Ladies and gentlemen, thank you for standing by, and welcome to the Choice Properties Real Estate Investment Trust Q2 Earnings Announcement Conference Call. 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 turn the call over to your speaker today, Doris Bonn, Senior Vice President, General Counsel and Secretary. Thank you.
Please go ahead.
Thank you. Good morning and welcome to Choice Properties' Q2 2020 conference call. I'm joined here this morning by Rell Dinan, President and Chief Executive Officer Mario Barrofatto, Chief Financial Officer and Anna Radek, Executive Vice President, Leasing and Operations. Before we begin today's call, I'd 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 estimates 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 assumptions that we made in applying and making these statements can be found in the recently filed Q2 2020 financial statements and management's 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 Q2 conference call. Let me start by acknowledging the ongoing impacts of the COVID-nineteen pandemic. We continue to take thoughtful actions to mitigate the effects of the pandemic on our day to day business operations, while focusing on the best interest of our employees, tenants and other stakeholders. We're encouraged by some initial signs of things returning to normal.
Every day, more businesses reopen and people find new ways to go about their daily lives. And while it is still early and the full impact of the pandemic cannot be fully predicted, we remain confident that our business model and disciplined approach to financial management will allow us to weather the storm. As I mentioned last quarter, the pandemic has had the most notable impact on our retail assets as certain tenants were either forced to close or to operate in a reduced capacity. That said, at Choice, we're in an enviable position given the makeup of our portfolio. Our retail assets are primarily leased to the grocery stores, pharmacies or other necessity based tenants with stable business operations.
We are confident that the high quality nature of our retail properties and the strength of our anchor tenants will help mitigate the effect of the pandemic. Beyond retail, we also own high quality industrial office residential properties in Canada's largest markets. This diversification enables us to further reduce risk and stabilize cash flows. As one of Canada's largest landlords, we have an important role to play in helping Canadians and their businesses during these unprecedented times. In March, we agreed to assist qualifying small businesses and independent tenants with rent deferrals for 60 days.
We have further supported our tenants by participating in the SEQA program, a federal relief program, which provides a 75% rent abatement for qualifying small businesses for 4 months commencing April 1, 2020, of which 1 third is funded by landlords and 2 thirds by the federal government. In addition to helping our small tenants, we've received numerous requests from our larger tenants who businesses have been adversely impacted by the pandemic. We're dealing with our larger tenants on a case by case basis to assist them with the path forward and there are instances in which we have evaded rent in exchange for improved lease terms. Rent collection for the Q2 was approximately 89%, a strong number reflecting the resilience of our necessity based portfolio. July rents have now come due.
And as of yesterday, we received approximately 94% of the contractual rents for the month. This is an encouraging sign as our rent collections are steadily increasing each month as more tenants are getting back to business. Before Mary discusses our financial results and the strength of our balance sheet, I want to spend a moment discussing transaction activity. While the market for transaction activities has slowed considerably as a result of the pandemic, we did execute on 2 strategic acquisitions. We acquired a small parcel of land at Bloor and Dundas for approximately 8,000,000 dollars This asset represents a key component of the land assembly at Bloor and Dundas.
We also acquired a 6.5 acre vacant parcel of land from Loblaw for approximately $8,000,000 The property is just south of the intersection of Warden and Saint Claire and Toronto and is in close proximity of the Warden subway station. We are working through a potential rezoning of the site for future residential density and hope to have more to report on this later. Subsequent to the quarter end, we entered into agreement with our partner Woodbourne residential development site at 190 Richland Road in Ottawa. The development envisions a mid rise rental residential building comprising 2 50 units in the trendy neighborhood of Westborough located west of downtown Ottawa and in close proximity to a future LRT station. Woodbourne is an existing partner on 3 other sites of choice.
The transaction with Woodbourn will be secured will be structured as a fifty-fifty venture with a 99 year ground lease. The ground lease structure allows Choice to retain 100 percent ownership interest in the land and is consistent with the REIT's objective of generating long term stable and growing income streams. This development represents an opportunity for Choice to unlock value through the intensification of an existing income producing asset. Construction is expected to start later this year or early in 2021. As it relates to our M and E lending program, we continue to work through the receivership process on our mortgage receivable asset in Barrie, Ontario.
The loan is secured by a property that is adjacent to a grocery anchored shopping center owned by choice and further cross collateralized by 2 other properties where Choice is a joint venture partner with the borrower. In July, the trust submitted an unconditional stalking cost bid to the receiver to acquire the property at a price that is approximately $8,000,000 less than the amount of the loan. It is possible that the trust offer will be accepted by the court and ownership of the property will be transferred by the court to the trust. Mario will provide more details on the accounting treatment in a moment. On the development front, our development continues to progress well.
There have been some temporary delays due to work stoppages, labor shortages and the implementation of social distancing measures on-site. But for the most part, construction is back up and running and the overall impact on our development program has been minor. In the quarter, we completed and transferred 2 development properties for approximately 22,000 square feet of GLA at our share. This includes a new Loblaws located at our Orange Ridge development in Alberta. Our 2 largest ongoing projects are the residential developments at 39 East Liberty and 390 Dufferin, both in downtown Toronto.
These projects are under vertical construction and have not experienced any significant delays as a result of the pandemic. We anticipate completing construction at 390 Dufferin in Q4 of this year and 39 N East Liberty in Q3 of 2021. With the projected lease up period of approximately 1 year for both assets following completion. I would now like to pass the call 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 financial results and then I'll speak to our balance sheet activity. Our reported funds from operation for the 2nd quarter was $140,600,000 or $0.201 per unit diluted. This compares to $170,200,000 or $0.248 per unit diluted in the Q2 of 2019.
The declines in FFO for the current period were primarily due to 3 risk mitigation measures, which resulted in one time charges to FFO of $29,200,000 or $0.04 per unit. The first mitigation measure was the May issuance of $500,000,000 of unsecured debentures with a 7 year term at an interest rate of 2.84%. The offering received strong investor demand allowing us to upsize the deal from $350,000,000 to 500,000,000 dollars and issue the debt at the 2nd lowest REIT coupon to date for 7 year bonds. Proceeds from the issuance was used to repay our credit facility and early redeemed $350,000,000 of debentures maturing in Q1 2021. The early redemptions of the 2021 bonds resulted in fees totaling $6,800,000 which IFRS requires to be fully expensed in the period rather than amortized over the term of the newly issued debt.
The second measure was supporting our tenants who've been negatively impacted by the pandemic through rent deferrals and participating in the SECRA program. And notwithstanding the ongoing support being provided, we recognize that there are costs and increased collectibility risk for certain tenants for these amounts past due. While we haven't experienced any significant tenant defaults to date, we have estimated a potential cost to the bad debts, including the potential SECRA amendments to be $14,600,000 for the quarter. And the final measure was protecting our investment in a mortgage receivable by placing a stocking horse bid for the underlying asset, which is currently in receivership. And for accounting purposes, the carrying value of the mortgage receivable has been revised to this bid, which resulted in a $7,800,000 credit loss during the quarter.
Excluding the previously noted bad debt expense, our operating performance was stable. Quarter end occupancy remained strong at 96.8 percent with retail occupancy at 97.7%, industrial occupancy at 94.9% and office occupancy at 92.6%.
We did have negative absorption in
the quarter of 516,000 square feet, but primarily related to our Ontario industrial portfolio, of which 360,000 square feet has already been leased and with strong prospects for the remaining space. This translate into same asset cash NOI excluding bad debts of 1.1% year over year. This growth reflects the annual step rents embedded within the Loblaw portion of our portfolio as well as incremental cash generated from leasing activity over the last 12 months. In consideration of COVID-nineteen, we have adjusted our property valuations. Leasing assumptions in the retail portfolio have been updated, reflecting increased downtime, potential vacancy, rental rate adjustments and increased leasing costs at certain properties.
This resulted in the reporting of a Q2 fair value loss of $231,000,000 In keeping with COVID, our top financial priority is to mitigate financing risk and maintain a strong liquidity position. Over the course of the year, we've significantly improved our balance sheet by extending our weighted average term of debt and lowering our weighted average interest rate cost. By redeeming 2 of our debentures maturing in early 2021, it leaves us with no significant debt maturities until September of 'twenty one, reducing our risk profile and providing us with flexibility. And by repaying amounts drawn on our $1,500,000,000 credit facility, it gives us ample liquidity in addition to approximately $12,000,000,000 of unencumbered assets that we can finance or prune to raise capital. We've also focused on capital preservation and maximizing the amounts available to be drawn on our credit facilities.
With that in mind, we are monitoring our capital expenditures. And where we contemplated using our credit facility, we're looking at alternate sources of financing. So overall, with our low debt level, our high liquidity level and our investment grade credit rating, we believe we are well positioned to manage the current challenging environment. I'll now turn the call back to Raul.
Thank you, Mario. Before we open it up to questions, I would like to reiterate why we continue to believe that we'll emerge from this crisis in a better position than most. First, our team. I'm incredibly proud of our team's response to date. They've adapted and remain connected going above and beyond for their fellow coworker and for our tenants.
Next, our portfolio. We own a high quality real estate portfolio and have a development program that will provide opportunities to add high quality stable real estate assets over the coming years. Finally, our balance sheet. We have a strong balance sheet with $1,500,000,000 of liquidity that provides the flexibility necessary to help insulate Choice Properties in the face of broader market volatility. We are confident that the strategic and operating decision that we have made across our business positions us to withstand this pandemic and assist our tenants where we can.
Our top priority remains ensuring the health and well-being of our employees and tenants, and we're working diligently to ensure that Choice Properties is running as smoothly and effectively as possible. Operator, we'll now open the call for questions. Thank you.
Your first question comes from Sam Damiani with TD Securities. Your line is open.
Thank you. Good morning, everyone. I just wanted to start off on the IFRS fair value loss. Just to clarify, this was an entirely management driven decision. There was no sort of evidence or push from appraisers or auditors to make these marks to the retail portfolio.
Is that correct?
Hi, Sam. Yes, you're right. We update our models regularly. There's very few changes really to the cash assumptions. So we decided just to go a little deeper and we just looked at more macro directional assumptions in terms of vacancy and rental rates and downtime.
So yes, nothing objective, just our view of updating the models and reporting back to our Board directionally on the environment as we see it today.
And what about on the industrial side? There's certainly evidence so far as the fundamentals have continued to strengthen during the pandemic. Is there any thought to tweaking those valuations?
Right now, I think on industrial, we're going to go back to the basics where to change our valuations, we need objective data. And right now, we have modified them in the past just due to rising rates. But again, with lack of transactions right now, we're just keeping kind of everything status quo. But I think you're right, out of the one asset class that has room or momentum to grow and to get it to go higher, it would be industrial.
And Sam, what we are seeing just on the industrial side is we are seeing some users active in the market looking for small building. And the process they and particularly in Toronto, the process they're willing to buy properties at on a per square foot basis would be foreign excess where we would be carrying the assets on our balance sheet at. So if a few of those transactions start to happen, we may be able take some write off then. But as we say, there definitely is some activity on the from a small from a user perspective.
Thank you. And just shifting over to, I guess, rent deferral agreements. I think back in April, you disclosed that tenants representing around 4.5% of rental revenues were approved for 60 day deferrals. What is that number today?
So Sam, Anna can give a little more color as well. But the way we did it is essentially we shifted our focus to the separate program. So the government had shortly announced that they were looking at a program. So many of those tenants that qualified for those deferral agreements then started seeing if they were able to qualify for the SECRA program. And so we would expect it to not be materially different than it was last quarter.
Anna, if you want to add anything.
No, I mean, I think you covered that. Most of our tenants are applying to Seqra, so we're working with them in that capacity. And some of our regional tenants with multiple locations, we have done a few deferral agreements with those, but really it hasn't materially changed the amount of deferral rents.
Okay. And just with the improved rent collections across the portfolio, the extension of Australia into July, how should we think about directionally bad debt expense for Q3 versus Q2?
Look, so as you said, Sam, so our rent collection has significantly improved from last quarter. Like if you recall, at the beginning of the quarter, it started at 86% and now it's 94%. And 94% represents roughly about $7,000,000 of uncollected amounts. And we're not fully through, obviously, July yet. We do believe the bulk of the provisions are behind us.
There will be some provisions for obviously 1 month of SACRA in July. And then if there are any potential defaults tenants. But right now, we do believe the bulk is behind us and we do expect things to continue improving.
Great. I'll turn it back. Thank you.
Your next question comes from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks and good morning. Just in terms of the bad debts, maybe stick to that for a minute. What amount actually related to the Seqra abatements versus, say, some of the other larger tenants?
Yes. So it's roughly a third relates to small tenants. And we not fully worked through the SACRO program. We've made assumptions which tenants will qualify. It's a very, very labor intensive program.
We have filed roughly, and Anna can correct me, roughly 200 applications so far. But it's a very labor intensive program. You need information back from the tenants and it's taking a lot of time. So we've made an estimate for tenants that will qualify and taken a provision based on our best estimate. I don't know, Anna, if you want to add anything.
Yes. We anticipate flying in total for 165 properties. So that would be well over 1,000 tenants. And in terms of the full abatement of rent, we're yes, that 30% number is kind of our estimate and it just is going to depend on the eligibility of the tenants, which we don't know exactly until we complete the process.
Right. Got it. And then just sticking to the Sacra, was the charge booked in Q2, was that for the full 75% abatement or was that a net figure, meaning net of the expected recovery from the government?
It's a net figure, net of the expected recovery for the government and just for the 3 months probably.
Okay. And then just maybe thinking about, I guess, going forward, so adjusting for, let's say, 1 month of Seqra in Q3, maybe there's some additional possibly some additional charges in Q3, but should that $15,000,000 charge be substantially less or substantially reversed like less in Q3 on a forward basis?
Yes. Based on what we know now, we believe that we should be substantially less. But again, it is too soon to tell, but we would expect just given the trend we're seeing in increased rent payments, etcetera, we would expect it to be significantly less.
Got it. Maybe just one last one. The balance sheet is in pretty good shape. You've got ample liquidity. How are you thinking about allocating capital between, let's say, the development program, maybe some acquisition opportunities that might come up or perhaps just paying down some or reducing leverage over time?
Larry, do you want to respond?
Sure, sure. I mean, we've I mean, our focus has been pushing out our debt maturities, the minimizing refinancing risk and making liquidity. And so right now, I mean, we're using whatever capital we can into our development program And it slowed down a little bit, but it will get back ramped up. And when opportunities arise, we'll go back into capital recycling and there could be some timing issues there. But I think we set ourselves up to be defensive, but if assets start coming to market and they the quality criteria we have, then we would be active in purchasing high quality assets.
Thanks very much.
Your next question comes from Himanshu Gupta with Scotiabank. Your line is open.
Thank you and good morning. So just to follow-up on the fair value valuation. So Q2 discount rates were unchanged as you have increased 25 basis points for retail portfolio in Q1. So what gives you confidence that no more change in discounted is required? And are you seeing or have you seen any transaction activity in the market to support that?
Hey Himanshu. No, right now we haven't seen anything in the market. So what we've tried to do is express our views directionally. But the quantum, there's no objective data that would support it. So we thought initially in Q1, we knew that there would be more risk in the environment discount rate.
In this environment right now, we're just saying that we just think that the leasing assumptions that we would have had in Q1 are different in Q2. And so that's really directionally what we've done. But there is no objective evidence, appraisal data, trades to validate anything. So we're just taking our best estimates.
Okay. And just to be clear, the entire fair value losses, which are booked in Q2, was it all non grocery, non Loblaw retail portfolio?
No, it's co mingled. Last quarter, we really focused on the non grocery, because the grocery stores themselves were going through record profits and we just didn't really have a view. And so all we did this quarter was extrapolate assumptions across the entire portfolio. It was again no one single assumption dominating our ruling, but just applying again directionally a trend that we're seeing in all the basic real estate fundamentals across the portfolio.
Okay. And are you also incorporating the trends in, for example, I mean, COVID has activated the online grocery sales as such. So are these assumptions also CCMs in the near term?
Well, in making an assumption on renewal probabilities, that would be one of the factors that would go into it. But no, again, we don't have we don't see the outcome yet as far as what that will mean for the grocery business. And if anything, I mean, the grocery stores are people want to be in those sites. The cash flows with the investment grade tenancies, the value could go the other way. They could become more valuable.
There's a lot of moving parts here and we're just trying to again just reflect our views both to investors, both to our Board. But again, I think nothing's played out where we can actually say that definitely we see this happening or that happening. So it's really just our judgment, our view right now.
Yes. And sure, as you mentioned, the grocery stores are still like they're very busy as Mario mentioned. And we just internally have a very conservative approach to valuations every quarter. So every quarter as we know information, we update our valuation model. So as Mario said, there was not one single macro assumption or series of assumptions on pushing out maybe downtime and maybe some re leasing costs.
And it had an impact on our overall valuation. But I wouldn't like we don't know any change in capital discount rates that we can point to. We just took an internal view that overall, we do believe we still value these assets on our balance sheet in a very
industrial portfolio, there was a negative absorption of almost 500,000 square feet in Ontario. Was it one specific property or was it across a number of properties? And then the space which has been re leased, what was the new rent versus the expiry rent?
Yes. So it was really 2 properties. So one, we purchased an asset from Weston Foods on Lawrence and Weston Road. And it's about 120,000 feet and the other one was in Mississauga or Brampton, it was 300,000 feet. So it's roughly 420,000 feet a month to two properties.
Just on the one on Lawrence Avenue, we look at the immediate term use as industrial, but longer term it's actually right near a GO Station and the Union Pearson Express stop. And we think longer term it's actually one of the few industrial sites that actually had long term intensification potential. Of that 120,000 feet on Lawrence Avenue, we have re leased about or leased about 60,000 feet. And rents that did exceed our pro form a. And then on in Brampton or Mississauga, on the 300,000 feet, we re leased that I think the new tenant takes occupancy August 1, and the rents were about 60% higher than the expiring rents.
So obviously, we're seeing real rental growth in industrial and particularly in Ontario. So obviously very positive what we're seeing in that portfolio.
Sure. And maybe last question for me, sticking to industrial. What was the occupancy change in your Alberta industrial portfolio? And do you have a sense of how the market vacancy has moved in Calgary or Edmonton industrial markets in Q2?
Yes. I don't have that information handy. I don't know, Anik, if you have it handy. Otherwise, we can get back to you.
Sure. That's fine. Thank you. And probably I'll turn it back.
Your next question comes from Sam Damiani with TD Securities. Your line is open.
Thank you. My question has been answered.
So just on Himanshu's question, just on the industrial in Alberta, the occupancy at the beginning of the year, we were at 96.8%, and now we're at 96.1%. So not a significant movement in occupancy to date.
Your next question comes from Jenny Ma with BMO Capital Markets. Your line is open.
Thanks. Good morning. Just a couple of fine tuning questions on the secret program. Are the secret tenants generally current on their rent? Just wondering if you have a good sense of the total number that's going to be applying.
So generally there what we've been doing because we're working with the tenants they're holding off making the payment until we finalize all the agreements. And as we've explained before, it is a very tedious process. And so some of the tenants actually have paid rent, who now qualify, and we're going to be giving them the money back. And others are holding off making the 25% payments until the agreements are all finalized.
Okay. I know there's the application deadline of August, but do you have a deadline that you've given to your tenants to say you've got to let us know by X date if you want us to apply for this? Or is it you guys pushing out the application or you guys offering the application to them and they need to respond to that?
So we offer and Anna can add more color, but we're offering the application now to the tenants that have to respond. But remember, you can only make one application per property. So if there may be a tenant who's taking longer, we're holding off on that property to apply until we would get that information back from the tenant. And so we have a very good process internally where we're using technology to reach out to tenants and populating as much of the forms electronically as possible. But as we've said, it is a very manual process.
And I don't know if you want to add any more color.
Yes. Simply, we're approaching it where we're applying for a group of assets, and then we reach out to the tenants and then we follow-up with them. And when we receive a response from the majority of tenants, we then apply. So I think we've applied for 60 or so properties and then there's always a group of assets every few days that we complete and submit. So it's an ongoing process and we expect to be completed, have the whole portfolio complete by the August deadline.
Okay, great. And then given that the July extension sort of came afterwards, I just want to understand how to think about the secret participation from June to July and how it sort of marries with the reopening too? Like if you if a tenant qualifies for April, May June, but they reopen in July, are they able to still keep the rent assistance for the 1st 3 months? Or do they stay closed for the 4 months? How is it measured?
I just want to know if there's a drop off in participation between June July.
So I can answer that, Raul. So if you qualify for April, May June and that's the threshold that the sales drop it relates to, you automatically qualify for July. You don't have to disclose your July sales. It's just an additional abatement to help the tenants sort of with other costs and to help them through the current economic crisis.
And does it matter if you've reopened or not?
It does not matter. No. You can have reopened, even in June and still qualify for Seqra.
Okay. Interesting. So I guess then the participation rate should be pretty much the same in July versus Q2 then. Is that fair?
Yes. I would say all the tenants who participated in April, May June will automatically qualify for July.
Okay. Great.
And Jenny, remember it's optional on the landlord and we have made a decision to whoever qualified to give them that benefit in July as well.
Okay, great. Okay, that's it for me. Thank you.
Your next question comes from Kyle Stanley with Desjardins. Your line is open.
Thanks. Good morning, everyone. So just along the lines of Seeker, just continuing the discussion here, could you disclose what the total gross revenue is covered by Choice's Seeker applications?
I don't know if we have that information handy, but we haven't yet completed all the application. But as we said, of the $15,000,000 that we allowed for during the quarter, roughly 30% related to those small tenants who would be SEKRA eligible. Okay.
Okay. That makes sense.
Part of that is an estimate, as we said.
Right. Okay. And then I guess back to that, the $15,000,000 bad debt provision, how much of that would be related to abatements that were extended outside of the secret program?
So it's a combination of abatements extended outside of the secret program where we, as we said, got something in exchange from a tenant, as well as assumed abatements that we're going to have we're going to give other tenants, again, partly through discussions with them as well as some bad debt amounts related to some of the tenants that had filed for bankruptcy protection, although there would be a smaller percentage of the overall number.
Okay. Okay. And then just the last one for me. So obviously, the rent collection for July improving.
So I'm just trying to get
a sense of where that improvement is coming from. Are the tenants that required deferrals earlier on in the process and they're now able to make those rent payments as well as repay what has been deferred or kind of where are you seeing that rent increase come from?
Yes, it's coming all over. So if you go back to April, industrial had some unpaid amounts. And right now, industrial is all fully we're pretty much collecting everything on the industrial. It's tenants reopening, the economy is reopening, stores are reopening. It's all over, small tenants, large tenants, it's all asset classes we've seen the improvement.
Okay, great. That's it for me. I'll turn it back. Thanks.
And there are no further questions queued up at this time. I'd like to turn the call back over to Will Diamond for closing remarks.
We want to thank everyone for joining today's call. Enjoy the warm weather and stay healthy. Thank you.
This concludes today's conference call. You may now disconnect.