Choice Properties Real Estate Investment Trust

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Choice Properties Real Estate Investment Trust first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I will now hand the call over to Simone Cole, General Counsel and Secretary. Please go ahead.

Thank you. Good morning and welcome to Choice Properties Q1 2026 conference call. I'm joined this morning by Rail Diamond, President and Chief Executive Officer, Aaron Johnston, Chief Financial Officer, Niall Collins, EVP Development and Construction, and David Moalem, SVP Leasing and Operations. Rael and Erin will provide a brief recap of our first quarter operational results and highlights before we open the line for Q&A, where Niall and David will join to answer your questions. 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 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 CDAR+. And with that, I turn the call over to Rael.

Thank you, Simone, and good morning, everyone. Welcome to our Q1 conference call. Before I begin my remarks on our strong first quarter results, I'd like to first briefly revisit the transformational transaction we announced two weeks ago. On April 16th, we announced that Choice, together with our partner, Kingstead Capital, has agreed to acquire First Capital REIT for approximately $9.4 billion. At closing, Choice will acquire approximately $5 billion of First Capital's high-quality retail assets with Kingsett acquiring the remaining assets. This is a highly compelling transaction. Opportunities to acquire assets of this quality and scale are extremely rare, especially those that align so closely with our strategy. This acquisition further strengthens our portfolio and solidifies choice as Canada's leading REIT. We look forward to providing updates on this transaction's progress throughout the year. Turning now to our first quarter results, we delivered another healthy quarter of strong operating and financial results as our team continues to execute on our strategic priorities. In Q1, portfolio occupancy remained resilient at 98.1%, supported by exceptional renewal activity across our portfolio with average leasing spreads of 21.8%, driving same asset and OR growth of 3%. We're encouraged by strong leasing momentum across the portfolio with healthy activity in both retail and industrial. We continue to backfill retail space, execute on value creation initiatives, and drive industrial growth at near full occupancy. Focusing on retail, we continue to see healthy demand across the portfolio from a variety of necessity-based retailers. During the quarter, we completed 364,000 square feet of renewals and 97,000 square feet of new leasing. Occupancy was largely unchanged at 97.9%. Renewal spreads remained very strong at 17.2%, led by Atlantic and Ontario regions. The spread was primarily driven by 28,000 square foot renewal representing the first market renewal in 15 years for this tenant, which had been paying well below market rents. Excluding this renewal, the average retail spread was still strong at 13.2% and in line with our expectations. Retail retention was 75.8%. This was largely driven by the early termination of two Toys R Us locations and a strategic termination that is already backfilled at higher rents, totaling approximately 50,000 square feet. Excluding these terminations, retention was approximately 85%. This is broadly in line with our historical rates and consistent with our strategy of capturing value from tenant turnover in a strong retail leasing environment. Over half the space vacated this quarter already has committed deals. These leases are expected to commence later this year. We're encouraged by backfilling progress at former Toys R Us locations as we are in advanced leasing discussions with multiple retailers. We have also advanced several value creation initiatives within our retail portfolio during the quarter, including the revitalization of the retail space at Bloor & Dundas. Loblaw vacated 90,000 square feet of warehouse space in a former Zellers in March of this year, and we're now repositioning the property to introduce a new shoppers drug mart and a grid line alongside Loblaw's investment in a no-fills conversion. This initiative is expected to generate approximately $2 million of incremental NOI at stabilization in the second half of 2027, and has created approximately $25 million in total incremental value. The revitalization does not introduce any additional lease encumbrances that would impact our longer-term redevelopment plans. Overall, these initiatives highlight the strength of our assets and our team's ability to identify and execute on value creation opportunities within our portfolio. In industrial, market conditions remain resilient across the country, with quarter-end occupancy of 98.6%. During the quarter, we completed 103,000 square feet of renewals at a spread of 46.2%, driven primarily by Alberta and Atlantic portfolios. Retention in the quarter was 56.6%, largely driven by 73,000 square foot non-renewal in Edmonton, where we were unable to accommodate the tenant's growth requirements. We also completed 24,000 square feet of new leasing in Alberta and Ontario that rents approximately 40% above our average in-place rates. In the GTA, we continue to see a tightening of supply of high-quality, large-bay industrial products as we continue to advance the next phase at Choice Caledon Business Park, we expect to be one of the only available options for new space over 750,000 square feet in the market next year. Lastly, in our mixed use and residential portfolio, occupancy remains stable with favorable leasing at certain residential assets. Moving to our transaction activity, with minimal activity in the quarter, As announced on our Q4 call, we completed two retail acquisitions in Montreal and Edmonton totaling $28 million. Beyond this, there was no additional transactions completed in the quarter. We are pleased to announce that Wellington Investments Limited has acquired our partner's 50% interest in our G2 purpose-built rental residential development in downtown Toronto that we expect to break ground on this year. This partnership allows Choice to advance the project with a strategically aligned equity partner while delivering meaningful, affordable housing to the City of Toronto. Finally, I want to acknowledge the release of our 2025 Environmental, Social, and Governance Report last night. This year's report highlights many of Choice's achievements over the last year, including the completion of the first full year of our three-year climate action roadmap, advancing our pathway to net zero by 2050, and the expansion of our social impact and placemaking initiatives nationwide. The report can be found in the sustainability section of our website, and I encourage you to all take a read. With that, I'll turn the call over to Erin to discuss our financial results and additional capital allocation activity. Erin?

Thank you, Rob. And good morning, everyone. We are pleased with our financial performance in the first quarter. Our underlying business remains in excellent shape. For the quarter, our reported funds from operations was $196 million, or 27.1 cents, on a per-unit dilution basis, representing an increase of 2.7% year-over-year. This performance was driven by robust total cash and OI growth of 4.2%, which included strong same-asset cash NOI growth and contributions from net acquisitions and new development and higher lease surrender revenue. This was partially offset by lower investment income, higher interest expense from refinancing activity, higher G&A expense, and lower fee income. Included in our results are certain non-recurring items, including approximately $1.9 million of incremental lease surrender revenue compared to the prior year, and $3.2 million of lower investment income related to Allied's distribution reduction. Excluding these items, FFO per unit growth was approximately 3.5%, reinforcing the continued strength of our core operations. AFFO in the quarter was $0.247 per unit, a decrease of 0.8% from the prior year, as FFO growth was offset by higher maintenance capital spend in the current year, which was largely timing related. Our AMFO payout ratio in the quarter was 78%. Turning to our property performance, same asset cash NOI was strong, increasing 7.5 million or 3% over the prior year. By asset class, retail same asset cash NOI increased 6 million or 3.2%, and industrial same asset cash NOI increased by 3 million or 6.2%. Key drivers for both were higher base rents from new leasing activity and contractual rent steps. Mixed use and residential same asset cash NRY decreased by approximately 1.5 million or 15.4% primarily due to a property tax incentive received in the prior year. Moving to the balance sheet. IFRS net asset value or NAV for the quarter was $14.53 per unit. representing an increase of approximately 67 million or 0.7% compared to year end. The increase was driven by a 51 million net contribution from operations and a 66 million net fair value gain on investment properties, partially offset by a 49 million fair value loss on our investment in the units of allied properties. As a reminder, we are required under IFRS to mark to mark this investment in Ally to its trading price at each period end. The fair value gains on investment properties were primarily driven by our retail portfolio, which included cap rate adjustments in Ontario, Quebec, and BC, supported by external appraisals and favorable leasing outcomes, particularly from backfilling initiatives at higher rents. This was complemented by a modest gain in our industrial portfolio. We continue to maintain our industry lending balance sheet with excellent debt metrics and significant access to capital. including approximately $1.6 billion of available liquidity through our corporate facility and cash on hand, and approximately $14 billion of unencumbered properties. Our debt to EBITDA ratio was seven times and remained unchanged since year end. We had no material financing activity or debt maturities in the quarter. Turning to our development activity. During the quarter, we completed two retail intensifications totaling 22,000 square feet for a blended yield of 8.9%. These projects included 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 continue to demonstrate our ability to generate attractive returns by intensifying land at our existing neighborhood retail centers. Looking ahead to the balance of the year, we will continue to prioritize operational excellence across the portfolio but also progressing towards the closing of the announced first capital portfolio acquisition. As the timing of closing remains uncertain at this stage, when referencing our outlook, we are doing so excluding the financial impact of the transaction. Recall, we are expecting to maintain stable occupancy and deliver 2 to 3% same asset cash NOI growth and FFO per unit diluted between $1.08 and $1.10 this year. While we expect earnings growth to moderate slightly over the next two quarters as we allow acquisition-related favorability, the timing of lease revenue compared to the prior year, and the impact of Ally's distribution reduction, we remain on track to deliver on our full-year outlook. With that, Rayl, David, Niall, 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 in your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from a line of Himanshu Gupta from Scotiabank. Your line is open.

Thank you and good morning everyone. So just on the lease surrender revenue, should we expect anything in Q2 as well? And then maybe can you elaborate, is it related to Toys R Us or, you know, you have been doing some right-sizing of Loblaws stores last year or anything related to that?

Good morning, Hemant. It's Erin. When we look at our lease surrender revenue this year, it's primarily related to Loblaws right-sizing consistent with prior years. We expect it to be relatively the same as last year in terms of total dollar value, but most of it will be spread between Q3 and Q4.

Okay, thank you. And I mean, do you know like how many Loblaws stores are in pipeline for this right sizing? And is it like mostly urban locations? What's the typical size reduction Loblaws is doing?

So in the last couple of years, we've had between two and four per year. It depends on the site. And maybe I'll let Rail or David comment a bit on locations.

Yeah, so for hey mentioned David speaking. So in terms of locations, it's mixed across the country. We have mostly larger stores, so call it super stores or we have probably go that convert to a max in Quebec, but essentially for this year we're thinking they'll be approximately four locations. I'll be right size.

OK, four locations exactly and then sorry in terms of square footage. How much is the typical reduction like? Like 20,000, 30,000, what's the typical reduction in size?

Yeah, it depends on the site and configuration, but about 30,000 is fairly standard. Okay.

Okay. Thank you. Thanks for that. Moving on, changing gears here, on IFRS valuation, I think, you know, retail cap rate was brought down by slightly two basis points. Do you see this capital further going down as the first capital transaction is closed? I would believe that should be a good positive mark on retail market valuation.

I know, Manchu. Yes, we continue to see appraisals come in slightly tighter than what we have on our books quarter after quarter, which was most of our retail gains. I know our team, as we bring in the first capital acquisition, we'll look at the values of those assets and ours. And so we'll update you when we know more, but.

Okay, fair enough. Maybe the last question is on the leverage, I mean, next year. In anticipation of, you know, increase in leverage, do you expect to do capital recycling this year or wait for this transaction to close? and any disposition targets you have, you know, post FCR closing.

Okay. So, why don't I start it, Hemantri, and then Aaron will just add a bit additional color. As we said on our earlier call in April, what we're thinking post the transaction, what we've modeled initially is just being balanced from a capital recycling point of view. And right now we were unbalanced to the tune of roughly $100 billion, buying more than we were selling. But look, balance sheet strength has always been exceptionally important to us. So as we have more to share on our plans on how we will delever and potentially delever quicker, we will share it with you. But, you know, I'd say for this year, outside of the major acquisition that we've already announced, like I think our, you know, acquisition activity will be very light. So we will do some, you know, small trimming prior to the acquisition closing. Erin, if you want to add anything.

No. Okay. Thank you so much. And I'll turn it back. Thank you, guys.

And as a reminder, if you'd like to ask a question, please press star 1 in your telephone keypad. Your next question comes from a line of Guiliano Thornhill from National Bank. Your line is open.

Hey, guys. Good morning, everyone. I just wanted to go back to those revitalization plans. I might have missed how much CapEx was associated to them. And I'm also just wondering on how are the leases being structured to actually get that pickup in NOI? As there is that, you know, net reduction of 30,000 per foot or per box.

So, so David speaking. So this is regards. So I think the first question or the second question was on right sizing in the structure. Um, so I can kind of tackle it, uh, in the 2 parts. Um, so on the floor done that part, the increase is really driven by the new tendencies. The space was rolling off lava is essentially paying a gross rent to use the space for storage on a temporary basis. And then we backfilled it with the mentioned shoppers and good life. Um. In terms of the second question for the right size, and so how the leases are structured, is the tenants pay a market rent, the new tenants or the third-party tenants that are joining the site pay a market rent, and that essentially there's a termination payment with law of law that factors in the leasing costs and any differential between the in-place rent that law of law is paying and the market rent the new tenant is paying.

And so with occupancy in the industry still pretty high, are you anticipating that leasing spreads can continue to push higher on just broadly for the portfolio?

So in general, with the strength of the retail market, we anticipate strong leasing spreads. As Rael mentioned, this quarter, the spreads were a little bit higher as a result of the one tenant that drove up a lot of the increase. For the remaining quarters, we do expect to be in that low double-digit range, which is consistent with how we've been performing and with some strength in certain categories. For example, limited service eating, full service, which we've been driving very strong renewals on, but offset by a portion of our renewals that are tied to historical fixed rates in our old leases.

And then just with the FCR deal, once it does close, are you anticipating a kind of material improvement in your financial framework for cash NOI expectations at all? Because it is higher quality and obviously pretty good locations.

Hi, it's Erin. When you think about our financial framework, we've always said, you know, 8% to 9% returns. That was made up of 2% to 3% same asset NOI growth and then 3% to 4%, which goes to 3% to 4% NAV plus the distribution. I'd say on that 2% to 3% same asset cash NOI growth, it moves us slightly higher in that range. But the way we really see it is this is de-risked stronger growth. And so moving forward, less more growth comes from same asset cash NOI and then less of the contribution to the NAV growth comes from development.

Okay, thanks. And just one kind of last question for me. I'm just wondering, can you speak kind of to how this transaction fits within the broader ecosystem of kind of GWL and CHIP, just in terms of the alignment of kind of capital and long-term priorities for the entire platform? Because there are obviously strategic benefits to the coordination here.

Yeah, look, I would tell you that this was a choice-driven transaction and it firmly fits within our strategy, you know, to acquire high-quality assets.

Okay, thanks.

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

Hey, good morning. Just on the FDR transaction and I appreciate the comments from the prior call. Just curious, on the initial FFO guidance, how should we think about the potential operating synergies between the portfolio being acquired and the existing choice platform, and how that may have been baked into the initial FFO guidance?

Hi, Brad. It's Erin. When we gave the initial FFO guidance, I'd say that what we've done is added on incremental costs to scale our platform. So that's adding a few people to our corporate teams as well as adding an incremental leasing team. Of course, the property people that we would have and hire would be absorbed by the properties, but we have not modeled in any incremental synergies related to platform.

And I guess part of the path to seeing better accretion over the next few years, that would assume as the integration occurs, there would be sort of more operating synergies to be had, as well as sort of capturing that rent growth embedded in the FCR portfolio.

Look, we're viewing this more as an asset transaction, as you know. So, you know, there may be a few synergies, but as Erin said, we're right now modeling just the incremental GNA that she described. Okay.

That's helpful. I appreciate it. Thank you.

And again, if you'd like to ask a question, please press star 1 now. We'll pause for just a few seconds. And as there seems to be no further questions, I will now turn the call back over to Rail Diamond, CEO, for closing remarks.

Thank you, Rob. Once again, our business and portfolio remain in excellent shape. Thank you all for your interest in Choice Properties and for joining us this morning. We look forward to providing you another update on the business this summer.

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