Ladies and gentlemen, thank you for standing by and welcome to the Choice Properties Real Estate Investment Trust Q1 Earnings Announcement. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star, then one on your telephone. If you require any further assistance, please press star zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Doris Spahn, Senior Vice President, General Counsel, and Secretary. Thank you. Please go ahead.
Thank you. Good morning, and welcome to Choice Properties Q1 2020 conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer, Mario Barrafato, Chief Financial Officer, and Ana Radic, 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 expectations that are not historical facts. Statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ material 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 making these statements can be found in the recently filed Q1 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. Good morning, everyone. Thank you for taking the time to join our Q1 conference call. We are pleased with both the financial and operational results for the first quarter. Let me start by acknowledging that the impact of the COVID-19 pandemic is profound. We've taken thoughtful actions to mitigate the effects of the pandemic on our day-to-day business operations and continue to focus on what's best for employees, tenants, and other stakeholders. While it is early and the full impact of the COVID-19 pandemic cannot be predicted, we remain confident that our business model and disciplined approach to financial management will allow us to weather the storm. We do expect that the current pandemic will have the most notable impact on our retail tenants.
However, we are in an enviable position that approximately 75% of our retail portfolio is leased to grocery stores, pharmacies, or other necessity-based tenants with stable business operations. Beyond retail, we also own high-quality industrial, office, and residential properties in Canada's largest market. 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. Earlier this month, we announced that we are assisting qualifying small businesses and independent tenants with a temporary rent deferral. To date, we've deferred approximately CAD 5 million of monthly contractual rent, and generally, the feedback from these tenants has been very positive.
In addition to the qualifying small tenants that we agreed to assist with rent deferrals, we have had numerous requests from other tenants asking for rental concessions or simply stating that they're not going to pay rent during this pandemic. We're in discussion with our larger tenants who have been adversely affected by COVID-19 and will consider a rent deferral request on a case-by-case basis. April rents have now come due, and as of yesterday, we received 86% of the contractual rent. For clarity, the uncollected amount of 14% includes the rent deferral that we have already offered to our tenants. It is too early to determine how much rent will be withheld in the months ahead as the duration and overall impact of the pandemic is unknown at this time.
From a liquidity perspective, we have approximately CAD 1.3 billion of available liquidity on our credit facility, and we are well positioned to weather the current market. Mario will elaborate further on the strength of our balance sheet, but before I hand it over to him, I would like to spend a moment discussing transaction activity. Dispositions are an important part of our strategy. We look to dispose of non-core or non-strategic assets on an opportune basis. During the quarter, we closed on the sale of four non-core assets for gross proceeds of CAD 135 million. This included The Shops at Oakbrook Place, our only U.S. asset, for proceeds of approximately CAD 98 million, a 50% interest in a residential property in Edmonton for CAD 10 million, and a suburban Halifax office asset for CAD 27 million. We reinvested CAD 22 million of these proceeds into a property in Coquitlam, British Columbia.
The asset is directly adjacent to our existing asset on North Road, and it was a strategic acquisition for its longer-term redevelopment potential. The combined site is well located near two lines of the Vancouver SkyTrain station. The additional land assembly will allow us to unlock greater density and improve the site configuration. As it relates to our mezzanine lending program, during the quarter, the borrower on a CAD 24 million mezzanine loan defaulted. The loan is secured by retail property in Barrie, Ontario, and further secured by two other properties where Choice is a joint venture partner. During the quarter, Choice repaid the first mortgage on the property of approximately CAD 44 million. Choice is now the only secured lender on the property and is working with the receiver to ensure proper management of the asset and the sale process.
We have previously taken an allowance of approximately CAD 3 million as it relates to this loan. On the development front, things progressed well in Q1, completing and transferring six projects costing us approximately CAD 20 million. The development program has also begun to see the impacts from the COVID-19 pandemic. In the short term, our development initiatives will likely be impacted by temporary delays due to work stoppages, labor shortages, and potential delays in supply chain. Our two largest ongoing projects are the residential development at 39 East Liberty Street and 390 Dufferin Street, both in downtown Toronto. These projects are under vertical construction, and to date, construction on the sites continues. While there may be some short-term delays for these projects, they continue to progress well. Work on planning and rezoning activities is expected to continue with no major delays.
However, we do expect delays to the commencement of construction for new development projects. While such delays are expected to be short-term in nature, we are confident that our development initiatives will, in the long term, provide us with opportunities to add high-quality real estate to our portfolio at a reasonable cost. I would now like to 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 financial results, and then I'll speak to our balance sheet activity. Overall, our results for the first quarter of 2020 were in line with our expectations and continue to reflect the stability of our portfolio. Our reported funds from operations for the first quarter was CAD 170.7 million or CAD 0.244 per unit diluted. This compares to CAD 169.3 million, or CAD 0.252 per unit diluted for the first quarter of 2019. Included in our NOI were one-time costs of CAD 500,000, comprised of bad debt expenses of CAD 900,000, offset by CAD 400,000 of positive cost recovery adjustments. None of these items were COVID related. The decline in year-over-year per unit FFO was primarily due to the deleveraging that occurred in 2019.
Proceeds from our equity issue and property dispositions lowered our leverage from a debt to EBITDA of 8.1x to the current 7.5x . Included in our Q1 performance was stable growth from same asset cash NOI. This marks the first quarter that reflects the combined Choice CREIT portfolio in the same asset classification. When we compare it to Q1 2019, same asset cash NOI increased by 1.8%. This growth reflects annual step rents embedded within the Loblaw portion of our portfolio, as well as incremental cash generated from leasing activity throughout 2019 and Q1 2020. Quarter-end occupancy remains strong at 97.5%, with retail occupancy at a strong 97.8%, industrial occupancy at 97.7%, and office occupancy at 92.9%. We did have negative absorption of 124,000 sq ft compared to Q4. However, 1/2 of that vacancy will be backfilled in the second half of the year. Now to our balance sheet.
2019 was a transformational year as we made great improvements to our balance sheet, ending the year with debt and liquidity measures among the best in the industry. We continued to improve our balance sheet in Q1 by adding low-cost long-term debt to our capital structure. In the first quarter, we issued CAD 500 million of unsecured debentures for a weighted average term of 14 years at a cost of 3.15%, financing that now looks very advantageous compared to the current environment. The proceeds were used to repay all of our maturing 2020 debentures. As a result of this transaction, we have no significant debt maturities for the remainder of the year, thus reducing our risk profile and leaving us well-positioned. We ended the quarter in a strong liquidity position with CAD 1.3 billion of borrowing capacity on our credit facility.
In addition, we have approximately CAD 12 billion of unencumbered assets that we can either finance or prune to raise capital. COVID-19 had no impact to our financial performance. However, it did have an impact on some of the risk assumptions used in our property valuations, resulting in the reporting of a fair value loss of CAD 148 million. These are early days, and we hope to have greater visibility in future quarters on the potential changes in cash flows and risk profile and the impact it will have on our valuations. Keeping with COVID, our top financial priority in the near term is to maintain a strong liquidity position. This includes capital preservation, maximizing the amounts to be drawn on our credit facilities. With that in mind, we are monitoring our capital expenditures, and where we contemplated using our credit facilities, we are looking at alternate sources of financing.
From our low debt level to our high liquidity level to our investment-grade credit rating, we believe we are well-positioned to manage the current challenging environment. I'll turn the call back to Rael.
Thank you, Mario. Before we open it up to questions, I want to summarize why we believe that we will emerge from the crisis in a better position than most. There are four reasons why I say this. First, our team. I am incredibly proud of our team's response to date. They have adapted and remained connected, going above and beyond for their fellow coworker and our tenants. Second, 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. Next, our balance sheet. We have a strong balance sheet with over CAD 1.3 billion of liquidity that provides the flexibility necessary to help insulate Choice Properties in the face of broader market volatility. Finally, our strategic relationship with our major tenant and the sponsorship of our major unitholder.
Loblaw is our largest tenant, representing 56% of our gross revenue. Our relationship with Loblaw is strong and will continue to create great opportunities for the REIT. George Weston is our largest unitholder, owning approximately 63% of Choice, and is committed to support our growth plans as a long-term owner, manager, and developer of a high-quality, diversified real estate portfolio. These relationships will continue to provide stability and growth for Choice. Operator, we'll now open the call for questions.
Thank you. As a reminder, to ask a question, please press star then one on your telephone, and to withdraw your question, press the pound or hash key. The first question is from Sam Damiani with TD Securities. Your line is open.
Thanks. Good morning, everyone. First, just to start off, it's good to see no impact from COVID in Q1 results. Just, I guess, since then, any anecdotal evidence on the leasing front in terms of any impact on the economic slowdown?
Yeah. Sam, it's Rael. It truly is too early to say. We've actually made great progress on our lease maturities to date. I think we had around 2 million ft remaining, and as of the end of March, we had either renewed or at a high probability of renewing roughly 50% of those. The balance of the year, it's again, really too early to say because most tenants are really focused on dealing with the current pandemic.
Right. Okay. I just saw the Loblaw WALT only declined by 0.1 of a year versus Q4, which is an unusually small decline, which would seem to indicate maybe some renewals or extensions may have been executed during the first quarter. If so, could you tell us what kind of rent increases were factored into those renewals?
Hi, Sam. Yeah, sorry, I don't have an answer for that, but we'll look into it. It might have been maybe a combination of some of the acquisitions and just rolling into the average lease term balance, but that's all I can think of right now, but we'll follow up.
Okay. Maybe one final quick one. Roughly 10% of the rents that weren't paid and weren't deferred, what's the status of talks there with those tenants, and how much of that do you expect to collect within the next, I guess, couple of weeks?
Yeah. Sam, it's Rael. Again, it's too early to say right now, but we're in discussions with tenants on receiving those rents, and we are confident that we will collect the majority of it. Again, it's really early days.
Great. I'll turn it back. Thank you.
The next question is from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks, and good morning. Can you maybe just comment, maybe going back to your leasing, I guess, commentary. Can you comment on what's happening or what you're seeing on the ground in Alberta with respect to your office and industrial portfolios?
Yeah. Hey, Pammi, it's Rael. Why don't I just start, and then Ana can give you a bit more color. Firstly, on the office side, you have to remember that office only represents 1%. Calgary office represents less than 1% of our total income. It is challenging right now. On the industrial side, we actually, this quarter, we announced that we had leased up the remaining vacancy at our Great Plains Business Park. We're very pleased with that. Maybe Ana can give you a bit more color on office and industrial.
Hi. Yes, I mean, generally, we are still seeing a reasonable amount of activity on the industrial side across the country and also in Alberta. We have been responding to RFPs. There are logistics users in the market, so I think there's still some activity in that sector. Moving to office, though, I would say it has been fairly quiet given that tenants are unable to tour premises and people are really restricted in their movement. We are seeing sort of a quietness generally across the office market.
Thank you. Maybe just coming back to, I guess, the rent collections. In terms of May, you made some, I guess, high-level remarks, but can you comment on what sort of indications or just conversation you're having with tenants regarding May or even a little further along in the year?
Yeah. Again, you have to break it up into two buckets. One is the small businesses. The small businesses we had already offered that rent referral for both April and May, and as we said, it was around CAD 5 million. As for the larger tenants, many of them, I think you have to break it up into two buckets again. Some are closed and aren't operating at the moment when they've been significantly impacted, and we're going to try and work with those tenants. Some are operating and are just really being opportunistic in this environment. We are going to try and pursue rent from those tenants as best as possible.
Got it. Just coming back to the mezz loans. Are there other loans outstanding with that borrower that defaulted in Barrie?
No. Once we clean this up, that would be the end of our relationship with that borrower.
Okay. I guess just maybe looking across the rest of the mezz loan book-
Sorry, Pammi, I do want to correct. There is a small mezz loan that is part of the other security, which is cross-collateralized. We made reference to the other two properties. It's small. I think it's sub CAD 2 million.
Okay. Got it. Just looking across the rest of the mezz loan book, are there any other potential areas of concern in terms of the financial health of the borrowers or any collectability or repayment concerns?
No, nothing at this time. Remember, the way we used to look at the mezz loans is it was strategic to help advance our development program. Really credible borrowers, credible developers, and we hope to continue to work with those partners. The one in Barrie was a historical relationship, and we don't have anything else to do with them.
Got it. Maybe just one last one for me, Rael. In terms of the fair value loss booked, in the quarter, how much of that was Alberta industrial and office versus the non-Loblaw anchored retail?
Hey, Pammi. Probably of the CAD 130 million incremental adjustment, I would say probably about CAD 30 million was Alberta related. The rest, on the power center side, we'd taken some big write-downs last year. The biggest adjustment would've been in those neighborhood shopping centers where it didn't have a large or significant grocery-anchored presence.
Got it. Thanks very much, Rael. Thank you. I'll turn it back.
The next question is from Jenny Ma with BMO Capital Markets. Your line is open.
Thanks. Good morning. Maybe just to expand on Pammi's questions about the fair value gains. This is probably getting a little technical, but on the retail side, it was described as being non-Loblaw anchored shopping centers. Is it really specific to Loblaw, like the grocery stores and then Shoppers Drug Mart, or is it just excluding all grocery anchored or pharmacy anchored type of shopping centers?
The way we described it as non-Loblaw-anchored or non-grocery-anchored, we actually looked at the percentage of income coming from our grocery tenants. If the percentage of income, I think, was greater than 70% or 80%, we never adjusted the discount rates on those assets. It was where it was less than that percentage, we adjusted it. We still think that in this environment, just given what's going on, it speaks to the desirability of the grocery-anchored centers, just shows how stable it is.
Okay. That's helpful. When we're looking at potential acquisition opportunities, you guys do some deals with Loblaw regularly. Is that something that we should expect to take a pause given the current market environment?
Yeah, Jenny, I think our focus really, especially over the last few weeks, has been on responding to what's going on in the business. We would expect that while we, in this current, call it the crisis, we would look to pause that and look to, I guess, revisit it towards the later half of the year.
Okay. That's fair. My last question is about the development. When we're thinking about the two larger ones that you described, do you think the magnitude of the delay would be mostly commensurate with the magnitude of the economic shutdown, or do you think there's certain parts of the development cycle that would actually have an extended delay because of all this?
No, on those two projects, we cautioned that there may be a delay. The first one's meant to complete in Q4 of 2020, or I think either Q4 of 2020 or Q1 of 2021. At this time, we actually don't think there is much of a delay. We're just cautioning that there may be a delay.
Okay, great. My last question is with the one-time items that were mentioned, just want to clarify that they went through the NOI line on the income statement?
Yes. They both be in the NOI line.
Okay, perfect. That's all for me. I'll pass it back.
Thanks, Jenny.
The next question is from Mike Markidis with Desjardins. Your line is open.
Hi. Good morning, everybody. Just on the 14% of non-pay, or I guess I should say deferred and non-paid rent at this juncture, do you by chance happen to have the square footage associated with that? Would be question one. The second thing is just to confirm, is that a gross rent versus a base rent methodology?
Unfortunately, I don't have the square footage handy. Yes, it is a gross rent.
Okay, great. If possible, if you could follow up with the square footage offline, that would be helpful.
Okay.
The second question I would have is just to confirm on the fair values that you had as of March 31st, 2020. Was it only discount rates that were touched at this juncture, would appear so from the tables, or were other inputs at this juncture left unchanged in terms of your occupancy assumptions and lease rates and PIs?
We always update our models every quarter for activity during the quarter, but we never ever made any global assumptions on pushing out renewal assumptions or changing rents. We just didn't have enough information to make those assumptions.
Okay. Got you. Just discount rates. Okay. That's all I have. Thanks very much.
The next question is from Tal Woolley with National Bank Financial. Your line is open.
Hi, good morning. If we go across the asset classes, is there anything in the operating costs that maybe we from the outside wouldn't necessarily expect that you are noticing in terms of managing the properties during this crisis? I would think maybe office there would be maybe some incremental costs you might need to deal with. Just any examples of those types of things that we should keep our mind on over the next couple of quarters?
Nothing from an incremental cost. If anything, we've definitely achieved cost savings, which we intend to obviously pass on to our tenants. Maybe Ana can just give you a flavor of what those would be across the various asset classes.
Sure. Hi, Tal. Yeah, we are obviously having to adjust our operations, and given the lower occupancy in the building, we're using this time to make sure that we're adjusting all the run times of our equipment, reducing lighting levels, actually doing tube swaps in our building so that we can lower our overall energy costs. That's been a big focus. We are already seeing a decline in our energy consumption. We're also being creative in how we deploy our operations teams. There's been work previously we would have contracted out. We're now using our own staff to go in and perform maintenance in our industrial portfolio, do repairs and so forth, and generally sort of reducing any discretionary spending and so forth. Generally we're really seeing at least a marginal decline in cost.
Okay. Maintenance CapEx for the year, what sort of assumptions should we be using for 2020?
I think from a global assumption, it's too early to give you a good number, but maybe Ana can speak to the approach we're taking.
Yeah. Sure. Our focus really has been ensuring that essential projects, we're focusing on those. We have projects tied to lease deals and preparing space for tenants. We're absolutely moving all of that forward. As our ability to complete maintenance and improvement projects is being impacted, one of our biggest challenges that we're facing is sort of logistical in that Loblaw being our anchor tenant, and we have other grocery anchored sites where we had paving projects and roofing projects. These sites are actually seeing increased traffic and it isn't feasible to start shutting down portions of the parking garages or the parking areas. We're just kind of taking a wait and see approach there and also coordinating roof replacements with our tenants who are really focused on operating their business.
That's kind of resulting in us having to just push projects further later into the year, and some might go into next year.
As Ana said, we see it as a huge benefit that our major tenants or our grocery stores are so busy, and we have to delay capital because of the operations being busy.
Okay. Then of the tenants that have elected not to pay rent thus far, is there any way you can sort of characterize who these tenants are? Is it a certain type of retailer or is it regional? Can you just give us a little bit of color about where the risk is?
It's definitely not regional, but you would expect the tenants, especially the ones who are not operating. If it's the fitness users, obviously would be a large non-payer. I don't know, Ana, if you want to give any other color.
No, predominantly it is both national and regional tenants who have been completely closed. Obviously, any sort of fashion or consumer goods groups are being impacted. Restaurants, for example. We have tenants who have been forced just to do drive-throughs and so forth. They're also requesting we talk to them about how we help them in this situation.
Okay. Then just my last question. You guys are sort of in a unique position as part of the bigger Loblaw and George Weston complex. It's probably one of the few entities out there in the market who could even contemplate playing some offense during this period. I recognize things are very concerned with dealing with what's going on right now today. I'm just wondering, in your conversations with Weston Loblaw, any sort of potential changes in strategy or tactics that you might see them employ over the next little while? Is it just sort of business as usual for now?
No. Look, right now our focus has really been into responding to what's going on in the business. Over the longer term, our strategy is the same. Acquiring high quality assets. Clearly we are in a far stronger financial position than most, and our properties are clearly performing better than most. As things start to stabilize, we definitely will look to be a net acquirer of assets. Weston has been a great financial sponsor and a very stable unit holder for us.
Okay. That's great. Thanks very much, everybody.
The next question is from Himanshu Gupta, Scotiabank. Your line is open.
Thank you, and good morning. Just on the rent collection discussion, how do you balance the long-term tenant viability, versus the short-term rent collection? Are you prepared to offer some kind of rent abatements or rent reduction or free rent in the near term? Maybe as opposed to providing some kind of tenant allowance for a replacement tenant down the road.
Look, I think it's going to evolve as this goes longer, Himanshu. Right now we are speaking to tenants about deferrals and not yet abatements.
Sure. Maybe on the deferral side, around 60 days period, based on your analysis, do you think is that period enough for smaller tenants to survive this kind of market turmoil? How confident are you in terms of eventually collecting this amount? Any sense on bad debts at this point of time, or is it too early to say?
Yeah, I think you said it best at the end. It's really too early to tell right now and then different provinces are going to hopefully start getting back sooner. Again, we'll obviously have more to report next quarter. Then the other thing we are quite positive on is the government is obviously speaking about assisting small tenants. We're obviously tracking that and we think it'll be very helpful.
Sure. In fact, my next question was on the government stimulus. Do you have a sense of what percentage of the smaller tenants have qualified for any kind of stimulus, or we are still waiting for more details to be coming out on the stimulus programs?
No, we're obviously waiting for more details to be released by the government.
Okay. Maybe just one clarification question on the rent deferral discussion. I think you have mentioned that you are in touch with some larger tenants as well. Any specific tenants you are referring to? What kind of requests are you receiving from your larger tenants?
Yeah. We prefer not to speak about any specific tenant names, but as we said earlier, we really are only in discussions on deferrals, not as an abatement.
Got it. Okay. Thank you. I'll turn it back.
The next question is from Sam Damiani with TD Securities. Your line is open.
Thanks. Just a quick follow-up on with the potential increase in bad debts being one of the larger variables impacting results going forward. Should we look to the note in the financial statements for the change in the allowance as being sort of the sole disclosure in this regard, or should we expect any other disclosure in terms of the impact of bad debt in NOI in Q2 and beyond?
Hey, Sam. Right now we're just treating everything as revenue with a receivable, we're just delaying the collection. We've had discussions kind of like, when do you realize absent an insolvency, when do you book it? We're going to kind of play it case by case. We're not actually sure where the disclosure will be, obviously if it's significant, there'll be full disclosure.
Thank you very much.
Again, as a reminder, please press star one to ask a question. The next question is from Mike Markidis with Desjardins. Your line is open.
Thanks. Just a quick follow-up. Apologies if you covered this when Himanshu was asking about stimulus, but Rael, you did mention and remind us I'm going to get the acronym wrong, but the Canada Emergency Commercial Rent Assistance. I realize the government hasn't released any details, but in your discussions with, I don't know, I guess the term would be lobbyists or anybody in the industry, have you any sense on how that might work or how that might potentially assist you? Aside from the obvious, I'm just trying to think of the administration and who the money flows to.
Again, look, let's wait for more disclosure. We don't want to give misinformation on the call.
Okay. That's fair. Thank you.
There are no further questions. I'll turn the call back to Rael Diamond for any closing remarks.
We want to thank everyone for joining us on today's call. Please do all you can to stay healthy and be safe. Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.