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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 2017 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 discussion and analysis related thereto, together with Choice Properties annual information form that are all available on our website and on SEDAR. 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 and the development of new space as we continued 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 11th 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 CAD 0.74 per unit from CAD 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 sq ft of gross leasable area in Manitoba from third-party vendors.
The combined purchase price was approximately CAD 9.8 million 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 have 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 are on track to meet our GLA objective with development yields ranging from 7%-9%. Leasing activity during the first quarter resulted in binding commitments for approximately 92,000 square feet of gross leasable area. This includes approximately 35,000 square feet of renewals, for which we obtained an average rent increase of 6.3%.
Leases executed this quarter resulted in an average base rent of CAD 15.39 per square foot on a same-property basis, or CAD 20.52 per square foot, including the higher rent from newly developed GLA. These compare to our portfolio average of CAD 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 2016. 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 will find selected financial results for the first quarter. As of March 31st, 2017, Choice Properties' portfolio comprised 536 properties with a total gross leasable area of 43.7 million square feet. Under IFRS, our investment properties were valued at approximately CAD 9.2 billion, based on a weighted average cap rate of 6.1%. For the quarter, rental revenue was CAD 203.4 million, and net operating income was CAD 142.4 million, 5.8% and 7.5% higher than in Q1 2016. On a same property, same GLA basis, NOI increased to CAD 135.6 million or by 2.7% from Q1 2016. 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 CAD 4 million, compared to CAD 4.8 million for the comparative period in 2016. Adjusted G&A excludes mark-to-market of unit-based compensation, related party property management fees, and internal expenses for leasing. The ratio of G&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&A run rate to approximate 2.75% of total revenue. Funds from operations for the quarter were CAD 108.8 million, or CAD 0.264 per diluted unit, compared to CAD 102.8 million, or CAD 0.251 per diluted unit in Q1 2016.
The 5.2% year-over-year growth in FFO per unit was largely due to higher net property income, as well as lower G&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 REALPAC white paper, was CAD 90.8 million, compared to CAD 78.4 million last year. With total distributions declared of CAD 72.9 million for Q1, our payout ratio for the quarter was 80.3%. This compares to 87.3% for Q1 2016. With increasing cash flows, as John mentioned earlier, we announced a 4.2% increase in our annual distribution to CAD 0.74 per unit, which will be effective for our May distribution, payable on June 15th, 2017. While ACFO can vary across quarters due to timing of operational cash flows, we expect our annual ACFO payout ratio to range between 85% and 90%.
Our debt service coverage ratio of 3.6 times remains unchanged, and our weighted average term to maturity is 5.3 years. We currently have approximately CAD 260 million of available liquidity. 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. Now, Tiffany, we would be pleased to take questions.
At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Mike Markidis with Desjardins. Your line is open.
Thank you, good morning, everybody. Couple items here. Bart, just on the distribution, did you say ACFO of 85%-90% or 80%-90%?
I said 85%-90%.
85%-90%, okay. Now you guys have done, I think it's three, or implemented three distribution increases over a period of 18 months. Have you given any thought, I would suspect you review the distribution quarterly, but as to what the setting a pattern of when you might actually announce the distribution increases going forward might be?
Well, we have, but as you say, we do review it quarterly, and so based on what our results are over that period of time, we'll determine whether we increase it earlier than expected. Our goal really is to increase the distribution annually, but it could be more frequent if performance justifies it.
Okay, gotcha. Just with respect to the gas bars and the CAD 35 million of 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? Will there be a yield associated with that disposition? Then maybe secondarily, how will the sale as conceived impact your leases going forward?
Well, on the CAD 35 million, that will not impact future cash flows. We're actually just selling assets that are on our book back, there is no change in cash flow from what we have with respect to leases with Loblaw.
Okay. That's clear. Thank you. Then just finally, a higher-level question here, 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, 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, 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, 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 and planning?
Yeah, certainly, Mike. Golden Mile, as you know, we announced back in January that we filed for an official plan amendment. That is in process right now. 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. 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. When we're ready to announce it, we obviously will.
Okay. Anything new on 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. Just lastly, are you looking at any major, significant transactions, game-changing transactions, acquisitions?
Not that I can comment on.
Okay. All right. Thank you.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thank you, 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 for this year.
Okay. Where would you like to see that go in future years? Static or lower?
No, I think, we'd like to see it trend down. I would think it would be in sort of the lower to mid 80s. 80-85 is where we see it over the long term.
Okay.
As you know, as you put these distributions in, it'll pop above the 85, which is what's happening here. As time goes along, our cash flow grows, and it'll move back down.
Just on the revolving facility, it's up close to CAD 500 million. 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 CAD 250 million, CAD 260 million left. We would expect to come to the market sometime this year. We continue just to monitor the markets at this point.
Okay. John, just on the mixed-use strategy, which has now sort of been put in the MD&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'll continue to grow. As we 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. Suffice to say that our early indications are that 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.
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 what the combination will be at this point.
Okay. Just high level, are you thinking of emphasizing more?
It would be more purpose-built rental than condominium.
Generally.
I can at least tell you that.
That applies to most sites or just Golden?
Most sites. Yes. Most sites. Yeah.
Okay.
Yeah. No, 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 from me. If the average rent on the overall portfolio is around CAD 13 and a quarter, I was wondering what you would say the market rent would be for the portfolio of comparable quality.
Well, you have to assume that where the rent is now is the rent we're collecting. You'd have to assume that that's market rent. 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. As we've been able to lease up the vacancy that we've had in the portfolio. That number will move higher, but I can't tell you what the market rent is today.
Well, let's say the ancillary space, I think the rent there is around CAD 14 and change. You have been doing leases comfortably north of that. Would your answer defer on the ancillary space?
Sorry.
I mean, in terms of what you think the market rent would be on the ancillary space versus what's the in-place rent today.
Yeah, Jimmy, 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 leases that are rolling in the neighborhood of 7%-8%.
What we're seeing happening is in sort of some of 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. As a result, if we look at the total portfolio, you're probably looking somewhere in that 7%-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. Are there other opportunities in the portfolio where you've maybe advanced planning or are 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. 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, Golden Mile, Dundas and Bloor, et cetera, are longer term. We do see launching, ideally this year. If not, it'll be early next year. We do have activity underway. Once all the T's are crossed and the I's are dotted, then we'll certainly announce the projects that we're going ahead with and how we're going about them.
For these two other projects, would they be smaller in scope than Golden Mile or about the same?
Smaller in scope, yes. Smaller in scope.
Okay. On Golden Mile, it's obviously, 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?
That's something that we're considering. We haven't landed specifically on who or how, but that is something that we're considering. I think really, as we continue to evolve the planning, the positioning, the scheduling, et cetera, 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.
At Golden Mile, is there sort of a range of the total possible cost of that site that, is it CAD 700 million, CAD 1 billion? I'm just curious. It's obviously quite a large, 3 million sq ft, I think.
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.
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&A?
Not for 2017, no.
Or, I mean-
There's some pre-development dollars in there, but they're not material.
Just lastly, just looking at the outlook for the year, in your comments regarding acquisitions, can you provide some context around the potential volume of deals from, or vend-in from Loblaw and whether you're seeing additional third-party opportunities out there?
Well, first of all, the vend-in from Loblaw is yes, we are looking to do further acquisitions from Loblaw this year in the range of CAD 150 million-CAD 200 million, depending on 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 a strategic view in terms of, is there value-add opportunities? Are they in markets that make sense for us? 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. 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 unitholders. Which schedule will start at 11:00 A.M., 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.