Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Morguard REIT. Welcome Morguard REIT's second quarter 2025 earnings conference call. I am joined this afternoon by John Ginis, Vice President, Retail Asset Management, Tom Johnston, Senior Vice President, Western Asset Management, along with Richard Clermont, Assistant Vice President, Asset Management, Eastern Canada. 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 2025 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.
Our second quarter results were consistent with the same trends that we saw in the first quarter and were also very consistent with expectations for the quarter. We have known for some time that 2025 was going to be a tough year due to the market rent reset at Panama Plaza in Calgary, the impact of which will continue throughout the year. Further to that, we have seen some pockets of softness in the enclosed mall segment from some tenant failures, but we are also seeing some strong same asset results from our strip segment, which are largely grocery anchored. A decline in interest expense from lower variable interest rates has also impacted the results. Our total net operating income for the second quarter declined from $31.8 million in 2024 to $25.7 million in 2025.
Approximately $4.7 million of the $6 million difference is due to the Panama Plaza lease reset. A $431,000 decline in lease cancellation fees has also had an impact on the NOI for this quarter. The decline in income from Panama Plaza is due to the expiration of the Obsidian Energy head lease on February 1st, 2025. This has resulted in a reset of rents for both Panama Plaza tenants and subtenants to current market rates. Effectively, this building has transitioned from a single-tenant building to a multi-tenant building. However, further, we are pleased that the resulting occupancy of Panama Plaza is now at 80% immediately after this transition. Significant inducements of opening free rents and free operating costs to secure tenancies are also impacting the Panama Plaza results for 2025, and in particular, the first three quarters of the year.
Our estimate is that there will be a downturn of approximately $15 million in net operating income for this asset in 2025, with some bounce back to this number in 2026 after these inducements burn off and other lease commitments kick in. As I mentioned, we are pleased with the 80% occupancy of this building after coming off many years where the office market in Calgary has struggled. Moving on, on Friday, March 7, 2025, The Bay filed for creditor protection under the Companies' Creditors Arrangement Act, or CCAA. The trust had two The Bay locations comprising a total of 290,000 square feet of GLA, one at Cambridge Centre in Cambridge and one at St. Laurent in Ottawa. The trust's annualized gross rent earned from The Bay leases was approximately $1.5 million.
The Bay has disclaimed specific leases in its portfolio, while other leases remain subject to the monetization process, which is currently ongoing. As of June 30th, 2025, the trust's lease with The Bay at Cambridge Centre has been disclaimed. The remaining lease at St. Laurent is subject to a bid by Ruby Liu Commercial Investment Corporation. Rent on the St. Laurent lease is still being paid while this process is ongoing. Notwithstanding the temporary softness in the enclosed mall segment, there are still lots of positives in this sector. We are seeing positive rental growth on lease renewals, and there remain lots of good conversations involving well-known national brands. It still remains quite expensive to construct new retail space, and hence a lot of retailers are looking at existing space rather than building new space. With the exception of one location, our community strip centers are essentially full at 99%.
Sales and traffic numbers at our enclosed malls also continue to be strong. The trust's interest expense declined almost $1.3 million for the quarter, due primarily to a decline in short-term variable interest rates on a year-over-year basis. Total interest expense is down over $2 million for the six-month period. Turning to financing and liquidity, the trust has $72 million in liquidity at the end of the quarter, which is down slightly from $81 million in liquidity at the end of 2024. I also note that our parent, Morguard Corporation, has advised the trust of its intention to receive its distribution in units rather than cash for 2025. As mentioned in previous quarters, the trust's operating capital reserves increased from $25 million annually to $35 million in 2025 to account for both higher repair costs as well as leasing costs. This represents $8.750 million per quarter.
Actual spending this quarter was approximately $7.6 million, which represented mainly repair and capital projects. Total spending for the six months approximates the $17.5 million reserves. So far this year, the trust has renewed or extended four mortgages totaling $80 million, lowering the interest rates from an average of 6.4% on these four mortgages to an average of 5% on renewal. The trust has approximately 18% of its debt as variable at the end of the quarter, which has increased slightly from 15% at the end of the year. The trust continues to focus on paying down debt, which has declined by more than $100 million since the end of 2020. Looking at our accounting for real estate properties during the quarter, we had $11 million in fair value losses, primarily due to some minor changes across all asset classes in the portfolio.
Our overall occupancy level at 85.9% at June 30th, 2025, decreased from 91.2% at December 31st, 2024, due to the increased vacancy at Panama Plaza and also due to the increased vacancy at Panama Plaza from the expiration of the Obsidian Energy head lease, in addition to the disclaimed Bay lease at Cambridge this past quarter. As I previously mentioned in past quarters, we are now embarking on a strategic merchandising program for St. Laurent, which will see the addition of two new nationally recognized brand names being added to the tenant roster, along with expansion plans for other tenants on the existing rent roll. The current budgeted capital commitment is $66.4 million and includes tenants such as Sephora and H&M, which are all expected to open in the next few months.
We are anticipating some future phasing beyond this spend as we look to ensure a stable and sustainable and profit-generating mix of tenants to this asset. Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal at the end of 2020 and is still in overhaul. While we recently have had some better back-and-forth discussions, this is still going slowly, and at this point, there is still no resolution to report. Wrapping up, we recognize that 2025 will be a tough year, but we are expecting the downturn to be limited. We are especially pleased that the leasing efforts at Panama Plaza have been able to have our most impactful office asset with an occupancy of 80% in this tough marketplace. Also, we continue to believe that there are strong fundamentals in the retail leasing environment.
We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in the 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'll now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You'll hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handsets before pressing any keys. One moment, please, for your first question.
Your first question will come from Jonathan Kelcher from TD Cowen. Please go ahead.
Thanks. Good afternoon. First question, just starting on The Bay, I guess for the Cambridge property where it was disclaimed, was there any NOI or any rent in there in the second quarter at all? When did that, when did they stop paying?
That was disclaimed at the beginning of June, so there would have been a small piece where we would not have received rent.
Okay.
Pretty material.
Material or immaterial?
It's pretty immaterial.
Okay, I guess it's like a month or a couple of months. It's not a lot of time, but any beginnings of plans for that space? Thoughts on it?
Hey, Jonathan. It's John Ginis. I have some questions.
Go ahead.
Hey, two-level space, an older format store. We're still in the preliminary evaluation component of what we do with the real estate. We've identified some temporary options to prop occupancy, though it's very soon for the short term, but nothing to report as of yet.
Okay. You don't have to give, is there anything like with that space vacant? Do you have to give any breaks to other tenants?
Co-tenancy is limited here. Fortunately for us, we have well-established relationships with a lot of our retailers across the portfolio, particularly ones here at Cambridge Centre. We are mitigating the risk profile associated with co-tenancy. We're not in a position whereby we're bleeding with respect to rent contractions that have to be awarded.
Okay. That's good. I guess switching gears over to office, we're seeing more return-to-office mandates. I guess there's at least a little bit more positive sentiment towards office. Are you guys starting to see a pickup in demand on that front?
Rick, do you mind giving some color on kind of what we're seeing in Ontario with respect to the office market?
Yes, sir.
Yes, sir.
Yes, there's been definitely an increase just recently with the return-to-office as the banks have announced more people coming back to work by the end of the year, basically kind of October-November. The same thing with the government trying to get people back a few more days a week. There's a bit more momentum in that sense. That's kind of where we're at. There is more interest, especially from the banks.
Okay, you're seeing more inquiries for your space?
Slowly, but yes.
Okay. Lastly, for me, just on the 2026 converting, I know it's the end of the year, but what are your thoughts on that right now?
It's still a little bit too early to comment on that, Jonathan. We have been putting some thought to it, but at this point, we're not really prepared to comment on it. Our track record has been just to roll it forward. Beyond that, it's still a little bit too early.
Okay. Fair enough. I guess just sticking with the balance sheets, on the balance of your mortgage maturities this year and in the next year, it looks like you're ± 50% loan to value on those properties. Are there, like, how should I think about that going forward? Like opportunities for up-financing? Is there any risk of needing to pay down one or more of those mortgages as they mature or just sort of renew as is?
I think we'll see the majority of them renew as is. There's not any that we're particularly worried about. There may be some small opportunities for up-financing, and we'll be reviewing those with the lender. There's really nothing on that list that we're overly worried about.
Okay. Thanks. I'll turn it back.
Great. Thank you.
Ladies and gentlemen, as a reminder, should you have any questions, please press the star key followed by the number one. We will pause for further questions. There are no further questions at this time. Please proceed with closing remarks.
Thank you, everybody, for your attention and listening in to the call. We'll look to talking to you at the third quarter call. Thank you and have a good weekend.
Thank you, gentlemen. This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.