Choice Properties Real Estate Investment Trust

Senior Vice President of Finance. Please go ahead.

Thank you. Good morning and welcome to the Choice Properties Q4 2024 conference call. I'm joined here this morning by Rayl Diamond, President and Chief Executive Officer, Mario Barifato, Chief Financial Officer, and Nadia Collins, Chief Operating Officer. Rayl will start the call today by providing a brief recap of our 2020-2024 performance and we'll cover the highlights of the fourth quarter. Now we'll discuss our operational results and development activity, followed by Mario and me, who will conclude the call with a review of our financial results and 2025 outlook before we open the lines for Q&A. Before we begin today's call, I would like to remind you that by 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, or exceptions that are not historical facts. These statements are based 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 four 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 Q4 2024 financial statements and management discussion and analysis, which are available on our website and on CDAR. And with that, I will turn the call over to Rael.

Thank you, Erin, and good morning, everyone, and welcome to our Q4 conference call. We are pleased to deliver another solid year of operating and financial results. Our business is strong and we have a proven strategy. Our fourth quarter and full year 2024 performance demonstrate the quality of our necessity-based portfolio and the strength of our platform. In 2024, we once again successfully met a full year earnings outlook. We maintained near full occupancy rates throughout the year and exceeded our same asset cash in our target while delivering on the high end of our FFO growth target. We also ended the year with conservative debt metrics and ample liquidity. Throughout the year, we maintained our market-leading portfolio by completing approximately $425 million in real estate transactions, including around $260 million of acquisitions and $165 million of dispositions. We made significant progress on our development pipeline by adding approximately 300 million of high-quality real estate to our portfolio. This included 1.2 million square feet of space across 14 projects, highlighted by 12 retail intensification projects, a Loblaw industrial ground lease at Caledon Business Park, and our purpose-built rental building, Unity, at Mount Pleasant Village in Brampton, Ontario. Our total investment of approximately $235 million was delivered at an average yield of 7%, resulting in significant NAV creation. Supported by the strength of our 2024 performance, our Board of Trustees has approved our third consecutive annual distribution increase, effective March 2025. This increase demonstrates our commitment to sharing our growth with our unit holders. Turning to our fourth quarter results, our momentum continued in the quarter. We delivered strong operational and financial results and advanced our development pipeline. In addition to operating performance, we completed $80 million in total real estate transactions, which included about $60 million of acquisitions and $20 million of dispositions. Our largest transactions in the quarter were the acquisition of a grocery-anchored retail sense in Ottawa and the acquisition of a 50% interest in a Loblaw Halifax industrial property. The retail center is an 85,000 square foot site anchored by Farm Boy, which is scheduled to move from this location. Choice purchased the asset and has concurrently entered into a 15-year lease with Love Law to backfill the Farm Boy upon their lease expiry in 2027. This eliminates leasing and downtime risk while delivering strong contractual NOI growth. The industrial acquisition in the farm The industrial acquisition is the fourth and final asset in a 50-50 joint venture we announced with Crestpoint last quarter. Choice will manage the portfolio. The property is an approximately 215,000 square foot site with a 15-year lease from Love Law with annual contractual rent steps of 2%. These transactions demonstrate our team's ability to leverage our relationship with Love Law, seizing market opportunities, and highlights the significant advantages of Choices' right of first offer on Loblaw's remaining real estate assets. Before I turn the call over to Niall, I want to touch on market fundamentals across our asset classes and the overall economic environment. Our grocery-agent necessity-based retail portfolio continues to be the largest and most resilient in Canada. Our assets performed exceptionally well throughout 2024, and our national footprint of neighborhood centers delivered rental rate growth comparable to those in core urban areas. We continue to experience high leasing demand with many of our tenants remaining interested in expanding their footprints, particularly in grocery anchored centers. As an example, of both this demand for retail space and the benefits of our strategic relationship with Loblaw, we're in various stages of planning and currently working with Loblaw to build out six new grocery stores across the country. Two are intensifications of existing sites, one of which is currently under active construction. Two are new developments on land we purchased in the fourth quarter, and the remaining two are in planning. In addition, we have nine shoppers drug marts in active development with a significant number of additional sites in different stages of planning, and we expect to continue to capture 25 to 30% of the growth of shoppers drug marts expansion. In industrial, we continue to benefit from untapped rental rate growth as our low-in-place rents adjust to market, evidenced by strong overall leasing spread. Despite rental rate growth moderating in 2024, After several years of robust growth, demand for our high-quality industrial assets remained high as supply in key markets remains limited. Lastly, while our residential assets today represents a small portion of our portfolio, we have long-term conviction in residential as an asset class. We continue to create opportunities and value by advancing our mixed-use residential properties through entitlement process. Overall, our business is in exceptional shape. Looking ahead to 2025, we acknowledge that the geopolitical threats continue to cause overall market volatility. Nevertheless, Troyes' portfolio remains in an enviable position. Our portfolio and platform are built to withstand economic cycles, and our disciplined approach to capital allocation and balance sheet management distinguishes us from our peers and provides us the capacity to continue to pursue growth opportunities. This is Mario's last conference call, and I want to thank him for his leadership and vision, which have guided us over the last 10 years. Mario, we are grateful for your contributions and the legacy you leave behind. You've also ensured a very smooth transition to Aeron, leaving us in very good hands. With that, I'll pass the call over to Niall to discuss our fourth quarter operational results and development activity. Niall?

Thank you, Raoul, and good morning, everyone. As Rael mentioned, our portfolio continues to deliver stable and consistent cash flow growth. We ended the fourth quarter with stable portfolio occupancy at 97.6%. During the quarter, we had approximately 794,000 square feet of leases expire, of which we renewed 610,000 square feet, achieving a 77% tenant retention. These renewals were completed at an average rent spread of 21.6%. We also completed 79,000 square feet of new leasing, resulting in negative absorption of 105,000 square feet, which was largely driven by vacancies in our Ontario Retail Portfolio and Atlantic Industrial Portfolio. I will comment on our plans to backfill this space in a moment. Turning to each of our asset classes. In our Retail Portfolio, occupancy remained stable at 97.6%. During the quarter, 485,000 square feet expired, We renewed 377,000 square feet for a tenant retention of 78%. These renewal spreads averaged 16% above expiring rents, with strong growth across all retail categories. We saw the strongest growth in the quarter from full-service restaurants, sporting goods, pharmacy, and medical. We also completed 65,000 square feet new retail leasing in the quarter, where average rents over the lease term is 67% higher than our average in-place rents for retail. This largely offsets the 108,000 square feet of expiries that did not renew in the quarter. Of the space that did not renew, 78% is already committed to backloads in 2025, with rents 53% higher than expiring rents of the prior tenant. During the fourth quarter, we generated $2.6 million of lease rendering revenue, The majority of this was the continuation of our right-sizing program, with Loblaws generating a total of $2.2 million of lease surrender revenue. These right-size opportunities create value for our properties as the spaces are filled by complementary third-party national tenants at higher ends. Our industrial portfolio occupancy of 97.9% was 20 bits lower than the last quarter. We had 293,000 square feet of expiries all within our Alberta and Atlantic portfolios, and we renewed 223,000 square feet for a 76% retention rate. Least renewal spreads remain strong for these regions, averaging 37% above expiry. We also completed approximately 14,000 square feet of new leasing. The small occupancy decline in the quarter was expected, and was primarily due to 41,000 square feet of vacancies in Atlantic and 29,000 square feet in Alberta. This was also temporary as our team has already executed 59,000 square feet of new leases related to this space with lease commencements in 2025. We expect industrial occupancy to improve over 2025, ending the year slightly above 98.5% based on strong tenant retention and vacant space being released. We continue to have embedded rental growth in our industrial portfolio, with average in-place rents $9.76 at the end of the quarter. Lastly, our mixed use and residential portfolio continues to perform well, with occupancy at 94.1%. Turning to our developments, as Rayl mentioned, we are very proud of the progress we made in our development pipeline. During the quarter, we delivered approximately 70,000 square feet of high-quality commercial GLA to our retail intensification program, and successfully delivered 921,000 square feet of industrial ground leases to Loblaws at our Caledon Business Park location. Cash rent commenced at the Caledon site on January 1st. In addition, we continue to advance our zoning and planning activities for future residential development. An example of this is our project at Woodbine and Danforth, where we obtained City Council approval during the quarter. In November, the project received zoning approval for the redevelopment of a 35- and 10-story mixed-use asset, including 422,000 square feet of purpose-built rental along with a grocery store. Site plan approval for the proposal was then submitted in September. While project economics on certain sites are improving, others, particularly large master plan sites, continue to be challenged due to elevated costs, lower land values, and the current impact of oversupply in the GTA condo market. During the fourth quarter, we made the decision to pause our Golden Mile redevelopment project because of increased upfront site servicing costs related to provide city requirements for infrastructure and our partners' decision not to proceed with the purchase of the condo block on the site. Our development and construction teams will continue to evaluate solutions to improve the project viability while continuing to advance a broader near-term project pipeline. I will now pass the call over to Mario to discuss our financial performance.

Thank you, Niall, and good morning, everyone. We're very pleased with our financial performance in the fourth quarter as our business continues to deliver stable and consistent growth. Our afforded funds from operation for the third quarter was $188.2 million, or $0.26 per unit. This was a clean quarter with non-recurring items limited to lease surrender income of $2.6 million, offset by $3.1 million, a temporary increase in G&A, project, which we noted last quarter. These two items account for a net charged FFO of $500,000. On a per unit diluted basis, our reported FFO for the fourth quarter, 26 cents per unit, reflects an increase of approximately 2% from the fourth quarter of 2023. This increase was primarily due to higher same asset NOI and net FFO contributions from completed developments, partially offset by higher interest costs. Turning to our properties, By asset class, retail same asset NOI increased by 4.2 million, or 2.3%. The increase was primarily driven by higher base rent from contractual rent steps, renewals, new leasing, and higher recovery income. Industrial same asset cash NOI increased by approximately 2.6 million, or 6.4%. This increase was primarily due to higher rent, higher base rent from leasing activity, new leasing, and higher capital recoveries. Mixed use and residential same asset cash NOI was relatively flat to the same quarter last year. Turning to our balance sheet, our IFRS NAV for the quarter was $14.07 per unit, an increase of $25 million or 0.2% over last quarter. Our NAV growth was driven by a contribution of $48 million from operations and a net fair value gain of $14 million from our investment properties. This was offset by a decline of $36 million on our investment in the units of allied properties where we are required under IFRS to mark to market this investment to its trading price at the end of each period. Our fair value gain on investment properties in the quarter was primarily driven by cash flow growth in the retail portfolio and the completion and transfer of the industrial Loblaw ground lease at our Choice Calvin Business Park. These gains were partially offset by a loss recorded due to a change in the circumstances at our Golden Mile redevelopment site, as mentioned by Niall. Turning to our financing activities, We continue to take a prudent approach to capital management to benefit from the stability provided by our industry-leading balance sheet. We once again enter the quarter and solve the financial position with strong debt metrics and ample liquidity. Our debt to EBITDA ratio was seven times. We continue to maintain a fully undrawn $1.5 billion corporate facility, and this is further supported by approximately $13 billion of unencumbered properties. During the quarter, we completed two mortgage refinancings and one new financing to fund our joint venture acquisition with Crestpoint. These mortgages were for total proceeds at a share of approximately $96 million. Their interest at a weighted average rate of 4.72% and were completed at an average term of approximately 10 years. The refinancing activity was completed on total maturing debt. The refinance activity was completed on total maturing debt of $67 million at a weighted average cost of 3.75%. representing enough financing of $21 million. Subsequent to the quarter end, we've repaid our $350 million 3.546 Series J senior unsecured debenture at maturity and issued our 300 million Series V unsecured debenture. The debenture was completed for a term of five years at an all-in rate of 4.293%, filling an underutilized spot on our balance to the 10-year debt ladder. The issuance was completed with a credit spread of 102 basis points, making it Choice's second lowest five-year spread ever. We also leveraged our secured lending relationships, funding $136 million a share on the recently transferred lawful ground lease at Choice Caledon Business Park. The mortgage is coterminous with lawful These two financings total $436 million and were completed at a weighted average rate of 4.48% in an average term of approximately 11 years, which once again highlights our ability to prudently manage and de-risk our balance sheet in a cost-effective manner. So once again, we are pleased with another strong quarter and meeting our 2024 annual earnings outlook. Choice is well-positioned. We have confidence in our business to continue to deliver stability and growth to our unit holders. And I'd now like to turn the call over to Erin to speak to our 2025 outlook.

Thanks, Mario. Looking ahead, we have a solid plan in place to continue to deliver on our operational and financial goals. For the full year 2025, we expect to maintain stable occupancy with approximately 2% to 3% year-over-year growth and same asset cash NOI. In addition, we expect to deliver annual FFO growth unit diluted between $1.05 to $1.06 reflecting approximately 2% to 3% year-over-year growth. We plan to continue to advance our development pipeline, with the majority of our spend focused on the advancement of our industrial development at Choice Caledon Business Park and our retail intensification program. Lastly, we remain committed to maintaining the strength of our industry-leading balance sheet and expect debt to EVA to remain below 7.5 times. With our recent unsecured debt issuance, we've addressed a significant portion of our 2025 maturity. And with that, Rail, Niall, Mario, and I would be glad to answer your questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Lauren Kelmar from Desjardins Capital Markets. Your line is open.

Thanks. Good morning, everyone. And I guess a bittersweet goodbye to Mario on the calls, at least. Just on the industrial side of things, it sounds like it's a decently bullish outlook, despite some of the broader headwinds. Within the portfolio, do you guys have a rough idea of the number of tenants or from a revenue percentage that could potentially be impacted by the potential tariffs? And then, yeah, so maybe I'll leave it. Oh, yeah, and then any, are you guys seeing any impact on leasing timelines as it relates in the industrial portfolio?

Hey, Lauren Israel, good morning. Look, I think from a macro point of view on tariffs, look, it's very early days and everyone's monitoring you know, the situation closely. I'll tell you what we know is, you know, we have a very high quality portfolio that's generic, that can accommodate a wide variety of tenants. And then when we look at the leasing we've done for 2025, we have renewed 85% of the tenants already rolling. And then if you think about the portfolio overall, like our portfolio has truly demonstrated real resilience, and we expect it to continue to do that. You know, if you think about just retail for a second, you know, we're seeing strong demand from retail tenants, and tariffs obviously don't have an impact on the fact that the limited supply in the majority of our tenants are true necessity-based tenants. So, as I said, we'll monitor the situation, but we don't expect a significant impact at this point.

Okay, that's good to hear. And then just quickly, maybe for Niall, on the Loblaws developments, the ground-up developments, can you give us an idea of what type of yield you would expect to get on those projects? Hi, Lauren. It's typically 7.5%. And would it be the same for the intensifications, or would you be able to get higher on the intensifications?

It's around the same on the intensifications, I promise.

Okay, perfect. That's all from me. I'll turn it back.

Your next question comes from a line of Brad Sturges from Raymond James. Your line is open.

Hey, good morning. Just wondering on just a Because, you know, on theme on industrial, just, you know, considering the laying bank you have today and the cost that you have on it, married with, you know, maybe a little bit more of an uncertain macro picture. Like, how do you think about new development in industrial? Would you still consider spec or, you know, switching gears more to, you know, build a suit or pre-leased sort of project at this stage?

Yeah, look, As you said, we have a real competitive advantage just given the land cost base. At the moment, we're actually building as much as we can on the site. We couldn't actually go quicker. The earliest we could actually start spec construction or new construction would be probably mid to call a Q3 of 25. And then if you see in our disclosure, we've seen quite a significant decrease in construction costs. So, you know, that coupled with our land pricing, we have a real cost advantage over others, which gives us the confidence to potentially go on spec pending no major dislocation in the end up for market. And while we've seen, you know, quite a few RFPs responding to, and as I said, we've got time to monitor the situation and move forward accordingly.

Okay. That makes sense. And just, More broadly speaking, I guess there was a little bit of transitional vacancy in the industrial portfolio, as you alluded to last quarter. How do you think about the vacancy rate in the next couple of quarters for industrial? Hi, Brad. It's Niall.

We see that vacancy rate improving because there has been a lot of absorption the last quarter. The meetings we've had with the brokers, It was a significant take-up in the GTA in Q4, which is voting well for 2025. Okay.

And in terms of what's left to do from an expiry perspective, there's no major non-renewals you're expecting at this point? No. Okay. I'll turn it back. Thank you.

Your next question comes from a line of Sam Demiani from TD Securities. Your line is open.

Thanks, good morning everyone. So first off, just I guess for Niall, your comment about Golden Mile deferring that was that what were the main reasons you mentioned, you know, oversupply in the GTA market? Like were there other reasons that were really were triggers there? Was it really just the partner not willing to go ahead? You know, could you go ahead on this project with a different partner and other other residential sites in the GTA that you would consider moving forward on in the near term?

I'll answer the last part of the question first. Yes, we are moving ahead with our sites in the GTA. What's particular to Golden Mile is the infrastructure for Golden Mile, both within our land and the external servicing is quite high. And there is a landowners group that is working with the city to try and figure out how to do this more effectively and efficiently. There's also no DC credits for the infrastructure that's created by the landowners group. So it's creating a bit of an abnormal situation just for this one particular master plan.

Okay, that's interesting. It sounds like something that should be fixed. Maybe just moving over to those development sites acquired in Calgary and Edmonton, do you have the total retail GLA that you're expecting to build on those and what rents you're targeting. I guess you mentioned the development yields kind of in the mid-sevenths.

Hey, Sam. It's Rael. The one in Edmonton, it's around 35,000 feet, and the one in Calgary, you know, our share, I believe, is around 100,000 feet. You know, the yields Niall commented on were general across everything we're doing with Love Law. You know, these new developments may be, you know, slightly lower than that, but not significantly lower.

Okay. Maybe just one last one for me. I mean, the comment on the 16% renewal spreads and leasing, I think that's a bit of a different metric than you've disclosed historically because it includes the average rent over the new term. How would that metric compare to the last couple years?

I can answer the Calc and then maybe now I can talk about SPEDS with SAMS. The 16% is what we've been discussing on the call over like the past couple quarters, which is ending to average. And then in our docs, we've also provided ending to year one as well. And what we saw in spreads in 2024 was relatively consistent to what we saw in 23 as well and what we expect going forward in 25.

I don't think we have the going back further, Sam, on the comparables. We don't have it handy here.

Okay, great. That's helpful. Thank you, and I'll turn it back.

Your next question comes from a line of Mark Rothschild from Canaccord. Your line is open.

Thanks, Sam. Good morning, everyone. So I understand that the Golden Mile development might be somewhat unique, but Rail, in your comments, you spoke about long-term conviction and residential, but you're not really undertaking anything significant now, even though the balance sheet is in pretty good shape. Is there something that you would need to see? Is the cost coming down? Is the condo market improving for you to work more aggressively in advancing some of the development projects you have? Because there obviously is quite a bit of potential in the portfolio.

Yeah, I think, Mark, I think what made Golden Mile unique is that we're relying on condo sales to, you know, almost supplement our rental building a bit. So we, as Niall said, we're pivoting to, you know, call it single tower rental only buildings. And we're definitely seeing a softening in costs, interest rate stability, or interest rates coming down. And that's what gives us that conviction that we believe over the next, call it, 12 months, we can actually get a project off the ground. Maybe Niall can just give a bit more color.

Yeah, Mark, I'd add to that that we're having a lot of success with the planning authorities as well, moving through entitlements and making modifications. They're moving a lot faster than we expected. So we're hoping to get two projects in the near term, moving action shovels in the ground with board approval, pending board approval. Okay, great. Thanks. That's all for me.

Again, if you'd like to ask a question, please press star 1 in your telephone keypad. Your next question comes from a line of Himanshu Gupta from Scotiabank. Your line is open.

Thank you, and good morning. So in your same asset NOI guidance of 2% to 3%, How much are you assuming for the industrial asset class? And then, you know, I think you mentioned occupancy, industrial occupancy to be 98.5% by the year end. I mean, what kind of rental spreads are you expecting on those expires as well?

So, Himanshu, if you think about a same asset, retail should be relatively consistent in 2025. and now can provide more color, but industrial in 2024 had a lot of role in the GTA, which significantly benefited us. When you think about 2025 for industrial, our same asset is going to be lower just because of where our leases are rolling more out west and Atlantic, but I'll hand over to Mal to give a bit more color there.

Yeah, we've only got three leases in Ontario this year. The first 130,000 square feet, you're going to see spreads that you're used to seeing and are quite typical. I mean, one very large renewal, which is a fixed rate renewal at the end of the year.

Got it. That's helpful. So only three in Ontario. And I guess I think a bulk of them is coming in Alberta, right? I mean, as per your disclosure, Calgary and Edmonton. Correct. Okay. Okay. Fair enough. And then any comments on, you know, Amazon kind of exiting the Quebec market? I mean, how does that impact you? I think you have one property in Laval. Maybe any thoughts there?

That's correct. We have one property in Laval that's leased until August 2032. We haven't heard a formal response from Amazon yet, so we're waiting to get that.

Okay. And I mean, based on your, it looks like no response, I get it. Do you think the space will be like going to the sublease market? Or I mean, how will that impact on the needle?

We're not quite sure yet. Like there is a significant rent lift between the in-place release rent and the market that I'm sure Amazon is looking at. And we share in that. So there is upside.

So, Himesh, I think we hope that they take it to market because we will share in their growth, as Niall said. But, you know, they've improved the space significantly. They're not using the space. But we have a lease with them, which, as Niall said, we're waiting on, you know, feedback from Amazon.

Got it. And I'm assuming your guidance basically assumes that you receive the rent for the full year, 25. So, no provision there. Correct. Okay. Okay. Fantastic. Thank you. And maybe just last question on the capital allocation. Rael, I mean, again, you know, active capital recycling year last year. I mean, given where the cost of that financing is, you know, unsecured adventure market is like wide open here. Do you see yourself to be a bit more opportunistic on the acquisition side?

We hope so. And, you know, there are a few things we're working on that hopefully come to fruition. So we'll have an update for you next quarter.

Okay, fair enough. Thank you all, and I'll turn it back.

Your next question comes from a line of Pommy Burr from RBC Capital Markets. Your line is open.

Thanks. Maybe just sticking with the line of questioning around industrial products. Have you seen any change at all in terms of maybe the opportunities coming out in the market from an investment standpoint, acquisitions related, and any changes in pricing where yields are coming in?

So, I mean, some of the opportunities we're actually looking at the moment are industrial. They're actually off-market opportunities. I'd say there has been no real change in pricing at

um on industrial yet like it remains strong and it seems to still be you know deep pools of of capital looking at it and with these vendors um is there any are they motivated or is it more just cycling out of maybe some funds or any color you can share them

Yeah, so one of the vendors is, one is a Loblaw deal that we have the right to purchase, and the other one is an off-market opportunity that we've been working with the vendor for about nine months on. I'm sorry, would these be in the GTA? The one, the Loblaw one is in the GTA. The other one is across Canada. Got it.

And then I guess... Oh, sorry.

I just said a few locations.

Okay. And then I guess, you know, just in response to the prior question from an investment standpoint, are the bulk of the opportunities then with, like, how would you sort of characterize the investment size, I guess, in terms of what's under review from an acquisition perspective?

I would say in total around $350 million.

Got it. Okay. Thanks very much. I will all turn it back.

And that concludes our question and answer session. I will now turn the call back over to Royal Diamond, CEO, for closing remarks.

Thank you, Rob. And thanks, everyone, for joining us this morning. And thank you for your interest and your investment in choice.

This concludes today's conference call. You may now disconnect.