And gentlemen, thank you for standing by, and welcome to the Choice Properties Real Estate Investment Trust Q4 Earnings Announcement. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Doris Bohn, Senior Vice President, General Counsel and Secretary. Thank you.
Please go ahead.
Thank you. Good morning, and welcome to Choice Properties Q4 2020 conference call. I'm joined here this morning by Rell Diamond, President and Chief Executive Officer Mario Barafato, Chief Financial Officer and Anna Radic, Executive Vice President, Leasing and Operations. Before we begin today's call, I would like to remind you that by discussing our financial and operating performance and in responding to your questions, We may make forward looking statements, including statements regarding Choice Properties' objectives, strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, intentions, outlook and similar statements concerning anticipated future events, Results, circumstances, performance or exceptions that are not historical facts. These statements are based on our current And assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward looking statements.
Additional information on the material risks that can impact our financial results and estimates and the assumptions that were made in applying and making these statements can be found in the recently filed Q4 2020 financial statements and management discussion and analysis, which are available on our website and on SEDAR. I will now turn the call over to Rael.
Thank you, Doris, and good morning, everyone. Thank you for taking the time to join our Q4 conference call. We are pleased with both our financial and operational results for the quarter As our portfolio of high quality real estate continues to produce strong and stable rent collections. By all accounts, 2020 was a challenging for all of us. The COVID-nineteen pandemic significantly impacted our communities and our day to day lives.
In response, we took thoughtful actions to mitigate the effects of the pandemic on our business and continue to focus on the best interest of our employees, tenants and other stakeholders. The uncertainty we experienced in 2020 Continuing into 2021, but we are well positioned to withstand the continued disruption. Our diversified portfolio is well occupied At 97.1 percent and is leased to high quality tenants across Canada. The pandemic and the most recent lockdown have had the most impact on our retail assets. That said, we're in a solid position given our tenant mix As our primarily leased to either grocery stores, pharmacies or other necessity based tenants who continue to operate.
Many of our tenants have found ways to operate at a reduced capacity, whether through delivery or curbside pay. Those with limited ability to operate who have been forced to close entirely have been most impacted during the recent lockdowns. This includes fitness facilities, dining restaurants and some personal service retailers, which were less than 6% of our overall retail portfolio. Beyond retail, we also had high quality industrial, office and residential properties in Canada's largest markets. This diversification enables us to further reduce risk and stabilize cash flows.
The Stability in our portfolio is reflected in our rent collection. For the quarter, we collected over 98% of our rents, which is consistent with Q3. Mario will speak more about in a moment. Before Mario discusses our financial results and balance sheet, I want to spend a moment discussing our development and transaction activity. On the development front, our program continues to deliver exceptional assets to our There'd be no significant delays as a result of the pandemic as both our planning and construction teams continue to make progress on our ongoing process.
For the quarter, we completed and transferred 3 development projects for approximately 183,000 square feet of GLA at our share. This represents a total development cost of $83,000,000 and includes the office component of our West Block development in Toronto. West Block is a mixed use development and the office space includes 160,000 square feet that is 100% leased to Laval. In addition to the program, we continue to be active with our capital recycling program. Since the end of the third quarter, We've completed or entered into agreements to complete $332,000,000 of dispositions and $214,000,000 of acquisitions.
I'd like to highlight a few transactions. 1st, on dispositions, we completed the previously announced sale of a 50% non managing interest in portfolio for $169,000,000 The portfolio includes 11 grocery anchored retail assets in secondary and tertiary markets. We also completed the previously announced sale of 2 additional retail portfolios for $107,000,000 including 3 standalone Canadian Thai And 5 assets anchored by Loblaw, each of these assets are all located in secondary and tertiary markets. Finally, We sold Walker Square Shopping Center in Windsor for an aggregate sales price of $51,000,000 The asset comprises of 259,000 square feet Recent asset management and leasing activities repositioned the asset to 100% occupancy With longer term with longer lease terms, which drove significant value creation and resulted in a sale price above our IFRS value. Collectively, these dispositions have the liquidity for existing portfolio.
Overall, we're encouraged by the interest from institutional investors And the strong pricing for our secondary and tertiary retail assets, both which speak to the high quality of our assets and the advantage of the grocery anchor. Next, on to acquisitions. We completed the previously announced acquisition of an industrial portfolio for $86,000,000 The portfolio is comprised of 4 cross stock facilities in vector markets and represents a significant land holding of 56 Acres. These assets are 100% leased to a national logistics company with a weighted average lease term of nearly €14 and with strong contraction steps. Further adding to our industrial platform, we acquired 6 industrial properties, Weston Foods for $79,000,000 The portfolio comprises 835,000 square feet of GLA and is 100% leased to Weston Foods with an average lease term of 20 years.
The properties are all located in key distribution markets across Canada with over 65% of the portfolio in the GTA. We also acquired 5 retail assets through VendIn from Loblaw for an aggregate purchase price of 46,600,000 This includes 1 multi tenant and 4 standalone Loblaw locations all on long term leases. 4 of the assets are located in 3 primary markets, including 2 in Vancouver and 1 in Toronto and in Montreal. These acquisitions speak to our ability to generate stable and growing net operating income through acquisitions. They Also highlight our strengths in sourcing high quality investments, both through existing related parties and off market opportunities.
Looking back at 2020, we delivered over $1,000,000,000 of real estate transactions through our capital recycling program, including $288,000,000 of acquisitions with equity. This activity demonstrates our ability to generate stable In growing net operating income, lower our leverage through equity issuance and improve the overall quality of our portfolio, We expect to continue our capital recycling program into 2021. I'll now pass it over to Mario to provide an update on our financial performance for the quarter.
Thank you, Rael. Good morning, everyone. I'll begin with a brief overview of our rent collections and then speak to our financial results and balance sheet activity. Rent collections for the Q4 were stable at 98%, which is consistent with the Q3. The steady rent collections reflect a combination Our stable portfolio and the effectiveness of rent relief measures, which have supported our tenants through these unprecedented times.
Continuing with rent collections for the quarter, we've reported a bad debt expense of $3,500,000 The expense recorded includes pre COVID amounts For a national retailer, excluding this amount, bad debt related to 2020 recurring billings is approximately $2,000,000 It's down from $4,700,000 reported in the 3rd quarter. In terms of accounts receivable, we have provided disclosure in our MD and A, which accounts for talent billings in the previous three quarters. And from this, you can see that almost all of our efforts have either been collected, deferred pursuant to deferral arrangements Or provided against, leaving only $4,000,000 of exposure, which we expect to recover. Our reported funds from operations The Q4 was $71,500,000 This was a relatively clean quarter with the exception of the $3,500,000 bad debt expense I referred to being offset by approximately $1,000,000 of non recurring lease surrender income. On a per unit diluted basis, our Q4 FFO was 23.9 per unit compared to 23.7 in the Q4 of 2019.
The increase in FFO per unit for the current period It was primarily due to NOI from acquisitions, a reduction in interest expense from rolling down interest rates and lower debt levels. This was offset by bad debt expense in the current period. Reflected in our per unit amounts is a higher number of units outstanding as a result of last quarter to acquire the West Block development And our head office at 22 St. Clair from Whittington and units issued this quarter to acquire the Weston Foods portfolio from George Weston Limited. Excluding the previously noted bad debt expense, our operating performance was stable.
Quarter end occupancy increased to 97.1% With retail occupancy at a strong 97.4%, industrial occupancy at 97.3% and office occupancy at 92.1%. The net increase in occupancy was due to the acquisition of fully occupied assets in the quarter Loss in Weston Foods partially offset by nominal negative absorption in the quarter of 58,000 Square Feet. Same asset cash NOI for the quarter decreased by 1% year over year when excluding the impact of that expense. The decline reflects lower parking and solar revenue and one time adjustments recorded in Q4 of last year. This is offset by annual step rents embedded within our Loblaw portfolio.
Turning to the balance sheet. For the quarter, we reported an increase the fair value of our investment properties of $100,000,000 The increase was related to a combination of realized gains from transaction activity, A revaluation of a parcel of development land that we sold subsequent quarter end and improved fundamentals in our grocery anchored retail and industrial portfolios. We continue to take actions to strengthen our financial position and support our business with an industry leading balance sheet, covenant with the issuance of equity in Q4 to acquire a portfolio of assets from Weston Foods. In total for 2020, we issued $288,000,000 of equity To acquire strategic assets that increase our net asset value and reduce our leverage. We had very little finance activity in the quarter As the early redemption in the Q2 of 2 of our debentures maturing in early 2021 has left us with no significant debt maturities since September of 2021.
Over the course of this past year, we significantly improved our balance sheet by reducing our risk profile and improving our financial flexibility. This includes extending the weighted average term of debt, lowering our weighted average interest rate and improving our liquidity position. And from a liquidity perspective, we have approximately $1,500,000,000 available on our credit facility and over $200,000,000 in cash on our balance sheet, Giving us ample liquidity in addition to approximately $12,000,000,000 of unencumbered assets that we can finance or prune to raise capital. So overall, with our stable portfolio, our active development pipeline, low debt level and high liquidity level, We believe we are well positioned to manage the current challenging environment. I'll now turn the call back to the operator for questions.
Your first question comes from the line of Himanshu Gupta from Scotiabank. Your line is open.
Thank you and good morning.
Good morning. So
just on the fair value gains in the quarter of around $100,000,000 was majority of it related to the disposition activity? And just wondering how much was related to the revaluation of the investment portfolio?
Hi, Himanshu. So I would say probably over half of it was related to transactions and And that was both the retail properties we sold and the development land that we sold. As far as the remainder, I would say probably $40,000,000 was due to industrial and one was just fundamentals in our GTA market And more of the mid market type product. And also we had a lease in Quebec that once you look at those fundamentals, It created significant so probably so half and half between transactions and fundamentals.
Got it. And then if I sticking on the valuation subject, I mean looking at the overall cap rates for the tail portfolio, It was unchanged sequentially and only up, I think, 9 to 10 basis points on year over year basis. I mean directionally, what are your thoughts going forward? And how is the appetite for standalone grocery properties in the market today?
So I mean, we're seeing it now. I mean, the value of the long term lease With an investment grade tenant, it's becoming evident. And right now, a lot of transactions are geared around that type of asset. So given bond rates where they are today, We just see that asset class becoming more valuable and it's not reflected right now in appraisals and we've been the primary source of transactions and you can see the gains we've reported. So hopefully, we'll see them narrow that gap.
As far as the rest of the portfolio, it really just depends on how we come out of This next phase of the pandemic and maybe I can defer to Rael as far as what we're seeing right now.
Yes. Himanshu, we've seen lots of interest as Mario said, lots of interest On necessity based retail, and then very strong interest in industrial. And in fact, one of our partners is in the process of selling their interest in, an office asset that we co own with them and the pricing is, a lot stronger than our current So there continues to be lots of liquidity for high quality assets.
Got it. And then just turning to the rent collection, it was strong at 98% consistent with Q3. How is the collection trending in January And February so far, any impact you're seeing from the recent run times?
So February, again, is coming in strong as well. So, and in February, we're still not done the full process, but really It's not so much the past. It's just seeing how our tenants come out of the next phase. But we're pleased. We started at 86% and I think we're leveling off and
Okay. So just to be clear, so January is very closer to What you collected in Q4, is that a fair statement?
That's a fair statement.
Okay. Fantastic. Thank you. And then just on the collections topic, I mean, as per disclosure, around $4,000,000 is the amount which is remaining to be recovered And for which no provision has been made, how do you get comfortable that this amount will be recovered? And by then do you expect to collect that?
For the most part, just the nature of the billings, it's just when you billings, You have catch up. So we have no reason to suspect they won't be paid. It's just a matter of timing right now and they come from tenants who've been paying rent otherwise.
Okay. And then just final question on the transaction activity. You bought an industrial portfolio from Western Foods at $79,000,000 or So what was the cap rate on that? I mean on a dollar per foot basis looks pretty attractive to me, dollars 100 per foot for the portfolio, which is I think 65% in GDA as you mentioned in your prepared remarks. So anything on the pricing there?
Yes. Look, as you said on the price per foot, It is attractive. It is long term leases and the cap rate is mid-5s.
Mid-5s, okay. And how is the pipeline looking for industrial assets? And is there a plan to increase industrial exposure to a certain size or certain percentage of the portfolio?
We don't have a specific target. We are seeing very strong rent growth in industrial. So we would like to increase our exposure to industrial. It's just very hard to find reasonably priced acquisitions, but we'll Trying to source them and hopefully we can complete a few acquisitions this year.
Got it. Stand up. Thank you, Ryan. I'll turn it back.
Your next question comes from the line of Jenny Ma from BMO Capital Markets. Your line is open.
Thank you and good morning. Congratulations on the volume of deals that you've done. With that in mind, I guess you have a good vantage point to comment on valuation for retail in particular. Are you seeing spread different spread between cap rates for primary and secondary markets or is valuation Most strongly predicated on the long term essential retailer anchor. And then in the same vein, do you see a differential between standalone boxes versus Grocery anchor centers.
Yes. Jenny, thanks so much for the question. So We actually think all necessity based retail has really separated itself from other sorts of retail and we're seeing strong interest regardless of the market. There has always been a pricing differential between call it secondary and tertiary markets versus and It hasn't widened, but there's very strong interest for assets provided is that necessity anchor. And in all situations on our dispositions this year, pricing was higher than IFRS value as Mary had pointed out.
Okay, great. And then my second part of the question was about Sandalone Boxes versus grocery anchored shopping centers. Are you seeing any change in the differential there or any differential at all?
No real change.
Great. And Riel, I think in the remarks and your letter to unitholders, you talked about additional capital in the sideways for 2021. Just wondering how to balance that against some acquisition opportunities you're talking about. Do you think that in 2021 based on what you see now Choice will be a net Buyer or seller of assets?
So in 2020, we're a net seller. We would like to We don't look at it on an annual basis. We look at it in total, Jenny. And so things may spill out in different years. We did over $1,000,000,000 of transactions this past year.
It's probably it's going to be tough to do that same level of volume in 2021, That we continually looking for good investment opportunities.
Okay, great. And then I guess Expanding that discussion, it looks like there's quite a bit of cash sitting on the balance sheet and you're still looking to recycle capital. Just looking at some of the upcoming debt maturities, it looks like it's mostly one bond and some mortgages. What is the planned use of Cash, I guess, do you intend to sort of pay down from the secured mortgages and increase the financial flexibility on the balance sheet? And Would it make sense to early redeem the bond that you have coming up in September or is it just something that you intend to wait out?
Hey, Jenny. Yes, I think the answer is yes, yes, yes. Hopefully, we can deploy the money as Raul said. As Raul said, the timing of matching up Dispositions and acquisitions didn't coincide. So we'd like to spend the money, but if we Paying down debt is not a bad option either and we will be looking to early redeem if it makes sense right now that just pay out a great fee when we don't really we have other potential I think that we'll figure it out.
But also we have a development pipeline where we can deploy the money as well. So we have a lot of options and we're going to kind of wait for a little bit, but it will go to good use.
Okay, great. Thank you. I'll turn it back.
Your next question comes from the line of Sam Damiani from TD Securities. Your line is open.
Thanks and good morning everyone. Just on the residential development program, you've started construction recently on a couple more projects. Obviously, you're confident in those specifically. Are you as committed to proceeding forth with new capital in that area, given what you've seen in terms of the impact of the pandemic on the revenue, market revenues, rents and also construction costs?
Thanks for the question. So long term, we are bullish and our investment thesis holds. We will invest In residential, on construction cost side, we have a huge competitive advantage given our land costs, what we carrying it On the balance sheet, Paul. So, we just have to be told that we won't take on too much development in one point in time. And we have to be realistic with our rent expectations.
As an example of what's coming online in 2021 with We would expect to increase and the rents really outperformed our original pro form a even today with the drop in rents Still exceeding our original pro form a. So we just have to be realistic going into any developments and we're very Positive about the 2 developments that we commenced construction recently on.
Thank you. And what sort of spreads between development yields and stabilized valuation yields, are you expecting or targeting on this program or these 2 new projects specifically?
So the yields are around a 5, Sam, and cap rates are in the high threes, I would say, Depending on location.
Okay, great. That's helpful. Real, you mentioned also the Young Street office building that I think you're just your partner is selling their interest and it sounds like the valuation is pretty attractive. You're not tempted to sell your interest as well. And also just curious what the Walt was on that particular building?
So Sam, we like the diversified nature of our portfolio And that is a very good asset and it caters to a tenant that is not really competitive with the large blocks of space downtown. And We're looking at it on the weighted average lease term. It wasn't
It wasn't long, Sam. It was less than 5 years for sure. And there's still Leases that are below market definitely pre COVID and even post COVID.
And sorry, it just went out there. Was that less than 5 year, Walt, Anna?
Less than 5. Yes, I don't know the exact, but it was somewhere Between 4 5 years, less than 5 years.
Okay. Yes, perfect. And just final question
on the Loblaw leases. They start to roll in 2023 of the retail leases. What do you envision there, just kind of a few renewals every year or do you envision a sort of a major sort of big portfolio of leases being renewed on block as we head over the next year or 2?
Yes, I think Sam, they're roughly 30 or 40 a year and we would expect that volume of renewals. Okay. Thank you.
Your next question comes from the line of Tal Woolley from National Bank. Your line is open.
Hi, good morning everybody.
Good morning.
Good morning.
If you look at the Loblaw owned or the Loblaw In the portfolio and sort of stratify their stores into like the market banners, the discount banners and the standalone pharmacies. Do you have
a sense from
Loblaw, whether the pandemic sort of changed kind of the Long term need for the size of those boxes, like whether they might need more safe or less going forward?
Hey, Tal. We in constant communication with Loblaw, We don't want to speak for them, but we're very positive on the portfolio that we The portfolio that we own and we have leases of, we would expect them to the stores are performing well and we would expect them to renew those stores.
Yes. I guess the reason I was asking the question was following up sort of where Sam was going that like there are these sort of 30 to 40 renewals you're facing a year. Like do you expect that like they might As part of those renewals, might need more space for things like click and collect and other stock. I just don't know How much of the portfolio is sort of optimized for all of that?
Well, I mean, they are investing in their Stores, so we are seeing them install the click and collect. And in some cases, they've been able to accommodate that Within the existing footprint, but we don't know of anything material that would suggest that they need Or space.
Okay.
And then just on the payout,
Obviously not having changed in a while. What sort of conditions would you expect to See where investors could maybe begin to start seeing distributions start to increase again.
Thanks, Tal. It's a good question. We really haven't talked about it. Right now, our this year will be 92%, but it's The run rate is 90%. We really like to build up the retained cash.
We just think it's prudent to level where if we're doing $200,000,000 of developments, We could have a good chunk of that kind of organically funded. So right now, It hasn't really been discussed. And I just think once that cash retained cash gets up to it's at $15,000,000 right now. And if it gets higher, Maybe, but right now we're not talking about it at all because we're just focused on the development program.
Got it. That's perfect. Thanks
Your next question comes from the line of Pammi Bir from RBC Capital Markets. Your line is open.
Thanks, and good morning. Apologies if this was already mentioned, but can you provide maybe some additional color on Draw in industrial same property NOI in the quarter?
Hi, Hami. Sure.
I can take that.
Go ahead.
I can take that, Pammi. Yes, Pammi, it's really a combination of 2 things. One is, as I said before, we had some accounting adjustments Last year and we kind of just on timing it chewed up in Q4. So that number was a bit higher. And also We've had some leasing in Alberta and we've kind of talked before about a bit of softness in the Edmonton market.
So we've seen a bit of roll down. So those are probably the two drivers of why it's down.
Got it. Okay. That's helpful. I guess in terms of The re leasing of that space in Alberta, how are you feeling about that over the next 12 months or so?
Hi, Pammi. Yes, I mean, we are seeing a good amount of activity, particularly in our Calgary portfolio, We're so I think we're optimistic we'll lease the Calgary space Within the year, in Edmonton, that's where we think there'll be a sort of a longer lease up time.
Pammi, the benefit of being diversified is, we there is some softness, as Anna mentioned, in Edmonton, but we're getting really good rent growth elsewhere in The country and you should see it come through in the numbers.
Yes. Overall, our rents spreads in industrial are over 10% So and Ontario is obviously driving that, but we're seeing growth in the Maritimes as well.
Great. Just maybe switching gears to the office portfolio. I realize this is a pretty small piece of the business at this stage, but do you have an estimate of, I guess the current amount of space that's on the sublease market in your portfolio and how our conversations going on leasing up some of the vacancy?
I don't have the exact number a square percentage of space in our portfolio. It isn't significant. We probably have a Full of pockets at 175 Floor and actually very little in our Calgary portfolio. So, and Also in Vancouver. So it isn't impacting us that much, but the overall market, clearly, everyone who's reading reports knows that the vacancy The sublease vacancy is increasing.
But sort of in terms of our portfolio, I mean, I think We tend to have smaller tenants, which are a little stickier. It's more difficult for them to Downsize 25% when it's just usually it's not economical to do so. And So we think there'll be less impact to the amount of sublease availability.
Great. Just one last one. I guess on 110 Young, did you consider at all perhaps acquiring the 50% stake that's, I guess, under contract Your partner or are you generally just comfortable with your exposure on that property?
We did look at acquiring it, but You'll see when the information is disclosed Pammi, the price is very, very tight.
Thanks very much. I will turn it back.
There are no further questions at this time. I turn the call back to President and CEO, Rael Diamond, for closing remarks.
Thank you, Jason, and thanks, everyone, for joining our call today. Please do all you can to stay healthy and safe and hope everyone has a good day long weekend coming up. Thank you.
That concludes today's conference call. Thank you everybody for joining. You may now disconnect.