Good morning. My name is Sylvie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust 2022 second quarter results conference call, for which management will discuss the quarter ended June 30th, 2022. All lines have been placed on mute to prevent any background noise. Should you wish to follow the presentation in greater detail, management has made a presentation available on BTB's website at www.btbreit.com/investor relations/quarterly and annual management presentation. After the speaker's remarks, there will be a question-and-answer period reserved exclusively for analysts. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad.
Before turning the meeting over to management, please be advised that some of the statements that may be made during this call may be forward-looking in nature. Such statements involve numerous factors and assumptions and are subject to inherent risk and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections, and other forward-looking statements will not be achieved. Several important factors could cause BTB Real Estate Investment Trust's actual results to differ materially from the expectations expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors that could influence actual results are described in BTB Real Estate Investment Trust's Management Discussion and Analysis, and its Annual Information Form, which were filed on SEDAR and on BTB's website at www.btbreit.com. I would like to remind everyone that this conference is being recorded. Thank you.
I would like to turn the conference over to Mr. Michel Léonard, President and Chief Executive Officer, Mr. Mathieu Bolté, Vice President and Chief Financial Officer, and Mr. Peter Picciola, Vice President and Chief Investment Officer. Mr. Léonard, you may begin the conference.
Thank you, Sylvie. Good morning, everybody. We are very proud of our results that we have published, yes, last night, for Q2 2022. We've shown a solid organic growth as far as same-property NOI grew by 8.2%. Strong operating performance, where we concluded lease renewals and new leases for 122,000 sq ft. The robust leasing activities basically landed at 93.8% of committed occupancy, and that at very positive rent spreads. We are now sitting with 5.8 million sq ft under management or ownership, I should say. The flight to quality that we undertook back in 2017 is basically paying off today. We still concluded in this market three acquisitions of industrial properties.
We acquired a property in Ottawa, a property in Vaudreuil, in the province of Quebec, and a property on Allard Avenue in Edmonton. We disposed a very small property for CAD 1.8 million, a property that was slated for disposition for quite a while. The total value of our investment properties surpassed CAD 1.1 billion. For the quarter, we collected 98% of our rents. Our recurring FFO sat at CAD 0.114, total debt ratio at 58.8%, and our recurring AFFO payout ratio at 76%. We're operating largely in the province of Quebec, where we're seeing a strong economy that surpassed other provinces post-COVID. The 2021 Quebec GDP growth is 5.6%.
That surpassed Ontario, that was at 4.6%, Alberta at 5.1%, and the Canadian average at 4.2%. The unemployment rate in the province of Quebec is 4.3%, and amongst the lowest across the country. In Montreal, the industrial rent average is CAD 10.41, increasing, compared to Toronto at CAD 14 and Vancouver at CAD 18. The rebound of Western Canada with our recent opportunistic industrial acquisitions, specifically in Edmonton, has really paid off for BTB. We're seeing lower cap rates for warehouses compared to the rest of Canada. Significant absorption in the past months with vacancy rates sitting at 4.65%. Saskatoon also shows favorable opportunities in the industrial sector, considering its limited supply. There is limited short-term financing requirement for BTB.
Only 10% of our debt remaining to be refinanced in 2022 and 2023. We refinanced or concluded new mortgages during the year 2020 and the year 2021, for a total of 49% of the mortgage debt at very advantageous interest rates with a remaining WALT of 4.5 years As at June 30th, 2022. There is a limited impact for 2022 with regard to the increase in interest rates, with CAD 125,000 of additional interest charges.
We forecast that for 2023, the additional charges based on the current rates offered to us would be CAD 850,000 for the year. Our portfolio has shown its resiliency with improving occupancy rates and strong performance amongst the three asset classes that we own. The occupancy rate, as I mentioned earlier, 93.8%. That's 1.6% higher than Q2 2021, and 0.7% higher than Q1 2022. Our collection rate throughout the year is 99%. The investment property year-over-year growth was 27%, and our average cap rate above 6%. We have 17 property that were acquired for an aggregate value of CAD 246 million and a total of 941,000 sq ft.
Six properties were disposed for an aggregate total value of CAD 32 million and totaling 499,000 sq ft. We have an attractive distribution yield, and it's adequately covered by the payout ratio. Our IFRS NAV stands at CAD 5.42 per unit. It was at CAD 5.51 in Q2 2021 versus a current market price of CAD 3.60. Yes, I did see that, yesterday we were up past CAD 3.70, and that's a discount of roughly 30%. Our fully diluted NAV is CAD 4.85 per unit, and it was CAD 4.80 in Q2 2021.
The distribution yield is right now around 8%, and the AFFO payout ratio shows an improvement at 72.3% for 2022 year-to-date and 77.9% for the year 2021. With this, I'd like to ask Mathieu, excuse me, Peter, to go through the leasing activities and the investment activities.
Good morning, everyone, and thank you for being on the call. It's my pleasure to be on this first call with BTB. My name is Peter Picciola, and on a day-to-day basis, I'm working on the investment, disposition, and leasing activities for the firm. Very pleased with our activities in Q2 and activities year-to-date. Broadly speaking, I'll give you a look at what those activities entailed, and I'll start with the leasing activities. In Q2, we've completed approximately 122,000 sq ft of leases renewed or new leases being completed, bringing our activities to 315,291 sq ft year-to-date. Large line items there secured long-term leases with groups in Ottawa, Quebec City, and Montreal, predominantly Quebec.
The City of Québec in Québec City renewed its lease for 23,500 sq ft. TÜV SÜD, a diagnostics company that's almost 155 years old, renewed its lease in Ottawa for approximately 27,730 sq ft, and Keysight Technologies renewed its lease for 7,500 sq ft of office space in Montreal. Of great note in these renewals is they are all on average longer-term leases than what our average WALT is today. That number continues to grow closer and closer to six and pushing past six. Perhaps of greater importance, some of the pricing power we have in some of these markets have allowed us to increase our average renewal rent by almost 21%, all classes of assets combined.
We are finalizing some construction work in Quebec at our property on F-X Sabourin, waiving conditions with the likes of Lumen. I know that there was some concern historically about the performance of this property. We're pleased to announce that property has been committed to 100%, and so we consider it fully leased with occupancy having taken place. The forecast for the future looks also bright. We've got a pipeline of activity that is solid, and at this particular time, and we can, you know, confirm that we've got a solid 36,000 ft of conditional deals that we feel are gonna be able to close in Q3. More positive news to come on the next call.
On the investment side, as Michel's previously mentioned, we're finally now up to 75 properties with over 5.8 million sq ft, pushing up against the CAD 1.2 billion asset level, although we're not quite there, standing at around CAD 1.185 billion. The acquisitions made in Q2 and throughout the first part of the year largely being single-tenant industrial, 100% leases certainly help positively in terms of our committed occupancies. Of greater note is we keep buying these assets on yields that are accretive and therefore not diluting our unit holders. At the same time, we continue our disposition strategy of non-core assets, having disposed recently of a small property in Magog in the townships of Quebec. We have two more in the pipeline, non-core, smaller sized office assets.
The addresses are 5878 Sherbrooke East and 8183 Turgeon, a combined 45,000 ft of office space that we believe we'll be able to chip close in either Q3 but more likely Q4. A brief note on our efforts to densify some of the sites we have in our portfolio. We had previously identified somewhere between four and six sites. I think that number today looks more like between five and seven, possibly more. There is one that is very well advanced. We have been working very hard with urban planner, architect, designer, and the city officials. So far, we are getting constructive, positive feedback in terms of what we're doing, and the green lights certainly are there for us to continue.
We believe, based on the discussions we've had with the city, that we should be very close to a zoning approval by the end of Q4 2022. If all goes well, we should be shoveling the ground in the fall of 2023. As it pertains to some of those other sites, we've engaged with some professionals, particularly urban planners for one part of town in particular, and we've recently had confirmation that our thoughts were correct. There are definitely possibilities on some of these retail sites where we believe we can densify and change or add to the location of some of these properties. Which takes me to slide eight for those of you that are flipping the pages. Just a brief overview as to where we stand in terms of our portfolio composition.
We now stand at 27% industrial portfolio. All these statistics are based on square footage. 49% in the office, downtown core office and 24% in the necessity-based retail. The largest moves coming obviously in the industrial asset class, given the acquisitions we've made in Quebec and predominantly across the rest of the country in the last six months. By geography, we are at 54% in Montreal, 24% in Quebec City, 14% in Ottawa, 4% in Saskatoon, and 4% in Edmonton. We are definitely on a push to diversify the geography, and our execution of acquisitions and dispositions is going to be reflected over the several next quarters as to how our portfolio is comprised.
With that, I'd like to turn the microphone back to, or rather to Mathieu Bolté, our CFO. Thank you.
Thank you, Michel and Peter, and good morning, everyone. We're pleased with the results and the accretive effect of the recent acquisitions. With the occupancy rate up 160 basis points versus a year ago, with our industrial portfolio now leased at 100% and the necessity-based retail portfolio showing increases of 3.3%. The composition of the portfolio has also evolved, with now more than 23% of our net operating income coming from the industrial segment. It's an increase of 9% compared to a year ago, and a decrease of the necessity-based retail net operating income from 32% to now 22%.
As we compare results to last year, let's recall that in Q2 last year, we had a retrospective additional recovery of CAD 2.3 million and an indemnity of CAD 0.3 million for a total of CAD 2.6 million, as we disclosed in the Q2 2021 MD&A. For this quarter, revenues were up 11.3% at CAD 29 million. Excluding last year adjustments, revenue was up 23.7%. Let's just mention some of the acquisitions that Peter mentioned and Michel just mentioned. Two were closed at the end of June, so they're not yet material for the second quarter, and they will come fully accretive starting in the third quarter. Net operating income was up 13% at CAD 17.6 million.
As well, excluding the last year adjustment, net operating income was up 35.6%. Same property NOI increased by 8.2% for the quarter and 5.1% year to date because of the positive occupancy increase and the lease renewals, rates and the good, the strong effort that has been put there to increase the occupancy rate. Recurring FFO was CAD 0.114 per unit for the quarter, compared to CAD 0.125 per unit for the same period in 2021. It's a decrease of CAD 0.011 per unit. Again, excluding last year adjustment, recurring FFO per unit was up 23.6% for the first six-month period, or 27.2% for the second quarter only.
Cumulative AFFO payout ratio was at 68.3%, slightly up by 4.6% compared to the same period last year. Looking at capital structure, the trust concluded the quarter with a total debt ratio of 58.8%. It's an improvement of 1.7% compared to the end of last year. Following the bought deal completed on March 30th, the trust used CAD 31 million to repay the revolving credit facility on April 5th. Since then, CAD 19 million has been used to finance the recent acquisition. Weighted average interest rate for mortgages was 3.62%. It's an increase of 10 basis points compared to last year as a consequence of some recent refinancing. Just keep in mind, it's still 30 basis points lower than the pre-pandemic level.
For the last six months of 2022, the trust has CAD 42 million of mortgages coming to maturity, of which CAD 18 million has been already refinanced in July, leaving CAD 24 million for the rest of the year. One thing that we added as part of the conference call presentation, it's a page just considering the current interest rate environment that shows the property and the impact of the coming refinancing for 2022 and also 2023. We break it down by maturity for the coming 18 months. What we conclude is the FFO impact is estimated to be CAD 125,000 for this year.
When we sum up the refinancing of this year plus the one of next year, we believe that by the end of next year, based on current rates, the impact would be around CAD 853,000. It's about CAD 0.01 per unit on an AFFO basis. Okay. This completes our presentation, and with that, we'll move to the Q&A.
Thank you.
Thank you, Sylvie.
Ladies and gentlemen, at this time, we would like to remind everyone that analysts may now ask their questions by pressing star followed by the number one on their telephone keypad. Again, if you would like to ask a question, please press star then number one. We'll pause for a brief moment while we compile the Q&A roster. Your first question will be from Tom Callaghan at RBC Capital Markets. Please go ahead.
Thanks. Good morning there, guys. Just looking at the acquisition disposition side of things, can you maybe talk about any of the changes in underwriting or bid-ask spreads that you guys have seen kind of perhaps over the last three months, just given the volatility in yields?
Yeah. Good morning, Tom. Thanks for your question. Listen, there's no question that pricing expectations on the vendor side have adjusted, perhaps not as much as one would expect when you're out there trying to buy. Having started here four months ago, I think the spreads that we saw four months ago to the spreads we see today, you know, those gaps have increased tremendously. I would say the pricing has adjusted, so there are still accretive deals out there for us, though not quite as much as how much the rates for financing have moved. No question, you know, the market has been adjusting, certainly in the industrial asset class to recognize that the financing environment is no longer the same.
Having not executed any trades on the retail or office side, it's tougher to say. Although based on the guidance we've gotten on some of the opportunities we've looked at, those vendors are also recognizing that the environment has changed a little bit.
If I may add also, the office properties that we have put on the market are the results that we are getting from the marketing is that the cap rate that we have as our IFRS appraised values are in the market. As far as these properties are concerned, we don't see any material impact with rising cap rates as a result of the conservative nature of our business when we do appraise our properties.
Got it. Thanks. Then just on those properties, the ones you mentioned there in terms of the potential for disposition kind of later this year, is there any kind of high-level proceeds expectation across those two properties?
We've identified seven properties that we wanna put on the market, two of which are well advanced. The others are gonna hit the market probably in early September after Labor Day. Our purpose is going to be to, I mean, call a spade a spade in the sense that we're not raising funds in the market in order to purchase properties. We are selling properties in order to redeploy capital. We do expect that we're gonna have a material amount of money in order to redeploy the capital into the industrial segment.
Got it. Thanks, Michel. Then just last one for me, but looks like another very strong quarter in terms of leasing and obviously on the spreads. Interested in your color on kind of go forward outlook there in terms of spreads and, you know, how that all kind of ties into occupancy at a high level, maybe into the end of the year.
I think there's lots of room to run still on the industrial asset class. I think based on what we've seen so far, the rebound in retail leasing is really, really encouraging. I think people are voting with their feet, if you'll indulge me. I think the jury is still out on what hybrid will be and what work from home and what natural impact that will have on the office market, broadly speaking. I do think, all things considered, if you're connected to transit and you're in a suburban office, you're more than likely to have access to a free parking spot and a shorter commute. I think we're well positioned, come what may.
That's great. Thanks, guys. I'll turn it back.
Thank you, Tom.
Thanks.
Your next question will be from Matt Kornack at National Bank. Please go ahead.
Good morning, guys. Maybe a quick follow-up.
Good morning.
Good morning.
Maybe a quick follow-up to the prior question, Peter, with regards to mark-to-market potential. Can you give us a bit of a sense? I mean, obviously, as was noted, the office spread is quite high. I assume there's some tenant-specific or space-specific things there. But if you can tell me otherwise what the mark-to-market would be for the office portfolio as well as it seems like retail's been fairly consistent. We haven't seen much in the way of industrial leasing from you guys, but your thoughts there as well.
I'll start backwards. I mean, on the industrial leasing, the portfolio is basically 100% leased and occupied. Tough to get rental growth when you don't have any turnover. On the retail, you know, I think we're seeing rates that are consistent with our valuations, and in some cases, without giving too much away, we are seeing rental increases in the high single digits, sometimes double-digit rents. On the office side, I think the growth is going to be there, but it's going to be lower single digits than anything else.
What we're finding is that in some situations, again, with pricing power and then given the high cost of construction, you've got some tenants with a fair amount of inertia that are happier to renew in place, possibly pay a premium because to remain competitive and relocated is much, much tougher. I think, you know, that's the way it's shaking out for the rest of the year. So far, that's what the results bear out in terms of the activities we've been able to execute and the pipeline of activities and discussions we're having with all the users in the different asset classes.
To provide a little bit more color, we've said that we lost a tenant, an office tenant, that was located on the Saint-Laurent Boulevard, probably dead center on the island of Montreal, very close to Little Italy. This tenant has relocated to downtown. It seemed to us that the activity as far as the determination to occupy, I think is there. We're definitely seeing new leasing. Like, we've concluded the leasing with the accounting firm MNP in Laval, a substantial deal in two phases, the first phase being 14,000 sq ft, the second phase being close to 9,000 sq ft. The second phase was basically conditional upon us being able to relocate or cancel leases for certain tenants. There is.
In the suburban environment, there is a flight back to the office. As far as retail is concerned, we've lost a little bit because this property that we have under development that we are seeking the new zoning from the city, it's very difficult when you're in a redevelopment mode to conclude new leases or even to be in the market in order to conclude new leases because the future is uncertain. As a result of that, in that center, we're not actively recruiting new tenants, although as we're gonna get the permission to redevelop, then we are going to hit the market really hard and there's gonna be, in our opinion, high demand for it.
in the suburb of Quebec City, we have concluded a deal with Bath & Body Works, which is again retailers returning to the physical stores. With this, there's a substantial and a well-known retailer that is following the footsteps of BBW. As a result of this, we're in heavy discussions that are gonna end with a signed lease for another 4,000 sq ft from again a very well-known retailer. We're seeing activity, and we're also seeing in our centers that the sales are back to not only pre-COVID era or times, but it's surpassing the sales that they had pre-COVID. We're very confident on the portfolio and its performance.
You know, the properties we have, as you know, our head office is located in downtown Montreal, and we have one floor that's available. That's not a lot. It's 6,000 sq ft, but we have absolutely no activity. Whereas in all our suburban environments, we do have activities. I think that there's a big disconnect between the two. I think that there is going to be an effort by the large tenants that are occupying space in the downtowns, Canada, in order to get their employees back at work. There's a definite trend that we're seeing where the employees wanna go back to work, but not necessarily in the downtowns. They don't want to commute.
They, you know, they basically are past the moment where they commuted in the past, so they just want to go back to work but be working close to home. That's what we're seeing.
Okay. No, that's fair enough. The other thing I noticed, you bucked the trend a bit on CapEx. It was actually quite low this quarter, notwithstanding fairly active leasing. Are you seeing that you're not having to pay additional tenant incentives or leasing costs as a result of the current environment, or was that just a quarterly anomaly?
I think that it's probably. There's two things that I think come into play here. When we were at 89% occupancy, we did a bunch of leasing, and that brought us up to the 93.8%. So that was capital intensive. Now for us to, you know, to go to 94%, I think is not significant. I think it's gonna taper off, but I don't think that this quarter is a testimonial to what's gonna happen. I think that the amounts are definitely lower than the past years.
Go ahead.
No, that's helpful. It seems like maybe Mathieu you can elaborate, but this seems like a pretty stable quarter. Nothing one-time in nature, a fairly good starting base. Unless I guess one thing maybe you can comment on is kind of where you see occupancy trending through the balance of this year and into next. But all things considered, there's not much one-time in nature in this print.
That's right.
On the occupancy front, I mean, 94% committed, 90% in place. Should we expect that 94% to hold and the in-place number to track in the direction of committed or how should we think about occupancy longer term?
Well, we know that in Quebec City, we're losing at the end of the year a large tenant. Not because they don't wanna go back to the office, it's just because it's part of Industrial Alliance, and they've decided to regroup all their employees under one roof in a different way of space usage. We also know that we have a pending deal, as you will remember, from our Montclair property in Gatineau, where we're waiting for the city of Gatineau to get off their you know what, in order to give us the right zoning in order for us to start the building process for Giant Tiger for 26,000 sq ft.
I think overall, you know, losing one and having an additional one, I think that generally we should trend in the 93%-94%.
Okay, perfect. Last one for me on the density that is being built. I would assume it's condo strata from a zoning standpoint, but is it supposed to be rental or condo? I know Quebec has held up better than the GTA in Vancouver in terms of housing prices. Just your thoughts there on what you're building.
The residential developer is going. We're talking about six towers in total, and four are gonna be rental and two are gonna be condos.
Okay. Perfect. Thanks, guys.
Generally, we're talking about just to complete, we're a little bit less than 950 units. Bringing on the site, let's say, 1,500-2,000 new people on our site, and that's where the excitement lies as far as the retailers are concerned.
Makes sense. Thanks, guys.
Once again, as a reminder, if analysts would like to ask a question, please press star followed by one. Your next question will be from Gaurav Mathur at iA Capital. Please go ahead.
Thank you, and good morning, everyone. A few questions on my list, and I'll begin with the first one. Firstly, on office. I noticed that occupancy has basically remained unchanged compared to the last quarter as well. Given all the drivers that are working for the portfolio, how should investors think about, you know, occupancy levels, across office for the second half of the year and, maybe even over the next 12 months?
I think our office portfolio is largely affected by one property. That's why, when we publish the numbers, where we say we're a little bit less than 90% occupancy in the Quebec City area. If we take out the Three Rivers property, then we're at 91.2% from memory regarding the Quebec City area. We're breaking our heads, our brains, I should say, in order to figure out what to do with this Three Rivers property. Obviously, we could put it on market and I think there would be takers.
We've never talked about the development of this property, but there's vacant lands that we could basically find a solution on a residential side with a residential developer, and I think that there would be demand for that type of product. It's not an easy resolve. Unfortunately, when we look at our statistics for Montreal, Ottawa, Quebec City, without Trois-Rivières, you'll see that our numbers are quite good. Unfortunately, we are in a bind in Trois-Rivières, and we have to find a way out.
Okay. Thank you for that. Just switching tracks here on renewal rates, I'd say cumulative average increase of 15% is quite strong across all business segments. How does that pan out for the rest of the year as well, and how should we look at this number going towards the end of 2022 and the beginning of 2023?
I think that, you know, the last quarter, you know, achieving in excess of 20% or rather 21%, bringing the average to around 20.6% and then 15% for the first half of the year, I don't believe that's something that we can continue to expect for the rest of the year. I certainly think that we will be in a position to to talk about lower double digits and probably heading into next year as well. I don't think that rental growth of 15%-20% for renewals is sustainable, not at the price points that we're looking at.
Okay, fantastic. Thank you for the color on that. Just one question on industrial. I know that right now you're 100% leased, but as my understanding is there will be some leases up for renewal in 2023. What sort of mark-to-market expectations do you have when those leases come up for renewal?
Well, look, we expect them all to increase in a material fashion. You know, between the opportunities in Québec and in Western Canada, we are poised, we think, to see real important material rental growth in the industrial asset class as well.
Just give you an example without mentioning names. We secured the renewal in Saskatoon for a tenant. They were paying CAD 9, and we increased it to CAD 11.50, was it?
Yeah.
We increased net rent to CAD 11.50. It's better than what we had forecast when we acquired the property.
Excellent. You know, just staying on the industrial front, and we discussed this earlier on the call. You are finding attractive opportunities as well. Obviously, financing is proving to be difficult across the board. Just given you know, the current market dynamics, how are you thinking about capital allocation on acquisitions and development versus maybe even thinking about buying back your stock given the discount now?
Well, when we talk about, there are two things. I think that there's a big disconnect between buying back your stock and growth. I think that there's a mixed message that is basically outlined. We want to continue our growth, find ways in order to do so and grow into the industrial segment. As you noticed, we have not made any fair value or market value adjustment yet in our portfolio. The reason being that we cannot just do a blanket adjustment, and I'll explain why. The portfolio that we purchased in last December in Edmonton and Saskatoon, we purchased the portfolio at a 6.9% cap rate.
Cap rates in Edmonton and Saskatoon have reduced over time, basically below, say, 5%-6%, just for argument's sake, and it's probably 5.8%, 5.7% right now. If we were to add just gleefully 20 basis points to our industrial portfolio, then we would basically really inflict damage to ourselves because then all of a sudden the portfolio would be at 7.1% cap rate. Whereas the adjustment should be done at a 5% cap rate plus 20 basis points, so 5.9%. We're still conservative in our books.
What we've decided on that front is that, together with Altus, we are going to go through a significant amount of our portfolio during Q3 in order to assess if our IFRS fair values are in line with the, let's say, new reality of the market. Are we still conservative, or should we make an adjustment? We're gonna go almost property by property in order to do the exercise, and then we'll report back. Because we don't wanna be penalized because we purchased assets at a decent price or not aggressively. We've never bought a property, let's say, at a 3.5% cap rate.
If we were to just basically in a blanket fashion, just add the, you know, certain percentage to the cap rate, I think it's just penalizing ourselves. We're just basically committed a hara-kiri all of a sudden, so it makes no sense. We're gonna do it methodically, and we're gonna report back on that front.
Michel, if I could just add, Gaurav. You know, we've talked about this, and we believe that there are better buying opportunities out there for our unitholders and the performance than simply canceling units. You know, I think that the valuation is where it is for a bunch of reasons that are beyond our control. This is impacting the REIT sector, diversified or otherwise. It's temporary. That being said, as savvy real estate operators, we see opportunities with rental growth and potential eventual cap rate compression. I mean, we have to be here every 90 days talking to all of you folks, letting you know what we're up to.
We think longer-term, it's a better play for us to invest in real estate that's got opportunities to grow in value and generate better-than risk-adjusted returns, as opposed to a sort of technical financial transaction and buying back units.
Fantastic. Thank you for the color, everyone. I'll turn it back to the operator.
Thanks, Gaurav.
Next question will be from Chris Koutsikaloudis at Canaccord. Please go ahead, Chris.
Thanks. Morning, guys.
Good morning, Chris.
Morning.
Just a couple quick ones here from me. Maybe this one's for Mathieu. I'm wondering if you can expand, maybe give a little more color on what drove the decline in same-property operating expense year-over-year.
Well, there is different things. Last year, we spoke about the project we put in place to improve our recoveries and overall expenses and having a better grasp on those. That's something we realized. We did as well put in place a procurement function, centralized procurement function to get additional volume discounts, pooling some of the portfolio together with some of the suppliers to cut that down. It was on different fronts. We've been investing in energy projects as well. You know, that's most of it. It's not a major reduction, but I think it's going in the right direction as well.
If I can add, I think that the flight to industrial properties, reducing our weight in the office properties and going towards the investment industrial properties is also helping. Because as you know, it's less expensive to carry an industrial property than it is an office property or a retail property also.
That's great color. Appreciate it. Just circling back on the comments on cap rates. Do you think there's enough transaction activity in the market today to be able to really assess where cap rates are or where they're moving?
The answer is no.
It's gonna be a difficult exercise then, I guess, to try and value your portfolio more comprehensively next quarter.
Yes. Yes. So far, for instance, in the office segment, there's been very few in our markets, very few transactions. We know of some that are in the market, and we're not bidding for any office property currently.
Got it. That's it for me. I'll turn it back.
Thank you. At this time, Mr. Léonard, we have no further questions. Please proceed with your closing comments.
Thank you, Sylvie. Thank you for everybody for your participation this morning. I think that the quarter, it's been numerous quarters of improvement for BTB since I would say 2019. Now we're seeing the fruits of all the efforts that have been invested by BTB, its personnel, staff, and so on, even trustees. This flight to quality that we started way back in 2007 when we had decided to basically rejiggle the portfolio. We're looking at very strong operating performance. The leasing activities are robust. We have healthy fundamentals in retail, in industrial, and even in the off-core office segment. As I mentioned earlier, we're not acquiring properties in order to raise eventually capital.
We're sitting on our hands on that front. We wanna make sure that we don't hinder, you know, the stock price and the ways that we're gonna go about the deployment of capital is basically by selling certain assets. Not because they're not performing, it's just that they're not performing enough for us as compared to the other ones that we own. There is gonna be a great acquisition potential for certain smaller investors. As far as we're concerned, most of these properties are gonna be sold at a profit. The redeployment of capital, as I mentioned earlier, is gonna go towards industrial properties, and it's gonna be proceeds from disposition.
If we are not successful in dispositions, we're not gonna acquire properties because that's where the money is gonna come from. We talked about the material impact of rising interest rates on BTB, where we saw that this year is gonna be very slight. Next year, we're talking about less than around CAD 800,000 based on the current environment. If the environment improves, then all of a sudden we're gonna see a lessening of this amount that we put forward this morning. As far as the adjustment to fair value, we talked about it, we are going to look at it on a property per property.
We don't anticipate that there is going to be a lot of movement on that front as a result of the fact that we have number one, we haven't been aggressive on our acquisitions regarding cap rates. We have been, on the contrary, probably more disciplined on that front. As a result, we believe in the value of our portfolio. With this, thank you again for your participation. It's been a great quarter or a great many quarters since 2019 for BTB. Although, you know, we went through the headwinds as others have as well, and we're very happy with the performance, very happy with where we stand. Again, thank you very much, and we'll see you or speak to you for the next quarter in November.
Thank you.
Thank you, Mr. Léonard. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good day.