Choice Properties just held its Q1 2024 earnings call, and while most analysts are focusing on the expected slowdown in industrial rent growth, something else caught my eye – a subtle shift in Choice's retail strategy that could signal a far bolder play than anyone realizes.

Sure, the headlines are all about industrial right now. Everyone's wondering if the boom is finally over, and Choice's industrial segment did see a slight occupancy dip this quarter. But listen closely to the undercurrent of the transcript [1] , and a different story emerges.

While Choice acknowledges the industrial slowdown, they're also subtly emphasizing the enduring strength of their retail portfolio – the largest necessity-based retail portfolio in Canada. It's almost as if they're sending a message: "Don't forget about retail. We're not just an industrial play."

This emphasis takes several forms. First, they highlight the consistently high occupancy rates in their retail segment, which remained stable at a near-perfect 97.7%. Then, there's the impressive 10.1% rent spread they achieved on retail renewals in Q1. That's not just strong – it's a statement. Choice is extracting significant value from its existing retail assets.

But the real tell is the unusual Markham store rightsizing deal with Loblaw, Choice's anchor tenant and strategic partner. This seemingly minor event reveals a deeper trend – Choice isn't just holding onto its retail assets, it's actively optimizing them for maximum value.

Let's break down the Markham deal. Choice collaborated with Loblaw to downsize a grocery store, freeing up 35,000 square feet. Choice then backfilled that space with a fitness user at a 7% higher rent. This is a brilliant strategic move on several levels.

First, it demonstrates Choice's proactive approach to managing its retail assets. They're not waiting for leases to expire or tenants to struggle; they're actively seeking opportunities to enhance value. Second, it highlights the strong tenant demand for Choice's retail space. In a supposedly challenging retail environment, they're easily replacing anchor tenants with higher-paying occupants. Third, and perhaps most importantly, it signals a shift in Choice's relationship with Loblaw.

This isn't just a landlord-tenant relationship anymore – it's a strategic partnership where both parties are actively working together to unlock the full potential of their assets. Choice is leveraging its deep understanding of tenant demand and its strong leasing relationships to help Loblaw optimize its store network, while simultaneously extracting higher rents and enhancing the value of its own portfolio.

This collaborative approach has the potential to be a game-changer for Choice. Imagine this happening on a larger scale: Choice identifies underutilized space within Loblaw stores across its vast portfolio. They leverage their leasing relationships to find higher-paying tenants for that space. Loblaw benefits from a more efficient store network and potential rent reductions, while Choice enjoys increased rental income and asset appreciation.

It's a win-win scenario that could fuel a significant expansion of Choice's already dominant retail footprint.

The Hypothesis: A Retail Empire in the Making

I believe Choice is using the industrial slowdown as a smokescreen to quietly build a Canadian retail empire. While everyone's distracted by the industrial narrative, they're strategically optimizing their retail portfolio and deepening their partnership with Loblaw to create a powerhouse that will dominate the Canadian retail landscape for years to come.

The Evidence

The numbers support this hypothesis. Choice's retail segment is performing exceptionally well, despite the supposed challenges in the broader retail market. The Markham deal, with its higher rent and collaborative approach, serves as a blueprint for future expansion. And Choice's massive scale, combined with its deep understanding of tenant demand and its strong leasing relationships, gives it a significant competitive advantage.

Occupancy and Rent Spread Trends

The following chart illustrates the occupancy rates and rent spreads for Choice Properties' industrial and retail segments over the past two quarters. Notice the consistent strength in retail occupancy and the impressive rent spreads achieved on renewals.

Choice Properties: A Snapshot

This is a story that's just beginning to unfold. Keep your eye on Choice Properties. They might be building something far more ambitious than anyone realizes.

"Fun Fact: Choice Properties was originally created as a spin-off from Loblaw Companies Limited in 2013, initially holding primarily Loblaw-anchored retail properties. This close relationship with a major retailer has given Choice valuable insights into the dynamics of the Canadian retail market."