Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust Second Quarter Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Today's call is being recorded Thursday, the 28th of July, 2022. I would now like to turn the conference over to Mr. Andrew Tamlin, Chief Financial Officer. Please go ahead, sir.
Thank you and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT second quarter 2022 earnings conference call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management, Tom Johnston, Senior Vice President of Asset and Property Management, Western Canada, Tullio Capulli, Senior Vice President, Asset Property Management and Leasing, Eastern Canada, along with Rai Sahi, Chief Executive Officer and Chairman of the Board. Thank you all for taking the time to join the call. Before we jump into the call, I would like to point out that our comments will mostly refer to the second quarter of 2022 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 pleased with the second quarter results, which showed continued improvement in same- asset metrics over last year, as well as the recording of CAD 12.3 million in fair value gains across our asset portfolio, mainly driven by increases in asset values in our strip mall portfolio. Net operating income for the quarter increased to CAD 29.7 million in 2022 from CAD 29 million in 2021 due to continued improvements in our enclosed mall portfolio results.
FFO for the quarter increased 8% to CAD 16.2 million in 2022 from CAD 15 million in 2021 due to the improved net operating income for the quarter, as well as continued interest savings from a decline in debt of CAD 43 million from a year ago. Same- asset net operating income for the second quarter improved 4% from a year ago, buoyed by a 15% increase in same- asset results for our enclosed mall portfolio. This represents the fifth quarter in a row where we've achieved improved same- asset results on a year-over-year basis. We have seen continued declines in interest expense, which declined another CAD 300,000 this quarter and CAD 600,000 for the six months, due primarily to the decline in debt on a year-over-year basis. As mentioned, our enclosed mall results continue to rebound.
This is mainly driven by our malls located in Western Canada, which have seen rebounds in traffic and sales, which has translated into increases in percentage rent and specialty leasing opportunities. We are also pleased to add opportunities of discriminating tenants such as Lululemon and Sephora at some of our Western Canada locations. These additions are solid endorsements to both our tenant and customer base. We are still seeing challenges in our two Ontario malls due to the numerous lockdowns imposed by the province over the last few years. We are, however, heading in the right direction and look forward to improved results in Ontario, as Ontario traffic and sales continue to rebound. Rent collections are for the most part back to normal, with the exception of the two Ontario enclosed malls that have been running recently at approximately 95%.
The tenants that are struggling in Ontario continue to be personal service tenants and food court tenants. The rent arrears and deferrals continue to decline since December 31, 2021, although there is still further work to do. The receivable balance for tenants has decreased from CAD 9.2 million at year-end down to CAD 7.6 million at the end of the second quarter. Most of the uncollected overdue amounts have been fully allowed for, but there is still cleanup needed to be documented, abatements to be granted, and the vast majority of these amounts are outstanding from Ontario malls. The REIT's PCME or operating and leasing capital reserve was established to be CAD 25 million for the year, which is back to normal levels.
We spent only CAD 6.8 million of the CAD 12.5 million six-month allocation, but we do expect to be more active on the spending in the back half of the year, which is typical for us. Our overall occupancy levels of 91% at June 30th remain relatively unchanged to both year-end and a year ago. This compares favorably to the rate from the beginning of the pandemic, which was 93%. This speaks to the fact that in most cases, we've been able to keep tenants together at quality assets. Now for an update on our leasing efforts. For the rest of 2022, there's approximately 253,000 sq ft in retail GLA coming due. We feel good about the renewal of the vast majority of this space, with renewals already completed for any space over 10,000 sq ft in GLA.
We also have approximately 212,000 in office GLA coming due over the next six months. Approximately one half of this represents a single-tenant government lease at Chancery in Vancouver. This has been renewed for 10 years and moves from an expiring rate of CAD 25 per foot to an average of CAD 27.50 per foot over the 10 years. Leasing discussions for retail opportunities have definitely picked up over the last six months as tenants now have a better handle on how they will be operating. Office leasing discussions are still somewhat muted as tenants are still trying to figure out what their office needs will be like in the long term in a post-COVID world.
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 now in overhold. While they have verbally told us that they expect to renew, they have unfortunately still been focused on their response to the pandemic, which has taken priority. At this point, we are looking at later in 2022 in order to get this completed. Our experience is pretty similar to other landlords who have the provincial government as tenants. Turning to financing and liquidity. The trust has CAD 165 million in liquidity at the end of the second quarter, and CAD 329 million in unencumbered assets. This liquidity position has increased from CAD 142 million a year ago.
It has been a pretty quiet time from a financing perspective over the first six months, but there are a few mortgage renewals we are working on that come due in the last six months of the year. We do expect to net pay down some of these mortgages, but we do have ample liquidity to be able to handle this. We will have further line of sight on this when we get to the third quarter reporting cycle. The trust is continuing with the Save-On-Foods development job at Pine Centre, which entails the re-tenanting of the empty Lowe's premises into a new 38,850 sq ft Save-On-Foods grocery store. Demolition of the existing former Lowe's premises is now complete, and we're arranging for subtrades and material deliveries and starting construction. This is expected to be completed early next year.
The addition of this grocery further complements the strong A-center tenant profile at this mall and has advanced leasing discussions with some discriminating tenants looking to come into this marketplace. Wrapping up, we are pleased with the resiliency of our assets and the improved results from our enclosed mall and retail segment. While there is still room to grow to get back to pre-COVID results, what we have seen in the last year has been positive. We are looking forward to continued positive leasing conversations for our assets, and most of our enclosed malls remain dominant in their geographical area. Our strip malls, which are largely grocery anchored, have performed well in the pandemic. 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 continue to execute our strategy and thank you for your continued support. We will now open the floor to questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Please stand by for your first question. Your first question comes from Jonathan Kelcher of TD Securities. Please go ahead, sir.
Thanks. Good afternoon. Just a little clarification there, Andrew, on your comments. Did I hear correctly that you have 253,000 sq ft of retail expiring over the balance of this year?
Yeah, that's right.
Okay. That exhibit you have in the MD&A that says 650 is roughly 400,000 sq ft month-to-month. Is that how we should think about that?
Yeah. There is a significant amount that's either month to month or specialty leasing, that sort of thing.
Okay. That's helpful. Secondly, just on the gain, the IFRS gain you had on strip retail, what drove that? Was it higher cash flow assumptions or did the cap rate change? Or what drove that?
Yeah. It was really some cap rate adjustments for that portfolio. You know, as our valuation department looked at comparables, they thought it was appropriate to do that.
Okay. Just lastly, I guess, for you, Rai, just given the current discount, we're starting to see more REITs do this, but what are your thoughts on an NCIB for Morguard REIT?
I think we still have NCIB there, so we'll take a look at it, whether we will use it or not.
Okay. No real current plans and obviously no plans to be aggressive with it.
Well, I wouldn't say no plans to be aggressive. Aggressive is just, not a proper word. Like, we always looking at on an ongoing, whether there. It depends on what becomes available. Okay. That's sorry.
No, it's okay.
I think that was it, Jonathan. Yeah.
Yeah. Okay. I'll turn it back. Thanks.
Okay. Thank you.
Your next question comes from Tom Callaghan of RBC Capital Markets. Please go ahead.
Hi. Good afternoon. Just to start, just curious with respect to occupancy and just given some of the recent commentary there that you made in your opening remarks, Andrew. Just curious if you have a view as to where occupancy kind of may trend here over the next six months into year-end.
It's been very stable, Tom, over the last, you know, few years under COVID, so I really wouldn't expect too much in the way of changes of occupancy. You know, as I've mentioned, we have pretty good line of sight to the major renewals coming up from a retail perspective. You know, a lot of the heavy lifting has been done already on the office as well. I don't really expect too much in the way of changes.
Got it. Makes sense. Just one more from me. Maybe any commentary and trends you're seeing with respect to TIs and particularly on the office front, you know, and how those maybe have evolved since the start of the year, if there's been really any movement from the tenant perspective and what they're looking for.
Yeah. I don't know. Tullio, do you wanna handle that or Tom, one of you?
Sure. Tullio here. Yeah, I mean, the TIs are starting to creep up a little bit. It hasn't gone up that much at this point in time, but you know, everybody's competing for a lower pool of tenants at this point until you know, people figure out what they need and how much space they need, and we go from there. We don't anticipate it to be huge, but we will be competitive with any deal that we think is appropriate to be done.
Got it. Thanks, guys. I'll turn it back.
Thanks, Tom.
Ladies and gentlemen, once again, if you would like to ask a question, please press star one now. Mr. Tamlin, there are no further questions from the phone line, sir. Please go ahead with your closing remarks.
Okay. Thank you everyone for joining the call and, look forward to seeing everybody next quarter. Thank you.
Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for participating and ask that you please disconnect your lines.