Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust Third Quarter Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. At any time during the call, if you require assistance, please press star zero for the operator. This call is being recorded on Thursday, October 27th, 2022. I would now like to turn the conference over to Andrew Tamlin, Chief Financial Officer. 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 Third Quarter 2022 Earnings Conference Call. I'm joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management, Tom Johnston, Senior Vice President of Western Asset Management, Tullio Capulli, Senior Vice President of Eastern Asset Management, along with K. 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 third 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, and which would also apply to any comments that we make on this call.
Overall, we are again pleased with the third quarter results, which showed continued improvements in same asset metrics on a year-over-year basis. Net operating income for the quarter increased slightly to CAD 30.4 million in 2022 due to continued improvements in our enclosed mall portfolio results. FFO for the quarter also increased slightly to CAD 16.6 million in 2022 as compared to a year ago. Same asset net operating income for the third quarter improved 1% from a year ago, buoyed by a 4% increase in same asset results for our enclosed mall portfolio. This represents the sixth quarter in a row where we've achieved improved same asset results on a year-over-year basis. Year to date, our same asset net operating income is up 2%, which is supported by a 10% increase in the malls.
Interest expense is relatively flat on a year-over-year basis at CAD 13.3 million. The impact of lower debt of approximately CAD 30 million on a year-over-year basis has been offset by higher short-term borrowing rates due to the higher interest rate environment that we find ourselves in. Year to date, our interest expense has declined CAD 500 million due to the lower debt levels. As mentioned, our enclosed mall results continue to rebound. This rebound started with our malls located in Western Canada, which have seen increases in traffic and sales. These have 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, with possibly more to come. These additions are solid endorsements to both our tenant and customer base.
We have noted that while traffic in general at our malls compared to 2019 is down, sales for the most part have either bounced back or exceeded the pre-COVID levels. This speaks to the trend of folks going to the mall to do purposeful shopping. Sales and traffic for our Ontario malls has continued to improve as well. These were the malls that were hardest hit from a results perspective due to the numerous lockdowns that Ontario imposed under COVID. Rent arrears and deferrals continue to decline since December 31st, 2021, although there is still further work to do. The receivable balance for tenants has decreased from CAD 9.2 million at December 31st to CAD 5.8 million at the end of the third quarter.
While the uncollected overdue amounts have been allowed for, there is still cleanup needed to document abatements which have been granted. The vast majority of these amounts outstanding are from Ontario malls and stem from pre-2022 arrears. During the quarter, we had a CAD 73 million fair value loss on our real estate properties as we were required to adjust these assets to fair market value under IFRS. This represented primarily a 25 basis point expansion of cap rates for enclosed mall retail and non-Vancouver office. Combined with earlier 2022 adjustments, we've recorded a CAD 36 million fair value loss on a year-to-date basis. 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 approximately CAD 13 million of the CAD 18.5 million nine-month allocation, but we do expect to be more active on the spending in the last quarter of the year, which is typical for us and into next year as we catch up on delayed capital projects and look at higher leasing volumes. Our overall occupancy levels of 91% at September 30th remain slightly higher than both year-end and a year ago. Our current occupancy level for all asset classes of 91% has only changed slightly from the start of the pandemic, which was 93%. This speaks to the fact that in most cases, we've been able to keep tenancy at our quality assets. Now for an update on our leasing efforts. For the rest of 2022, there's approximately 200,000 sq ft in retail GLA coming due.
While we expect the vast majority of this space to renew, more than half of this represents large national tenants which have already agreed to renewals. Leasing discussions for retail opportunities have definitely picked up since the start of the year, as both current and prospective tenants now have a better handle on what to expect going forward. This has led to numerous conversations about various opportunities at our properties across the country. Office leasing discussions, on the other hand, while gaining some momentum, are still somewhat muted as tenants are still trying to figure out their office needs, 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 of Petroleum Plaza at Edmonton, which came up for renewal back on December 31st, 2020, and is now in overhold.
While they have verbally told us that they expect to renew, they've unfortunately still been focused on the response to the pandemic, which has taken priority. At this point, we are looking at 2023 in order to get this completed. Our experience is similar to other landlords who have the provincial government as tenants. Turning to financing and liquidity. The trust has CAD 168 million in liquidity at the end of the third quarter and CAD 326 million in unencumbered assets. This liquidity position has increased from CAD 163 million a year ago. Looking specifically at fourth quarter mortgage renewals, we are concluding on the refinancing discussions of a mortgage attached to an asset in Calgary in the amount of CAD 149 million.
As part of the refinancing of this mortgage, we are looking at a CAD 35 million pay down funded by our lines of credit. 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 are busy with construction efforts. This is expected to be completed early next year and turned over to the tenant. The addition of grocery further complements the strong anchor tenant profile at this mall and has advanced leasing discussions with some discretionary tenants looking to come into this marketplace.
The trust has also reached an agreement with Team Town to convert the empty Home Outfitters space at Heritage Towne Centre in Calgary into a 34,000 sq ft retail store. This project will cost approximately CAD 3 million from a landlord perspective and will be completed in early 2023. Wrapping up, we are pleased with the resiliency of our assets and the improved results and activity levels from our enclosed mall and retail segment. While there is still room to grow to get back to pre-COVID levels, what we have seen in the last year has been positive. We are looking forward to continued positive leasing conversations for 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 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 unit holders. We look forward to continuing to execute our strategy, and thank you for your continued support. We will now open the floor to questions. Hello?
I'm here, Andrew.
Is the operator there?
I don't hear you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. If you'd like to withdraw your request, please press star followed by two. If you are speaking on a speaker phone, please lift your handset before pressing any keys. Your first question comes from Jonathan Kelcher. Please go ahead.
Thanks. Good afternoon. First question, just that was good color on the Calgary mortgage maturity. That CAD 35 million, do you plan just to keep that floating, or are there any plans to use some of your unencumbered assets to sort of fix that over time?
For right now, we'll just keep that floating as a you know payment against our line. Yeah, no real plans beyond that, although we are looking at other opportunities into 2023.
Okay. Wait, what property was that again?
It's Penn West Plaza.
Penn West Plaza. That's all. Just for, I guess, the same question as we look to 2023 maturities, I think you're in the MD&A, it says the leverage is about 60%. Do you think you'll have to do any pay downs on 2023 maturities?
It's a little too early to say on that, Jonathan. I mean, it is tight as you noticed. You know, having said that, you know, we do have a pretty strong unencumbered asset pool to dip into and, you know, pretty good availability on our lines of credit as well. I think we'll be fine, but we will be looking closer at that as we move into next year.
Okay. Then just lastly for me, I guess you said office leasing was a little bit more muted. Might you give a little bit more color on that and where you expect that to go? Do you think it's more muted due to people thinking about hybrid work, or do you think it's more muted for recessionary fears or some combo of those?
Yeah, I mean, it's probably a combination of both. Maybe Julie or Tom, one of you would be prepared to add a bit of color on the office asset class these days.
Sure, I can. Hi, Jonathan. It's Tom Johnston in Vancouver. I would argue and every sub-market performs differently, but overall where we're seeing some uptick in vacancy in particular, the Vancouver market is an example where you are gonna see some, the vacancy creep up. It's really related to a couple things. One would be definitely the hybrid model and also is the sort of the tech industry has definitely slowed down. In certain markets that have been heavily reliant on the take up by the tech industry, they will be affected. Whereas in a market like Calgary, we're actually had the first quarter of some positive absorption. There's actually some good news coming out of there, and again, that's related to the oil and gas industry.
I generally wouldn't say it's related to the recession in the West. Again, it would be more oriented towards the hybrid work model and then, you know, maybe tech in some of the cities. Does that answer your question?
Yep, that is helpful. I'll turn it back. Thanks.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question comes from the line of Tom Callaghan from RBC Capital Markets. Please go ahead.
Thanks. Good afternoon. Maybe Andrew, just one clarification on your comment there. When you were mentioning the sales exceeding 2019 levels in the enclosed mall portfolio, was that strictly related to Western Canada or kind of the entire portfolio there, including the Ontario assets?
No, the Ontario assets have come back as well now. I mean, it took a while for the sales levels to come back, but they're, you know, they are now at approximately the 2019 levels from a sales perspective. Definitely good news from that standpoint.
Got it. Thanks for that. Then just quickly, and I apologize if I missed it in your opening remarks there, but with respect to the government tenant there at Penn West Plaza, have they physically returned back to the office or are they kind of still 100% working from home?
Tom, yeah, I think you could probably answer that, right?
Yeah. Well, hey, hi, Tom. Again, they are the province in Alberta, depending on what ministry it is on the hybrid model. We've seen lots of folks come back to the office. I'd say our occupancy levels are certainly up more in the 50% range in that asset. There are, you know, the government is still adopting somewhat of a hybrid model for right now, and I don't think they have a clear path forward at this point in time. Definitely more and more folks returning to the office.
Got it. That's great. Thanks, guys. I'll turn it back.
Thanks, Tom.
There are no further questions at this time. Please proceed.
Okay, thanks everyone for joining the call, and looking forward to speaking with everybody next quarter. Have a good day.