All participants, thank you for standing by. Your meeting is ready to begin. Good morning. My name is Nadia, and I will be the operator assisting you on your call today. At this time, I would like to welcome everyone to CT REIT's second quarter earnings 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 questions during that time, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. The speakers on the call today are Ken Silver, Chief Executive Officer of CT REIT, Lesley Gibson, Chief Financial Officer of CT REIT, and Kevin Salsberg, Senior Vice President of CT REIT. Today's discussion may include forward-looking statements. Such statements are based on management assumptions and beliefs.
These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see CT REIT's public filings for a discussion of these risk factors, which are included in their 2018 MD&A and AIF, which can be found on CT REIT's website and on SEDAR. I will now turn the call over to Ken Silver, Chief Executive Officer of CT REIT. Ken?
Thank you, operator. Good morning, everyone. We're very pleased to welcome you to CT REIT's second quarter 2019 investor conference call, and to share with you the results of another strong quarter. Our results and new announcements reflect CT REIT's core attributes and growth strategy. Firstly, attractive, predictable and low-risk organic growth driven by a large portfolio of long-term net leases with Canadian Tire. Secondly, a privileged and aligned relationship with Canadian Tire that provides an ongoing pipeline of additional investment properties and developments to supplement the organic growth. Thirdly, a disciplined approach to complementing our foundation of net leases with high-quality value-add opportunities.
As an example of this third component of our growth strategy, we're pleased to announce our commitment to increase our ownership interest in the Canada Square mixed-use complex at Yonge and Eglinton in Toronto to 50% from 33%, with a closing expected prior to year-end. We're also pleased to announce two milestones in the redevelopment of the complex. The first being the conditional consolidated, amended, and restated ground lease with the Toronto Transit Commission, and the second being a conditional lease for a new head office building for Canadian Tire Corporation that will anchor phase 1 of the redevelopment. The ground lease provides for an extension of the term together with a renewal option and incorporates an additional two acres of land once the conditions have been satisfied, which will bring the total land area of the complex to approximately nine acres.
Our co-owner, Oxford Properties, is advancing the redevelopment program and is working towards submitting a development application on the site. We continue to pursue a conservative approach to our balance sheet and financial metrics with the goal of providing to our investors an attractive blend of growth and security. I'm now going to turn the call over to Kevin Salsberg, our Senior Vice President of Real Estate, to provide an update on our investing activities and operations. Lesley Gibson, our Chief Financial Officer, will then review the financial aspects of the quarter, and I'll wrap things up before turning the call over for questions. Kevin?
Thanks, Ken, and good morning. As outlined in yesterday's release, we are pleased to announce three new investments this quarter totaling CAD 29 million. These new projects include the vend-in of a Canadian Tire store and Canadian Tire Gas+ gas bar in Sault Ste. Marie, Ontario, the vend-in of a Canadian Tire store in North Battleford, Saskatchewan, and the expansion of a Canadian Tire store in Fenelon Falls, Ontario. In total, these investments, when completed, are expected to earn a weighted average cap rate of 6.5% and will result in an incremental 163,000 sq ft of gross leasable area being added to the portfolio. Additionally, we invested CAD 44 million in previously announced investments that were completed in the second quarter.
These projects include the development of a new Canadian Tire store located in Sherwood Park, Alberta, the vend-in of two properties located in Matane, Quebec and Minden, Ontario, the intensification of a Canadian Tire store in Huntsville, Ontario, and the development of third-party pads at three existing properties. At the end of the second quarter, CT REIT had 25 properties under development. These properties represent a total committed investment of approximately CAD 214 million upon completion and a total gross leasable area of approximately 1.14 million sq ft, of which 1.08 million sq ft, or 94.1%, has been pre-leased.
Excluding the properties under development, our portfolio is 98.7% occupied as at the end of the second quarter, which is consistent with Q2 of the prior year and a slight decrease from the prior quarter due to the end of the short-term occupancy by Canadian Tire of a portion of our 11 Dufferin Place Southeast property in Calgary, Alberta. With that, I will turn it over to Lesley for her review of our financial results.
Thanks, Kevin, and good morning, everyone. In Q2 2019, we reported FFO per unit diluted of CAD 0.291, a slight decrease of 0.3% compared to the CAD 0.292 per unit diluted in Q2 of 2018. While AFFO per unit increased by 3.3% to CAD 0.249 compared to CAD 0.241 in Q2 of 2018. Reported net operating income was CAD 91.5 million for the quarter, increasing 4.8% compared to the same period in the prior year. As mentioned last quarter, to ensure comparability, we will continue to exclude expenses related to ground rent and NOI for 2018 for the remainder of the year as a result of the adoption of IFRS 16. Drivers of NOI growth include the acquisition of income-producing properties and properties under development completed in 2019 and 2018.
The same-store NOI growth of 2.9% and same property growth of 3.3% were driven by several components, including: the contractual rent escalations of 1.5% on average contained within the Canadian Tire store, Gas+ Gas Bar, and long-term distribution center leases, the recovery of capital expenditures and the related interest earned, the impact of the tenancy changes at 11 Dufferin Place Southeast and 25 Dufferin Place Southeast in Calgary, Alberta, and intensifications completed in 2019 and 2018. G&A expenses for the quarter were 8.6% higher versus Q2 2018, primarily due to the change in fair market value of the CT REIT's unit price and increased consulting costs related to the new ERP CT REIT implemented during the quarter, which was partially offset by lower service agreement costs and higher income tax recoveries.
Excluding the fair market value changes, G&A expenses as a percentage of property revenue remained flat for the quarter compared to the prior year at a rate of 2.4%. The interest coverage ratio decreased slightly to 3.35 times this quarter compared to the 3.38 times for the same period in 2018. This is primarily due to the IFRS 16 impact of adding the interest expense related to the lease liabilities, as well as higher interest in other financing charges, partially offset by the growth in EBIT fair value. With respect to the balance sheet, we continue to maintain a strong financial position. We have approximately CAD 257 million available on our credit facility, as well as over CAD 8 million of cash, which also keeps our balance sheet in a liquid position.
As of June 30th, CT REIT's indebtedness ratio was 44.0%, a decrease compared to the 45.1% as of December 31st, 2018. The decrease in the ratio is due to our continued investing activities and fair market value adjustments made to the investment property portfolio and the IFRS-related impact of including the right-of-use asset in investment properties, partially offset by an increase in total indebtedness. Debt as compared to earnings before interest taxes and fair value adjustments was 7.16 times, lower than the 7.34 times reported in Q4 2018, primarily related to EBIT fair value growth exceeding the growth in CT REIT's total debt. Our AFFO payout ratio this quarter remains consistent with Q2 2018 at 76%.
Distributions per unit for the quarter amounted to CAD 0.189, 4.0% higher than the same period in the prior year, due to the increase in the annual distributions effective with the first distribution paid in 2019. I'd take a minute to speak to the trend in our book value per unit. As of June 30th, 2019, the net book value per unit was CAD 14.31, representing a 4.4% growth over the book value of CAD 14.01 reported at the end of Q4 2018. The following are contributing factors to this increase: a higher fair value for the income-producing properties due to ongoing growth in the cash flow resulting from the annual rent increases, ongoing recoverable CapEx spend, and retained FFO. I'll turn it back to Ken.
Thank you, Lesley. With another solid quarter under our belts, we're very pleased with the way 2019 is unfolding, and we look forward to continuing to execute on our focus strategy. Now, operator, I'll turn the call back to you for any questions from our listeners.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We ask that you please pick up the handset or step close to your speakerphone system when asking your question to provide maximum audio clarity. We will pause for just a moment to compile the Q&A roster. The first question is from Sam Damiani from TD Securities. Please go ahead.
Thank you. Good morning, everyone. I just want to congratulate you on the progress at Canada Square. I just wanted to see if you could shed a little more light on what we can expect to see with this project over the next few years. How close do you think Oxford is in terms of finalizing its application? If you could shed any light on the size of the CTC lease for the head office space and what percentage of the total GLA of the development that might represent?
Hi, Sam. It's Ken speaking. Obviously, we're very pleased with the progress that we've announced on Canada Square. It is a little bit premature for us to go into any great details on the development plan for the project, including the Canadian Tire building. Oxford is proceeding with its architectural and design work to support a municipal application, and that will be the next critical step forward in the development.
Would your best guess, would that application be submitted this year or next year?
I think practically at this point, it's going to be next year.
Next year? Just high level, is residential likely to be a meaningful component of the overall project?
I would expect that it would be a mixed-use development, yes.
Okay. Just sort of on that, does CT REIT have an appetite to add more large mixed-use development projects similar to this, either on new land acquisitions or on existing Canadian Tire store sites?
Sam, I think we've said before that we're taking a more measured approach to mixed-use development than some of our peers. We certainly have opportunities embedded in our portfolio where redevelopment or densification could be realized. We're really focusing on the Canada Square asset first and foremost, to proceed and test the waters, if you like, with mixed-use development.
Okay. I'll look forward to hearing more about it. Last question before I turn it back is just on the portfolio growth. On a year-over-year basis, the GLA growth is now kind of in the low single-digit percentage range on a year-over-year basis, and that was down from the sort of mid-single-digit growth over the last couple of years. What would you say is a better expectation over the next couple of years for annualized GLA growth?
Sam, I wouldn't draw any conclusions from that rate of growth that you're seeing this year. I think it's kind of a function of opportunities we see in the marketplace and when we decide to drop-down properties from Canadian Tire, as well as a reflection of the development pipeline that we're working on with Canadian Tire. I wouldn't draw any conclusion from that.
Great. Thank you. I'll turn it back.
Thank you.
Thank you. The next question is from Pammi Bir from RBC Capital Markets. Please go ahead.
Thanks. Good morning. Just with the amended lease terms with the TTC, can you just describe what are some of the conditions that are attached to that, and along with the lease with Canadian Tire?
Hi, Pammi. It's Ken. I think in both cases, without getting into the terms of either of those agreements, I would say generally the conditions are related to what you would expect the co-owners requiring in order to being able to proceed with the redevelopment.
Okay. Just maybe thinking about the increase in the ownership stake for both yourselves and Oxford, what should we think about in terms of the incremental cost? I guess that transaction should happen by year-end, but how should we think about that?
Well, this is another answer you're going to love. Just by way of background, the Canada Square ownership group comprises CT REIT and Oxford, as well as a private group. The co-owners agreement provides for certain liquidity events, and so one of which was exercised. The co-owners agreement provides for a process for determining the purchase price, and that process is underway. Once the transaction is completed, it'll be reflected in our disclosure at that time.
Presumably, there is a valuation process underway. I guess secondly, can you remind us again, going back over the years, what the initial cost of that transaction was?
I'm trying to remember whether we disclosed it or not at the time we did that acquisition. I don't recall that we did, so I think I'll just defer on that.
Okay. Thanks very much. I will turn it back.
Okay. Thanks, Pammi.
Thank you. The next question is from Tal Woolley from National Bank Financial. Please go ahead.
Hi. Good morning.
Good morning, Tal.
I'm just wondering, in your conversations with Canadian Tire right now, given that their e-commerce has been more up and running over the last 18 months, are you getting any sense, when they look out to building their next generation of stores, that the footprint might change or the type of space that they want as you go and look at redeveloping and relocating some of these stores? Can you talk at all about what the changes in the store might be?
No, I can't.
No?
No. Sorry. Really, I would allow or defer to Canadian Tire to allow them to talk about their merchandising plans, development plans and whatnot. Suffice it to say, as you all know, we have a close relationship with Canadian Tire and work with them on their forward requirements for their retail network strategy. Certainly, they would be thinking about all the things that you've asked about.
Okay. This might be a tough one to answer, but just in some of your smaller markets where you've got some third-party space, are you seeing any sort of big challenges in terms of like vacancies or leasing spreads, are those numbers generally just holding up as you would expect?
Hey, Tal, it's Kevin. I think the first thing I would note is we don't actually have that much.
Yeah
multi-tenant property types in smaller markets. The ones we do have either been or are in the process of being redeveloped. We bought them with a plan, and we're in the midst of executing that plan. As a general comment on multi-tenant assets in smaller markets, I think your supposition is probably correct. There is some pressure on rents and upward pressure on cap rates. What's interesting is we're seeing a bifurcation between multi-tenant and single-tenant. There's still large appetite on the investment side from private investors for single-tenant assets with credit tenancies. From a cap rate perspective, while smaller market multi-tenant assets may be seeing slight cap rate increases, we're not really seeing that with the majority of our asset type being the single tenant.
Okay, just lastly, can you give any sort of progress update on the leasing activity in Calgary on the DCs?
Sure. It's Kevin again. As you know, Canadian Tire occupied the space on a short-term basis. We just got it back again at the end of June. We're relaunching our marketing efforts. At a high level, Calgary is still seeing a slight positive absorption, I think, in the last quarter, but there's a lot of new supply coming online. From a leasing effort perspective, I would say it's as tough as you might imagine in Alberta right now.
Okay. Sorry, just to recall, is that a Canadian Tire DC, or are those the old Forzani DCs that were in Calgary when it was acquired?
It was a DC that we acquired from a third party, and we leased to Canadian Tire, and then they vacated when they flipped over to the old Sears DC.
Okay, perfect. Thank you.
Thank you. The next question is from Jenny Ma from BMO Capital Markets. Please go ahead.
Thanks. Good morning. Most of my questions have been answered. Just going back to Canada Square briefly. I believe very recently when we were talking about the timeframe of developing it, that you would wait until the Eglinton Crosstown was sort of completed. Does the announcement that came out with the quarter change that timeline?
Hi, Jenny. It's Ken. No, it doesn't. The incremental acreage that would be folded into the ground lease with the TTC are lands that Crosslinx is currently using for the construction or development of the LRT. We would need that to be completed before we could start.
Okay. That's fair. Just a quick housekeeping question. Lesley, you had talked about some of the one-time costs in G&A that related to the new ERP system. I believe it was about CAD 700,000 that you mentioned. The Q2 G&A looked lighter than I expected. Can you give us a sense of whether or not the majority of it's going to be booked in Q3, or has that number changed?
No, Jenny. There was some few hundreds of thousands CAD booked in Q2. I'm expecting still some amounts as we sort of finalize some of the sort of last modules and various things, so the ERP through Q3 and Q4. I still think there's another few hundred thousand CAD to come in the balance of 2019.
Okay. That's everything for me. Thank you.
Thank you.
Thank you. The next question is from Sam Damiani from TD Securities.
Thanks. I just wanted to just check in on the carrying value of Canada Square from when it was originally acquired, I think over five years ago. Has it been written up at all from an IFRS fair value perspective since that date?
Sam, it's Ken. Our IFRS value on Canada Square is essentially our share of the original purchase price, subject to some small adjustments.
That's great. Thank you very much.
Thank you. If you have a question, please press star one at this time. As there are no further questions at this time, I will turn the call over to Ken Silver, CEO, for any closing remarks.
Thank you, Operator, and thank you all for joining us today. We expect our third quarter results will be released early November, and we look forward to speaking with you then. Thanks.
This concludes today's call. You may disconnect your lines.