaw assets, and David can speak to those a bit, plus some smaller lease termination income tied to a few other tenants. But regarding our rightsizing program, we said at the start of the year that it would be fairly consistent with last year, meaning roughly $10 million, and that is where we stand right now. So there will be no further rightsizing lease termination income in Q4; we are finished for the year. Then for next year, we will provide more guidance during Q4. David can give some detail on which locations were involved this quarter.

There were two this quarter; both were in Alberta — one in Calgary, and the other in a smaller market last bridge. Broadly speaking, we backfilled with fish and dollar stores, and those tenants are the ones taking over the space that Loblaw downsized. Much of the termination payment really covers the re-leasing costs and the downtime, but every rent we've received from the new leases is higher than what our in-place leases carry. So from the rents, we have a bit of upside there as well.

Understood, Dave. On the next question about the transaction, you seem upbeat about getting it closed in Q4. So when it comes to Competition Bureau approvals, is there a timeline within which you'd expect an answer either way?

Thank you. This is Simone. I appreciate your question. We don't have a precise timeline, though the process is moving along very well, and that is exactly why we feel optimistic about Q4?

All right. After you receive that approval, how much time will the closing require once the approvals are in hand?

Right. We're quite well prepared, so there won't be much of a gap between the announcement that approval is granted and the closing, which comes a couple of weeks later.

All right, a couple of quick items. Okay. Perhaps one final brief question regarding the financing side. What is your current expectation for raising that? I believe it's roughly $800 million in debentures for the SCR transaction? And then I know you mentioned a 4.5% weighted average, but what specifically applies to the new debenture rates?

For the $800 million of new debentures, our present assumption is 5%, correct? And that reflects a mix of tenors. So — and then when you consider 2027, you ought to be modeling 10-year debt; so it likely depends on where rates stand today, and is really closer to 5% as well.

Yeah, and maybe to go back to the FCR deal for a moment — with those updated financing costs you disclosed, has anything shifted in your outlook compared with the initial dilution you cited?

Yes, Pammi, this is Erin. We're expecting roughly an additional $0.01 in dilution.

Okay, so regarding the — I suppose, the review that's still underway with the bureau, which parts of that process might move things, whether to mid-Q1, late Q1, or early Q — or rather, this quarter? And what factors could either stretch it out or speed it up?

Yes, thanks for asking. I wouldn't point to specific pieces. It's functioning, and we've been moving through it in a pretty constructive way. It's simply that — we wanted to be fully transparent that this process isn't in our hands, and so it could slip into Q1. But as we mentioned, we're feeling fairly good about it, and we still expect it to be late this year, early next year.