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 speakers' presentation, there will be a question and answer Also, please be advised that today's conference is being recorded. I would now like to hand the conference 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 Q1 2020 Conference Call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer Mario Barafato, 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. 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 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 Real.
Thank you, Doris, and good morning, everyone. Thank you for taking the time to join our Q1 conference call. We are pleased with both our financial and operational results for the Q1. Let me start by acknowledging that the impact of the COVID-nineteen 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-nineteen 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 have deferred approximately $5,000,000 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 and will consider rent deferral requests 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. However, from a liquidity perspective, we have approximately $1,300,000,000 of available liquidity on our credit facility and we're 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 4 non core assets for gross proceeds of $135,000,000 This included the shops at Oak Brook, our only U. S. Asset for proceeds of approximately $98,000,000 a 50% interest in a residential property in Edmonton for 10,000,000 dollars and a suburban Halifax office asset for $27,000,000 We reinvested $22,000,000 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 $24,000,000 mezzanine loan defaulted. The loan is secured by retail property in Barrie, Ontario and further secured by 2 other properties where Choice is a joint venture partner.
During the quarter, Choice repaid the 1st mortgage on the property of approximately $44,000,000 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 $3,000,000 as it relates to this loan. On the development front, things progressed well in Q1, completing and transferring fixed projects costing us approximately $20,000,000 dollars The development program has also begun to see the impact from the COVID-nineteen pandemic. In the short term, initiatives will likely be impacted by temporary delays due to work stoppages, labor shortages and potential delays in supply chain. Our 2 largest ongoing projects are the residential development at 39 East Liberty Village and 390 Dufferin, both in downtown Toronto.
These projects are under vertical construction and to date construction on the site 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, Rell. 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 Q1 of 2020 were in line with our expectations and continue to reflect the stability of our portfolio. Our reported funds from operations for the Q1 was $170,700,000 or $0.244 per unit diluted.
This compares to $169,300,000 or $0.252 per unit diluted for the Q1 of 2019. Included in our NOI were one time costs of $500,000 comprised of bad debt expenses of $900,000 offset by $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 8.1 times to the current 7.5 times.
Included in our Q1 performance was stable growth from same asset cash NOI. This marks the Q1 that reflects the combined Choice Crete portfolio in the same asset classification. When we compare it to Q1 2019, same asset cash NOI increased by 1.8%. This reflects 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 remained 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 square feet compared to Q4. However, one half of that vacancy will be backfilled in the second half of the year. Now to our balance sheet. 2019 was a transformational year 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 Q1, we issued $500,000,000 of unsecured debentures for a weighted average term of 14 years and a cost of 3.15 percent. Financing that now looks very advantageous compared to the current environment. The proceeds were used to repay all of our maturing 2020 debentures. And 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 $1,300,000,000 of borrowing capacity on our credit facility.
In addition, we have approximately $12,000,000,000 of unencumbered assets that we can either finance or prune to raise capital. COVID-nineteen 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 $148,000,000 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. So 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. And 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'll emerge from the crisis in a better position than most. And there are four reasons why I say this. First, our team. I'm incredibly proud of our team's response to date.
They've adapted and remained connected, going above and beyond for their fellow coworker and our tenants. 2nd, 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 $1,300,000,000 of liquidity that provides the flexibility necessary to help insulate Choice Properties in the face of broader market volatility.
And finally, our strategic relationship with our major tenant and the sponsorship of a 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 will now open the call for questions.
Thank you. The first question is from Sam Damiani with TD Securities. Your line is open.
Thanks and good morning everyone. First, just to start off, it's good to see no impact from COVID in Q1 results. But just I guess since then, any anecdotal evidence on the leasing front in terms of any impact on the economic slowdown?
Yes, 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 2,000,000 feet remaining. And as of the end of March, we had either renewed or at a high probability of renewing roughly 50% of those.
But 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. And 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 Q1. If so, could you tell us what kind of rent increases were factored into those renewals?
Hi, Sam. Yes, 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? Sam, it's Raul. So 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. But again, it's really early days.
Great.
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, 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?
Pammi, it's Rael. So why don't I just start and then Anna can give you a bit more color. So 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 Industrial Business Park. So we're very pleased with that. And maybe Anna 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 or 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.
So we are seeing sort of a quietness generally across the office market.
Thank you. Maybe just coming back to, I guess, 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 other a little further along in the year?
Yes. So again, you have to break it up into 2 buckets. So one is the small businesses. And the small businesses we had already offered that rent deferral for both April May. And as we said, it was around $5,000,000 As for the larger tenants, many of them I think you have to break it up into 2 buckets again.
So 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. And then some are operating and are just really being opportunistic in this environment. And 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 Berry?
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 it as part of the other security, which we would intend to which is cross collateralized. And we made reference to the other two properties and it's small. I think it's sub $2,000,000
Okay. Got it. And just looking across the rest of the mezz loan book, what are your 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. And remember, the way we used to look at the mezz loans is it was strategic to help advance our development program, really, really credible borrowers, credible developers, and we hope to continue to work with those partners. The one in Barrie was 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 $130,000,000 incremental adjustment, I would say probably about $30,000,000 related with Alberta related. And then the rest on the power center side, we've taken some big write downs last year. And so the biggest adjustment would have been in those neighborhood shopping centers where it didn't have a large or significant grocery anchored presence.
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 incurred shopping centers. So is it really specific to Loblaw like the grocery stores and in Shoppers Drug Mart?
Or is it really more so or is it just excluding all grocery anchored or pharmacy anchored type of shopping centers?
So the way we described it as non lot law anchored or non grocery anchored, we actually looked at the percentage of income coming from our grocery tenants. And if the percentage of income, I think, was greater than 70% or 80%, we never adjusted the discount rates on those assets. Where it was less than that percentage, we adjusted it. And 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. And then 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?
Yes. Jenny, I think our focus really over the last especially over the last few weeks has on responding to what's going on in the business. And 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. And then my last question is about the development. So when you're thinking about the 2 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 just we caution that there may be a delay. The first one is meant to complete in Q4 of 2020 or I think or maybe either Q4 of 2020 or Q1 of 2021. And 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. And then 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, Jeff.
The next question is from Mike Markidis with Desjardins. Your line is open.
Hi, good morning everybody. Just on the 14% of non paid or I guess I should say deferred and non paid rent at this juncture, do you happen by chance happen to have the square footage associated with that would be question 1. And then the second thing is just to confirm, is that a gross rent versus the base rent methodology?
So, unfortunately, I don't have the square footage handy. And then, 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 The second question I would have is just to confirm on the fair values that you had as of March 31, 2020. Was it only discount rates that were touched at this juncture? Would it 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?
So 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. So just discount rates.
Okay, that's all I have. Thanks very much.
The next question is from Tal Wali with National Bank Financial. Your line is open.
Hi, good morning. If we go across the asset classes, is there anything in like 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? Like, I think maybe like office, there would 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?
So nothing from an incremental cost. If anything, we have definitely achieved cost savings, which we intend to obviously pass on to our tenants. And maybe Anna can just give you a flavor of what those would be across the various asset classes.
Sure. Hi, Tal. Yes, so 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.
So 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. So generally, we're really seeing at least a marginal decline in cost.
Okay. And 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 Anna can speak to the approach we're taking.
Yes. Sure. Our focus really has been ensuring that essential projects, we're focusing on those. So we have projects tied to lease deals and preparing space for tenants. So we're absolutely moving all of that forward.
But as our ability to complete maintenance and improvement projects is being impacted, I mean, one of our biggest challenges we're seeing our anchor tenant and we have other grocery anchored sites where we have paving projects and roofing projects, these sites are actually seeing increased traffic and just being it isn't feasible to start shutting down portions of the parking garages or the parking areas. So we're just kind of taking a wait and see approach there and also also coordinating roof replacements with our tenants who are really focused on operating their business. So that's kind of resulting in us having to just push projects further later into the year and some might go into next year?
Yes. So as Anna said, we see it as a huge benefit that our major or our grocery stores are so busy and we have to delay capital because of their operations being busy. Okay.
And 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? Like is there a certain type of retailer? Is it regional?
Like can you just give us
a little bit of color about where the risk is?
Yes. So it's maybe not regional, but it will be you would expect the tenants, especially the ones who are not operating. So if it's the fitness users, obviously, would be a large non payer. I don't know, Anna, if you want to give any other color.
No, I mean, it would 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. And then we have tenants who are have been forced just to do drive thrus and so forth. So they are also requesting we talk to them about how we help them in this situation.
Okay. And then just my last question, you guys are sort of in a unique position as part of a bigger Loblaw Westin George Weston Complex. And it's probably one of the few entities out there in the market, who could even contemplate playing some office at some offense during this period. I recognize things are very concerned with dealing with what's going on right now today. But I'm just wondering in your conversations with Weston Loblaw, has there any sort of potential changes in strategy or tactics that you might see them employ over the next little while?
Or 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. And clearly, we are in a far stronger financial position than most, and our properties are clearly performing better than most. So as things start to stabilize, we definitely will look to be a net acquirer of assets.
And Western has been a great financial sponsor and a very stable unitholder for us.
Okay. That's great. Thanks very much everybody.
The next question is from Haimeshwar Gupta with Scotiabank. Your line is open.
Thank you and good morning. So just on the rent collection discussion, how do you balance the long term tenant viability versus a short term rent collection? I mean, 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 the placement 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. And maybe on the deferral side, around 60 days period. I mean, based on your analysis, do you think is that period enough for smaller tenants to survive this kind of market turmoil? And how confident are you in terms of eventually collecting this amount? I mean, any sense on bad debts at this point of time?
Or is it too early to say?
Yes. I think you said it better. It's really too early to tell right now. And then different provinces are going to hopefully start getting back sooner. So again, we'll obviously have more to report next quarter.
And then the other thing we are quite positive on is the government is obviously speaking about assisting small tenants And we're obviously tracking that, and we think it will be very helpful.
Sure. And in fact, my next question was on the government stimulus. And 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. And maybe just one clarification question on the VEN 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? And what kind of request are you receiving from your larger tenants?
Yes. We prefer not to speak about any specific tenant names. But as we said earlier, we're really 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 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. Yes, I mean, right now, we're just treating everything as revenue with a receivable and we're just delaying the collection. And we've had discussions kind of like when do you realize, absent an insolvency, when do you book it. So we're going to kind of play it case by case. And this we're not really sure where the disclosure will be, but obviously, if it's significant, they'll be fulsome disclosure.
Thank you very much.
The next question is from Mike Markidis with Desjardins. Your line is open.
Thanks. Just a quick follow-up and apologies if you cover this when Himanshu was asking about stimulus. But Raul, you did mention and remind us of the I'm going to get the acronym wrong, the Canadian Commercial Rent Relief Program and I realize the government hasn't released any details. But in your discussions with sort of, I don't know, I guess the firm would be lobbyist or anybody in the industry, have you had any sense on how that might work or how that might potentially assist you? I mean 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.
And there are no further questions. I'll turn the call back to Mr. Diamond for any closing remarks.
So 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.