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 session.
Thank you. Kim Lee, VP of Investor Relations, you may begin your conference.
Thank you, Tiffany. Good morning, and welcome to the Choice Properties REIT first quarter twenty seventeen 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 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, 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 applied in making these statements can be found in our 2016 annual report and management's discussion and analysis related thereto, together with Choice Properties' annual information form that are all available on our website and on SEDAR. And now I'll turn it over to John.
Thank you, Kim, and good morning, everyone, and thank you for joining our conference call. I'm pleased to report another solid quarter for Choice Properties. During the quarter, we remained on plan with acquisitions to expand our portfolio, the development of new space as we continue to actively manage our portfolio. We started the year on solid footing with Q1 results delivering an increase of 5.2% in FFO per unit, our eleventh consecutive quarter of year over year growth. With continued expectations for sustainable increases in cash flows, our Board of Trustees have approved a 4.2% increase to our annual distribution to $0.74 per unit from $0.71 per unit.
Let me now provide you with the quarter's highlights. During the quarter, we successfully completed the acquisition of two properties totaling approximately 92,000 square feet of gross leasable area in Manitoba from third party vendors. The combined purchase price was approximately $9,800,000 with an accretive weighted capitalization rate of 7.6%. Both of these income producing properties are consistent with our strategy. As at the end of the quarter, we constructed approximately 170,000 square feet of the 337,000 square feet of new GLA we target to complete in 2017.
With approximately 80% of the remaining 167,000 square feet of GLA already pre leased, we're on track to meet our GLA objective with development yields ranging from 7% to 9%. Leasing activity during the first quarter resulted in binding commitments for approximately 92,000 square feet of post leasable area. This includes approximately 35,000 square feet of renewals for which we obtained an average rent increase of 6.3%. Executed this quarter resulted in an average base rent of $15.39 per square foot on a same property basis or 20.52 per square foot, including the higher rent from newly developed GLA. These compared to our portfolio average of $13.23 per square foot.
Overall, we continue to maintain our total portfolio's high occupancy rate at 98.8% compared to 98.7 for Q1 twenty sixteen. 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 eight of our presentation material, where you'll find selected financial results for the first quarter. As of March 3137, Choice Properties portfolio comprised five thirty six properties with a total gross leasable area of 43,700,000 square feet. Under IFRS, our investment properties were valued at approximately $9,200,000,000 based on a weighted average cap rate of 6.1%. For the quarter, rental revenue was $203,400,000 and net operating income was $142,400,000 5.87.5% higher than in Q1 twenty sixteen.
On a same property, same GLA basis, NOI increased to $135,600,000 or by 2.7% from Q1 twenty sixteen. This increase was primarily a result of higher average rents on new ancillary leases and rent steps in Loblaw leases as well as revenue from capital recoveries. Other revenue and lower non recoverable operating expenses also contributed to the increase in NOI. Adjusted general and administrative expenses for the quarter were $4,000,000 compared to $4,800,000 for the comparative period in 2016. Adjusted G and A excludes mark to market of unit based compensation, related party property management fees and internal expenses for leasing.
The ratio of G and A expense to total revenue was 2%, which was 50 basis points lower than last year due to timing of expenses. Given economies of scale with the growth of our portfolio, we expect our annual G and A run rate to approximate 2.75% of total revenue. Funds from operations for the quarter were 108,800,000.0 or $0.02 $64 per diluted unit compared to $102,800,000 or $0.02 $51 per diluted unit in Q1 twenty sixteen. The 5.2% year over year growth in FFO per unit was largely due to higher net property income as well as lower G and A expenses partially offset by increases in interest and other financing charges. With respect to cash flows, our adjusted cash flow from operations, ACFO, as defined by the recently issued RealPak white paper was $90,800,000 compared to $78,400,000 last year, with total distributions declared of $72,900,000 for Q1, our payout ratio for the quarter was 80.3%.
This compares to 87.3% for Q1 twenty sixteen. With increasing cash flows, as John mentioned earlier, we announced a 4.2 increase in our annual distribution to $0.74 per unit, which will be effective for our May distribution payable on June 1537. While ACFO can vary across quarters due to timing of operational cash flows, we expect our annual ACFO payout ratio to range between 8590%. Our debt service coverage ratio of 3.6 times remains unchanged and our weighted average term to maturity is five point three years. We currently have approximately $260,000,000 of available liquidity.
And with that, let me now turn it back to John to provide closing remarks.
Thanks, Bart. Q1 was another solid quarter for us and a clear indication of Choice Properties capacity to consistently deliver operational and financial results. I look forward to continue to lead the team in maintaining our focus on execution and delivering results as we continue to broaden our growth opportunities and expand our development program to include mixed use development projects. I want to thank the Choice Properties team for their efforts and to congratulate them on another successful quarter. And now Tiffany, we would be pleased to take questions.
Your first question comes from the line of Mike Markidis with Desjardins. Your line is open.
Thank you and good morning everybody. A couple of items here. Bart, just on the distribution, did you say a CFO of 85% to 90% or 80% to 90%?
I said 85% to 90%.
85% to 90%. Okay. And now you guys have done, I think it's three or implemented three distribution increases over a period of eighteen months. Have you given any thought, I would suspect you review the distribution quarterly, as to what the setting a pattern of when you might actually announce distribution increases going forward might be?
Well, we have, but as you say, we do review it quarterly. And so as based on what our results are over that period of time, we'll determine whether we increase it earlier than expected or but our goal really is to increase the distribution annually, but it could be more frequent if performance justifies it.
Okay. Got you.
Just with respect to the gas bars and the $35,000,000 it looks like chattels that have been now put as held for sale and being sold back to Loblaw. Can you just give us a sense of how that's going to impact cash flow? Like will there be a yield associated with that disposition? And then maybe secondarily, how will the sale as conceived impact your leases going forward?
Well, on the $35,000,000 that will not impact future cash flows. We're actually just selling assets that are on our book back, but there is no change in cash flow from what we have with respect to leases with Loblaw.
Okay. That's clear. Thank you. And then just finally, a higher level question here, but with the mixed use development plans that you guys have been going forward, just curious if you had any thoughts on the recent rent control guideline adjustment in Ontario with respect to the building of new multifamily units?
We're obviously aware of it, Mike. And but our view is that it's not going to have any kind of a material effect on our plans. We're taking a very long term view on the residential opportunities. And so we don't see it affecting our decisions to go forward.
Okay. That's it for me. Thank you. Thanks.
Your next question comes from the line of Michael Smith with RBC Capital Markets. Your line is open.
Thank you and good morning. I wonder if you could just give us an update on Golden Mile and 2280 Dundas West? How are they progressing in terms of entitlement planning?
Yes, certainly, Mike. Golden Mile, as you know, we announced back in January that we filed for an official plan amendment and that is in process right now. So there's really nothing new to advise on that. It's in process. We are hopeful that we start construction on the new Loblaw store, which is call it Phase one of the site in 2018.
So that timeline hasn't changed. In terms of Dundas And Bloor, again, we're working behind the scenes, if you will. There's been no public disclosure on that site. We are working behind the scenes on a master plan and we're ready to announce that we obviously will.
Okay. Anything new on the West Block?
West Block, we have completed excavation. We have now finalized pricing for construction and we expect construction to start within the next couple of weeks.
Okay, finally. And just lastly, are you looking at any major like significant transactions, game changing transactions, acquisitions?
Not that I can comment on.
All right. Thank you.
Your next question comes from the line of Sam DeMany with TD Securities. Your line is open.
Thank you and good morning. Bart, just on the comment on the payout ratio on ACFO, is that a 2017 statement or was that a sort of future goal?
It was just a 2017 statement where we expect to end up during the for this year.
Okay. And where would you where would you like to see that go in future years, static or lower?
No, I think we'd like to see a trend down. So but I would think it would be in sort of the lower to mid-80s. So '80 to '85 is where we see it over the long term. But as you know, as you put these distributions in, it will pop above the 85,000,000 which is what's happening here. And then as time goes along, cash flow grows and it will move back down.
And
then just on the revolving facility, it's up close to $500,000,000 Just wondering what your plans are on the financing front, if any, in the near term?
Well, at this point, we continue to access our operating lines. As we said, we still have $250,000,002 $60,000,000 left. And we would expect to come to the market sometime this year, but we continue just to monitor the markets at this point.
Okay. And John, just on the mixed use strategy, which is now sort of been put in the MD and A a little bit more explicitly. How much do you see that forming a part of the asset base over time?
Well, over time, Sam, it will continue to grow. As develop it out, we'll obviously find ourselves in a situation where we can add more residential or add residential and then add more residential as we continue to go forward. At this point, we're not in a position to disclose what the diversification would look like. But suffice to say that our early indications are that it can be it will be quite substantial as it's built out over time, particularly as we look at the sites that we have in both Toronto and Vancouver.
And sorry, I just don't recall offhand. Was the plan on Golden Mile to do all rental or was there any condo?
We haven't determined whether what the combination will be at this point.
But just high level, I mean, are you thinking of It
would be more purpose built rental than condominium. So I can at least tell you that.
That applies to most sites or just gold?
Most sites, yes, most sites. The focus would be more purpose built rental as opposed to condominium. Absolutely. All
right, thanks very much.
Okay.
Your next question comes from the line of Jimmy Shan with GMP Securities. Your line is open.
Thanks. Just one question for me. If the average rent on the overall portfolio is around 13.25%, I was wondering what you would say the market rent would be for that for the portfolio of comparable quality?
Well, you have to assume that that where the rent is now is the rent we're collecting. You'd have to assume that that's market rent. And so we're only kind of three years into it. The rent will move higher, obviously, as we continue to build new space, to renew tenants at higher rents, which we've been doing obviously and we've demonstrated that. And as we've been able to lease up the vacancy that we've had portfolio.
So that number will move higher, but I can't tell you what the market rent is today.
On the ancillary space, I think the rent there is around 14 and change, but you have been doing leases comfortably north of that. Would your answer defer on the ancillary space?
Sorry, would I
Like, I mean, in terms of what you think the market rent would be on the ancillary space versus what's in place rent today?
Yes, Jamie, like what we've been seeing as we've shown in our press releases over the last few years is that we're kind of averaging increases on the releases that are rolling in the neighborhood of 7% to 8%. What we're seeing happening is in sort of some of the in the stronger markets like Ontario and BC that we're getting double digits, but in some of the markets like the Maritimes that will mute that increase. And as a result, if we look at the total portfolio, you're probably looking somewhere in that 7% to 8% increase over current contract.
Okay. Thank you.
Okay.
Your next question comes from the line of Pammi Bir with Scotia Capital. Your line is open.
Thanks. Good morning. Just going back to your comments on the future mixed use developments, it sounds like the focus here continues to grow. So are there other opportunities in the portfolio where you've maybe advanced planning or seeking approvals?
We're working on a couple of sites right now, which we hope to announce this year. One of them is in Ottawa, the other one I can't disclose at this point in time. So the answer to your question is yes, we are working behind the scenes on two more immediate sites and the ones that I described earlier, Gold Mile, Dundas And Bloor, etcetera, etcetera are longer term. So we do see launching ideally this year. If not, it will be early next year, but we do have activity underway.
Once all the Ts are crossed and the Is are dotted, then we'll certainly announce the projects that we're going ahead with and how we're going about them.
And for these two other projects, would they be smaller in scope than Golden Mile or about Smaller in
scope, yes, smaller in scope.
Okay. On Golden Mile, I mean, it's obviously substantial it could be a substantial undertaking. Just what are your thoughts here with respect to perhaps bringing in partners? And how do you look at that across the rest of the opportunities in the portfolio?
So that's something that we're considering. We haven't landed specifically on who or how, but that is something that we're considering. And I think really as we continue to evolve the planning, the positioning, the scheduling, etcetera. And we look at whether it's a combination of purpose built rental, there may be a condo building or may not. We're going to determine whether we bring in a joint venture partner for some, for all.
We haven't landed on that yet, but it's certainly something that we're contemplating.
And at Golden Mile, is there sort of a range of the total possible cost of that site that is it $700,000,000 $1,000,000,000 I'm just curious, it's obviously quite a large 3,000,000 square feet, I think.
Yes. No, we don't have a let's put it this way, Pammi, we don't have a number that we can talk about yet. We're still working through the cost side of it.
Okay. And then just on the, I guess, the initial phase for the relocation of the Loblaw store, is any of these costs at all reflected in the development schedule in the MD and A?
Not for 2017, no. Or I mean I mean, there's some predevelopment dollars in there, but they're not material.
It. And then just lastly, just looking at the outlook for the year in your comments or regarding acquisitions, Can provide some context around the potential volume of deals from or vend ins from Loblaw and whether you're seeing additional third party opportunities out there?
Well, first of all, the lendings from Loblaws, yes, we are looking to do further acquisitions from Loblaws this year in the range of 150,000,000 to $200,000,000 depending what is offered to us. We are also seeing third party acquisition opportunities. We just completed two, which were our first acquisitions from a third party vendor and we're seeing more. We certainly look at these opportunities with strategic view in terms of is there value add opportunities, are they in markets that make sense for us. And but we are seeing some opportunities and it is a focus for us as well.
Got it. Thanks very much.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thank you. My questions have been answered.
Okay.
There are no further questions in queue at this time. I turn the conference back over to our presenters.
Thank you very much, Tiffany, and thank you all for joining our conference call this morning. We're actually speaking to you from the St. Andrew's Conference Center in Downtown Toronto, where we're going to now move on to our Annual General Meeting of Unit holders and we'd schedule to start at 11AM and you're all welcome to attend and we certainly hope to see you there. Thank you very much.
This concludes today's conference call. You may now disconnect.