Good morning, and welcome to the Choice Properties Real Estate Investment Trust second quarter 2022 earnings. My name is Rob, and I will be your conference operator today. Today's call is being recorded, and all lines have been placed on mute. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I would now like to hand the conference over to your speaker today, Erin Johnston, Vice President of Finance. Please go ahead.
Thank you. Good morning, and welcome to the Choice Properties Q2 2022 conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer, Mario Barrafato, Chief Financial Officer, and Ana Radic, Executive Vice President, Leasing and Operations. 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 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 fact. 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 financial results and estimates and the assumptions that were made in applying and making these statements can be found in our recently filed Q2 2022 financial statements and Management Discussion and Analysis, which are available on our website and on SEDAR. With that, I will turn the call over to Rael.
Thank you, Erin, and good morning, everyone. Welcome to our second quarter earnings call. To start the call, I'll provide a brief recap of our quarterly performance and cover the highlights of our transaction and development activities. Ana will cover our operational results, followed by Mario, who will conclude the call with a review of our financial results before we open the lines for Q&A. Before we dive into the activities of the quarter, I'd like to first highlight that along with our earnings release, we announced that the Science Based Targets initiative, or SBTi, has validated Choice's greenhouse gas emissions targets, making Choice one of the first entities in Canada to have net zero targets approved by the SBTi.
As we've said before, fighting climate change is fundamental to our purpose of creating enduring value for our stakeholders, and we are proud to deepen our environmental commitment with these targets. Turning to our results, last quarter, we announced that we are focusing our time and capital on the opportunities available in our core business areas of essential retail, industrial, and our growing residential platform. Our strong operating results in the quarter demonstrate this focus with improved occupancy in each of these core asset classes and same asset cash NOI growth of 3.8%. Our performance in the quarter was underpinned by several key themes. First, the strength of our retail portfolio. Next, the significant growth potential of our industrial portfolio. Finally, a focus on managing risk in the current economic environment. Our retail portfolio is one of the best performing in the Canadian REIT industry.
It is primarily leased to necessity-based tenants that provide stable and steady cash flow growth, and we also benefit from our strategic relationship and long-term leases with Loblaws. This relationship provides us with both long-term stability and growth opportunities. An example of long-term stability includes the renewal of 2.9 million sq ft of Loblaws leases subsequent to the quarter for an average term of 7.7 years, which Ana will expand on shortly. An example of growth are our five active Shoppers Drug Mart developments, representing a total investment of CAD 22 million, an expected initial yield of 6.75% with additional projects in planning. The size, quality, and growth potential of our industrial portfolio contributed to our strong operating performance in the quarter.
Our 17.4 million sq ft industrial portfolio includes large, purpose-built distribution facilities for Loblaws, as well as high-quality, generic industrial assets that can accommodate a wide range of tenants. We have significantly embedded growth in our industrial portfolio, with non-Loblaws tenants representing two-thirds of NOI, with leases being on average 40% below market. In addition to the growth in our existing assets, we believe that over time, we have the ability to significantly increase our industrial portfolio through development. Our investment activity in the quarter significantly increased our future industrial development pipeline, which now has approximately 6.5 million sq ft under development on various stages of the rezoning and planning process.
First, we acquired an additional 97-acre parcel of land adjacent to the future industrial site in Caledon that we acquired in 2021. This acquisition increased our total future net development industrial land in this multi-phase industrial park to approximately 380 acres, of which we own 85% interest. The assembly has been completed at an attractive pricing of CAD 700,000 per acre. We're currently working through the rezoning process with the town of Caledon to permit a total of approximately 5.5 million sq ft of industrial space. Next, we exercise our previously announced equity conversion right from the Rice Group to acquire 75% ownership interest in 154 acres of developable industrial land in East Gwillimbury in the GTA.
The plan is to build a multi-phase industrial park with a potential for approximately 1.8 million sq ft of new generation logistic space. For the first phase of the development, we have entered into a 100-acre land lease with Loblaws, where Loblaws intends to build a 1.2 million sq ft, fully automated multi-temperature industrial facility. We expect an initial yield of between 6.5% and 7% on this land lease to Loblaws, with rent commencing in the first quarter of 2024. Finally, we also have two other active industrial developments, other construction totaling 500,000 sq ft in Vancouver and Edmonton, which are expected to be completed in the second half of 2023, with leasing expected to be completed prior to construction completion. Turning to the current economic environment.
Since the beginning of the year, concerns over inflation have resulted in a significant increase in interest rates. This increase has put downward pressure on the valuation of our investment properties and resulted in higher incremental borrowing costs. Mario will discuss shortly the steps we have taken during the quarter to ensure that in light of these changes, our balance sheet remains extremely strong. I'm now going to pass the call over to Ana to discuss our operational results. Ana.
Thank you, Rael, and good morning, everyone. As Rael mentioned, our operational results for the quarter were strong, driven by our high-quality portfolio and the talent of our operational team. We continue to see strong new leasing velocity and tenant retention, driven by increasing consumer spending, retailer confidence in opening new locations, and continued demand from industrial users. Our period end occupancy was exceptionally strong at 97.6%, an increase of 60 basis points compared to last quarter. During the quarter, we completed 517,000 sq ft of new leasing commencing in the quarter. We had approximately 1.4 million sq ft of lease expiries, and we renewed 1.3 million sq ft at leasing spreads 7.8% higher than expiring rents.
Tenant retention in the quarter was exceptionally strong at 92.7%, resulting in positive absorption of 419,000 sq ft. Turning to our asset classes. Our approximately 44 million sq ft retail portfolio, which consists of open-air centers with necessity-based tenants, once again delivered stable results. Canada has maintained strong retail sales through the first half of this year, with consumer spending exceeding 2019 levels. Our retail portfolio continued to strengthen, increasing 10 basis points to 97.5% occupied. We completed 512,000 sq ft of renewals in the quarter with tenant retention of 87%. Long-term renewals were completed at rents 5.3% above expiry. We also had 67,000 sq ft of new retail deals commence in the quarter.
In addition, subsequent to quarter end, we finalized renewals with Loblaws for 42 locations expiring in 2023. Loblaws exercised a 5-year renewal option on 42 retail leases, totaling 2.9 million sq ft. The average rents increased from CAD 16.16 to CAD 16.98, which is an increase of 5% over the expiring rent. Loblaws and Choice agreed to an additional 5-year extension on 23 of the 42 leases, totaling 1.7 million sq ft. These rents increased from CAD 16.52 to CAD 17.80, which is an increase of 7.8% over the 2028 expiring rent. Lease renewals in future years present greater opportunity for rental rate growth as compared to these earlier years, where in-place rents are closer to the current market rents.
Turning to our industrial portfolio, demand for industrial continued to surge, driving the availability rate in Canada to a new record low of 1.6% in the second quarter. Half of Canadian markets have availability rates of 1% or less, with Edmonton and Calgary experiencing the largest quarterly decrease in availability, 110 basis points and 80 basis points, respectively. The asking net rental rate in Canada rose 17.4% year-over-year to CAD 11.20 per sq ft, recording its strongest quarter on record, with Toronto and Montreal seeing rental rate growth of 30% year-over-year. Occupancy in our industrial portfolio increased 200 basis points in the quarter, finishing at 99.2%.
We completed 751,000 sq ft of renewals in the quarter at rents 13.1% above expiry and reflecting tenant retention of 97%. We also had 440,000 sq ft of new leasing commence in the quarter. The increase in occupancy was primarily due to the completion of two new deals in Alberta and one in Ontario. As we mentioned on our prior quarter call, two of these spaces were vacated in Q1 of this year, and we were able to capitalize on the strong industrial market fundamentals to quickly re-lease these spaces at new rents, significantly exceeding the expiring rents. 170,000 sq ft in Calgary was re-leased at rents 30% above the previous tenant's expiring rent.
While in the GTA, a 113,000 sq ft building was leased at rents 150% higher than that paid by the previous tenant. Both deals required limited landlord capital. Subsequent to the quarter, we also completed two new deals with Amazon. Amazon leased 603,000 sq ft at 2,700 Francis Hughes in Laval for a 10-year term. Amazon's starting rent is 90% higher than the previous tenant's expiring rent, with 2.75% annual rent steps. Amazon also leased 290,000 sq ft at 2,625 Sheffield Road in Ottawa, a building we purchased from Loblaws last year with the plan to re-lease it. The deal was done at a strong market rent, also with a 2.75% embedded annual rent step.
Both deals commenced in September of this year, and rent will commence in November once Amazon completes their fixturing. Demand for rental residential continues to increase. Our rental residential portfolio consists of three stabilized assets, which ended the quarter at approximately 97.4% leased. Our two newest assets, The Brixton and Liberty House, located in the West Queen West and Liberty Village neighborhoods, respectively, are 72% occupied and 77% leased. We expect The Brixton to reach stabilized occupancy by the third quarter of this year and Liberty House by the second quarter of next year, if not sooner. Our operating results in the first half of 2022 were exceptionally strong, and we remain confident that our portfolio will continue to deliver solid operating results through the balance of 2022. I'll now pass the call over to Mario to discuss our financial performance.
Thank you, Ana, and good morning, everyone. As Rael and Ana mentioned, we are very pleased with our strong underlying operational performance so far in 2022. In addition, we continue to take steps to ensure we maintain our strong balance sheet despite pressure from inflation and rising interest rates, which I will speak to in a moment. Our reported funds from operations for the second quarter was CAD 175.3 million, or CAD 0.242 per unit. On a gross dollar basis, our funds from operations for the quarter increased CAD 3.4 million, or 1.7%, compared to the prior year. This was primarily due to higher same asset net operating income in both retail and industrial, higher interest income from our mezzanine loan program, and lower overall interest cost driven by low interest rates on our 2021 debt refinancings.
Included in FFO was approximately CAD 1.3 million in non-recurring NOI, primarily from lease surrender revenue. On a per unit diluted basis, our Q2 FFO was CAD 0.242 per unit, up 1.7 compared to the 23.8 in the second quarter of 2021. Occupancy increased in the quarter and contributed to our strong same-asset results. Same-asset cash NOI increased by CAD 8.2 million or 3.8% compared with the second quarter of 2021. By asset class, retail increased by CAD 6.8 million or 4%. This increase was primarily driven by a combination of new leasing activity, higher renewal rents on expiring leases, Loblaws rent steps, and higher capital recoveries. The increase also included a reduction in bad debt expense of CAD 1.4 million.
Industrial increased by CAD 1.1 million or 3.3%. This increase was driven by higher occupancy and rents. Mixed-use residential and other increased by CAD 200 thousand or 2.2%, and this was driven by positive leasing in our residential assets, coupled with a decline of CAD 250 thousand in bad debt expense. This gain was partially offset by challenges primarily in our remaining Alberta office portfolio. Turning to our balance sheet, we continue to take a transparent and conservative approach to valuations. With a higher cost of capital putting pressure on real estate valuations, we have updated our valuations to incorporate this impact as well as other market factors. In the quarter, we reported a fair value loss on investment properties of CAD 522 million.
This represents a decline of 3.3%, driven primarily by our retail portfolio and partially offset by gains in our industrial portfolio and certain development projects. The net fair value loss on our retail portfolio reflects the impact of current market conditions. Gains from new leasing and appraisals were more than offset by the impact of cap rate expansions from changing return expectations due to higher borrowing costs and also increased risk just due to overall market uncertainty. This resulted in an approximately 40 basis point increase to the implied retail overall cap rate, bringing it to 6.42%. The fair value gains in our industrial portfolio were driven by strong industrial fundamentals, with leases renewing at significantly higher rates. Gains on our development assets primarily relate to our industrial development pipeline and demonstrate the future value creation potential of these projects.
In addition to the net fair value loss on our investment properties, we reported CAD 159 million downward fair value adjustment on our investment in Allied Properties units. Under IFRS, we are required to mark-to-market this investment to its trading price at June 30. Our business is supported by our industry-leading balance sheet and disciplined approach to financial management. With ongoing economic uncertainty and recently heightened stagflation and recession concerns, we continue to prioritize liquidity and a balanced debt maturity ladder to reduce risk and create financial flexibility. We closed the quarter with strong debt metrics and ample liquidity. Our debt-to-EBITDA was 7.4x, up slightly from 7.3 reported in the second quarter of 2021. This was due to the acquisition of our industrial development lands that Rael referred to earlier.
From a liquidity perspective, we have approximately CAD 1.4 billion available on our credit facility, and this was further supported by approximately CAD 12 billion of unencumbered properties. We successfully completed the issuance of CAD 500 million unsecured debentures for a 10-year term, bearing interest at 6%. The proceeds from this offering we used to redeem our CAD 300 million, 3.6% Series Ten senior unsecured debentures and repay a portion of the balance drawn on our credit facility. The issue was part of our overall financing strategy, which in this period of volatility, places more emphasis on maintaining a high level of liquidity and a balanced debt maturity ladder. For the remainder of the year, we have a very manageable 128 million of remaining debt obligations coming due.
We are fortunate to have access to several sources of capital, including unsecured debentures, commercial mortgages, CMHC financing, and property dispositions to deal with this refinancing. Overall, we continue to believe the resilience of our earnings in conjunction with our strong balance sheet and a commitment to prudent financial management will allow us to navigate through market volatility and uncertainty. With that, Rael, Ana, Erin, and I would be glad to answer your questions. Back to you, Rob.
At this time, I would like to remind everyone in order to ask a question, press star, then number one on your telephone keypad. Your first question comes from a line of Sam Damiani from TD Securities. Your line is open.
Thank you. Good morning, everyone. First of all, maybe just on the Loblaws lease renewals, I just want to clarify some of the numbers. You said that the rent increase on the first five-year term was 5% and the new rent was CAD 16.98. I didn't quite catch the prior rent.
Yeah.
I thought you said 16 16.
The prior rent was CAD 16.
Oh, 16. Okay.
Sorry, the first one. CAD 16.16-CAD 16.98.
The 23 leases, there's another five years added with the 7.8% increase on the 2028 rent. Annualized, you know, that's slightly above, I guess, 1% on average, maybe 1.25%, whatever the math might be. How does that compare to what these leases delivered in terms of rent increases on average over the last five years?
You know, on average, they delivered about 1.5% annualized when you average it annually.
Sorry, that's the new term?
Sam, the old term, Ana, was what I'm saying.
Yeah.
The portfolio was set up that there were various steps, and on average, the portfolio as a whole delivers 1.5%. These renewals, as you pointed out, were you know, on the
Yeah, they were about 1%-1.25% when you average it over the term that the 7.7 kind of average term.
Sure.
As I sort of said, it just depends which leases are rolling at a given time and what the spread is between that in-place rent and the market rent of the tranche of leases.
Okay. I think I missed your comments earlier, but you said that these rents were a little closer to market versus the average Loblaws lease. Is that what you were saying?
Yes.
For future extensions with Loblaws, you would expect that on average, the increase would be a little bit higher, all else the same.
Yes, I do.
Was there any pay to Loblaws to achieve these extensions?
No.
No.
Nothing.
On the two leases not renewed, is there any color you can share in terms of locations, properties, or alternative plans for them?
Yeah. Both are in Quebec, Sam. Vacant stores that have great redevelopment potential. One's on the island on the northwest, and the other one's just across in Laval, across the A-19 bridge. So.
Are there any plans sort of underway at the moment?
We're actually working with Loblaws because you know, they've been thinking about reopening the stores or you know, maybe in a different format. We hope to share plans shortly. We do expect to have a food store component and then either residential or sell the density.
Oh, great. Great. Just switching over to the industrial developments, it looks like the yields were pretty much intact from what was announced last quarter. Of course, the addition of the Loblaws ground lease at 6.5%-7% was great to see. Have you know, recast your pro formas with updated costs and rents and everything? Just wondering how you think about yields on development of industrial going forward.
The pro formas had good contingencies in them. We've obviously recast the cost, and we're still within the original numbers disclosed. You know, the rents, Sam, we do believe are probably conservative just given what's going on in the market. We haven't leased them, so we haven't updated our pro forma accordingly. You know, how we think about it, like we have a phenomenal industrial development land bank at very low land cost, and we can be extremely competitive. The bulk of our development is in the GTA. You know, rents keep pushing up. You know, recently we heard of about 1 million sq ft that was done at a rent starting at about CAD 90, a new development.
We're very, very bullish on our land holdings and, as soon as we have news to share, we will share it with you.
Okay, great. Last question from me, just on the lease surrender fees of around CAD 1.9 million. Was there any particular property or tenant that drove the bulk of that?
Yeah, it was two locations with National Sports where they had closed the locations and we backfilled actually one space completely and 70% of the other one and negotiated a lease surrender with Canadian Tire for the locations.
Oh, fantastic. All right. That's it for me. Thank you very much.
Thanks, Sam.
Your next question comes from the line of Jenny Ma from BMO Capital Markets. Your line is open.
Thank you. Good morning. Just going back to the Loblaws lease renewal, I want to clarify the numbers that you gave. The 1616-1698, that is the 1698 is the average of the renewals over the expiring rent. Is that correct?
Yeah. It's a flat renewal, so it goes from 16.16 average to the 16.98 average over the 2.9 million sq ft.
Is CAD 16.98 the day one on the new lease or is that gonna step up over time?
Yes.
over the five years?
Yes. That's the day one.
The day one.
How we get that 5%. Yeah.
Okay. There's no more rent steps for the duration of the five years?
Correct.
I'm just wondering, considering the inflation that we're seeing, and maybe the Loblaws leases have different terms, but are you starting to see any inflationary pressure on the annual rent bumps you might be seeing, whether it be from third parties or from Loblawss specifically?
Jenny, just maybe we'll step back. The way the leases with Loblaws work is they are negotiated at market, but there's a ceiling and a floor.
Okay.
You know, in this inflationary environment, it's obviously very fluid, and we do expect it to have a positive impact on future leasing, given we do expect. Obviously replacement cost is increasing significantly, and therefore the economic rents of the locations are increasing, and therefore rent should increase.
Okay, it wasn't a factor for this negotiation. It was just a matter of timing?
This, we actually started speaking to Loblaws, you know, a couple of months ago on this. It was actually just papered up prior at the end of the quarter. No, it wasn't a real factor in this negotiation.
Okay. When I look at the 2023 lease rolls, it looks like the Loblaws component is 3.8 million sq ft. I'm just wondering if you could provide some color on the seven hundred thousand remaining that wasn't part of the IPO portfolio. Is that something that you and Loblaws will be addressing later in the year or throughout 2023?
Actually, that's the Francis Hughes industrial building that I spoke of that has been leased to Amazon.
Oh, okay.
Yeah.
Okay.
Which we released it.
Okay. Perfect. I wanted to move forward to the IFRS valuation. Mario, I know you spoke about some of the factors driving the changes in the retail portfolio, and it looks like it was the discount rate that was moved. Quarter-over-quarter, the overall capitalization rate didn't actually move. I wonder if you could speak to, from the appraisal side, or the internal valuation side, what would it take for that number to be moving versus the discount rate?
Hey, good morning, Jenny. Actually, Jenny, that was a typo. We actually just amended our MD&A and re-posted it on our SEDAR and our website. It actually, the overall cap rate for retail went up by 38 basis points. That's just a function of the discount rate and the terminal cap rate. It did have some movement, and I think that translated into about a 25 basis point increase in overall cap rate for the portfolio.
Oh, okay. Gotcha. That makes a lot more sense than.
Yeah, it does. It does.
Okay, perfect. That's all for me. Thank you.
Your next question comes from the line of Tal Woolley from National Bank Financial. Your line is open.
Hi. Good morning, everybody.
Morning.
Just wanna stick on the fair value question. Can you talk a bit about what are some of the toughest parts for you guys to estimate right now, when you're trying to establish fair values, and why did you feel it was necessary to add the cautionary language about the second half of the year?
Well, tell you what. I can tell you maybe our thought process, and Rael can share what the toughest part is, 'cause he not only has to value the effect of the deployed capital. In our part, like we do what we do every quarter, and in this quarter we saw that, you know, almost every buyer has a higher cost of capital, which means that the returns on portfolios will be less, so they have to factor in what their return expectations are. We also thought there's a riskier environment right now, so people would expect a higher return. The appraisals weren't very helpful. They're all backward-looking.
There were very few transactions, but we did get broker sentiment, and it was consistent across the board that every asset would have a 50-100 basis point potential impact. Nothing tangible, but we saw the sentiment, and we talked to a few others in the industry who shared that sentiment. We just did a general blanket cap rate expansion and so. There's no the number. It can be challenged. The direction and the sentiment is what's reflected in our financials. Yeah, I think, Tal, just on the second half of the year, no one knows. We'll have to wait and see. It's more of a cautionary, you know, outlook.
I think the toughest part was, you know, all indicators in the market are pointing that valuations are trending down. As Mario said, there'd been no trades. We debated, is now the right time or do you hang your hats on the fact that there'd been no trades? We just felt that it was prudent to start reflecting that we are seeing a slowdown in volume of transactions. We're seeing a bigger bid-ask spreads between buyers and sellers, and we just felt it was prudent to do it now versus hang your hats on waiting because there are no trades.
Got it. You know, you guys did the CAD 500 million debenture offering. I'm assuming part of the rationale for choosing to take that money at that time was to maybe keep your credit lines fully available. If the market does weaken here, do you guys have a shopping list of things that you're the type of assets you're looking for, and can you talk a little bit about that?
Look, the first thing is we always wanna make sure that our entity is exceptionally strong and we have a fortress balance sheet. You know, if things do dislocate, we are in a position of strength, and we would look to buy in all of our core asset classes of retail, industrial, and residential.
Okay. I guess just lastly, you know, given that you have, as you put it, a fortress balance sheet, you know, and you have a, you know, an active and arguably quite enticing industrial development program ahead of you, and that's a, you know, industrial development's much faster than a lot of other types, you know, like residential and things like that. Would you consider maybe stepping up the speed or pace at which you choose to pursue development of the industrial portfolio?
Yeah, we're always looking to say how can we do it, you know, as quick as possible on a risk-adjusted basis. You know, we will do buildings on spec, but we'll never do too many on spec that you know, puts pressure on the entity. We have a phenomenal land cost basis and are very, very optimistic about the prospects in that asset class.
Is it fair to say that, like, with the supply chain challenges there are right now, it's easier to do industrial development than other types, or is it still a bit challenging across all asset classes?
Just given the complexity of the building, it is easier from that point of view. Look, I don't know, Tal, if you're looking for more.
Okay. Just lastly, in your retail portfolio, do you have an estimate of how many of the sites are anchored by discount banners versus market banners?
I don't have that information, sorry.
Okay.
Offhand I don't know.
Okay.
We can get it for you.
Okay, perfect. Thank you.
Again, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from the line of Pammi Bir from RBC Capital Markets. Your line is open.
Thanks. Good morning. Just coming back to the fair value markdown in retail, it sounds like again it was more of a blanket reduction, but were any regions maybe more impacted than others, primary versus secondary markets or even maybe open-air centers versus the freestanding grocery stores?
No, nothing that significant, Pammi. You know, really just based on broker sentiment.
Maybe they made a comment that maybe the larger assets might be less liquid, so a slight difference there. Otherwise, no, it's more of a blanket view that that more of a higher cost of capital, greater risk, return expectations, really a small drawback. Okay. I did wanna clarify one of your earlier questions on the renewals with Loblaws. Again, it was a 5% bump in year one to CAD 16.98. To clarify, there are no steps over the, over the, I guess, the next 5 years?
No. Well, the second tranche has another step, but. There's 23 of the 42 were extended for 10 years, so there's a subsequent bump on those leases.
Right.
That is 7.8% higher. Did I answer your question?
Right.
Yes.
Yes. No, that helps. Yeah. Then just lastly, you know, if I look back to some of the commentary from last quarter in terms of the organic growth outlook, you know, I think you've kind of guided something in that 1.5%-2% range for this year. But given, I guess, the strength that you've had so far through the first half, plus I think you maybe talked about some downtime from a vacancy standpoint in industrial, which it looks like it's been addressed. So when you put all that together, you know, has your outlook sort of for the balance of this year changed or the overall changed for the property NOI, kind of something north of 2% on the back of some of the strength in leasing? Yeah. Hey, Pammi, you're right. You're right.
The two big things was, yeah, a lot of that industrial downtime hasn't materialized. We may have a little bit in Q3, but that was big. When you look at the rents we're getting on the industrial rollover, you know, that's been higher than we expected. The retail's it's been resilient and, you know, rents are strong. I think that's the byproduct of maybe this inflationary environment coming off of COVID. We are performing well, and I think given where we are, we're at 3.7%, I think, for the six months. We don't expect to maintain that, but we do see ourselves being high 2s, low 3s for the year. Yeah.
Okay. Got it. Last one, I guess for me. Just again, given the concerns over, you know, a slower economy and I guess layering on the fact that you actually expect organic growth to hold up pretty well, are you maybe seeing any early signs of changes in any tenant behavior at all, whether it's on renewals, new leasings, expansions, and I guess more so on the retail side more than anything? Industrial clearly continues to hold up quite well. Curious if there's any cracks that, you know, might be coming to light. No, Pammi, we're really not seeing that. We're seeing really high, you know, tenant retention and we have, you know, very high quality tenants and great locations.
We're not seeing, you know, a lot of headwinds right now.
Thanks very much. I'll turn it back.
There are no further questions at this time. Rael Diamond, I turn the call back over to you for some closing remarks.
Thanks, Rob. To summarize, we are very pleased with our second quarter operating performance. In the face of broader market volatility, we are really uniquely positioned to remain in a position of strength. I say this because we have an exceptionally high quality income producing portfolio that has long-term leases with stable and growing cash flow. We have one of the best development pipelines in Canada that provides us with long-term growth potential. Finally, our strong balance sheet with over CAD 1.4 billion dollars of liquidity provides us with flexibility. Thank you for your interest, your investment in Choice, and for joining us this morning. Have a good weekend.
This concludes today's conference call. You may now disconnect.