All participants, please stand by. Your conference is ready to begin. Good morning. My name is Valerie, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q1 2022 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 star then the number two. The speakers on the call today are Ken Silver, Chief Executive Officer of CT REIT, Kevin Salsberg, President and Chief Operating Officer of CT REIT, and Lesley Gibson, the Chief Financial 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 its 2021 Management's Discussion and Analysis and 2021 Annual Information Form, 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 first quarter 2022 investor conference call. As this marks my last call as CEO before my retirement at the end of the month, I'll leave the bulk of the commentary on the quarter to Kevin Salsberg and Lesley and share with you some departing thoughts. I couldn't imagine a better time to complete our succession plan. As you've seen throughout the pandemic, and as you will hear most recently in Q1, the business is performing well, and our balance sheet and credit metrics are in great shape. In Kevin Salsberg, we have an incoming president and CEO with terrific real estate investment, leasing, and development skills, and a deep background in public real estate markets.
Take those skills together with what is now an in-depth knowledge of Canadian Tire Corporation and its strategies, strong relationships and shared values with CTC's leadership team, and you have the perfect leader to take CT REIT into the future. Kevin will be heading up a highly capable and agile team with a great track record of value creation. The foundation of our prospects going forward remains solidly tied to CTC's growth plans, which is laid out in its recent Investor Day, includes significant expansion of its real estate store network and supply chain, investments that CT REIT is already participating in. Our prospects beyond our core portfolio, including third-party acquisitions, intensification, and surfacing value in underutilized assets, remain largely untapped opportunities. The confidence I'm projecting is shared by the board of CT REIT, both in its support of Kevin and in our strategic direction.
This confidence was displayed with the announcement yesterday of another distribution increase, the ninth since our IPO, to take effect with the distribution to be declared in June. What better time to hand over the reins? Kevin, over to you.
Thanks, Ken, for the kind words, and good morning, everyone. I can't imagine starting my remarks without talking about Ken and the tremendous legacy he leaves behind, both at Canadian Tire and CT REIT. In his time with the Canadian Tire family, Ken has been responsible for many remarkable accomplishments. He was the architect of a new store network strategy that allowed Canadian Tire to successfully compete head to head with other big box entrants to Canada. He was the point person on a new dealer contract, which reimagined the way Canadian Tire engaged with one of their largest stakeholders, a key contributor to setting the stage for one of the most productive periods in the company's history. He obviously not only led the charge to take CT REIT public, but has also been a great steward of the REIT's exceptional performance since that time.
Despite the fact that I am 6 ft 4, Ken leaves me with some big shoes to fill. I feel confident, however, in the REIT's ability to compete and outperform. Our business was created to deliver durable and growing results. Our privileged relationship with Canadian Tire provides us with an opportunity set and growth pipeline that is consistent and meaningful. We have also significantly evolved our own capabilities since going public in 2013. At the time of our IPO, there were exactly two REIT employees that were primarily supported by a large team at Canadian Tire and by external service providers. Key functions since that time, though, have been internalized and new capabilities added. Our team now numbers over 60 talented real estate, legal, finance, and accounting professionals and is one of the strongest and most capable in the industry.
I'm pleased to report that our cost structure has remained one of the leanest in the sector. There has been one recent addition at the REIT that I would be remiss if I did not call out. I want to welcome Jodi Shpigel to our management team as Senior Vice-President, Real Estate. I know that Jodi will be a great addition to the group, and I am positive that her skill set and experience will only serve to further enhance the way we work and our ability to execute on our strategy. Lesley will go into the details of the quarter shortly. As she will note, our results were once again strong.
Our balance sheet remains in great shape, and with our most recent unsecured debenture refinancing, we have now taken all of our public unsecured debenture maturities off the table until 2025, thereby significantly reducing interest rate-related risks, a key achievement given the context of today's markets. Our 99.3% occupancy rate, conservative payout ratio, and strong rent collections all remain at very healthy levels. It is based on this solid foundation, our positive outlook, and the strength of our team that our board approved another distribution increase, our ninth since going public eight and a half years ago. The distribution increase of 3.4% will be effective with the July 22, 2022 payment to unitholders. I think it is also important to highlight that since our IPO, we have increased our distributions by more than 33%.
We also continue to work closely with our largest tenant and majority unitholder on delivering their recently announced enhanced investment plans in both their store network and supply chain. As highlighted in our press release yesterday, we were pleased to announce five new investments this quarter totaling CAD 60 million, which once completed, will add an incremental 286,000 sq ft of GLA to the portfolio.
The new projects include the acquisition of land and the vend-in of an existing Canadian Tire store in Kingston, Ontario, the acquisition of land from a third party adjacent to a REIT-owned property, and the expansion of an existing Canadian Tire store in Napanee, Ontario, the acquisition of land from a third party for the development of a new Canadian Tire store in Sherbrooke, Quebec, the vend-in of land adjacent to an existing REIT-owned property, and the expansion of an existing Canadian Tire store in Invermere, BC, and finally, the expansion of a Canadian Tire store in Orleans, Ontario. At the end of the quarter, CT REIT had 29 properties that were at various stages of development, with five projects currently expected to be completed in Q2 of this year.
The projects in our development pipeline represent a total committed investment of approximately CAD 380 million upon completion, CAD 83 million of which has already been spent, and CAD 162 million of which we anticipate will be spent in the next 12 months. Upon completion, these projects will add a total incremental gross leasable area of close to 1.4 million sq ft to the portfolio, 72% of which had been pre-leased at quarter end, and nearly half of which consists of development related to industrial assets.
As a further update on the new 350,000 sq ft net zero distribution center that we are developing in Calgary, Alberta, I am happy to report that subsequent to the quarter end, Canadian Tire is now committed to leasing the entire facility and will take occupancy upon its completion in Q4 2023. Factoring in this leasing update, our 1.4 million sq ft development pipeline is now 97% pre-leased. As we have discussed with you previously, we also continue to work proactively to extend leases with Canadian Tire. To the extent possible, this activity provides increased certainty around lease turnover and allows us to avoid temporary vacancy and leasing CapEx for the most part, and securing continual annual rent escalations fosters ongoing growth in cash flows. In the quarter, we completed agreements with CTC to extend the leases of three Canadian Tire stores.
As we work towards the final days of transition between Ken and myself, I would like to thank him personally for his mentorship, guidance, and friendship over the last six years. They have meant a great deal to me, and I will certainly do my best to fill those shoes I discussed earlier and to continue to build off the amazing base he helped to create here at CT REIT. With that, I will turn it over to Lesley to review our financial results.
Thanks, Kevin, and good morning, everyone. As Ken and Kevin have highlighted, it was a strong first quarter, and we are very pleased with the results delivered by the REIT. First quarter AFFO per unit on a diluted basis was CAD 0.278, an increase of 1.8% compared to the Q1 of 2021. NOI variances were partially offset by higher interest expense due to prepayment charges associated with the completion of our debenture refinancing and increased personnel costs, including those related to CEO transition. Excluding these one-time costs, AFFO was up 3.8%. Diluted FFO per unit for the quarter was CAD 0.307, a slight decrease compared to CAD 0.308 in Q1 of 2021, as the growth in units outpaced the growth in FFO.
Net operating income was CAD 102.8 million for the quarter, an increase of 3.8% or CAD 3.8 million compared to Q1 last year. This NOI growth was comprised primarily of 2.3% growth in same-store basis and 2.5% growth on a same-property basis. The same-store NOI for the quarter grew by CAD 2.3 million or 2.3% as a result of contractual annual rent escalations, which contributed nearly CAD 1.2 million, including the 1.5% average annual rent escalation contained within our Canadian Tire leases, with the balance of the growth from the continued recovery of maintenance capital and related interest carry, along with no credit losses recorded in the quarter.
In the first quarter, adjusted G&A expenses as a percentage of property revenue were 3.2%, which was above the 2.8% in Q1 2021. As we pointed out last quarter, the accelerated amortization of long-term compensation costs related to CEO transition will run through the P&L and drive slightly higher G&A expenses, which amounted to CAD 0.6 million in Q1 and will continue through Q2. Excluding these transition costs, G&A as a percentage of property revenue would have been 2.8%, in line with Q1 of 2021. The REIT recorded a fair value increase of CAD 22.1 million on our investment properties for the quarter, the first quarter of 2022. The increase in the fair value adjustment on investment properties was mainly driven by continued slight compression to the investment metrics within the portfolio based on recent market activity.
Distributions in the quarter were CAD 0.210 or 4.6% higher than the first quarter of 2021 due to the increase in distribution paid since last July, resulting in an AFFO payout ratio of about 75.5%, which continues to be within our targeted range. Now turning to the balance sheet. Our debt metrics remain solid with interest coverage ratio of 3.57x in Q1 2022 compared to 3.68 times for the first quarter of 2021. The decrease in the interest coverage ratio is primarily due to the one-time CAD 750,000 debenture prepayment penalty included within interest and financing charges, which is partly offset by the growth in EBIT fair value.
CT REIT's indebtedness ratio has also improved and was 40.9% at the end of Q1 compared to 41.2% as at December 31st, 2021. The decrease in the ratio was due to the increase in the fair value adjustments made to the properties as well as acquisition intensification development activities exceeding the growth in total indebtedness. With the successful issuance of CAD 250 million of unsecured debentures at 3.03% for a 7-year term during the early part of the quarter, we completed the early refinancing of our obligations well ahead of the recent run-up in rates.
This leaves us in a strong liquidity position and largely insulated from refinancing risk, with no public debentures scheduled to mature until 2025, and with CAD 294 million available in our committed credit facilities, along with CAD 40 million of cash on hand. With that, I will turn the call back to the operator for any questions.
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'll pause for just a moment to compile the Q&A roster. Our first question is from Jenny Ma with BMO Capital Markets. Please go ahead.
Hi. Thanks, and good morning.
Morning.
Morning, Jenny.
Congratulations, Ken, on your retirement, and welcome, Kevin. I look forward to hearing more from you.
Thank you.
Also, great news that you leased the new DC to Canadian Tire, because I originally had a question on the timing of that lease up. I'm just wondering if you could talk to us about whether or not you're able to get, I believe it was a 20% premium on rent that you had alluded to during the last call due to the green measures that are being built into the facility, and also whether or not you were able to get some contractual rent steps that are characteristic of your CT leases.
Sorry, Jenny, you're coming through a little muffled. I think I got your question, but if I miss anything, just pipe up and let me know. You know, we're not gonna comment specifically on the rent on theor one specific deal. I can say, you know, in terms of the range of market rent, we feel we're certainly at the upper end of it. We also feel pretty good about where our pro forma has shaken out relative to where we thought it was gonna be. Obviously, this is a win-win for both Canadian Tire and the REIT in terms of the sustainability initiative and being a leader in net zero buildings in Canada.
Certainly we feel the value of the building will also command a premium at the end of the day. You also asked, I believe, about whether or not we were able to achieve our typical contractual rent escalations as we do in our retail leases, and the answer is yes. We got similar bumps on an annual basis in this lease.
Okay, great. You know what? That is all for me. Thank you.
Thank you.
Thanks, Jenny.
Thank you. Our next question is from Tom Callaghan with RBC Capital Markets. Please go ahead.
Thanks, and good morning. Ken, congrats again, and all the best on the next chapter.
Great. Thank you.
Just maybe curious, in light of what's happening across the markets and bond yields, are you seeing any new acquisition opportunities out there or maybe start to surface, or is it kind of pinned down at this stage?
I think it's pretty pinned down at this stage. You know, I think Q1 had a lot of activity kind of flowing out of the end of the last year. I think Q2 has been busy enough in that there was activity in Q1 that sort of finishing up. I think Q3 and Q4 will be quite slow as things are certainly on pause. We've heard of a couple deals thus far being repriced to get done or being dropped, not in any significant way, but it's kind of qualitative and anecdotal. I'm, you know, hopeful that they'll bring some opportunities in the marketplace relative to, you know, a change in pricing. Things were getting a little overheated, especially in our space.
We're gonna keep our eye on the markets and try to be opportunistic as we always have been. Certainly, investors are being considerate of the macro environment. I think as private investors sort of price discover what their new cost of financing looks like over the next couple of months, there certainly could be some interesting data points that we watch out for from a cap rate perspective.
Thanks, Kevin. That's good color. I'm maybe just curious with respect to the Canadian Tire type portfolios or assets out there other than, you know, in terms of any transactions in the market with third parties. Have you seen any changes in pricing at all with respect to, you know, the type of real estate that you target?
I think it's too early at this point, so my short answer would be no, we haven't seen it. There's also, you know, in the last three months, I would say there haven't been a lot of data points.
Got it. Just last one for me. On the store expansions that were announced in the CAD 60 million of new investments, what can you share with us with respect to maybe how the format of those stores is going to change to accommodate the expansion? Is it more back-end, you know, for e-commerce related or online orders, or are they adding more SKUs to the actual store layouts?
I think just as a general comment, each store would be unique in the intervention that you might see, both from, you know, whether the building is being expanded out the back, out the side, you know, if it's more warehousing, they're delivering more of a customer fulfillment portion. Generally, most of the store projects have some sort of fulfillment portion to the work that they're doing to better facilitate pickup in store. You know, I think they are certainly increasing the number of SKUs. They're trying to be more mindful in terms of the way they warehouse and store goods and obviously make customer shopping a better experience, a more enjoyable experience and an easier experience.
I would say each one is sort of custom tailored to the unique attributes of the store and what it requires. All of this sort of flows from the Canadian Tire reinvestment in their store network supply chain to better integrate, you know, both the digital and the physical to continue to improve customer performance. That's what's really driving all of it in the background.
Thanks very much. That's good color. I'll turn it back.
Thank you.
Thank you. Our next question is from Himanshu Gupta with Scotiabank. Please go ahead.
Thank you, and good morning. You know, congratulations to Ken first. Clearly, CT REIT has accomplished so much under your leadership, Ken. You know, best of luck to Kevin. You really have big shoes to fill there.
Thank you.
Yeah, in terms of the, you know, the question, really on the Calgary Distribution Center, I understand, you know, you can't share the rents on the property. Can you provide a range of what pro forma cost will shake out to be, just to range there?
A range on the cost side? Is that what-
On the cost side, yeah, pro forma cost. That's right, yeah.
Yeah. I think we had talked about it on the last call. The building cost is in the low CAD 40 million range.
Low CAD 40 million. Okay. Sticking to Calgary, I think you have the Dufferin Place coming for renewal as well this year. Any color when is that coming up for renewal?
Yeah. To remind our listeners, we own one distribution center that's 625,000 sq ft leased to Canadian Tire in our Dufferin district. We have the new net zero DC we were developing on adjacent lands, and we also own a 200,000 sq ft building that we call Eleven Dufferin. It has two tenants in there. One is on a longer-term lease, and there's 100,000 sq ft that is coming up for renewal, I think in Q3 of this year. We're in discussions with a prospective tenant. The existing tenant is vacating. We've already had a couple showings, and there's some options on the table, but we don't have any firm commitments at this point.
Got it. Thank you. Thank you, guys, and I'll turn it back.
Thank you. Our next question is from Tal Woolley with National Bank. Please go ahead.
Hi. Good morning.
Good morning.
Morning, Tal.
Just wondering, Kevin, as you sort of take on the top job here, you've obviously added, you know, Jodi to help backfill your position. Are you thinking of adding any other execs to the management team?
At this point, Tal, no. You know, I think with Jodi's addition, we're fully well-rounded out. You know, I think based on where the business is at, obviously we're you know, we're adding capabilities and people as needed throughout the organization. From a senior management team, no, that'll be it.
You know, you say you're sort of adding some more depths below the senior management team level. Is that just normal course kind of business, or are you sort of... I was just wondering, like, as you sort of build up for, like, Canada Square project, that kind of thing, would you be planning to hire more along those lines?
I mean, specific to Canada Square, if you'll recall, Oxford is the development manager on that file, so I don't think we need any additional resources at the REIT. We certainly are adding people in the normal course and as the portfolio grows and as we continue to, you know, over time, internalize functions or develop new capabilities. I mean, one example of a new hire we just brought on recently was a manager of sustainability. So, you know, that's a function that didn't used to be in the REIT, and we are now obviously taking that a little bit more to heart and bolstering our internal resources as it relates to ESG. So, that's the type of thing that we would add as necessary going forward.
Okay. Then Lesley, maybe you can just talk a bit about, I appreciate that you don't have any, you know, major refinancing to do for quite some time. Could you just talk about where you think you would see mortgage and unsecured rates right now if you were to be in markets?
Sure, Tal. I mean, just I guess for reference, for comparison to the deal that we had done in early part of the quarter, and it's sort of a seven-year deal is probably in the range of 200 basis points wider today, you know, on that front. You know, mortgage rates for us, we're sort of not actively in the sort of secured market. It would be a good price discovery to see what that would be for us. Definitely things have crept wider and there's still obviously a lot of volatility. Sort of week by week, things are moving quite quickly. Yeah, considerably wider than they would've been, obviously early in the quarter.
Happy to have taken that off the table early, but.
Okay. If you guys were to, you know, find some acquisitions to do, probably then smart for us to sort of think about cost of debt, maybe in the mid fours. Does that feel about right?
That's in the right ballpark. Obviously, we've got some cash still to spend on the balance sheet and lots of, you know, ample room on our line of credit. I think we have a few different options for us as well as we go forward.
Okay. That's it for all my questions. I'll just say congratulations, Ken. Best of luck.
Thank you, Tom.
Thank you. Our next question is from Sam Damiani with TD Securities. Please go ahead.
Thanks, and good morning. I just wanted to do a follow-up on the lease announced this morning. Kevin, you mentioned the cost in the low CAD 40 million range. Does that cost change as a result of the lease? Does it include everything like land and everything at an all-in cost?
To answer your second question first, no, that's just the building cost. That doesn't include the land. The lease does not change the cost structure. I think I mentioned this on our last conference call. We had designed the building such that it would work for Canadian Tire if they wanted it. The spec was designed in collaboration with them and suits their needs.
Is your cost and what you're delivering to Canadian Tire just a base building like you would normally do to any third-party tenant? Or are you investing any more inside the building than you might otherwise?
Pretty much just the base building spec. I would call it an enhanced supply chain spec. What I mean by that is, you know, there's some, the dock levelers are of a certain caliber, you know, the roof heights and the column spacing was designed, you know, to accommodate their racking, things like that. So, as I mentioned, designed with them in mind, and certainly we felt it could have worked for any tenant occupying a warehouse. We're mindful of the potential future occupant at the time it was designed and costed.
Attributes certainly would be valuable to any user, it sounds like. I guess with their commitment to this building, does it maybe raise the possibility of Canadian Tire having some surplus warehouse space in the Dufferin district down the road?
No. It's a completely different-use facility.
Okay. All right. Well, that was it for me, and I just wanna congratulate Ken, Kevin, and Jodi as well. Great all around, and look forward to catching up soon and hearing what your plans are next, Ken.
Thanks, Sam.
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. When we were preparing for our IPO in 2013, we came up with a tagline for CT REIT, "Reliable, durable, growing." Almost nine years later, we still use it, and CT REIT's combination of attractive defensive characteristics and solid growth are still compelling. To have performed as well as we did through the pandemic, raising distributions as others were forced to cut theirs, and to have delivered one of the strongest compound growth rates since our IPO in AFFO and FFO per unit reflects CT REIT's unique characteristics in an uncertain world. As I prepare to hand over the leadership to Kevin, to have delivered on and continue to deliver on our original promise is one of the things of which I am most proud.
As a final thought, I'd like to thank all of our listeners today who I've had the opportunity to meet with over the years. I truly enjoy telling you our story, answering your questions, and most importantly, learning from you. With that, we look forward to welcoming you to our annual meeting of unit holders, which we will conduct virtually later today. I know Kevin and Lesley will also look forward to speaking to you again in August after we release our Q2 results.
Thank you. This concludes today's call. You may now disconnect.