Choice Properties Posts 2.2% FFO Growth; First Capital Deal May Slip to 2027

Choice Properties Real Estate Investment Trust (TSE:CHP.UN) reported third-quarter funds from operations (FFO, a key REIT cash-flow measure) of CAD 205.2 million, or CAD 0.284 per diluted unit, up 2.2% from a year earlier. The gain came with a caveat: the trust's planned First Capital acquisition could close in the fourth quarter or slip into early 2027 as regulatory review continues.

By Sophie Lindqvist

Same-asset cash net operating income (NOI, property revenue minus operating costs) rose 3.1%, supported by higher rents, leasing activity and contractual rent increases. Chief Financial Officer Erin Johnston said higher refinancing costs and lower investment income partially tempered FFO growth. Adjusting for nonrecurring items, including changes in lease surrender revenue and Allied Properties distributions, FFO growth was 3.5%.

Adjusted FFO reached CAD 0.214 per unit, up 11.5% year over year, largely because of the timing of tenant improvements and maintenance capital. Lease surrender revenue totaled CAD 10.6 million. Johnston said the company's 2026 right-sizing program was complete and would not generate further lease termination income in the fourth quarter. Timing, in this business, flatters generously.

What will the First Capital deal cost now?

More than originally underwritten. Johnston said Choice now expects the weighted average cost of the transaction's total debt financing at approximately 4.5%, compared with 4.2% in its original underwriting. The company has begun hedging a portion of its expected financing needs, and the higher costs will add approximately CAD 0.01 to the deal's expected dilution.

For an expected CAD 800 million in new debentures, management is assuming a 5% rate across a blend of maturities, Johnston said. She also noted that First Capital's third-quarter results were strong and showed retail trends similar to those in Choice's portfolio.

General Counsel and Secretary Simone Cole said Choice was making progress on the previously announced transaction with First Capital and KingSett and remained optimistic about a fourth-quarter closing. She cautioned that closing could slip into the first quarter of 2027. Asked about the Competition Bureau review, Cole said there was no exact timeline for a response; closing would likely follow approval by a couple of weeks, and the company does not control the regulatory process.

How strong are leasing fundamentals?

Portfolio occupancy rose 10 basis points from the preceding quarter to 97.8%. Average leasing spreads (the change in rent on renewed leases) were 11.2%, including annual Loblaw renewals at 8.7%; excluding those renewals, spreads averaged 17.7%.

President and Chief Executive Officer Rael Diamond said demand for well-located, grocery-anchored retail space continued to exceed supply. The numbers agree with him:

• Retail occupancy increased to 97.5%, with tenant retention of 96%.
• Retail renewal spreads averaged 9.6%, including 12.8% for third-party tenants.
• Industrial occupancy held steady at 98.6%.
• Industrial renewal spreads averaged 30.8%, including 46.2% across approximately 252,000 square feet of Ontario renewals.

Diamond said industrial spreads were expected to moderate in the fourth quarter because of the mix of expiring leases, rather than a change in market fundamentals. A lease calendar, not a market, sets the pace.

What is being built, and with whose balance sheet?

Choice has started a build-to-suit industrial project on excess land at its Ajax property. The multiphase development will add 255,000 square feet, with a development yield in the mid-6% range and completion expected in the first quarter of 2028, Diamond said.

Construction continues on the 1 million-square-foot Building D at Choice Caledon Business Park, with completion targeted for the second half of 2027. Diamond said the company hoped to have a tenant in place by completion, although cash rent would likely begin in 2028. Executive Vice President of Development and Construction Niall Collins said the company was considering three potential transactions for the full space.

The balance sheet carries room. Choice reported approximately CAD 2.4 billion in available liquidity and a debt-to-EBITDA ratio, net of cash, of 6.9 times. IFRS net asset value was CAD 15.04 per unit, including a CAD 139 million fair-value gain on a derivative related to unit consideration for the First Capital transaction. Excluding that derivative, NAV was CAD 14.86 per unit.

What does the 2026 outlook say?

Management reiterated expectations for stable occupancy, 2% to 3% same-asset cash NOI growth and diluted FFO of CAD 1.08 to CAD 1.10 per unit for 2026, excluding the First Capital transaction.

Choice lowered its full-year adjusted debt-to-EBITDA outlook to approximately 7 times from 7.5 times, citing balanced capital recycling and lower development spending. If the First Capital transaction closes in the fourth quarter, the company expects adjusted debt to EBITDA of approximately 8.5 times on an annual basis after closing. Management plans to provide its 2027 outlook with fourth-quarter results in February.

Choice Properties is Canada's largest real estate investment trust, a national owner, operator and developer of commercial and residential real estate. The trust closed the quarter with occupancy near 98%, double-digit spreads, and a regulator holding the stopwatch. Two of those three are within management's control.