This call is being recorded on Thursday, May 2, 2024. I would now like to turn the conference over to Mr. Andrew Tamlin. Please go ahead.
Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's first quarter 2024 earnings conference call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management, Tom Johnston, Senior Vice President of Western Asset Management, and Todd Febbo, Vice President of Eastern Offices, Eastern Office Asset Management. Thank you all for taking the time to join the call. Before we jump into the call, I'd like to point out that our comments will mostly refer to the first quarter 2024 MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we make on this call.
Overall, we are again pleased with the first quarter results, which saw strong increases in same store net operating income growth across all asset classes, which is consistent with the levels of leasing momentum that we are seeing. Net operating income for the quarter was down slightly at CAD 30.9 million, as compared to CAD 31.5 million in 2023, due to a one-time property tax refund received last year in the amount of CAD 2.8 million. If this prior year amount is excluded, our net operating income increased by 8% or more than CAD 2 million. Same asset net operating income for the quarter increased a healthy 5.3% due to increases in all three asset classes. Retail results continued to do well as traffic and sales in our enclosed malls continued to improve post-COVID.
Office results saw a 3% increase in same asset net operating income due to increased leasing activity in the trust's Alberta assets. Interest expense increased 15% to CAD 16.9 million on a year-over-year basis. Higher interest costs on rollovers of mortgages in the last year have been a key reason for this increase. The trust has approximately 20% of its debt as variable at March 31, 2024, which is up slightly from year-end. The trust will continue to monitor this, and we expect to see this number decline in the second quarter as we work towards converting some of this variable rate debt to fixed, in addition to paying off some.
FFO for the quarter decreased 18% to CAD 13.4 million in 2024, as compared to CAD 16.3 million a year ago, due to higher interest expense, as just referenced, and the one-time CAD 2.8 million property tax refund. Our enclosed malls continue to perform and do well. We are continuing to see increases in sales per sq ft on a year-over-year basis and a quarter-over-quarter basis. For example, our sales per sq ft for our seven malls are on average, close to 15% higher than pre-COVID numbers. This has led to positive rental growth upon renewals for tenants at our enclosed mall assets and a continued trajectory of a bounce back of the performance of these assets. During the quarter, we had a CAD 50 million fair value loss in our real estate properties.
These adjustments were focused around expanded cap rates for some of our enclosed malls, as well as some of the REIT's BC office assets. PCME, our operating and leasing capital reserve, was established to be CAD 25 million for the year, or CAD 6.25 million for the quarter. Actual spending was CAD 6.5 million for the quarter. We are expecting elevated capital needs above the reserve amounts as we move further into 2024 due to increased leasing capital needed, particularly for office deals, and further catch up on operating capital from COVID. Our overall occupancy level of 90.3% at March 31, 2024, is 60 basis points higher than a year ago. Retail occupancy is up 80 basis points, and office occupancy is up 50 basis points.
Looking specifically at our enclosed malls, occupancy is up 100 basis points from a year ago, with every mall posting improved occupancy numbers over that time frame. The increase in office occupancy is driven by increased leasing activity at our Alberta assets, in particular, our suburban Calgary assets. And now for an update on our leasing efforts. In 2024, there's approximately 230,000 sq ft in retail GLA coming due, and 101,000 sq ft in office and 84,000 sq ft in industrial GLA coming due over the last nine months of the year. We expect that every tenant larger than 5,000 sq ft to renew their space and are positive about the remaining leasing activity necessary for the rest of the year.
Looking ahead to 2025, I note that we have approximately 500,000 sq ft in space at Penn West Plaza coming due. We are actively working with these tenants to determine their needs beyond this date. Presently, we've got renewal commitments for approximately 70% of the building and are having good conversations with certain other tenants. This will become a multi-tenant building at that point. At this point, we expect a decrease in net operating income of approximately CAD 14-15 million in 2025 due to the lease up and vacancy costs as the rents in this building get reset to market rates. However, we expect an approximately CAD 5 million improvement in 2026 in future years as we move past the initial lease up period.
Leasing discussions for both office and retail opportunities have definitely picked up in the last year, as both current and prospective tenants now have a better handle on what to expect going forward post-pandemic. This has led to numerous conversations about various opportunities at our properties across the country. Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal on December 31, 2020, and is still in overhold. While we have recently had some better back and forth discussions, this is going slowly, and at this point there is still no resolution to report. Turning to financing and liquidity, the trust has CAD 88 million in liquidity at the end of the first quarter, which is down from CAD 101 million at the end of 2023.
From a financing perspective, it was a pretty quiet quarter. However, looking at the rest of 2024, we are looking at a number of renewals that will be coming up in the second quarter of 2024. There will be minimal opportunities to procure our financing for these renewals and the rest of the renewals in 2024. We now have a binding arrangement for the sale of Heritage Towne Centre, which is a non-grocery strip mall based in Calgary. We expect to have net proceeds in the range of CAD 19.5 million after payout of the CAD 17 million mortgage when this transaction is completed in the second quarter. The proceeds will be put towards paying off lines of credit.
Wrapping up, we are pleased with the resiliency of our assets and the improved results and the activity levels from our enclosed mall and retail segment. We are especially pleased with the positive same asset results we've seen so far this year. We are looking forward to continuing positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area, and our strip malls, which are largely grocery anchored, have performed well. Beyond our retail assets, we have high quality office buildings in Canada's largest markets, with a high degree of government office tenants. We continue to be positive about our business and the objective of building value for our unitholders. We look forward to continuing to execute our strategy, and thank you for your continued support. We will now open the floor to questions.
Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Jonathan Kelcher with TD Cowen. Please go ahead.
Thanks. Good afternoon. First question, just on the, just a little clarity on this, but on the enclosed regional centers, it looks like the renewals were, the renewal rate was well below the, expiring leases. I'm just looking for a little bit of color on that.
You can chalk that up to the seasonality of the business, John. There's typically a high degree of Christmas-type tenants that fall off the roll. That's to be expected this time of year.
Okay. So if I look, if I were to look at that on an apples-to-apples basis, what sort of. Did you get an increase? And if so, what sort of increase did you get there?
If you back that out, we would probably be flat to a little positive.
Okay. That's helpful. And then secondly, just maybe an update on the development of Pine Centre. Looks like the cost on that is a little higher or the expected cost is a little higher this quarter.
Well, that's now done and closed out. Yes, there were a few additional costs as part of that project. We're still very positive about that project, though. The new grocery store has led to real good leasing conversations with new tenants such as H&M, which is still to open. But that mall is performing well and has a good, is looking forward to a good 2024.
Okay. That's, that's it for me. I'll turn it back. Thanks.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question comes from Tom Callaghan with RBC Capital Markets. Your line is now open.
Thanks. Good afternoon, guys. Andrew, maybe just to start, quick clarification from your opening remarks. I just want to make sure I heard you right in terms of the Penn West Plaza next year. Did you say a decrease now of CAD 14 million-CAD 15 million on an annualized basis next year expected?
That'll be a one-time thing, and yes, that'll be for next year. There's free rent that's being given out as an inducement. There's also some vacancy as well. So that will bounce back by approximately CAD 5 million when you get into 2026. So, you know, from an annualized perspective, once you get past next year, probably CAD 10 million is probably-
Got it.
a more appropriate number.
Okay, perfect. Thanks. Maybe just on Heritage, can you talk a little bit about what led to that disposition? Like, was that unsolicited, or are there other assets in addition to this one that you'd maybe look to part with over the next year or so?
It was really just recycling of capital, Tom. That asset is at a bit of a high watermark from a net operating income perspective. We just thought it was appropriate to go ahead and do a bit of a process, and we've now executed on a binding contract. So, it's really just recycling of capital.
Perfect. And was there a cap rate on that you could disclose?
It's about 7-7.25.
Great, thanks. And then maybe just last one for me. In terms of the maturities, I know you mentioned that no real opportunity for out financing, but any sense as to potential paydowns here over the remainder of 2024?
We could see some in the fourth quarter, but I wouldn't expect anything until then. So-
Okay.
It's a little too soon to talk too much about the fourth quarter.
Understood. Thanks, guys.
There are no further questions at this time. I will now turn the call over to management for closing remarks.
Thank you, everybody, for joining our conference call, and we'll look forward to talking to everybody for our second quarter. Thank you. Bye for now.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.