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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star then one on your telephone keypad. If you would like to withdraw your question, please press the pounds key. 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 second 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 calls, 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 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 second quarter of 2019. At a high level, another solid quarter. Operationally, same asset net operating income increased by 2% compared to Q1 2019, and period-end occupancy increased to 97.7%. This morning, I'll provide a further update on our operational results and transaction activities. Mario will then provide you more detail on our financial performance. Our consolidated portfolio of income-producing assets includes 736 properties comprising 68 million sq ft 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 the 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 sq ft of retail development at a total cost of CAD 33 million. Included in the transfers is a 50,000 sq ft grocery-anchored retail site on Rymal Road in Hamilton, Ontario. The site is anchored by a 30,000 sq ft 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 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 are 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 investment. Our industrial portfolio includes 115 properties and approximately 17.2 million sq ft of GLA. The portfolio is concentrated in Canada's largest distribution markets, where demand for industrial space by both investors and tenants remains strong. Our industrial assets operate under healthy fundamentals with low vacancy rates and increasing rents. Period-end occupancy increased 100 basis points to 98.2%. This was primarily due to the commencement of a 125,000 sq ft lease at our recently completed Petty Road industrial facility. 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 partner's 50% interest in two 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 sq ft at our ownership interest. Both assets are fully occupied and have a weighted average lease term greater than seven years. 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 strong distribution markets. Next, onto 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 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. Period-end 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. 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 rental residential assets that are income producing, and another seven residential assets that are in various stages of development. In total, when complete, these residential projects will represent approximately 1,500 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'll 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. I'll comment on our balance sheet activity. Overall, our 2019 second quarter results were in line with our expectations and reflect the stability and consistency that is inherent in our portfolio. Our reported FFO for the second quarter was CAD 170.2 million, or CAD 0.248 per unit diluted, down slightly from CAD 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 CAD 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 in 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 Le Blanc 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%. Onto our balance sheet. Q2 was a very busy quarter from a balance sheet perspective. We completed two major capital raises totaling CAD 1.1 billion that significantly improved our balance sheet. In May, we issued approximately 30 million trust units in a bought equity deal at a price of CAD 13.15 per unit. This resulted in total gross proceeds of CAD 395 million.
This was Choice's first equity offering since the 2013 IPO. We were exceptionally pleased with the demand, especially from both existing and new institutional investors. We are also pleased that George Weston, our largest unitholder, participated in the deal for approximately CAD 50 million. The proceeds from the equity offering were used to repay amounts drawn 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 CAD 750 million of unsecured debentures with a term of 10 years and an interest rate of 3.53%. The proceeds were used to repay existing indebtedness, including the redemption of CAD 300 million of unsecured debentures expiring in 2019, CAD 400 million of term loans that arose from the CREIT 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 term to maturity, which increased from 4.8 years to 5.5 years. We improved our overall liquidity by increasing the available balance on our credit facility from CAD 1 billion to CAD 1.4 billion. Overall, Q2 was a soft quarter with stable operating results and significant improvements to our balance sheet.
I will now turn the call back to the operator for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We will pause for a brief moment to compile the Q&A roster. 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 CREIT industrial portfolio coming into same store. You had guided to the CREIT 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, Mark. The portfolio overall is performing exceptionally well, particularly in Toronto, where we're seeing 10-plus % rent growth. Our comments today would be that the portfolio would have higher organic growth than what we would've probably guided to about a year ago.
Okay. 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 rates? Maybe also on that note, does it change your view on owning those types of assets in the future?
Hey, Mark. Yeah, in general, there is an increase in cap rates, that kind of is a brush across all that asset class. Specifically, you might have rental assumptions or capital spending assumptions that would hit the value as well. It doesn't really change our view on that asset class right now. It performs well, we have taken a hit in the past, and I think things are kind of stable right now.
Mark, some of the assets are exceptionally well located, and you couldn't assemble land masses with surrounding neighborhoods in today's market. Great long-term assets.
Even with the great location of those assets, there still was an increase in the cap rate, you're saying.
Yeah. Truly, we also rely on third-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. 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 development program. As always, when we see an opportunity where we can improve the balance sheet, we'll take advantage of it. 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. We're comfortable now, but if we did have a chance where we can actually get some capital, be it through equity or through recycling, and it could be part of paying down leverage, I think we would go further. There's no urgency in doing so right now.
Okay. That's fair. Just moving on to residential development and appreciating that the timing for the whole pipeline isn't laid out. 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, Sumayya. It's Rael. 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. The next one would be our project in Leslie Village, which started construction in, I think, Q3 of 2018. We expect that one to be stabilized in the third quarter of 2022.
Okay. A couple of years out. Thanks. Then just lastly, and probably a question for Mario. I think previously you've mentioned a normalized annual spending of CAD 90 million to CAD 100 million for maintenance and leasing CapEx. Just at the halfway point here, it's tracking quite a bit lower. Is that just chalked up to just timing of expenses? Should we just kind of stick with the range you've given to us before?
Right now, it does track more to the back end of the year just due to timing. Right now, I think it's normal for this period. 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 by next quarter, but we'll probably, I'd say, be between CAD 10 million to CAD 15 million 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 multi-family development pipeline, any update there on other projects that could be added to that pipeline? If it's sitting at, call it half a billion today, where do you see that moving over the next, call it one to two years?
Hey, Pammi. We're busy actually working through that right now. We'll provide you an update when we have more to report. As we said, we have seven projects in various stages of development, and we're very excited about the prospects of those projects.
Okay. 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 we're spending about CAD 200 million a year. That'll take us probably to, say, CAD 600 million on our balance sheet, maybe, as we get going. We probably can go a bit higher. We have scale, and I think as we have the liquidity and as long as with things like this equity offering we just did and some capital recycling, we can kind of balance the debt and the equity to not to put strain on the balance sheet.
That's helpful. Thanks very much. Just one last one. In terms of the 50% stake on the land sold in Brampton, I think it was for CAD 15 million. Can you comment on what's the intent there and what's happening at that site?
Pammi, we had originally contemplated a Target anchor development over there. Obviously, with the change in Target's plans, we were able to rezone the land. We sold it to Daniels, and they're going to be doing a townhouse development. We've retained. Sorry, we've also retained, I forget how many acres of land. One of the portions of land we're going to be doing a rental development with Daniels, and then we have, I believe, eight or 10 acres still left for retail development.
This is-
We made it.
Okay. This is very preliminary. 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 270-unit rental building with Daniels, and I believe there are 90 condo units.
Sorry, one last one. Just coming back to the fair value change in the quarter. I realize this is rather minute, from an 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, Pammi, but effectively, just Vancouver office, we're seeing increase in rents. The market's very hot there, so that's where you had your increase, and then the discretionary retail was the downside. It's pretty that simple. It was pretty simple from a valuation point of view.
Okay. Thanks very much.
Again, if you would like to ask a question, it is star one on your telephone keypad. 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. There's a schedule in the MD&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?
Yeah. Hey, Sam. It's Rael again. What prompted it is, as we've gone through the planning of some of these projects, on 1050 Sheppard Avenue, there was a slight delay in timing because we landed up squaring out the building a little bit, which made the units in the building so much better. On the project I was mentioning earlier on the Brampton land, originally, we had contemplated entrance to our site off a private road that Metrolinx owns. We had to change the design as we couldn't come to an agreement with Metrolinx. Again, we believe that the revised design with the entrance off a public road is a lot better. That pushed out the timing of those two projects further than we had originally contemplated.
Okay, that's helpful. The Dufferin and the East Liberty, those two projects are on track?
Correct.
It's really just these other projects. Okay, that's helpful.
Yeah.
Appreciate that. You mentioned industrial leasing is strong, and does that include Calgary and Edmonton? What are you seeing there? I know you obviously bought and you're confident with buying the asset in Calgary, excuse me. What are you seeing there in terms of momentum, and do you see opportunity to add more development there? How's the leasing going on your one project underway?
In Calgary, leasing is very stable, and we will again commence construction as we have fully leased the buildings. We'll commence construction on another building, I would think, over the next 12 months. Edmonton is slower. 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 the 50% interest 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 building's all stabilized.
Just looking at the sort of longer term, I think I've asked on previous calls, what's the outlook for some of 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 and 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?
The costs are actually the same. It was just a presentation. We had previously netted out the condo sale component, which was previously recognized through the P&L. We are actually now showing the gross cost, excluding the condo sale component, which I believe was around CAD 15 million. The project's 84% leased. Costs are exactly in line where we thought they would be, and it should transfer to income producing mid to late next year.
Great. Thank you. That's everything for me.
There are no further questions at this time. I will now turn the call back over to the presenters.
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.