Choice Properties Real Est Invstmnt Trst (TSE:CHP.UN) reported what management described as a solid second quarter, supported by high occupancy, strong leasing spreads and continued progress on retail repositioning and industrial development initiatives.
On the company’s Q2 2026 conference call, President and Chief Executive Officer Rael Diamond said the results reflected “the strength of our portfolio and the disciplined execution of our strategy.” He cited strategic leasing in the REIT’s necessity-based retail portfolio and tenant demand in its industrial portfolio as key contributors.
Retail Leasing Remains Resilient
Choice Properties’ retail portfolio ended the quarter at 97.4% occupancy. During the quarter, the REIT completed 643,000 square feet of renewals and 83,000 square feet of new leasing. Retail renewal spreads averaged 12.4%, including increases across categories such as liquor, restaurants and dollar stores.
Diamond noted that the renewal spread included 318,000 square feet of fixed-rate option renewals. Excluding those fixed-rate renewals, the average retail renewal spread was approximately 20%.
Retail retention was 66%, which Diamond said was mainly due to known non-renewals of two large spaces previously leased to Loblaw, totaling 172,000 square feet. He said both spaces had been used for storage or temporary purposes and carried single-digit gross rents because of the flexible nature of their leases.
The first space, a 90,000-square-foot location at Bloor and Dundas, is being converted into a multi-tenant configuration with commitments from Shoppers Drug Mart and GoodLife. Diamond said Choice turned the space over to Shoppers Drug Mart for fixturing during the quarter, with a target opening later this year. Possession for GoodLife is targeted in early 2027.
The second space is an 82,000-square-foot location in Laval, where management is pursuing a similar backfill strategy. David Muallim, Senior Vice President of Leasing and Operations, said the Laval site requires “a bit of a rezoning process,” adding that the company expects to share more in coming quarters.
Excluding the two Loblaw non-renewals, retail retention was approximately 80%, which Diamond said was broadly in line with historical levels. He added that about 50% of the second-quarter vacancy space has already been re-leased at rents well above expiring rates.
Choice also reported progress on former Toys “R” Us locations. No Frills has taken possession and is fixturing at Don Mills Crossing, while the company remains in active discussions with its joint venture partner on two remaining locations.
Subsequent to quarter-end, Choice completed the renewal of its 2027 tranche of Loblaw leases, covering 50 retail locations and 3.6 million square feet. The leases were renewed at an average spread of 8.8% and an average term of five years. Diamond said the renewals address approximately 67% of the REIT’s 2027 retail lease maturities.
Industrial Portfolio Delivers Strong Spreads
Choice’s industrial portfolio occupancy was stable at 98.6%. The REIT completed 353,000 square feet of industrial renewals during the quarter, with an 80.6% retention rate and an average renewal spread of 40.2%. Activity was concentrated in Ontario and Alberta.
At Choice Caledon Business Park in the Greater Toronto Area, rent commenced in April at the recently completed National Logistics Services building. Construction is also progressing on Building D, with completion and occupancy targeted for the second half of 2027.
Niall Collins, Executive Vice President of Development and Construction, said Building D is “the only 1 million square foot project that’s under construction right now” and that the company is encouraged by market activity. He said a number of offers are moving back and forth and that Choice is working to secure one of them.
Asked about tariffs and broader market uncertainty, Collins said there had been consistency over recent quarters in new expansion opportunities. Muallim said Choice is encouraged by where industrial occupancy is headed toward year-end, though the company is monitoring conditions closely.
FFO Rises, AFFO Declines on Timing of Capital Spend
Chief Financial Officer Erin Johnston said reported funds from operations were CAD 192.9 million, or CAD 0.267 per diluted unit, up 0.8% from the prior year. She said the increase was driven by 2.8% same-asset cash NOI growth and CAD 1.6 million of higher lease surrender revenue.
Those gains were partly offset by higher interest expense from refinancing, higher general and administrative costs and lower investment income. Adjusting for non-recurring items, including lease surrender revenue and the reduction in Allied Properties’ distribution, FFO growth was 1.5%.
Adjusted funds from operations were CAD 0.217 per unit, down 6.1% year over year. Johnston said the decline was largely related to the timing of maintenance capital and tenant improvements, and that Choice expects 2026 capital spending to be broadly in line with the prior year.
Same-asset cash NOI increased CAD 6.9 million, or 2.8%. Retail same-asset cash NOI rose 1.9%, or 2.4% excluding bad debt expense primarily related to the Toys “R” Us termination. Industrial same-asset cash NOI increased 5.8%, or 5.2% excluding bad debt reversals. Mixed-use and residential same-asset cash NOI rose 4.1%, primarily because of lower operating costs.
First Capital Transaction Remains on Track
Management said it continues to make progress on the proposed acquisition of First Capital. Diamond noted that First Capital unitholders voted overwhelmingly in favor of the transaction and that the Ontario Superior Court approved the plan of arrangement.
Simone Cole, General Counsel and Secretary, said the Competition Bureau review is the main remaining approval. “Everything is on track,” Cole said, adding that the company continues to expect closing in the second half of the year, more specifically in the fourth quarter.
Johnston said Choice has approximately CAD 2 billion of available liquidity through its corporate facility and cash on hand, including a recent CAD 500 million increase to its credit facility. The company also has CAD 14.1 billion of unencumbered properties, and its debt-to-EBITDA ratio was unchanged at seven times.
Asked about financing costs for the transaction, Johnston said spreads have remained strong and continue to hover around 10-year lows. She said 10-year financing had recently been around 4.7% to 4.8%. She also said the company does not currently have hedges in place but has the ability to hedge closer to refinancing.
Diamond said asset sales related to deleveraging after the First Capital transaction would likely begin in early 2027. He said there is “likely more to be sold on the Choice portfolio than the First Capital portfolio” because Choice was selective in the assets it agreed to acquire.
Guidance Reaffirmed
Choice completed CAD 14 million of transactions during the quarter and CAD 13 million after quarter-end, bringing year-to-date capital recycling activity to about CAD 55 million. During the quarter, it acquired a retail property in Waterloo, Ontario, for CAD 7.4 million and completed CAD 6.8 million of dispositions. After quarter-end, it sold its remaining 50% interest in an Alberta retail property for CAD 13.2 million.
The REIT also completed two retail land lease intensifications totaling 66,000 square feet at a blended yield of 27.2%, including a 65,000-square-foot land lease in Kingston, Ontario, and a 1,000-square-foot land lease at a 50%-owned Winnipeg site.
Johnston said Choice is reiterating its outlook, excluding the impact of the First Capital transaction. The company expects stable occupancy, 2% to 3% same-asset cash NOI growth and diluted FFO per unit between CAD 1.08 and CAD 1.10 for 2026.
About Choice Properties Real Est Invstmnt Trst (TSE:CHP.UN)
Choice Properties Real Estate Investment Trust invests in, manages, and develops retail and commercial properties across Canada. The company’s portfolio primarily consists of shopping centers anchored by supermarkets and stand-alone supermarkets. The properties are mostly located in Ontario and Quebec, followed by Alberta, Nova Scotia, British Columbia, and New Brunswick. Choice Properties generate the majority of revenue from leasing properties to its tenants. The company’s principal tenant, the large-format retailer Loblaw Companies, contributes the vast majority of the total rent.
