Ladies and gentlemen, thank you for standing by, and welcome to the Choice Properties Real Estate Investment Trust Q3 earnings announcement. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Adam Walsh, Vice President General Counsel. Please go ahead.
Thank you. Good morning, welcome to Choice Properties' third quarter conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer, and Mario Barrafato, Chief Financial Officer. 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. 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 actual results and estimates and assumptions we applied in making these statements can be found in the 2018 annual report and Management's Discussion and Analysis, together with Choice Properties Annual Information Form, all of which are available on our website and on SEDAR. I will now turn the call over to Rael.
Thank you, Adam. Good morning, everyone. Thank you for taking the time to listen to our conference call. We are very pleased with both our financial and operational results for the third quarter. This morning, I'll provide you an update on our operational results and transaction activities. Mario will provide you with details of our financial performance. At a high level, another solid quarter. Our consolidated portfolio of income-producing assets includes 707 properties comprising 66 million square feet of GLA. This high-quality portfolio includes retail, industrial, office, and residential properties and is located across the country with a concentration in Canada's largest markets. Our retail portfolio is primarily focused on necessity-based tenants. This includes grocery-anchored neighborhood retail centers and standalone Loblaw locations. These retailers are far less sensitive to the ups and downs of the economy and the ever-changing retail environment.
Our long-term leases with Loblaw provide for contractual annual rent growth. This makes our retail portfolio well-suited to deliver stability and growth. Period-end occupancy in retail was 98%, which was up from 97.8% in the prior quarter due to 125,000 sq ft of positive absorption. We continue to successfully add to our retail portfolio, both through related party acquisitions and development. During the quarter, we closed on the acquisition of a grocery-anchored retail property from Loblaw for a total cost of approximately CAD 23 million. The property is 128,000 sq ft and is located in Langford, BC, in the Greater Victoria area. On the development front, we added to the retail portfolio through a mix of greenfield developments and intensifications.
These development initiatives continue to provide us with the best opportunity to add high-quality real estate to our portfolio at a reasonable cost. In Q3, we completed and transferred a total of 75,000 sq ft of retail development at a total cost of CAD 26 million. Included in the transfers is a 28,000-square-foot grocery store located in Saint-Julie, Quebec. Sorry, Saint-Julie, Quebec. We have a 75% ownership interest in the site with our development partner. The balance of the site is 43,000 sq ft, including a liquor store, dollar store, bank, and other service-based tenants, and is expected to transfer next quarter. Industrial portfolio includes 112 properties and approximately 16 million sq ft of GLA and is concentrated in Canada's largest distribution markets.
With the exception of the small bay market in Alberta, industrial assets are operating under healthy fundamentals with low vacancy rates and increasing rent. Period-end occupancy was down 10 basis points to 98.1%, driven primarily by some softness in the small bay market in Alberta. The acquisition environment for industrial properties continues to be extremely competitive, development is a logical way to add high-quality assets to our portfolio. Incrementally, our development partners continue to provide us with opportunities to acquire their interest in stabilized assets on an off-market basis. As an example, subsequent to quarter end, we closed on our partner's 15% interest in two industrial buildings in Milton, Ontario. This includes our recently completed 665,000 sq ft Petty Road development and our 635,000 sq ft development at 333 James Snow Parkway. Both assets are now 100% leased.
The 15% interest in these assets was acquired for CAD 28 million. These assets are new generation, large bay distribution facilities in the GTA West industrial node. We now own 100% interest in both properties. As mentioned, new generation industrial facilities are extremely difficult to acquire at a reasonable price. This is a wonderful opportunity to continue to grow our industrial portfolio in a strong distribution market. Next is our office portfolio. Our office portfolio is focused on large, well-located buildings in the downtown core of Canada's largest cities. Period-end occupancy for our total office portfolio increased 50 basis points to 93.2% from 92.7% in the prior quarter, primarily due to positive absorption in our Vancouver and Halifax portfolios. Finally, our residential platform provides an opportunity to further diversify our portfolio. Our focus has been on developing new rental residential assets, primarily in the Greater Toronto Area.
The rental market in the GTA is strong as limited new supply and robust demand has driven up rents. Our current residential platform includes four residential rental assets that are income producing. Another six residential assets that are currently in various stages of development. I'd like to highlight the progress of two of these assets. Construction at our 39 East Liberty Village site continues to progress well. The parking structure is now complete, and we are pouring concrete to the second floor. We currently have a 47% interest in the site, which includes 163 units at our ownership share. We expect that the building will be complete in early 2022 with stabilization a year after. 390 Dufferin Street, located in the Queen West neighborhood of Toronto, is our most advanced residential development project, as construction has reached the sixth floor.
We currently have a 47% ownership interest in this project. It will include 32,000 sq ft of commercial space and 163 residential units at our ownership share. The building will be complete in early 2021. We anticipate stabilization in 2022. When our ongoing residential projects are complete, our residential portfolio will represent approximately 1,500 units at Choice's share. This includes over 1,000 units in the GTA, all of which are in close proximity to major transit. Next, I'd like to provide an update on the Oak Street disposition. At the end of the third quarter, we completed a 30-property portfolio sale for aggregate sale price of CAD 426 million. The unencumbered portfolio included 27 standalone retail properties and three distribution centers with an average lease term of approximately 12 years.
This transaction represents an excellent opportunity for us to recycle capital, and the total portfolio was sold at an amount slightly above the aggregate IFRS carrying value. The proceeds of this transaction we used to repay debt and provide capacity to fund our development program. Mario will speak more about the impact on our leverage metrics in a moment. That concludes my comments. I'd 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, then I'll comment on our balance sheet. Overall, our 2019 third quarter results were in line with our expectations and continue to reflect the stability that's inherent in our portfolio. Our reported funds from operations for the third quarter was CAD 175 million, or CAD 0.25 per unit diluted. This is up slightly from the CAD 0.248 per unit at June 30th. The increase is primarily due to CAD 1.5 million in non-recurring items, which include items such as lease surrender revenue, prior year NOI adjustments, and charges associated with the early repayment of our term loans. Excluding these non-recurring items, FFO on a normalized basis would have been flat with Q2 2019. Included in our Q3 performance was stable year-over-year growth in same asset cash NOI.
For the quarter, same asset cash NOI increased by 3.1%, or 2.6% when you exclude certain prior period adjustments. The growth reflects the annual step rents embedded within the Loblaw portion of our portfolio, as well as incremental cash generated from leasing activity. On the leasing front, we had 151,000 square feet of positive absorption, primarily from leasing activity in our retail portfolio. This improved our overall quarter-end occupancy by 10 basis points from Q2 to a strong 97.8%, with retail occupancy at 98%, industrial occupancy at 98.1%, and office at 93.2%. Now, on to our balance sheet. As Rael previously mentioned, during the quarter, we closed the sale of a 30-property portfolio for CAD 426 million. These proceeds were utilized to repay our remaining CAD 400 million variable rate term loan, with the balance applied to the credit facility.
This transaction, combined with both the equity and unsecured debenture offerings in the second quarter of 2019, has significantly improved our financial position and our risk profile. Over the last nine months, we've reduced our leverage ratio to 7.5 times debt to EBITDA from eight times at the start of the year. We've flattened out and extended our debt maturity ladder, and we maintain a strong liquidity position with CAD 1.3 billion of available credit and an CAD 11.7 billion pool of unencumbered assets. Overall, Q3 was a very solid quarter with stable operating results and significant improvements to our balance sheet. Looking forward to the fourth quarter, we expect continued stability in our operations. However, the full impact of the Oak Street disposition will be reflected in our Q4 NOI and FFO.
This is also the time of year where we typically expect a seasonal pickup in CapEx spending, as many of our ongoing projects are completed before winter sets in. On the whole, while we expect a strong fourth quarter, FFO and AFFO will trend slightly lower than Q3. I'll now turn the call back to the operator for questions.
At this time, if you would like to ask a question over the phone lines, please press star then one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Himanshu Gupta of Scotiabank. Your line is open.
Thank you and good morning. On the asset dispositions, obviously, you sold grocery-anchored assets in secondary markets. Has this met your near-term goal, or should we expect more dispositions in the near term?
Thanks so much for the question. It's definitely met our near-term goal. We wanted to bring our leverage down. We're very comfortable where our leverage is at the moment, and we'll continue to look for disposition opportunities, but nothing of this scale in the near term.
Right. Just bigger picture, just trying to understand what's your portfolio mix likely to be in, say, two to three years? Do we see retail component further going down in the medium term, or the focus is to reduce secondary and tertiary market exposure?
No, in the medium term, I think it's very unlikely that the portfolio composition is going to change materially from where it is today, just given the size of our retail portfolio. In the longer term, as we get more traction on our mixed-use developments, you should see residential and mixed-use type income, so maybe office trend up. In the short term, I wouldn't expect any major changes. We really viewed the Oak Street sale as an opportunistic sale to raise capital. I wouldn't read much more into it than that.
Sure. You mentioned about leverage, kind of comfortable. Do you expect the leverage to bring it down further as the development portfolio grows, or are you happy at the moment with 7.5x there?
In the near term, I think, yes, we're happy with 7.5 times. We've lowered our leverage a lot in the last nine months. We're really comfortable operating here. Like Rael said, as we recycle assets, if there is capital, I'm sure we could go a bit lower. Right now, we're pretty comfortable what we've done in the last year.
Sure. Maybe just last question from my side on the residential development portfolio. What development yields are you underwriting on East Liberty and Dufferin Street? Obviously, rents have gone up substantially, but so has the construction cost. Have your pro forma development yields changed in the last, say, 12 months?
In both of those, we were underwriting approximately a five yield. We were actually fortunate that we tended many of our construction costs before some of the increases. We've had the benefit of locking in the pricing and the benefit of rising rents. We would expect to beat that yield.
Sure. Thank you. I'll turn it back. That's very helpful.
Your next question comes from the line of Jenny Ma of BMO Capital Markets. Your line is open.
Thanks. Good morning.
Morning.
Morning.
Just on the one-time items affecting NOI, I just want to be clear about it. The MD&A mentions CAD 0.6 million impact on same property. Is that related to the prior year NOI adjustments, or is there any lease termination captured in that?
No. Hi, Jenny. No. The CAD 600 is just pure prior period adjustments, catching up on property taxes and that kind of stuff. That's in the same asset NOI. No, the termination is totally separate.
Okay, great. Thank you. With regards to some of the office expiries coming up, could you speak to where they are? Do you expect Calgary to be any impact? I know it's a small part of the portfolio, but just wondering if Calgary is going to continue to weigh on the office segment.
For 2020, we don't expect Calgary to weigh on the office segment. We have very little rolling, and we've done a very good job being proactive on our leasing. In 2021 and 2022, I think the numbers, Jenny, are around 30,000 or 40,000 feet at our ownership, but I don't have those exact numbers handy. It's not material that those rents will roll down.
Is it fair to expect a little bit of an improvement on the office same property NOI number, I guess, once you roll in the CREIT office assets, given the strength we've seen in the Toronto, Vancouver, Montreal office markets?
I don't have that information handy, but what we do have is some vacancy in suburban Montreal, which will drag down our NOI growth next year. Overall, I think it would be pretty stable.
Okay, that's helpful. Sticking with the same property NOI, you guys don't disclose it by geography anymore, but could you give us a general sense of what the distribution has been like in the different markets? Was it fairly stable across all the markets, or are there stronger or weaker performers in that mix?
Obviously, retail's been performing well, and that's a function of the strength of the step rents. Otherwise, we haven't had a lot of turnover. Retail, I'd say, is pretty consistent. No, the markets are strong right now. Alberta industrial, maybe you're seeing a bit of pressure there, but I don't have the exact numbers by geography. As we talked about kind of philosophically, the office markets in the big cities are doing fine. In the suburbs, you'll probably see less growth there. Same thing with industrial, strong in Toronto, strong in Vancouver, but in Alberta, a bit of pressure. The retail, because we're locked in, pretty consistent. Again, as we talked about, maybe power centers would probably have lower growth.
Okay. My last question is, one of your peers who's done transactions with Oak Street announced a special distribution. Is that something that Choice will have to look into given your transaction?
Hey, Jenny. We're in the process right now of assessing our level of taxable income, so we'll finish that process, and if we're at that level, we'll announce it at that time.
Great. Thanks. I'll turn it back.
Again, if you would like to ask a question over the phone lines, please press star then one on your telephone keypad. Your next question comes from line of Sam Damiani of TD Securities. Your line is open.
Thank you. Good morning. I just wanted to get into Alberta a little more. The CREIT portfolio did have exposure in all asset classes there. Just wondering how are things performing on the retail and industrial sides, I guess specifically. We've talked about office already.
Yes. On the retail side, Sam, it's performing very well. It's neighborhood centers. We haven't really seen much pressure. On the industrial side, it's really a function of the different product types, and we're seeing pressure, as we commented on the call earlier, we're seeing pressure on the small bay. For example, in Calgary, we have about just under 1 million sq ft, I think it was 830,000 sq ft of GLA across 18 properties in the small bay product. We're seeing both an increase in vacancy and some roll down in rents. That's where we're seeing the biggest pressure. Edmonton, as we've been commenting for the past few quarters, is a softer market in the large bay product.
Is your development there likely to get some traction in the next quarter or so, or no?
We have two. We have one in Calgary and one in Edmonton. Edmonton, the leasing's been slow. Calgary, we are currently speaking to a tenant, and we hopefully have something to announce next quarter.
Just when we look at the fair value gains on the portfolio, I know there's been some puts and takes year to date, but is there anything holding back sort of the ability to record some fair value gains in the current year or maybe even early next year, just given the drop in interest rates and the cap rate environment today?
Right now, Sam, I think everything's been kind of has stabilized. We always just watch for retail, things go out of favor and sometimes there's lack of a market. We kind of look out for that. Right now I think the office market has been stable. We're starting to see some comps on industrial go off. We're watching that and waiting till it's a regular kind of occurrence. Really, we're just watching the retail. No, we expect things kind of right now, except on an individual basis as we get our appraisals done. We're not looking for any blanket kind of changes or concerns to the valuations right now.
Just maybe on industrial, you did the buyout in Milton, which looks like it was priced at around CAD 140 or CAD 145 a square foot. Is that correct? Was the valuation there a negotiation or was it somehow a fixed price agreement based on the JV agreement?
Yeah. The purchase was a negotiation. Also remember, we actually have some extra density on the one buildings on James Snow Parkway. I don't remember the exact number. It's about 200,000 feet of excess density. That we essentially paid land value. You'd have to deduct that from the price per foot. Slightly on a price per foot lower than what you just quoted.
Okay. Thank you very much.
There are no further questions over the telephone lines at this time. I turn the call back over to the presenters.
Thank you very much for joining our call today. Hopefully everyone has a good rest of the week. Bye.
This concludes today's conference call. You may now disconnect.