Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to Choice Properties Real Estate Investment Trust Q2 Earnings Announcement. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the call over to Adam Walsh, VP and General Counsel. You may begin your conference.
Thank you. Good morning, and welcome to the Choice Properties' 2nd quarter conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer and Mario Barafato, Chief Financial Officer. Before we begin today's call, I would like to remind you that by discussing our financial and operating performance and in responding to your questions, we may make forward looking statements, including statements concerning 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 our 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 the 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, and good morning, everyone. Thank you for taking the time to attend our conference call this morning. We are pleased with both our financial and operational results for the Q2 of 2019. At a high level, another solid quarter. Operationally, same asset net operating income increased by 2% compared to Q1 2019 and Peridane occupancy increased to 97.7%.
This morning, I'll provide a further update on operational results and transaction activities. Mero will then provide you more detail on our financial performance. Our consolidated portfolio of income producing assets includes 736 properties comprising 68,000,000 square feet of GLA. This high quality portfolio includes retail, industrial, office and residential properties and is located across Canada with a concentration in Canada's largest markets. This provides the foundation for stable cash flows.
Our retail portfolio is primarily focused on necessity based retail tenants and is anchored by long term leases with Loblaw, Canada's largest retailer. When we say necessity based, we mean retailers focused on sale of everyday goods and services such as food and personal care items. This asset class is far less sensitive to the ups and downs of the economy and the ever changing retail environment. This makes it well suited to deliver stability and growth. Period end occupancy
in retail was
97.8%, which is consistent with the prior quarter. We continue to successfully add to our retail property portfolio through development, including a mix of greenfield development and intensifications. Our development initiatives continue to provide us with the best opportunity to add high quality real estate to our portfolio at a reasonable cost. In Q2, we completed and transferred a total of 115,000 square feet of retail development at a total cost of $33,000,000 Included in the transfers is a 50,000 square foot grocery anchored retail site on Rymall Road in Hamilton, Ontario. The site is anchored by 30,000 square foot No Frills grocery store and ancillary service tenants include a doctor and dentist office.
This transaction highlights the competitive advantage of our strategic relationship with Loblaw. The land originally acquired from Loblaw the land was originally acquired from Loblaw and they are also the anchor tenant for the development. Well located grocery anchored sites with a strong mix of necessity based tenants on the backbone of our portfolio. We expect that this relationship will continue to be an excellent source of opportunities in the future. We are diversified beyond retail real estate with industrial office and residential properties.
This diversification allows us to reduce risk, stabilize cash flows and creates more avenues for investments. Our industrial portfolio includes 115 properties and approximately 17,200,000 square feet of GLA. The portfolio is concentrated in Canada's largest distribution markets where demand for industrial space by both investors and tenants remain strong. Industrial assets operates under healthy fundamentals with low vacancy rates and increasing rents. Perid end occupancy increased 100 basis points to 98.2%.
This was primarily due to the commencement of 125,000 square foot lease at our recently completed Peddie Road Industrial Facility. The acquisition environment for industrial properties continues to be extremely competitive. So development is a logical way to add high quality assets to our portfolio. Incrementally, our development partners continue to provide us with opportunity to acquire their interest in stabilized assets on an off market basis. As an example, in Q2, we acquired our partners 50 percent interest in 2 industrial buildings at our Great Plains Business Park in Calgary.
These buildings were recently completed and stabilized and this transaction brought our ownership in these assets to 100%. The buildings are new generational, multi tenant distribution facilities and total approximately 280,000 square feet at our ownership interest. Both assets are fully occupied and have a weighted average lease term greater than 7 years. As mentioned, new generation industrial facilities are extremely difficult to acquire at a reasonable price. So this is a wonderful opportunity to continue to grow our industrial portfolio in strong distribution markets.
Next, on to our office portfolio. Our office portfolio is focused on large well located buildings in the downtown core of Canada's largest cities. This portfolio is a great example of diversification at work. The fundamentals in most large office markets in Canada including Toronto, Vancouver and Montreal are healthy due to a strong economy and robust job growth, whereas office property fundamentals in Calgary continue to be challenging. Our focus in Calgary continues to be proactive, working with existing tenants to complete early renewals and being aggressive in the market on new leasing.
We are seeing the impact of this approach. PeriDAYD occupancy for our total office portfolio increased 50 basis points to 92.7% from 92.2% in the prior quarter due primarily to positive absorption in our Calgary office portfolio. 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 rent.
Our current residential platform includes 4 rental residential assets that are income producing and another 7 residential assets that are in various stages of development. In total, when complete, these residential projects will represent approximately 1500 units at Choice's share. This includes over 1,000 units located in the GTA, all of which are in close proximity to major transit. We're excited about the prospects of our residential initiative as a further means of income diversification and another avenue to grow our asset base. 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 and then I'll comment on our balance sheet activity. Overall, our 2019 Q2 results were in line with our expectations and reflect the stability and consistency that is inherent in our portfolio. Our reported funds from operations for the Q2 was $170,200,000 or $0.248 per unit diluted, down slightly from $0.252 per unit at March 31 as FFO growth from acquisitions and completed development projects were offset primarily by the deleveraging effect of the May 2019 equity offering and $800,000 of non recurring charges associated with early repayment of our 2019 debentures.
After adjusting for these items, FFO per unit for Q2 would have been just slightly above Q1 2019. Included in our Q2 performance was stable year over year growth and same asset cash NOI. For the quarter, same asset cash NOI increased by 2% over the prior year. This 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 237,000 square feet of positive absorption, primarily from increased leasing activity in our industrial portfolio.
This improved our overall quarter end occupancy from Q1 to a strong 97.7% with retail occupancy at 97.8%, industrial occupancy at 98.2% and office at 92.7%. Now on to our balance sheet. Q2 was a very busy quarter from a balance sheet perspective. We completed 2 major capital raises totaling $1,100,000,000 that significantly improved our balance sheet. In May, we issued approximately 30,000,000 trust units in a bought equity deal at a price of $13.15 per unit.
This resulted in total gross proceeds of $395,000,000 This was Choice's first equity offering since the 2013 IPO and we were exceptionally pleased with the demand, especially from both existing and new institutional investors. We're also pleased that George Weston, our largest unitholder, participated in the deal for approximately $50,000,000 The proceeds from the equity offering were used to repay amounts strong on our credit facility. This created additional borrowing capacity, providing us with further financial flexibility to fund our active development pipeline. Subsequent to the equity raise, we issued $750,000,000 of unsecured debentures with a term of 10 years and an interest rate of 3.53 percent. The proceeds were used to repay existing indebtedness, including the redemption of $300,000,000 of unsecured debentures expiring in 2019, dollars 400,000,000 of term loans that arose from the CREED acquisition.
These are variable rate loans that can be repaid at any time with no penalty. The balance of the proceeds were used for general business purposes. Similar to the equity offering, we were thrilled with the demand for our debt. Investor demand resulted in the optimal size and pricing for 10 year notes. Overall, our financial metrics have improved significantly as a result of these transactions.
Using amounts from our proportionate balance sheet, our debt to gross book value has decreased to 45% from 47.6% in the prior quarter. Normalized leverage ratios have improved, decreasing to 7.7 times as compared to 8.1 times in the prior quarter. We improved our weighted average return to maturity, which increased from 4.8 years to 5.5 years. And we improved our overall liquidity by increasing the available balance on our credit facility from $1,000,000,000 to $1,400,000,000 The overall future was a soft quarter with stable operating results and significant improvements to our balance sheet. I'll now turn the call back to the operator for questions.
Your first question comes from Mark Rothschild with Canaccord. Your line is open.
Thanks and good morning everyone. Rael, you made some comments about being bullish on industrial and with the Crete industrial portfolio coming into same store, you had guided to the Crete portfolio having weaker internal growth than the Choice portfolio in the past. With the strength in industrial, would you make the same comment now or would the outlook for that portfolio perhaps be stronger than you guys had indicated in prior quarters?
Mark, thanks for the question. I think the portfolio actually comes into same store next quarter next year, sorry, Mary. The portfolio overall is performing exceptionally well, particularly in Toronto, where we're seeing 10 plus percent rent growth. So our comments today would be that the portfolio would have higher organic growth than what we would have probably guided to about a year ago.
Okay. And then for the fair value of your assets, you noted in your disclosure that while there were increases in some areas, you did have a drop in the value of the power centers. Would that have been based on the NOI outlook being weaker adjusting the cap rate? And maybe also on that note, does it change your view on owning those types of assets in the future?
Hey, Mark. Yes, in general, there is an increase in cap rates. And so that kind of is a brush across all that asset class. And then specifically, you might have rental assumptions or capital spending assumptions that would hit the value as well. But it doesn't really change our view on that asset class right now.
It performs well And so we have taken a hit in the past and I think things are kind of stable right now.
And Mark, and some of the assets are exceptionally well located and you couldn't assemble land masses with surrounding neighborhoods in today's market. So great long term assets.
But even with the great location of those assets, there still was an increase in the cap rate you're saying?
Yes. And truly, we also rely on 3rd party appraisers for data points and cap rates, but there was a softening that we saw. Okay.
Thank you very much.
Your next question comes from Sumayya Hussain with CIBC. Your line is open.
Thanks. Just firstly on leverage and the improvement there. Any desire to take it down further towards the low 40s level? Or are you guys comfortable with where it's sitting at right now?
Hey, Sumayya. We were comfortable before given the portfolio, the tenant base and where we are in our balance program. But as always, when we see an opportunity where we can improve the balance sheet, we'll take advantage of it. And that's what we did this quarter with getting a chance to get equity, reduce leverage and consistent with kind of maybe slowly ramping up our residential program. So we're comfortable now, but if we did have the chance where we can actually get some capital, be it through equity or through recycling and contribute part to paying down leverage, I think we would go further, but there's no urgency in doing so right now.
Okay, that's fair. And just moving on to residential development and appreciating that the timing for the whole pipeline isn't laid out, but are you able to indicate when the first couple of projects will start to come online and which are the ones that are in the more advanced stages of completion?
Sure, Sumay, it's Reyl. The first two would be 390 the first one would be 390 Dufferin which started construction. I believe in Q1 of 2018, we expect that to be stabilized by the end of 2021. And the next one would be our project in Linde Village, which started construction in I think Q3 of 2018 and we expect that one to be stabilized in the Q3 of 2022.
Okay. So a couple of years out. Thanks. And then just lastly and probably a question for Mario. I think previously you've mentioned a normalized annual spending of $90,000,000 to $100,000,000 for maintenance and leasing CapEx.
And just at the halfway point here, it's tracking quite a bit lower. Is that just chalked up to just timing of expenses? And should we just kind of stick with the range you've given to us before?
So right now it is it does track more to the back end of the year just to the timing. So right now think it's normal for this period. But longer term, I think right now, given where we are as far as doing our reviews and advancing some of the process, we're probably not going to hit that number. I can probably provide more color like next quarter, but we'll probably actually be between $10,000,000 to $15,000,000 lighter right now and maybe a bit more.
Okay, that's helpful. Thank you.
Your next question comes from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks. Good morning. Just in terms of the multifamily development pipeline, any update there on other projects that could be added to that pipeline? If it's sitting at, call it, dollars 500,000,000 today, where do you see that moving over the next, call it, 1, 2 years?
Hey, Pammi, it's Phil. We're busy actually working through that right now. We'll provide you an update when we have more to report. But as we said, we have 7 projects in various stages of development and we're very excited about the prospects of those projects.
Okay. And just looking at the current platform and where the balance sheet sits from a leverage standpoint, how much development are you comfortable adding to the balance sheet today?
Right now, in the near term, I think I see us we're spending about $200,000,000 a year. That'll take us probably to say $600,000,000 on our balance sheet maybe as we get going. And we probably can go a bit higher. We have scale and I think as we have the liquidity and as long as things like this equity offering we just did and some capital recycling, we can kind of balance the debt and the equity to not put strain on the balance sheet.
That's helpful. Thanks very much. Just one last one. In terms of the 50 percent stake on the land sold in Brampton, I think it was for $15,000,000 Can you comment on what's the intent there and what's happening at that site?
So, we had originally contemplated a target anchor development over there. And obviously with the change in Targets plans, we were able to rezone the land and we sold it to Daniels and they're going to be doing a townhouse development. So we've retained sorry, and we've also retained I forget how many acres of land. One of the portions of land we're going to be doing rental development with Daniels. And then we have, I believe 8 or 10 acres still left for retail development.
And this is okay.
So this is very preliminary. I guess you don't have any density
figures yet or still going through that process?
On the Daniels land, we don't have their figures. On the Choice land, we are building, I think, about a 2 70 unit
rental building with Daniels, and I
believe they're 90 condo units.
Okay. Sorry, one last one. Just coming back to the fair value change in the quarter, I realize this is rather minute, but from a overall or from the composition of that change in the quarter for the investment properties, do you have that handy in terms of what the change was for the retail and the office assets?
No, I don't have the numbers in front of me, Palmy, but effectively just Vancouver office, we're seeing increase in rents. The market is getting it's very hot there. So that's where you had to increase and then the discretionary retail was the downside. It's pretty that simple. It's pretty simple from a valuation point of view.
Okay. Thanks very much.
Your next question comes from Sam Damiani with TD Securities. Your line is open.
Thanks and good morning. Just wanted to ask about the development spending budget for the next two and a half years as a schedule in the MD and A. Looks like the residential spend has reduced a little bit. Is that because some projects are being delayed or the construction time is being extended. Can you just give a little bit of color as to what prompted that?
Yes. Hey, Sam, it's Raul again. What prompted it is as we've gone through the planning of some of these projects on 1050 Shepherd Avenue, there was a slight delay in timing because we landed up squaring out the building a little bit, which made the unit in the building so much better. And then on the project I was mentioning earlier on the Brampton land, originally we contemplated entrance to our site of a private road that Metrolinx owns. We had to change the design as we couldn't come to an agreement with Metrolinx.
But again, we believe that the revised design with the entrance of a public road is a lot better. So that pushed out the timing of those two projects further than we originally contemplated.
Okay. That's helpful. So the Dufferin and the East Liberty, those two projects are on track?
Correct.
It's really just these other projects. Okay. That's helpful. Appreciate that. And you mentioned industrial leasing is strong in does that include Calgary and Edmonton?
What is seen there? I know you obviously bought your confident view of buying the asset in Edmonton Calgary, excuse me. But what are you seeing there in terms of momentum? And do you see opportunities to add more development there? And how is the lease going on your one project underway?
Yes. So in Calgary, leasing is very stable and we will again commence construction as we have fully leased the buildings that are we'll commence construction on another building, I would think, over the next 12 months. Edmonton is slower. So Edmonton, the leasing has we've got one building that's currently under lease up and demand is definitely slower.
Do you see more opportunities to acquire 50 percentage risk that you don't own in some of those projects out there?
Given our partner, we believe we will acquire their 50% interest once the buildings are stabilized.
Just looking at sort of longer term, I think I've asked on previous calls what's the outlook for some of the stores, the Loblaw stores over the longer term given the changes in the industry. Are you having any discussions with Loblaw with respect to change of use in some of the stores in terms of accommodating fulfillment?
No, we're
not. All
right. I think that's it for me. Thank you.
Your next question comes from Tal Woolley with National Bank. Your line is open.
Hi, Eric Kim here stepping in for Tal. I just had a quick question on your Bathurst in Lakeshore development. It looks like the expected spending rose 38% kind of as compared to Q1, but there was no increase in your ownership or your projected GLA there. Can you just provide some details on what drove that revised cost estimate?
Yes. So the costs are actually the same. It was just condo sale component, which was previously recognized through the P and L. So we had actually now showing the gross cost excluding the condo sale component, which I believe was around $15,000,000 The project is 84% leased, costs are exactly in line where we thought that would be and it should transfer to income producing mid to late next year.
Okay, great. Thank you. That's everything for me.
There are no further questions at this time. I will now turn call back over to the presenters.
So thank you everyone for joining our call this morning. Hope everyone is enjoying the warmer weather and enjoy the rest of your summer. Thanks so much.
This concludes today's conference call. You may now disconnect.