Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Choice Properties Real Estate Investment Trust First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.
Kim Lee, you may begin your conference.
Thank you, Tiffany. Good morning, and welcome to our Q1 2018 conference call. The call is also being webcast simultaneously on our website at toy3. Ca, where you will also find a copy of our Q1 summary information package that we will be referring to on this call. I'm joined here this morning by John Morrison, President and Chief Executive Officer and Bart Munn, Chief Financial Officer.
Before we begin today's call, I want to remind you that by discussing our financial and operating performance and responding to your questions, we may make forward looking statements, including statements concerning Choice Properties' objectives, its strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, intentions, outlooks 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 could impact our actual results the estimates and assumptions required in making these statements can be found in the 2017 Annual Report and Management's Discussion and Analysis related thereto, together with our Choice Properties, Annual Information Form and are all available on our website and on SEDAR. I will now turn it over to John.
Thank you, Kim. Good morning, everyone, and thank Thank you for joining our conference call. I'm going to start with an overview of the quarter and Bart will follow with a presentation of the financials. After that, we'll open it up for questions. This July, Choice Properties will celebrate its 5th anniversary.
Since our IPO, we have built a strong and stable business. From a standing start, we established an efficient business platform, continually acquired properties to expand our portfolio and created value add development capacity, whereby we invested capital and constructed new commercial space at very attractive returns. We have laid the groundwork for future growth and to solidify our position as a leading REIT. As part of our aspiration to be Canada's best real estate company, this February, we announced our intention to acquire Canadian REIT. This transaction, which we expect to close next week on May 4, was made possible because of the growth and success that Choice Properties has delivered over the past 5 years.
Our progress this quarter is a reflection of the strength of our operations. We delivered another quarter of growth with a 2.3% increase in organic net operating income driven by the underlying fundamentals of our real estate business. Let me now provide you with more details of our achievements for the quarter. This quarter, we successfully acquired 5 properties from 3rd party vendors for an aggregate purchase price of $29,400,000 before transaction costs. Together, they add approximately 91,000 square feet of gross leasable area to our portfolio and opportunities for future development.
On Slide number 5 of our summary information package, we present the 32,000 square feet of new GLA we constructed during the quarter. Construction during the quarter contributed to the 81,000 square feet of new GLA completed towards our 2018 objective of 3 166,000 square feet. These completions provided a 16,000 square foot Shoppers Drug Mart in Toronto and 19 new retail spaces for ancillary tenants in Alberta, Ontario and Quebec. These projects represent a total capital investment of approximately $28,000,000 and yield returns ranging from 7% to 8%. We continue to improve rental rates as we maintain solid occupancy for our ancillary space.
During the quarter, we entered into binding commitments totaling square feet, representing a renewal retention rate of 59.6%. The average base rent for renewing leases increased 7.2%. Our new developments and active management continue to drive a positive trend for our average ancillary rental rate. As at the end of the quarter, the average base rent for ancillary space was $15.41 per square foot, and this compares to $14.42 per square foot as reported in Q1 2017 and represents a 6.9% increase year over year. Overall, we continue to maintain our total portfolio's high occupancy rate at 98.8%, relatively flat compared to that of the end of 2017.
And with that, I will turn the call over to Bart to provide you with a review of the financials for the quarter.
Thanks, John, and good morning, everyone. I refer you to Slide 9 of our presentation materials, where you'll find selected financial results for the Q1. As of March 31, 2018, Choice Properties portfolio comprised of 548 properties with a total gross leasable area of 44,200,000 Square Feet. Under IFRS, Choices Properties investment properties were valued at approximately 9 point $7,000,000,000 based on a weighted average cap rate of 6.07 percent, flat compared to year end of 2017. For the quarter, rental revenue was $215,000,000 and net operating income was $149,800,000 5.7 percent and 5.2% higher than in Q1 2017, respectively.
On a same property, same GLA basis, organic net operating income increased to $145,100,000 or by 2.3% from Q1 2017. This increase was primarily a result of step rents in Loblaw leases and higher average rents per square foot on ancillary leases. Adjusted general and administrative expenses for the quarter were $5,300,000 compared to $4,000,000 in Q1 2017. Internal leasing expenses and adjustment to fair value of unit based compensation have been excluded from adjusted G and A expense. The ratio of adjusted G and A expense to total revenue was 2.5% in line with our expected annual run rate.
Funds from operations for the quarter were $105,700,000 or 0.255 dollars per diluted unit compared to $108,800,000 or $0.264 per diluted unit in Q1 2017. The year over year decrease in FFO was largely due to increased interest and other financing charges related to the expected Creek transaction and debt refinancing respectively. Excluding these items, FFO and FFO per unit increased 2% and 1.5% respectively. Our adjusted cash flow from operations was $83,600,000 compared to 90 $800,000 for the Q1 of 2017. With total distributions declared of 76,500,000 or $0.185 per unit for Q1, our payout ratio for the quarter was 91.5%.
This compares to 80.3 percent for Q1 2017. Excluding the financing charges I mentioned earlier, our payout ratio was 86% and within our current target payout range of approximately 85%. During the quarter, we issued senior unsecured debentures Series I through L, raising a total of $1,950,000,000 The net proceeds of Series K and L are held pending the completion of the acquisition of Crete. At the end of the quarter, our debt to total assets was 51.9%, our service coverage ratio was 3.5 times and our weighted average term to maturity on our senior unsecured debentures was 6.1 years. Excluding Series K and L, our debt to asset ratio would have been 45.4%.
Now let me turn it over to John to provide closing remarks. Thanks, Bart.
As I mentioned at the outset, we have built a strong and stable business. Our acquisition of CREET is expected to further strengthen our position and form Canada's
Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Choice Properties Real Estate Investment Trust First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.
Kim Lee, you may begin your conference.
Thank you, Tiffany. Good morning, and welcome to our Q1 2018 conference call. This call is also being webcast simultaneously on our website at choicereit. Ca, where you will also find a copy of our Q1 summary information package that we will be referring to on this call. I'm joined here this morning by John Morrison, President and Chief Executive Officer and Bart Munn, Chief Financial Officer.
Before we begin today's call, I
want to Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Choice Properties Real Estate Investment Trust First Quarter Results Conference Call. Good morning. My name is Tiffany, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Properties Real Estate Investment Trust First Quarter Results Conference Call. 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. Kimley, you may begin your conference.
Thank you, Tiffany. Good morning, and welcome to our Q1 2018 conference call. This call is also being webcast simultaneously on our website atchoicereit. Ca, where you will also find a copy of our Q1 summary information package that we will be referring to on this call. I'm joined here this morning by John Morrison, President and Chief Executive Officer and Bart Munn, Chief Financial Officer.
Before we begin today's call, I want to remind you that by discussing our financial and operating performance and responding to your questions, we may make forward looking statements, including statements concerning Choice Properties' objectives, its 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 could impact our actual results and the estimates and assumptions we apply to making these statements can be found in the 2017 Annual Report and management's discussion and analysis related thereto, together with our Choice Properties Annual Information Form and are all available on our website and on SEDAR. I will now turn it over to John.
Thank you, Kim. Good morning, everyone, and thank you for joining our conference call. I'm going to start with an overview of the quarter and Bart will follow with a presentation of the financials. After that, we'll open it up for questions. This July, Choice Properties will celebrate its 5th anniversary.
Since our IPO, we have built a strong and stable business. From a standing start, we established an efficient business platform, continually acquired properties to expand our portfolio and created value add development capacity, whereby we invested capital and constructed new commercial space at very attractive returns. We have laid the groundwork for future growth and to solidify our position as a leading REIT. As part of our aspiration to be Canada's best real estate company, this February, we announced our intention to acquire Canadian REIT. This transaction, which we expect to close next week on May 4, was made possible because of the growth and success that Choice Properties has delivered over the past 5 years.
Our progress this quarter is a reflection of the strength of our operations. We delivered another quarter of growth with a 2.3% increase in organic net operating income driven by the underlying fundamentals of our real estate business. Let me now provide you with more details of our achievements for the quarter. This quarter, we successfully acquired 5 properties from 3rd party vendors for an aggregate purchase price of $29,400,000 before transaction costs. Together, they add approximately 91,000 square feet of gross leasable area to our portfolio and opportunities for future development.
On slide number 5 of our summary information package, we present the 32,000 square feet of new GLA we constructed during the quarter. During the quarter contributed to the 81,000 square feet of new GLA completed towards our 2018 objective of 366,000 Square Foot Shoppers Drug Mart in Toronto and 19 new retail spaces for ancillary tenants in Alberta, Ontario and Quebec. These projects represent a total capital investment of approximately $28,000,000 and yield returns ranging from 7% to 8%. We continue to improve rental rates as we maintain solid occupancy for our ancillary space. During the quarter, we entered into binding commitments totaling approximately 153,000 square feet.
Of these leases, renewals accounted for 49,000 square feet, representing a renewal retention rate of 59.6%. The average base rent for renewing leases increased 7.2%. Our new developments and active management continue to drive a positive trend for our average ancillary rental rate. As at the end of the quarter, the average base rent for ancillary space was $15.41 per square foot, and this compares to $14.42 per square foot as reported in Q1 2017 and represent a 6.9% increase year over year. Overall, we continue to maintain our total portfolio with high occupancy rate at 98.8%, relatively flat compared to that of the end of 2017.
And with that, I will turn the call over to Bart to provide you with a review of the financials for the quarter.
Thanks, John, and good morning, everyone. I refer you to Slide 9 of our presentation materials where you'll find selected financial results for the Q1. As of March 31, 2018, Choice Properties portfolio comprised of 548 properties with a total gross leasable area of 44,200,000 square feet. Under IFRS, Choices Properties Investment Properties were valued at approximately $9,700,000,000
based on
a weighted average cap rate of 6 0.07 percent, flat compared to year end of 2017. For the quarter, rental revenue was 215,000,000 and net operating income was 149,800,000, 5.7% and 5.2% higher than in Q1 2017, respectively. On a same property, same GLI basis, organic net operating income increased to $145,100,000 or by 2.3 percent from Q1 2017. This increase was primarily a result of step rents in Loblaw leases and higher average rents per square foot on ancillary leases. Adjusted general and administrative expenses for the quarter were $5,300,000 compared to $4,000,000 in Q1 2017.
Internal leasing expenses and adjustment to fair value of unit based compensation have been excluded from adjusted G and A expense. The ratio of adjusted G and A expense to total revenue was 2.5%, in line with our expected annual run rate. Funds from operations for the quarter were 105,700,000 dollars or $0.255 per diluted unit compared to $108,800,000 or $0.264 per diluted unit in Q1 2017. The year over year decrease in FFO was largely due to increased interest and other financing charges related to the expected CREAT transaction and debt refinancing respectively. Excluding these items, FFO and FFO per unit increased 2% and 1.5%, respectively.
Our adjusted cash flow from operations was $83,600,000 compared to $90,800,000 for the Q1 of 2017. With total distributions declared of $76,500,000 or $0.185 per unit for Q1, our payout ratio for the quarter was 91.5%. This compares to 80.3% for Q1 2017. Excluding the financing charges I mentioned earlier, our payout ratio was 86% and within our current target payout range of approximately 85%. During the quarter, we issued senior unsecured debentures, Series I through L, raising a total of $1,950,000,000 The net proceeds of Series K and L are held in escrow pending the completion of the acquisition of Crete.
At the end of the quarter, our debt to total assets was 51.9%, our service coverage ratio was 3.5 times and our weighted average turn to maturity on our senior unsecured debentures was 6.1 years. Excluding Series K and L, our debt to asset ratio would have been 45.4%. Now let me turn it over to John to provide closing remarks. Thanks, Bart.
As I mentioned at the outset, we have built a strong and stable business. Our acquisition of CREIT is expected to further strengthen our position and form Canada's preeminent diversified REIT. The combination will provide us the scale and reach to leverage our best in class real estate platforms, improved stability through diversification of tenants and asset type, and an expanded development pipeline that offers unmatched opportunities to create value and drive continued growth for the long term. I would like to take this opportunity to thank the entire Choice Properties crew for their passion and dedication and to congratulate them on 5 years of results. And operator, we would be pleased to take questions.
Your first question comes from the line of Sam Damiani with TD Securities.
Just on the acquisitions and dispositions, I recall last year you expected 2018 acquisitions on the property side to pick up. Any firm outlooks there? And also with the merger coming up, any plans to on the disposal side being firmed up?
Sam, it's John. We continue to look at acquisitions and will during the year. We did some acquisitions already in the Q1 of this year. We're working on some more. It goes without saying that we do have a pipeline of available properties from Loblaw, and that will continue.
With regard to dispositions, it's difficult for us to comment on that at this time, But I'm sure there'll be further updates on that sort of thinking in future quarters.
Maybe just one follow-up on the West Block. The office space there is, I believe, fully committed. Could you just remind us, if you could, who the tenants are?
The tenant is Loblaws Company Limited.
Okay. And that's a firm lease?
Yes, sir.
Thank you.
Your next question comes from the line of Pammi Baer with Scotia Capital. Your line is open.
Thanks. Good morning. Just on the 2,280 Dundas project, can you do you have some additional color that you could provide in terms of the mix of GLA, potential costs and when we may actually see spending start on that particular project?
Yes, we can give you some of the information. Let me pull it up here, Penny. So in terms of the Dundas Brewer site, we are planning on submitting an OPA to the city. It's a mix of residential and retail and office. And these numbers are approximate, so it'd be about 2,600 residential units, about 650,000 square feet of commercial space.
And that includes both office and The project, we expect to start physical construction in about 2 to 3 years. This thing is going to get this project will be constructed over a 10 year period. And it's in excess of $1,000,000,000
Okay. So spending won't start until, I guess, in bigger amounts until about 2020?
Yes, the earliest, yes.
Okay. And just coming back to the CREATE acquisition, has there been any change with respect to anticipated accretion or I guess initial dilution based on some of the financing that has been done to date?
Not at this point in time, no.
Okay. And then just can you do you have any additional thoughts respect to leverage going forward post the completion of the transaction and over what time you would target to get that down?
Well, I think we've met with investors during this period of pre close and we have communicated that over time, it is the intention to bring the leverage down and ideally bring out the payout ratio down as well. But I can't put a timeframe for that.
Okay. Just last one for me. Just going back to, I guess, the aggregate development pipeline of, I guess, 60 sites that you've talked about previously. Any initial thoughts there with respect to potential density as you've looked across the combined portfolios? And then how would that impact the annual development spending going forward?
Well, these sites are all different, as you can appreciate. Perhaps adding office, depending on the site and adding residential. Perhaps adding office depending on the site and adding residential. Some of them are just adding strictly residential as an adjacent site. Some of them may be.
So there's a combination there. So they're all different. We have a rough idea of what the overall density and square footage would be, but that's based on getting entitlements and what have you. So it's not something that we really want to publicize because it's a bit of a moving target as well. And so it's substantial, let's put it that way.
And I think we've clearly articulated that.
Right. And then just lastly, on have any of those sites what portion of those sites are actually zoned for Well,
they're all zoned. They're all zoned. What do you
mean for residential?
Well, I'd say less than 10%. But we're in process on a whole number of sites. Right. And I'm kind of guessing at 10%, to be honest with you.
Okay. Thanks very much.
Your next question comes from the line of Michael Smith with RBC Capital Markets. Your line is open.
Thank you and good morning. I just have a couple of questions on development. So just on the Bloor Dandas 2,280, can you just give us a bit of color on the school and how that what agreements you have or what your thinking is on moving the school and what have you?
Certainly. So the school as it exists today is a school it's a school that's occupied by the Toronto Catholic School Board. And they occupy that building and they have a land lease with the Toronto District School Board that is quite lengthy. So our discussions have been with the Catholic School Board in terms of them relocating to another portion of the site and constructing a new school, obviously, under financial arrangements that are between ourselves and the school board. So the process is underway and involves certain municipal and regulatory and educational system approvals, which are underway right now.
So we're confident that this is going to happen. And so at the end of the day, the new occupant being the Toronto and Catholic School Board will have a brand new facility because I think their existing facility is very old and tired and requires a lot of capital. So it all makes sense to make this happen and we're confident that is going to happen. It's just we have to continue to go through the process with the school boards.
Sure. Yes, I know, understood. Obviously, it makes a lot more sense to have it there adjacent to that new park that I've seen from your renderings. Would the school be more or less the same size or is that still to be determined?
More or less.
Okay. And then just lastly, any updates on Golden Mile?
Yes. Golden Mile, as you know, we filed an OPA last year. We have comments back from the city, which we're working through and are in constant dialogue with the city planning people. We have more or less finalized the retail component, which is Phase 1 with Loblaws being the key tenant. And we're hoping to ideally be in the ground on Phase 1 sometime in 2019, 2020 at the latest.
Great. Thank you. That's it for me.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thanks. Just back to the Dundas Bloor site. With the city or I guess the Toronto District School Board owning the site on Bloor Street, are they going to retain an equity ownership in the new project or are you buying that land? And the second question is in terms of the near construction, how many phases is it broken up into and what would be the first phase constructive and the last phase constructive?
So the answer to your first question is we would be buying the land and the school and then they would be under a land lease on our property.
So the development is 100% on Choice's balance sheet as it stands today?
Sorry, it'd be more of a swap, not a land lease. Sorry, what was your question?
Just on the phasing of it over 10 years, what would be the first?
So yes, we have to construct the retail commercial component first. And it is kind of spread out through the project. So the building that would be on Bloor Street towards the railway, which is the proposed location for Loblaws, That would be constructed first. And together, we also we would start constructing the location for the new school. So that'd be kind of phase 1, because we can't obviously, they both Bloblau's and the school need to operate.
Right.
And then once those buildings are completed and they relocated, then we take down the existing retail and we start to build out the balance of the project.
Okay. So most of the residential, it sounds like, will be later on?
Yes. Well, the majority of it, but there will be a portion of residential that will sit over top of the Loblaw store. So as that's constructed to accommodate Loblaw, the residential will be pretty much ready as well over top of that because there's underground parking and underground parking component underneath the Loblaw store.
Of course. And just back to Golden Mile, John, was the what's the plan now? Has it changed in terms of retaining the residential units as rental properties or any of them going condo?
The plan right now is for purpose built rental particularly in that market.
Your next question comes from the line of
ask just started in my building. But I just wanted to ask first of all, in your conversations with Loblaw over the last year or so, how has the conversation I
think
conversations with them. How do you sort of see that going forward?
Well, we can't really comment on Loblaw's. I mean, we're aware of their plans, but we can't really comment publicly on that's up to Loblaw to talk about in terms of what their square footage plans are, their store openings, closings, etcetera. We continue to look to provide opportunities for them for their new store development plan, but that's something that we discuss with them on a regular basis. But it's not something that we would comment any further on in terms of what their plans are. That's not really up to us.
Okay. And just a follow-up, how much of new square footage that's being added to the network is originating within Choice, would you say, versus Loblaw right now?
The majority is ancillary space that we're building. There may be 1 or 2 new Loblaw stores as part of our additional GLA build. And then that would include Shoppers Drug Mart as part of that as well. So it's a combination of both of them.
Okay, that's perfect. Thank you very much.
I will now turn the conference back over to our presenters.
Thank you, Tiffany, and thank you all for joining us this morning on our conference call. We certainly look forward to speaking with you next quarter. Have a great day.