All participants, please stand by. Your conference is ready to begin. Good morning. My name is Melanie, I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's third 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 a question 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, Chief Operating Officer of CT REIT. Today's discussion may include forward-looking statements. Such statements are based on management's 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, and good morning, everyone. We're very pleased to welcome you to CT REIT's third quarter 2019 investor conference call. As is typical with CT REIT, our third quarter results reflect the predictable growth arising out of our large portfolio of long-term triple net CTC leases. In the quarter, we also realized an additional benefit from our successful investment in the former Sears Canada industrial facility in Calgary. This one, due to the assignment of a claim arising from Sears' CCAA filing. We look forward to further upside in Calgary once our vacant industrial property at 11 Dufferin is leased up. Another highlight of the quarter was the completion of a joint treasury and secondary equity offering with CTC.
With this issuance, we've accomplished our goal of significantly increasing our public flow and are advised that with this milestone, we are likely to be included in a number of indices, including the TSX Composite, Capped REIT, Dividend Aristocrat, and the high-yield indices when they are next rebalanced. Speaking of dividends, we were delighted to announce our sixth annual distribution increase in the six years since going public. A 4% increase to take effect in January 2020. Over our history, we have delivered one of the strongest track records in the sector of AFFO and NAV per unit growth, as well as distribution growth while operating with one of the most conservative and secure balance sheets. Our disciplined and focused strategy is one we believe will continue to reward investors.
As we near the end of 2019, one of the other highlights we can look back on is the progress we've made on the Canada Square redevelopment at Yonge and Eglinton in Toronto. As previously indicated, we are excited to be increasing our ownership interest in this exceptional development opportunity to 50%, which is expected to close within the next few months. We look forward to sharing more information about the redevelopment in the coming year. I'm now going to turn the call over to Kevin Salsberg, our newly appointed Chief Operating Officer, to provide an update on our investing activities and operations. Kevin joined CT REIT about three and a half years ago and has contributed significantly to the growth of the REIT and the quality of our acquisition, development, leasing, and asset management programs.
Following Kevin will be Lesley Gibson, our Chief Financial Officer, who has recently celebrated her one-year anniversary with the REIT, to discuss the financial aspects of the quarter. With Lesley and Kevin, together with Kim Graham, Clint Elenko, and David Goldstein, I'm delighted with the evolution of the senior management team at CT REIT and the depth of talent we have in the organization. Kevin?
Thanks, Ken, and good morning. As outlined in yesterday's release, we are pleased to announce seven new investments this quarter, totaling CAD 66 million. This includes a new third-party acquisition consisting of a sale leaseback transaction to buy 11 freestanding retail bank branch locations that was completed subsequent to the quarter end. This portfolio highlights our focus on triple net leased properties and is a great complement to our existing asset base. It is entirely leased to the Bank of Montreal, an investment-grade tenant, on a long-term basis, and consists of a geographically diverse set of single-tenant properties situated on great corners in very attractive urban and secondary markets. All leases contain contractual rent escalations every five years, providing for embedded organic growth.
We are also pleased to announce additional investments related to our pipeline of Canadian Tire opportunities, consisting of one vend-in five Canadian Tire store expansions, one of which required us to acquire some additional land adjacent to an existing property that we own. These investments reflect a continued focus on our core strategy and Canadian Tire's confidence in its business and ongoing investment in its store network based on a proven track record of growing sales and improving store-level productivity. In total, these investments, when completed, are expected to earn a weighted average cap rate of 6.5% and will result in an incremental 281,000 sq ft of gross leasable area being added to the portfolio. Additionally, we invested approximately CAD 4 million in previously announced projects that were completed in the third quarter.
These projects included the intensification of a Canadian Tire store in Brampton, Ontario, the development of a Canadian Tire Gas+ gas bar in Innisfil, Ontario, and the development of a Canadian Tire Gas+ gas bar and car wash in Hamilton, Ontario. At the end of the third quarter, CT REIT had 29 properties under development. These properties represent a total committed investment of approximately CAD 251 million upon completion and a total gross leasable area of approximately 1.3 million sq ft, nearly 95% of which has been pre-leased. Excluding the properties under development, our portfolio remains in a strong position with 98.8% occupancy as of the end of the third quarter, remaining consistent with Q3 of the prior year as well as the prior quarter. With that, I will turn it over to Lesley for a review of our financial results.
Thanks, Kevin. Good morning, everyone. Our strong Q3 results yet again continue to demonstrate the underlying quality of our portfolio. In Q3 2019, we reported AFFO per unit diluted of CAD 0.261, an increase of 8.3% compared to CAD 0.241 per unit in Q3 of 2018. Additionally, FFO per unit diluted increased by 4.8% to CAD 0.303, compared to CAD 0.289 in Q3 of 2018. Reported NOI was CAD 93.9 million for the quarter, an increase of 7% compared to the same period in the prior year. The primary drivers of NOI growth include the acquisition of income-producing properties and properties under development completed in 2019 and 2018.
Same-store NOI increased by CAD 3.8 million, or 4.4%, and same-property NOI increased by CAD 4.4 million or 5.1% compared to Q3 2018, and were driven by several factors, including: the contractual annual rent escalations of 1.5% on average contained within the Canadian Tire store leases, contributing approximately CAD 1.7 million to NOI growth. The recovery of capital expenditures and interest earned on the unrecovered balance and intensifications completed in 2019 and 2018, contributing approximately CAD 1.2 million. In addition, as Ken mentioned, there was an additional component to same-store growth this quarter related to the former Sears tenancy in Calgary, Alberta. The impact of the tenancy changes at 11 Dufferin Place Southeast and 25 Dufferin Place Southeast, Calgary, and the amount received from the assignment of the REIT's interest in a claim against Sears Canada under the CCAA, together with increased NOI by CAD 1.2 million.
If we were to adjust the reported same-store NOI growth for this CAD 1.2 million, same-store NOI growth would have been 3.0%. G&A expenses for the quarter amount to 2.4% of property revenue, which is consistent with Q3 2018. Excluding the fair market value changes, G&A expenses as a percentage of property revenue improved to 2.2% for the quarter. This is due to both the successful implementation of the ERP system and capabilities that have started to demonstrate a positive impact related to the general and administrative expenses and the property operating expenses, as well as an increase in revenues driving same-store NOI growth this quarter. The fair value gain on investment properties as of Q3 2019 was CAD 12.9 million, a decrease of CAD 3.8 million compared to the same period in the prior year.
The decrease is primarily due to higher increases in property values across the portfolio in the prior year. Turning to the balance sheet briefly, we continue to maintain a strong and liquid financial position. We have approximately CAD 295 million available on our credit facility, as well as over CAD 47 million of cash as a result of the recent equity offering, which we anticipate putting to use the balance of the fourth quarter. As Ken also mentioned earlier, in September, we completed a joint equity offering for an aggregate 16.8 million units, comprised of the issuance of 6.3 million units in treasury for net proceeds of CAD 86 million and the sale of 10.5 million units by Canadian Tire Corporation. The net proceeds of the treasury offering were used to pay down amounts owing on our credit facility to fund our investment program and for general working capital and corporate purposes.
We are pleased with the positive impact the equity offering has had on our float, as well as trade volumes, both key ingredients for an improved liquidity for all unit holders. The interest coverage ratio increased to 3.45 times this quarter, compared to 3.36 times in the same period in 2018. This is primarily due to the growth in the EBITDA fair value exceeding the growth in interest and other financing charges, despite the interest related to the lease liabilities being included in interest expense in 2019. As of September 30th, CT REIT's indebtedness ratio was 42.8%, a decrease compared to the 45.1% as of December 1st, 2018, and 44% as of June 30th, 2019.
The decrease in the ratio is primarily due to the equity offering completed during the quarter, as well as our 2019 acquisitions, intensifications, and development activities, the fair value adjustments made to our investment property portfolio, and a decrease in total indebtedness. Indebtedness to EBITDA FV ratio was 6.96 times as of the quarter end, lower than the 7.34 times reported in Q4 2018, and the 7.16 times reported at Q2 2019, primarily related to the EBITDA growth exceeding the growth in CT's total debt. Our AFFO payout ratio this quarter decreased compared to Q3 2018 to 72%. Though our Q3 year-to-date AFFO payout ratio of 75% remains in line with 2018. I also want to briefly remark on the trend in our book value per unit.
As of September 30th, 2019, the book value per unit was CAD 14.46, representing a 3.2% growth over the book value of CAD 14.01 reported at the end of Q4 2018. The increase is due to net income exceeding distributions. With that, I'll turn it back to Ken.
Thank you, Lesley. As we near the end of 2019, CT REIT's core attributes have never been clearer. Our ability to deliver both attractive growth and low risk, anchored in a strong balance sheet and the highest investment-grade credit rating in the sector, has led again to the announcement of another distribution increase.
The clarity and simplicity of our strategy, and more importantly, the results, are there for investors to see. 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 1 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'll pause for just a moment to compile the Q&A roster. The first question is from Himanshu Gupta of Scotiabank. Please go ahead.
Thank you and good morning.
Good morning.
Good morning.
On the acquisitions, the BMO bank branches portfolio that you bought, and I know you bought CIBC bank branches earlier as well, is that a segment you are actively looking at? What was the cap rate on this portfolio, and what are the rent escalators?
Hi, it's Kevin speaking. We can't disclose the specifics of the transaction. To your first question, I would say yes, this is a segment we're continuing to be interested in. We bought the CIBC portfolio that was similar in nature in 2017. These are nice tuck-in acquisitions for us, and obviously complement the existing portfolio and are very closely aligned with the existing type of assets that we currently own. We'll do it selectively and opportunistically. Just stay tuned for, I guess, the amount of investment we're pursuing in this vein. The rent escalations are every five years. In terms of the cap rate, I can say it's a mid-six cap, but I can't really give details beyond that.
Sure. Well, thanks, Kevin, and by the way, congratulations on your promotion to Chief Operating Officer. Just sticking to acquisitions, Canadian Tire Corporation has recently completed acquisition of Party City in Canada. Are there any plans to vend-in those assets? Will you have any exposure to Party City down the line?
There are no owned Party City assets, so there's no specific vend-ins that might be opportunities for the REIT. We're working closely with Canadian Tire as they develop their plans for any new Party City locations. To the extent there are opportunities within the REIT portfolio that match their strategy, obviously we'll work closely with them on that.
Sure. Just switching gears on the one time, that NOI adjustment of CAD 1.2 million, is that the final amount? I assume most of the amount is from Sears, or do you expect any more settlement down the road? The second thing would be, regarding the vacancy at 11 Dufferin. Any update there?
Sure, Himanshu, it's Lesley. I'll take the first part of that question. The CAD 1.2 million is comprised of a couple of things we've noted in the MD&A. It's some of the tenancy changes at our two Dufferin locations in Calgary in our industrial portfolio as well as the amount we received from selling our claim under the CCAA. That is really the last piece. That's a one-time transaction for the selling of our CCAA claim.
On the leasing progress, I can say we're in advanced stages with a couple of groups that would take portions of the building. I'm optimistic that we'll be able to get something done there, but we've been at this stage before with others, and obviously in the current environment today in Alberta, people are somewhat reticent to make investment decisions. Stay tuned, but hopefully we'll have something for you in the next quarter or two.
Sure. Probably the last question from me on valuation, in terms of cap rates, especially in secondary markets. What are you seeing today versus, say, 18 months back? How are your Canadian Tire stores performing in these secondary markets say compared to two years back or 18 months back? I assume you monitor these two levels of performance closely then.
On the cap rate side of things, we've talked a little in the past about the liquidity and the level of interest of the type of assets we own, the single-tenant properties in a certain price range. To be honest, they've been flat in all markets, in my opinion. There's still a lot of interest, a lot of buyers out there for these well-tenanted, long-term leased type product. I think the BMO deal is kind of reflective of that. There was a lot of interest, and we were happy with obviously the cap rate, but I think it does support our general valuations as it relates to the Canadian Tire portion of our portfolio. In terms of Canadian Tire's sales and productivity in those markets, I think it continues to be robust. They're doing well.
Obviously, they can speak to their trends better than we can, but all things are positive on that end.
Sure. Maybe I'll just squeeze in one last question on the G&A expenses. I understand there's some expected savings to do property management internalization and ERP implementation. How should we think about modeling them, following them next year?
Himanshu, it's Lesley again. You'll start to notice in the current quarter, Q3, since our system went live back in May, we're now starting to see in Q3, I think the benefits of some of that internalization. The G&A run rates that you see in Q3 are now more reflective of what we think will occur in the future.
Got you. Okay. Thank you so much, and I'll turn it back.
Thank you very much.
Thank you. The following question is from Pammi Bir of RBC Capital Markets. Please go ahead.
Thanks, good morning. Just coming back to the bank branches. Again, this is the second transaction you've done for branches, should we interpret that as you're looking at doing perhaps more triple net lease transactions, even outside of the bank branches, whether it's other retail? Is it at this stage really just the Canadian Tire portfolio and perhaps some branches?
Pammi, it's Kevin. I guess I would say, similar to my previous comment, we'll be opportunistic about the opportunities. We would consider branching out beyond CTC, beyond banks. Retail is our preferred asset class, but that doesn't mean we wouldn't look at others as well. Obviously, 15% of our portfolio roughly is industrial. We like that, but those are competitive assets today. I think it's based on the opportunities that present themselves and whether or not it fits in terms of our asset criteria and obviously, trying to find accretive opportunities.
Thanks. Kevin, congratulations as well.
Thank you.
Just maybe on Canada Square. Any update on, you mentioned a transaction maybe in the next few months? Can you be a little more specific and perhaps the potential range of the investment to increase your stake?
Hi, Pammi, it's Ken. I think in our last call, we had indicated that the purchase price was going to be determined as part of a process as laid out in the co-owners agreement. That is proceeding. Perhaps a little bit more slowly than we had expected at the last quarter. It is unfolding as per the co-owners agreement. I would expect that we'll see it close in the next few months, as we mentioned in our comments. At this point, obviously, I can't comment on valuation or the purchase price.
Thanks very much, Ken. I will turn it back.
Thank you.
Thank you. The following question is from Jenny Ma of BMO Capital Markets. Please go ahead.
Thanks. Good morning, everyone.
Morning.
This question's probably for Lesley, but I see in the financial statements that there was CAD 1.8 million of other income booked versus very minimal or almost none in most other quarters. Is that all related to Sears?
No, Jenny. The Sears as well as some of the other changes in tenancy only in total amounted to CAD 1.2. The portion from Sears was the larger portion of the CAD 1.2 of those two items. There's just some other sort of, I would describe as sundry revenues and bits and pieces from some of our investments that are showing up in that CAD 1.8 million you see in the other income line this quarter.
Okay. Is there anything in that bucket that might be of a recurring nature, or is it mostly one time?
There's some other bits that are.
Go ahead.
There are some other bits that are recurring, but I'd say they're quite small, Jenny.
Okay. That's fair. With regards to the BMO portfolio, are you able to comment on the weighted average lease term?
Yes. I believe off the top of my head, it's about 12 years.
12 years. Are there extensions on it?
Yes.
Okay, great. Okay. Most of my questions have been answered. My last one is related to some of the Class C unit expiries coming up in May of 2020. Have those discussions started with CTC?
We have regular conversations with CTC about what their plans are. We'll continue between now and then, but nothing has been decided at this early juncture as of yet.
Okay, great. That's all for me. Thanks.
Thank you. As a reminder, please limit yourself to one question, then returning to the queue for any further. The following question is from Sam Damiani of TD Securities. Please go ahead.
Thanks. Good morning, everyone.
Morning.
Maybe, Ken, just to start off, the leverage of the REIT has come down consistently over the six years of its history. What is the goal over the next couple of years? I know it'll tick up once the Canada Square acquisition closes a little bit, but are you targeting low 40s or even 40% or lower going forward?
Morning, Sam. I'd say we're certainly comfortable with the leverage that we're operating at today. You're absolutely right. It has come down over the years. We think that that has been a prudent path to be pursuing. I wouldn't say that we would be looking at material differences in our leverage in either direction at this point.
From where it is in Q3?
Yes.
Okay. Over to the triple net sort of strategy. We talked about that a little bit already, but I wonder would gas stations not operated by Canadian Tire, would that fit the bill if that opportunity were to arise?
Sam, it's Ken again. I'd say theoretically, yes. We would be looking across, as Kevin mentioned earlier, different asset classes, different kinds of properties. I think what we would be looking for, as you find with the net lease REITs in the U.S., that they invest in quite often a variety of asset classes. We'll be focusing on obviously the attributes that you would be looking for in an attractive triple net investment.
Okay. That's helpful. Back to Canada Square, just to touch on it. Sounds like it might even slip into early 2020 in terms of the actual closing of the increased interest. Is that something you meant to hit at in your comments, Ken?
Yes. At this point in the process, when you're getting close to the end of the fiscal year, it could tip over into Q1 for sure.
Just a couple little ones to finish off here. Orillia Square, looked like the timing has been delayed a little bit there. Any update on what's going on there and sort of leasing for the backfill space?
No, the timing delay is actually mostly related to Canadian Tire's requirements to remediate their portion of the site. They require a little bit of extra time to decommission the service center and provide it back to us in the condition as required under the lease. That was a little bit more onerous than we expected it to be.
I guess it's too early to talk about backfilling that space at this point?
Yes.
Okay. Just finally, the Brampton expansion. Just curious, that store looked like it occupies the full site already. How are you squeezing in another, I think it's 16,000 square feet?
I believe that one's going to be a rear expansion.
Rear.
Yeah.
Right. Makes sense. Okay. Thank you.
Thank you. The following question is from Tal Woolley of National Bank Financial. Please go ahead.
Hi. Good morning.
Good morning.
Good morning.
I just wanted to ask, we're sort of about two to three years in with Canadian Tire pushing its e-commerce business in the mainline banner. I'm just wondering, when you look at the distribution center strategy that they've got for their business right now, as the e-commerce portion grows for the business, do you see any sort of changes to the distribution center strategy where you might see them having to develop e-commerce-only DCs, that kind of thing, that might involve CT REIT in the future?
Hi, Tal. It's Ken. As we've mentioned earlier, both in this call and in other calls, we stay pretty close to Canadian Tire and their planning, including their plans for their supply chain, and want to continue to understand the implications of their e-commerce strategy on their bricks-and-mortar network, both retail and supply chain. A very long way of saying there's nothing concrete to report in terms of how we might participate with Canadian Tire in their evolving plans. Suffice it to say, though, that to the extent that we can, we would like to participate.
Okay. That's great. Thanks very much.
Thank you.
Thank you. Once again, please press star one at this time if you have a question. The following question is from Himanshu Gupta of Scotiabank. Please go ahead.
Hi, guys. Sorry. Just a follow-up here on Jenny Ma's question on the Class C units. I know CAD 200 million is up for renewal in May 2020. Just trying to understand, how is the agreement with CTC structured? In case it is automatically renewed for five years, so will there be a rate reset? How will the new rate be determined? The reason I'm asking is current rate is, like, 4.5%, so there could be potential for interest rate savings there.
Himanshu, it's Lesley. The rate reset does provide for renewal of those maturing at the end of May in 2020. The rate would be set based on market rates at that point in time. Such that if the current rate environment continued into 2020, yes, we'd expect to see some rate savings compared to the current rate that is in place for the CAD 250 million.
Awesome. Okay. Thank you so much. I'll turn that back.
Thank you. The following question is from Sumayya Syed of CIBC. Please go ahead.
Thanks. Morning, everyone. Just have the one question probably for Ken here. We've obviously seen strong demand for the single-tenant net lease type assets in the private buyer space. A couple of your peers have done some asset sales. Any thoughts there? Does that seem like something you could potentially do down the line?
Hi, Sumayya. I wouldn't say that large-scale capital recycling would be on our radar screen. I would say that it is quite possible that we might want to rotate out of some assets or markets and do some capital recycling going forward. I don't think that what you see in our peers do is necessarily something you'll see us do.
Okay, great. That was all for me. Thank you.
Thanks.
Thank you. As there are no further questions at this time, I will turn the call over to Ken Silver, CEO, for closing remarks.
Thank you, operator, and thank you all for joining us today. We expect our fourth quarter results will be released in the second week of February. We look forward to speaking with you then. We also wish you all the best for the upcoming holiday season.
Thank you. This concludes today's conference call. You may now disconnect your lines.