Choice Properties REIT reported an $11.8-million net loss in Q2 2022, but some positives were also revealed in the July 22 earnings conference call covering the three months ended June 30.

Choice (CHP-UN-T) reported six-month net income of $375.2 million, compared to $22.4 million for the same period a year earlier. Net operating income (NOI) increased by $8.2 million and $15.9 million through three and six months, respectively, year-over-year.

Choice reported a net fair value loss on investment properties of $522.3 million on a proportionate share basis as fair value declines in the retail portfolio – due to capitalization rate expansion from rising interest rates and economic volatility – were partially offset by gains in the industrial portfolio and certain development properties.

The REIT anticipates rising interest rates may put further downward pressure on the fair value of properties in the second half of 2022.

Choice also recorded a $158.7-million unfavourable adjustment to the fair value of its investment in real estate securities of Allied Properties REIT, due to the decrease in Allied’s unit price.

These were held pursuant to its sale of six office properties to Allied in the first quarter of 2022.

Choice issued $500 million of unsecured debentures in the quarter to increase its liquidity position and further stagger its debt maturity profile.

It ended the quarter with a strong liquidity position, with approximately $1.3 billion of available credit and a $12-billion pool of unencumbered properties.

Improved occupancy at Choice properties

Overall occupancy in the quarter improved to 97.6 per cent, reflecting 420,000 square feet of positive absorption. Retail occupancy was 97.5 per cent, industrial was 99.2 per cent and mixed-use, residential and other properties were 87.5 per cent.

Choice’s portfolio is primarily leased to necessity-based tenants and logistics providers that are less sensitive to economic volatility and therefore provide stability.

“We continue to see strong new leasing velocity and tenant retention driven by increased consumer spending, retailer confidence in opening new locations and continued demand from industrial users,” executive vice-president of leasing and operations Ana Radic said during the call.

Choice completed 517,000 square feet of new leasing and renewed 1.3 million square feet of its 1.4 million square feet of lease expiries, at an average spread 7.8 per cent higher than expiring rents, during the quarter.

Office properties no longer core to portfolio

Choice decided in 2021 to focus on the opportunities available in its core business of essential retail and industrial properties, its growing residential platform and its development pipeline.

That led to the sale of six office properties to Allied and office no longer being a stand-alone asset class in the REIT’s reporting.

“The size, quality and growth potential of our industrial portfolio contributed to a strong operating performance in the quarter,” said president and chief executive officer Real Diamond.

“Our 17.4-million-square-foot industrial portfolio includes large, purpose-built distribution facilities for Loblaw as well as high-quality generic industrial assets which can accommodate a wide range of tenants.

“We have significantly embedded growth in our industrial portfolio, with non-Loblaw tenants representing two-thirds of NOI, with leases being on average 40 per cent below market.”

Subsequent to the second quarter, Choice and Loblaw Companies Limited renewed 42 of 44 retail leases from the initial public offering portfolio that expire in 2023.

They comprise 2.9 million of 3.1 million square feet at a weighted extension term of 7.7 years. The average rent increased by five per cent.

The two leases not renewed are both for vacant stores in Quebec that Radic said have “great redevelopment potential.” Choice is working with Loblaw with regards to the two stores and plans to reveal plans shortly.

Choice’s approximately 44-million-square-foot retail portfolio “is one of the best-performing in the Canadian REIT industry,” according to Diamond.

Q2 acquisitions and dispositions

Choice completed $211.3 million worth of acquisitions and $16.6 million of dispositions during the second quarter.

The REIT acquired an 85 per cent interest in an additional 97-acre land parcel in Caledon, Ont., which was part of an existing industrial development project totalling 380 developable acres, for $86.7 million.

“We are currently working through the rezoning process with the Town of Caledon to permit a total of approximately 5.5 million square feet of industrial space,” said Diamond.

Choice acquired a 75 per cent interest in 154 acres of industrial  development land in East Gwillimbury, Ont. for  $52.8 million by exercising the equity conversion option on a mezzanine loan advanced to Rice Group.

Both Caledon and East Gwillimbury are at the northern edges of the Greater Toronto Area.

The REIT completed the acquisition of strategic retail assets in Halifax and Burlington, Ont. for $57.3 million.

Choice acquired its partner’s 50 per cent interest in an industrial building in Edmonton for $14.5 million, bringing its interest in the building to 100 per cent.

The REIT sold a non-core retail asset and a development land asset for $16.6 million.

Development activity

Choice invested $19.7 million of capital in development on a proportionate share basis during the second quarter and transferred $16 million of properties under development to income-producing status, delivering approximately 108,000 square feet of new gross leasable area.

The REIT has a mix of active development projects ranging in size, scale and complexity, including retail intensification projects, industrial development and rental residential projects in urban markets with a focus on transit accessibility.

Choice continues to progress on the construction of two high-rise residential projects, one in Brampton, Ont. next to the Mount Pleasant GO Transit station, and the other in Ottawa’s Westboro neighbourhood.

The REIT has three active industrial development projects that it expects will deliver 1.5 million square feet, at share, of new generation logistics space in the near to medium term.

An industrial project at Horizon Business Park in Edmonton, comprising two buildings totalling 300,000 square feet, is progressing. Occupancy of the first building is underway and substantial completion and occupancy of the second building is anticipated in the second half of 2023.

Choice commenced construction of a 300,000-square-foot modern logistics facility in a prime industrial node in Surrey, B.C. that’s expected to be completed in the second half of 2023. Leasing is anticipated to be done before that time.

The plan for the East Gwillimbury property is to build a multi-phase industrial park with approximately 1.8 million total square feet of new-generation logistics space.

For the first phase, Choice has entered into an approximately 100-acre land lease with Loblaw, which intends to build a 1.2-million-square-foot, automated, multi-temperature industrial facility. Site preparation is underway.

“We believe that, over time, we have the ability to significantly increase our industrial portfolio through development,” said Diamond.

Choice also has a substantial pipeline of larger, more complex mixed-use developments and land held for future industrial development.

It’s advancing the rezoning process for several mixed-use sites, with 11 projects representing more than 10.5 million square feet in different stages.

Net-zero targets approved

Finally, the Science Based Targets initiative (SBTi) has validated Choice’s greenhouse gas emissions reduction targets, making it one of the first entities in Canada to have net-zero targets approved by the SBTi.

“Fighting climate change is fundamental to our purpose of creating enduring value for all stakeholders and we are proud to deepen our environmental commitment with these targets,” said Diamond.