Good morning, welcome to the Choice Properties Real Estate Investment Trust second quarter 2023 earnings conference call. Today's call is being recorded. After the speaker's remarks, there will be a question and answer session. I'd now like to hand the conference over to your first speaker today, Erin Johnston, Vice President, Finance. Please go ahead.
Thank you. Good morning, welcome to the Choice Properties Q2 2023 conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer; Mario Barrafato, Chief Financial Officer; and Ana Radic, Chief Operating Officer. Rael will start the call today by providing a brief recap of our second quarter performance and provide an update on our transaction and development activity in the quarter. Ana will discuss 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 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 that include 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 exceptions 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 actual results to differ materially from the conclusions in those 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 these making these statements, can be found in the recently filed Q2 2023 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. Good morning, everyone, and thank you for joining us today. We are pleased with our second quarter results, delivering another solid quarter. We delivered strong same asset cash NOI growth of 4.35% and FFO growth of 5%. This was driven by strong leasing and active asset management. While inflation remains elevated and investors continue to be cautious, fundamentals across our three strategic asset classes remain strong. Our financial and operating performance in the quarter demonstrate the continued demand for our necessity-based retail centers, well-located generic industrial assets, and transit-orientated residential buildings. Robust tenant demand for space within our properties continues to drive momentum in our leasing pipelines and in our ability to drive rent growth, which Ana will speak about in a moment. One trend that we continue to see since our last quarter update is in regard to the transactions market.
The market has been impacted by uncertainty in the financing markets, and we continue to see a slowdown in transactions with wide bid-ask spreads persisting. Despite this, our team continues to be hard at work, looking for opportunities to execute on our capital recycling program, with a focus on ensuring we maintain our high-quality portfolio. In the second quarter, we completed CAD 103.1 million of transactions, including CAD 101.2 million of dispositions. Our dispositions were focused on continuing to exit office, taking advantage of strong market fundamentals in assets we considered on call and improving the quality of our retail portfolio. We completed the sale of one of our final two non-strategic office assets in the quarter, disposing of Metropolitan Place in Dartmouth, Nova Scotia, for proceeds of CAD 13.4 million. This disposition completes Choice's office assets in Atlantic Canada.
We are actively marketing our remaining office asset in Calgary. On the theme of selling non-core assets, during the quarter, we leveraged the strong market for data centers and closed on the sale of a data center adjacent to the Loblaw head office in Brampton for net proceeds of CAD 74.2 million. Lastly, we completed the disposition of a single-tenant retail site in Cornwall, Ontario, for proceeds of CAD 10 million. The site, which had been dark since 2019 and was tenanted by a large box home improvement retailer on a long-term lease. Our team was able to facilitate the sale of the asset to a buyer while capitalizing on the remaining value of the lease by negotiating receiving a lease termination payment of CAD 7.4 million from the existing tenants.
While transactions have slowed, our developments are progressing very well, and the team continues to focus on delivering on our development pipeline. In addition to our ongoing retail intensification program, we are on track to complete approximately 1.6 million sq ft of industrial space and two residential projects this year. During the quarter, we commenced servicing and site work at Choice Caledon Business Park. Servicing for the entire site is expected to take approximately 18 months and cost approximately CAD 165 million a share. Once complete, Choice will have a fully graded service site at a land cost of approximately CAD 1.1 million per acre. We're also pleased to report that for the first phase of this development, we've entered into an approximately 90-acre ground lease with Loblaw, with rent commencement in the first quarter of 2025.
The lease has an initial term of 25 years, with 2% annual rent steps. The total cost of the first phase with Loblaw, including land, servicing, and phase I specific costs, expected to be approximately CAD 125 million at share and yield between 7.25% and 7.75%. For future phases of the site, our leasing team continues to see strong interest and is working through proposals with potential tenants. Subsequent to the quarter, our team also completed leasing at our development in South Surrey, BC, leasing the entire 353,000 sq ft for initial term of 10 years. With the completion of this lease, our revised yield is now expected to be approximately 10.75%, with a total cost of approximately CAD 72 million.
The advancement of each of these projects demonstrate our team's ability to create value and add high-quality assets to our portfolio. We continue to focus in the short term on the opportunities available to us in our retail and industrial development pipelines, which continue to deliver strong returns despite heightened interest rates. With that, I'll hand it over to Ana to provide more color on our operational results. Ana?
Thank you, Rael. Good morning, everyone. Our portfolio continues to perform well. Leasing activity is strong. Our tenants continue to demonstrate their resilience. Occupancy remains near full at 97.4%. We are seeing strong rental rate growth across our three strategic asset classes. During the quarter, we had approximately 1.1 million sq ft of lease expiries. We renewed 743,000 sq ft at an average spread of 21.1%. We completed 116,000 sq ft of new leasing that commenced in the quarter. We experienced negative absorption of 212,000 sq ft. Over half of this was the result of an industrial expiry in our Ontario portfolio, where we chose not to renew the tenant.
We leased the space to the neighboring tenant at an average rent that was 170% above the previous expiring rent. The expansion commences in August of this year, resulting in only 2 months of downtime. The balance of the negative absorption was primarily related to three retail vacancies, which I will speak to shortly. In our approximately 44 million sq ft necessity-based retail portfolio, occupancy decreased slightly to 97.7%, primarily related to three retail vacancies. The largest being a 33,000 sq ft location in Waterloo, Ontario, where we negotiated an early lease surrender and lease surrender payment from the in-place tenant. The full space has been re-leased to No Frills, with rent commencing in the fourth quarter of this year.
The remaining decline was due to the closure of one Nordstrom location in Edmonton and one Bed Bath & Beyond in Dartmouth, Nova Scotia. Both spaces total 39,000 sq ft at our share. We are very close to finalizing a deal to backfill the Bed Bath & Beyond location and continue to work on backfilling the 18,000 sq ft space vacated by Nordstrom Rack. We had 306,000 sq ft of retail space naturally expire in the quarter, and we completed 264,000 sq ft of renewals, resulting in tenant retention of 86%. The renewals were completed at rents 19.6% above expiry. Included in our renewals was a 28,000 sq ft space where the expiring rent was reduced during COVID and then renewed at current market rents, which resulted in an increase of 100%.
Excluding this deal, spreads were still very strong at 13% above expiry, making this the highest quarterly retail leasing spread we have recorded. Demand for retail space remains high. While tenants are dealing with rising costs and labor challenges, they are not suspending their plans to grow or relocate stores. We continue to see strong demand for our retail centers, as evidenced by our sustained high occupancy, despite recent bankruptcies that have impacted the entire retail market. As I've mentioned on past calls, there is very little new supply being built. This is driving tenants to existing centers and adding upward pressure on market rent. The quality of our tenants and our focus on necessity-based retailers continues to provide resiliency in our portfolio. Many retail tenants continue to move ahead with their plans to grow store counts and relocate to superior sites.
We are working to accommodate several such retailers by relocating and right-sizing existing tenants at our centers, enabling us to increase rents, drive asset value, as well as enhance the tenant mix at our sites. While overall industrial leasing activity has moderated slightly in the second quarter of 2023, industrial demand remains strong. The national vacancy rate at 1.9% remains well below the historical 15-year average of 4%. Net rental rates continue to rise. Occupancy in our industrial portfolio is 97.3%. While remaining close to full occupancy, this quarter marks a slight decline of 10 basis points, primarily due to the temporary two-month vacancy of 122,000 sq ft in Ontario, which I spoke of earlier. The remaining 56,000 sq ft was primarily due to rollover in Alberta.
We have released over 80% of the total space vacated this quarter to new tenants, with rent commencing this year. We had 661,000 sq ft of industrial leases expire in the quarter, of which we renewed 474,000 sq ft at rents 22.3% above expiry. In Ontario, 33,000 sq ft of expiries were renewed at rents 110% above the expiring rent. We have significant embedded rental rate growth in our industrial portfolio, and with our current national average in-place industrial rent at $8.57 per sq ft, and our average in-place rent in Ontario at $8.18 per sq ft, we expect to deliver strong rental rate growth across our industrial portfolio.
The industrial asset class continues to experience elevated demand, and we continue to transact at rents well above current in-place rents. We believe that well-located, new generation distribution space will continue on an upward trajectory, though not at the same pace we have seen over the past few years, and rents in older generation buildings will likely moderate sooner. There are 49 Loblaw leases expiring in 2024, consisting of 48 retail locations and one industrial site. Subsequent to the quarter, we renewed 46 of these leases, totaling 2.77 million sq ft at a weighted average extension term of 4.9 years. In addition, Loblaw has conditionally agreed to renew two additional retail leases totaling 70,000 sq ft for five years at a 10% increase, and we expect these renewals to be finalized in the fourth quarter.
The total base rent across all 48 locations is increasing by 7.5% over the total expiring rent. One small grocery location of 18,000 sq ft has been closed for five years and was not renewed. We are very pleased with the outcome of the Loblaw renewals, the ongoing stability their anchor tenancy brings with it, and the quality of the necessity-based tenants we are able to attract to our grocery-anchored portfolio. I'll now pass the call over to Mario to discuss our financial performance.
Thank you, Ana, good morning, everyone. We are pleased with our financial performance in the second quarter, as our business continues to be well-positioned to deliver on our financial goals. Our reported funds from operations for the second quarter was CAD 183.6 million, or CAD 0.254 per unit. Included in FFO for the quarter was lease surrender income of CAD 8.4 million. There were no other significant or unusual one-time items. On a per unit diluted basis, our second quarter FFO of CAD 0.254 per unit reflects an increase of approximately 5% from the second quarter of 2022. Strong same asset NOI, lease surrender income, and higher interest income from mezzanine loans was offset by higher borrowing costs and higher G&A costs, driven by inflation and a competitive talent market.
Occupancy remained strong at 97.4% and contributed to our strong same asset results. Same asset cash NOI increased by CAD 9.6 million, or 4.3% compared to 2Q 2022. By asset class, retail same asset cash NOI increased by CAD 6.1 million, or 3.4%. The increase was driven by strong leasing, higher capital recoveries, and contractual rent steps. For the remainder of 2023, we expect retail same asset cash NOI to trend back to our target range of 1.5%-2% as we start to lap the impact of higher occupancy, rental rates, and interest on capital recoveries in the second half of the year. Industrial increased by approximately CAD 2.4 million, or 6.7%.
This increase was primarily due to higher rental rates for both renewals and new leases completed, as well as contractual rent steps. Mixed-use, residential, and other increased by approximately CAD 1 million, or 14.6%. This increase was due to improved residential occupancy and other revenues. Turning to our balance sheet, our IFRS NAV increased 1.1% to CAD 13.55 per unit, an increase of CAD 106 million over the last quarter. NAV growth was driven by CAD 88 million of fair value gains in our investment properties, partially offset by the fair value adjustment on our investment in Allied Properties of CAD 31 million, where we're required under IFRS to mark to market this investment to its trading price as of June thirtieth. We continue to take a transparent and conservative approach to the valuations of our investment properties.
In the second quarter of last year, a rising interest rate environment, driven by inflationary concerns, led us to adjust our retail cap rates, reflecting our belief that a higher cost of capital would put downward pressure on property valuations. We are now seeing this reflected in external appraisals and the challenging transaction markets, confirming our approach to hold retail cap rates since our revaluation last year. We have recorded fair value gains in each asset class every quarter since then, driven solely by cash flow growth and major development milestones. Current quarter fair value gains on investment properties were mostly property specific and primarily driven by industrial leasing, retail cash flow growth, and transaction activity. We had minimal financial activity in the quarter. We ended the quarter in a solid financial position with strong debt metrics and ample liquidity.
Our debt-to-EBITDA ratio was 7.4x . We have over CAD 1.4 billion available on our credit facility. This is further supported by approximately CAD 12.5 billion of unencumbered properties. Subsequent to the quarter end, we repaid the CAD 200 million Series B senior unsecured debentures upon maturity on July 5th, 2023, using proceeds drawn on our credit facility. This debenture had an interest rate of 4.9%. With strong demand from lenders translating into relatively low credit spreads, we're well positioned to fund our remaining capital requirements in 2023 at a reasonable cost. We expect to fund with our remaining capital requirements through the unsecured market. As for us, there's no longer a meaningful spread between unsecured pricing and what we're seeing in the secured market. Overall, this was once again a very solid quarter.
Our results reflect the stability and resiliency of our retail portfolio and the growth potential from strong industrial fundamentals. With that, we remain confident in our ability to deliver on our 2023 outlook. Now, Rael, Ana, Erin, and I would be glad to answer your questions.
If you'd like to ask a question, please press star, then one on your telephone keypad. Our first question is from Himanshu Gupta with Scotiabank. Your line is open.
Thank you, good morning, everyone. Just on the Loblaw renewal done, I think you mentioned 7.5% rental spread. Just to be clear, does that mean 1.5% on annualized basis?
It's actually a 7.5% from 2024 from the expiring rent, and it's flat for five years, so we get the full 7.5% in year one.
Okay. Okay, thanks. Just to clarify, Ana, I mean, is there like a negotiation involved when you do the renewal? I think the, based on the formula, you can go up to 10% increase on the renewal here.
That's correct. The renewal provision is standard in all of the Loblaw leases, and the renewal is to be at market rent. However, it can't exceed 110% of the expiring rent, but nor can it be less than the expiring rent. There's a floor of zero and a ceiling of a 10% increase.
Okay. Okay, fair enough. Then, you know, I think there was one lease remaining, which was not renewed. Any color on that?
It's a small store in a very small market in Ontario. Our transaction team is looking to dispose of it. It has a very immaterial.
Got it. Okay, thank you. Maybe, you know, just turning to your same property NOI guidance, you know, first half of the year is very strong, you know, mid 4%, I think your guidance was unchanged at 2%-3%. Are you expecting more retail vacancy in the second half of the year in your guidance? Are you baking in some, I mean, vacancy uptick here?
Himanshu, actually, the NOI will remain strong. It's just that the comparator base now is higher. Therefore, the growth number is lower. It's just math. It's still very, very strong, and it'll be at the high end of our range.
Okay, awesome. Thank you. My last question is on the Ontario industrial portfolio. I think you mentioned in place rents are like low CAD 8 range. What do you think is the mark to market on this industrial portfolio in Ontario? What rates are you signing leases in GTA these days? Thank you.
Oh, yeah. You know, the market rents in Ontario, you know, range, you know, due to size and, you know, location, but they're generally, we're doing deals in between CAD 15 and CAD 18 a sq ft.
Okay, thank you, and I'll turn it back.
The next question is from Mark Rothschild with Canaccord. Your line is open.
Thanks. Good morning. Mario, maybe just following up on your answer there as far as the same property NOI growth. Are you saying that the growth should remain in this 4% range in the second half of the year, or that the NOI will remain consistent and still grow, but because it was stronger in the second half of 2022, the pace of growth will get more like 1%-2% in the second half to average out to the guidance for the year?
Yeah, it's the latter, Mark, exactly. There won't be a big vacancy, and there's no, there's nothing that's going to impact the occupancy or the number of the NOI. It's just the comparator, the comparator level is higher.
Okay, great. Thanks. In regards to the industrial fundamentals, there was a comment made that, maybe the growth is moderating. Are you expecting to see rents continue to rise in your markets for the industrial properties you own? Or are you seeing that rent growth maybe has just, you know, peaked based on what tenants can afford to pay?
No, I think what we were referring to was more the fact that they've risen by 20%, 30%, you know, 60% in some markets. We are still seeing, you know, rental rate growth, but, you know, not at the historical levels. The tenants are, you know, paying the market rents, you know, despite the increase from their current in-place rent, which, you know, as we mentioned, was sort of CAD 8, you know, under CAD 9. CAD 8.58 a square foot.
Okay, thanks. Maybe just one last question, just on the data center lease, the NSS sale, rather. Just provide some color on what how that worked with the payment to the tenant to get out of the lease. Was that a requirement of the purchaser?
Hey, Mark, it's Rael. It wasn't a requirement. We actually took it to market, knowing Loblaw was going to downsize their space, and we worked out a formula with Loblaw that we shared in the upside, and the payment to them was based on that formula. like, it just speaks to the power of the relationship that we have with Loblaw that, you know, we can do things that others cannot do with the tenant. you know, just the transparency in the business. It allowed us to essentially achieve our goals, unlocking value at a significant, you know, capturing value that wasn't really captured on a balance sheet, and allowed Loblaw to get out of a lease and get a payment.
Okay. Thank you very much.
The next question is from Lorne Kalmar with Desjardins. Your line is open.
Thanks. Good morning, everybody. Maybe turning back to the industrial portfolio, it doesn't look like there's much left to mature in the GTA for the remainder of the year. What do maturities look like for the region in 2024?
Yeah. In 2024, our three industrial, about 40% of it actually is in Ontario, about 43%. Yes, we have-
Okay.
About 0.7 million sq ft rolling in 2024.
Okay. Then maybe just following on that, would you expect, given the mark-to-market there, you know, a jump in same property NOI as those leases are renewed?
Absolutely. The average in-place rent in 2024 on those leases is actually sub CAD 8, so we do expect strong growth on those renewals.
Okay, great. It looked like you guys started doing pre-leasing at the Element out in Ottawa. Just wondering how that's going so far?
It's going well. We're actually about 25%, sort of pre-leased, including, you know, just validating, sort of tenant applications. There's been strong demand.
How have rents been relative to pro forma?
They've been in line with pro forma, probably a little bit higher than we expected.
Okay. Just last one. With the phase I of Caledon getting underway, I know Loblaw going in there, what sort of the thoughts on timing for the balance of the project, the balance of the phases of the project, I should say?
Yeah. It's going to take us, call it 18 months to fully service the site, and during that time we're gonna be, you know, looking for other tenants. It, you know, hopefully we'll have something to report in the next few quarters, but likely you won't have income coming from another tenant until, you know, probably later in 2025, 2026, assuming we can get some disinflation soon. Loblaw's commences in Q1 of 2025, right?
Okay, great. Thank you so much for the color. I will turn it back.
The next question is from Gaurav Mathur with iA Capital Markets. Your line is open.
Thank you, and good morning, everyone. Just on cap rates in the residential and mixed-use segment, could you provide some color on what's driving cap rate compression there since the beginning of the year?
You're referring to our MD&A table, which shows our cap rates coming down. It's because we're selling non-core office at higher cap rates, and.
Right
... the remaining assets are core assets.
Mm-hmm
... so that's what's driving it down.
Okay, okay. Just on the follow-up to that segment, you know, how should we think about future development activity as, you know, construction costs continue to increase?
Yeah, I think construction costs have definitely moderated in that. We're probably 12 months away from any of our sites being truly shovel-ready.
Mm-hmm.
You know, we're gonna make a decision at that time. Right now we're in a truly unique position that we have lots of opportunities available to us in both residential, sorry, in both retail and industrial, and we're really pushing development on the commercial, just given where interest rates are. Hopefully, we'll be in a position to commence the residential, you know, as they're closer to being obviously shovel-ready. We're just not in that position yet.
Okay. Okay, fantastic. Just lastly, switching gears to the balance sheet, is there a targeted leverage range that you're focusing on?
Yeah. Right now, we've been working at a 7.5x debt to EBITDA. We're okay if it goes a bit lower or a bit higher, but we feel at that level, it gives us a lot of flexibility.
Mm-hmm
... to operate and deal with, any timing of development spend.
Okay. Just what moves the needle, you know, higher or lower? If you could just provide a little more color on that.
... it would just be timing of financing, timing of.
Okay. Okay, great. Thank you for the color, everyone. I'll turn it back to the operator.
The next question is from Sam Damiani with TD Cowen. Your line is open.
Thanks, and good morning, everyone. Really just wanted to focus in on the retail leasing. Ana, I wonder if you wouldn't mind giving a little more color on, like, the 20% renewal spread in the quarter, I guess 13% adjusting for the pandemic relief. Like, is that kind of uplift expected to continue in the near term? What sort of tenants are driving that, you know, sudden spike in rent growth?
I think it's definitely, you know, driven by increased demand, Sam. It's, we're just seeing that as we're seeing strong tenant retention and, you know, general optimism from retailers. It's a real mix of tenants, both, like, necessity-based, you know, some banks, fashion as well in our power centers, where the fashion retailers, you know, we're coming off maybe a little bit lower rents, but so that's also a factor in the spread. I would say they're, you know, I don't know if they'll be 13% in coming in the subsequent quarters, but definitely in that sort of higher range for us.
Just on the pandemic relief, like, how much of that is now unwound, or is still left to go, and how long do you think it'll take to fully unwind those relief provisions that were granted?
Actually, I think most are now unwound. We had tenants who were. You know, this was one of the last ones, I think. We had a few fashion tenants that, you know, in the previous quarters, but nothing material remains in terms of kind of COVID-related concessions.
Okay, fantastic. That helps, and I'll turn it back. Thank you.
The next question is from Tal Woolley with National Bank Financial. Your line is open.
Hi, good morning. I just wanted to circle back on, you know, sort of your comments about the development pipeline and how you're focusing a little bit more, you know, near term on advancing commercial projects because of the interest rate environment. I guess how long do you think that sort of view on how to allocate your development capital will persist? What do you sort of need to see in the market to advance more residential stuff?
Yeah, look, I think for us, as I said earlier, we're just in a unique position that we making, you know, a really good spread over where we're developing, you know, the commercial product to where the cap rate is. Use the one in Surrey right now. Like, we developed it to call it, you know, 10 and three-quarter yield, and cap rates in Vancouver, modern, generic industrial would be like, you know, half of that. We're making a lot of money. For us, it's, you know, we're very focused on keeping a strong balance sheet, and we're not going to allow that to, you know, we're not going to allow our leverage to creep up.
If it means deferring the rental to start because we have better opportunities available, on the commercial, we'll keep doing that. On many of our residential sites, as you know, like, you know, it's excess land, and we continue to collect rent from the existing tenants, so it's not like there's much of a carry on the land. But I think the short answer to your question, Tal, is we need to see, we need to believe that our pro forma, a realistic pro forma will deliver us, you know, we essentially create NAV growth. Otherwise, we shouldn't be doing it.
Okay. Then I apologize, I had my phone cut out a little bit while you were talking about the retail piece. I was just curious, is there a specific type of tenant that drove the size of the termination piece this quarter, or was it just a bunch of little ones?
It was really two tenants. Just a general kind of merchandise tenant where they had a few years left on the term, and they were still paying rent. We were able to negotiate a termination that was about CAD 800,000, and then re-lease it to No Frills. The other was as Rael spoke about, like a home improvement tenant, who was dark in also in Ontario, we negotiated a lease termination. They had 13 years left on their term, it was a significant remaining obligation that resulted in a CAD 7.4 million lease surrender fee. We sold the site to another to a user.
Got it. Just lastly, on the Caledon site, that you're sort of down the path. Was there a particular rationale for going with the ground lease structure versus something more traditional? Given that you're sort of seeing, I think a development yield in the mid-sevens with a ground lease, was there potentially more on offer if you'd done the full development, you think?
sorry, I didn't hear the second part of your, sorry, what? Repeat the second part of your question.
Yeah, I was just trying to understand, with the ground lease site, what was the driver for going with that particular method as opposed to a more traditional, like, you know, owning the building, doing all, you know, doing the rest of the development, getting compensated for that? I think you're getting, you know, a pretty great return on a ground lease. I'm just wondering if there was more on offer, if you had done more of the project.
Yeah. Like, firstly, from a macro point of view, we do like land leases. You know, if you think about the most secure form of real estate, are truly a land lease. It's because the tenant invests a lot of improvements in their building, and if they don't renew, you essentially get a free building. You know, Loblaw, in East Gwillimbury, we've done a land lease structure. They're investing a lot of capital, as they've reported, in East Gwillimbury, and we used that same structure on Caledon. It truly, it works for us. It's quick, and it's low risk, and we're getting a really good return, and then it allows Loblaw to control the timing of their capital investments into the building. So that's what drove our decision.
The other thing, just on land leases in general, I'd say we probably one of the few, if not the only REIT who's actually been doing land leases on rental buildings with development partners. I think that just speaks to how we think about it, that we're really focused on long-term. We're trying to generate long-term income, and also we're in a phenomenal shape with our balance sheet. We don't need the cash right away. I think that's why we are so unique in the Canadian REIT landscape.
Okay, that's great. Thanks very much, everyone.
The next question is from Sumayya Syed with CIBC. Your line is open.
Thanks. Good morning. Just, firstly, a follow-up on the renewal of the Loblaw leases. Average term of almost five years, and I believe the renewal last year was closer to almost eight years. Just wondering what would explain the difference in the average terms between last year than this year's renewals?
Yeah. Last year, we renewed, some of the leases, for five and 10 years. Essentially, two options to extend were exercised, and that's why there was a bit of a weighted longer average lease term. That was, you know, we had a desire to, you know, secure some of the larger superstores that were rolling that year in Atlantic Canada, Loblaw was comfortable doing that. That sort of was the reason for our decision to do a longer term. This, and this year, you know, we were happy with the five year extension, and we'll.
Yeah. Yeah, I think, Sumayya, the other thing, as Anna said, is, like, you know, essentially like, essentially 100% of the leases were renewed. The one that was not renewed was, you know, closed for multiple years, and we're waiting out the lease term, and we intend to sell it. You know, from our point of view, it's a great story, and again, it speaks to the power of the relationship with the tenant.
Okay, thanks for that.
Welcome back, Sumayya. It's good to have you on the call.
Thank you. Just looking at the leasing you did on the Surrey Industrial Centre, just wondering about the profile of the tenant there, and also any info you can share on the escalators on that lease?
Oh, it's a high covenant tenant. We can't disclose who they are right now, but they're a national tenant, a national retailer, but they're not Loblaw, so don't worry. The growth, the average, rental rate steps are for 3.95% over the 10 years, so annually.
Okay, thanks. Just lastly, Rael, anything changed on your stance on the Allied units with the first lock-up expiring last month?
No, nothing's changed. Like, you know, we'll sell it when we, need the capital, and that we see that the shares are trading closer to what we perceive as value. Nothing's changed. Right now, our balance sheet's in great shape, and we're very happy that they completed the data center sale because, you know, it puts their balance sheet in really good shape, and, that's it from us.
Okay. Okay. Thank you, guys.
The next question is from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks. Good morning. You know, Loblaw had previously indicated plans to sell some real estate. Are you anticipating any further acquisitions from them this year? Can you maybe just talk about what sort of cap rates you're seeing on transactions that are in the market?
The short answer is yes, we do intend to still continue purchasing from Loblaw. Like what we said at our investor day is that we want to be balanced from a capital recycling point of view, and we've done a very good job so far in, you know, recycling assets at very good value to Choice unit holders. You know, we probably have identified around another CAD 100 million that we will do, you know, towards the end of this year or sometime early next year. Just as far as magnitude. You know, I think we cap rates are probably. It's like, you know, a year ago, we wrote down our retail cap rates, about, you know, so about 40 basis points.
We wrote down values, we wrote, we increased cap rates about 40 basis points. I think what you're starting to see is appraisers are starting to get closer to that number now. I think that's where things are trading. You know, there's definitely been more groups who are very hesitant to buy assets with negative leverage. I.e., where they're paying, you know, more on the interest expense or interest rate than they will or they're earning on the assets. There's definitely been a tone change on that front, whereas previous, you know, or earlier this year, people were willing to do that, but definitely there's been more of a tone change. You know, I would also say that every transaction that's traded has a unique story to it.
Often there was debt in place or, you know, someone really covered with the asset, but there's generally a unique story. You know, there's definitely been a slowdown in volumes.
Got it. Thanks for the color Rael. Maybe just coming back to developments. If you look ahead, I know it's still a ways out for 2025, but I think I only see one project slated for completion. How do you see the pipeline growing over the next, call it, 12-1 8 months for 2025? What could that look like in terms of what you deliver in that year?
Yeah, look, you know, we have a lot of commercial development that can keep us busy for the next five to seven years. Remember, the commercial development is a lot shorter in the time to develop it. For example, in phase I in Caledon, we're going to deliver it in Q1 of 2025. I think as we start getting leasing traction or as we ready to go on a spec development, you'll see more come in. You know, we have several more phases, as I said, in Caledon and in East Gwillimbury, and we are seeing leasing interest, and we expect to keep that going. On the residential side, as we said earlier, we do expect to start, you know, construction as things are shovel ready.
Although you wouldn't see income come, you know, for a few years. You know, it takes three to four years to stabilize the asset, but hopefully you'll start seeing something in the pipeline over the next 12-18 months.
Okay. Just maybe sticking to, your comments on resi. I think, I think you've got Mount Pleasant condo completions, scheduled for, I think, the second half of this year. Should we anticipate the closings on those condos, like starting end of this year or into, more, is that more 2024?
It could be towards the end of this year or in 2024. It's in that area for me, yes.
Okay. Then just lastly, the Strategic Alliance Agreement, I think, was renewed earlier this month. Just curious, were there any changes that were notable relative to the prior agreement or any update there?
No, no changes. Automatic renewal.
Okay. Thanks very much. I'll turn it back.
That's star one if you'd like to ask a question. The next question is from Himanshu Gupta with Scotiabank. Your line is open.
Thank you. Just a follow-up question on balance sheet. Credit facility of CAD 200 million was used to pay down the, I think, unsecured debenture expiry. What is your plan to put permanent financing, and what interest rate are you expecting now?
Yes, I mean, as I said, you know, the unsecured market would be the probably the most effective way to go right now, given the gap between secured, unsecured, just for us, it's gotten narrower. As Rael said, we have a few dispositions still on the go. That'll determine, you know, if we can use proceeds to pay down the line or we can do a financing. We'll just keep watching it. It's only at CAD 300 million, so it's not a big number, but that'll be the deciding factor. Also the volatility. Right now, you're seeing a bit of interest rate volatility, as central banks keep moving.
There's no urgency, but if there's a window that makes sense and we have visibility on future cash flows, we'll take advantage.
All right. Mario, do you have a sense, what will be the rate if you were to, I mean, access the unsecured venture market? Is it like still mid-five or is it even creeping higher than that?
It depends on the time of day, but yes, right now, like our spread is around 220, and if you're at a 3-year, 5.5.6% for 10-year. The thing is, the yield curve is pretty flat when you go from kind of seven as well. 10 is a spot that would work and the pricing would be good.
Thank you. I'll turn back.
There are no further questions at this time. I'll turn it back to the presenters for any closing remarks.
Thank you, Chris. To summarize, we're very pleased with our second quarter performance. A high-quality portfolio, ongoing focus on operational excellence, development opportunities, and balance sheet strength uniquely position us in the Canadian REIT landscape. We remain really confident in our ability to execute on our strategic priorities and drive long-term NAV growth. Thank you for your interest, your investment and Choice, and for joining us this morning. Have a great weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.