Second-quarter reporting season for real estate investment trusts is underway and Choice Properties REIT was the first major retail trust to release its results in this uncertain economic environment last week.

While Choice reported a net loss for the quarter of $154.2 million, compared to net income of $513.2 million in the same prior year period, it was primarily due to an unfavourable fair value adjustment in its exchangeable units -- due to the increase in the trust’s unit price.

Choice has a portfolio of more than 700 income-producing retail, industrial, mixed-use and residential properties encompassing more than 60 million square feet of gross leasable area. The REIT’s fundamentals remain strong and its overall performance was solid.

“We maintain near-full occupancy of 97.8 per cent, driven by the resilience of a necessity-based portfolio that continues to produce steady cash-flow growth,” president and chief executive officer Rael Diamond said during a July 18 conference call with analysts to review Choice’s performance.

“We achieved strong renewal spreads and completed strategic asset management initiatives which resulted in securing higher-paying and stronger covenant tenants at certain assets. The portfolio continued to deliver stable, predictable growth in this quarter, with no exception.”

Lease renewals

Choice renewed 251,000 of the 337,000 square feet of retail lease expiries that arose in the second quarter, for a 75 per cent tenant retention rate.

“Our retail retention rate was impacted by two strategic lease terminations in Ontario and Alberta, totalling approximately 50,000 square feet of non-core tenants,” chief operating officer and executive vice-president of development and construction Niall Collins said. 

“These terminations enabled us to release the space to more portfolio-focused, long-term tenants at higher rents, including Staples, Shoppers Drug Mart and No Frills.”

Subsequent to quarter-end, Choice and Loblaw renewed 39 of a tranche of 41 leases expiring in 2026, comprising 2.52 million of 2.62 million square feet at a weighted average spread of 8.6 per cent and a weighted average extension term of five years.

Occupancy and liquidity

Choice expects its industrial portfolio occupancy to improve and be above 98 per cent by the end of the year.

Occupancy for Choice’s mixed-use and residential portfolio was 95.4 per cent, which was up 50 basis points from the previous quarter and 130 basis points from a year earlier.  

“We continue to take a prudent approach to capital management and benefit from the stability provided by our industry-leading balance sheet,” chief financial officer Erin Johnston added.

Choice ended Q2 with an adjusted debt-to-total-assets ratio of 40.8 per cent. It maintained a strong liquidity position, with approximately $1.3 billion of available credit and a $13.5-billion pool of unencumbered properties.

Second-quarter transactions

Choice completed $427.1 million of transactions in the second quarter. It:

• acquired an industrial distribution centre in Ajax, Ont. from Loblaw for $182.9 million and leased it back to Loblaw for 10 years, with two per cent annual rent increases;
• acquired eight industrial outdoor storage sites across Canada for $162 million;
• disposed of nine industrial sites in Calgary for $73.4 million;
• acquired a 50 per cent interest in a 3,400-square-foot retail property at 555 Yonge St. in Toronto for $6 million, unlocking future density potential in conjunction with a property at 543 Yonge St. in which it holds an ownership interest; and
• disposed of a retail property in Halifax for $2.8 million.

Development activity

“Our active (retail) development pipeline totalled 18 projects of approximately 1.1 million square feet at an average forecasted yield of 6.7 per cent,” Collins said. “Our development pipeline continues to be a reliable source of long-term cash-flow and, now, growth for our portfolio.”

“We have 360 acres of land at a low cost base at Choice Caledon Business Park, a strong balance sheet and a proven team ready to execute,” Diamond said of the REIT’s industrial development pipeline. “We are well-positioned to move forward when others simply cannot. 

“In our mixed-use and residential portfolio, we’ve observed some softening of residential markets as new supply comes online. Despite this, our assets have maintained solid occupancy and stable rental rates -- consistently outperforming their respective markets.

“We continue to be confident in the quality of our residential products and remain bullish on the long-term fundamentals of residential real estate across major urban markets in Canada.”

Choice’s development team continues to make progress on zoning for rental residential projects. 

“We’re very focused on how we're going to bring them forward in a timely way to take advantage of where the market is in terms of yields,” Collins said. “They're generally going to correspond to the types of yields we've had to date.”

Approval from the City of Toronto was received in April for a joint project with Woodbourne that would see the development of a 33-storey apartment building with 384 units on Parkway Forest Drive.