Good afternoon, ladies and gentlemen, and welcome to the Morguard REIT fourth quarter for the year ended December 31, 2022 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. This call is being recorded on Thursday, February 16th, 2023. I would now like to turn the conference over to Mr. Andrew Tamlin. Please go ahead, sir.
Thank you. Good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's fourth quarter 2022 earnings conference call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management, Tom Watson, Vice President of Western Asset Management, and Todd Thibault, Vice President of Eastern Asset Management. 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 fourth 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 would make on the call.
Overall, we are pleased again with the fourth quarter results, which showed continued improvement in the same asset metrics on a year-over-year basis. Net operating income for the quarter increased 6% to CAD 33.5 million in 2022 due to continued improvements in our enclosed mall portfolio results. Net operating income for the year was flat at CAD 122 million. The improved operating results for the full year is offset by the decline in one-time lease cancellation fees in the amount of two and a half million dollars. FFO for the quarter also increased 6% to CAD 19 million in 2022 as compared to a year ago. Same asset net operating income for the fourth quarter improved 5% from a year ago, buoyed by an almost 10% increase in same asset results for our enclosed mall portfolio.
This represents the 7th quarter in a row where we've achieved improved same asset results on a year-over-year basis. For the year, our same asset net operating income is up 3%, primarily due to a 10% increase for the enclosed malls. Interest expense has increased 6% to CAD 14 million for the quarter on a year-over-year basis. The impact of lower debt in the amount of CAD 25 million on a year-over-year basis has been offset by higher short-term borrowing costs due to the higher interest rate environment that we find ourselves in. For the year, interest expenses rose marginally or one half of a percent. We continue to see interest expense decreasing in 2023, notwithstanding our decline in debt.
This is due to both an elevated amount of mortgage maturities in the next 2 years, in addition to the fact that the trust has approximately 18% of its debt as variable. As mentioned previously, our enclosed mall results continue to rebound from the downturn we saw under COVID. This rebound started in late 2021 with our malls located in Western Canada and has continued throughout 2022 with our Ontario malls. 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. Sales at our malls, for the most part, have either bounced back or exceeded the pre-COVID levels.
This speaks to the trend of folks going back to the mall to do in-person shopping. In general, we found that it was a solid holiday season for our enclosed malls and their tenants. We are pleased with the results from Pine Centre in Prince George, British Columbia as well. This mall will have a new Save-On-Foods grocery store opening shortly, which has also led to leasing opportunities with discriminating tenants such as lululemon and Sephora, with potentially more to come. Rent arrears and deferrals continue to decline. The receivable balance for tenants has decreased from CAD 9.2 million at the end of last year to CAD 5.4 million at the end of this year. While the uncollectible overdue amounts have been allowed for, there is still cleanup needed to document certain abatements to be granted.
The vast majority of these amounts outstanding are from the Ontario malls and stem from pre-2022 arrears. At this point, the amount of bad debt expense that we are seeing is very comparable to pre-COVID levels. During the quarter, we had a CAD 113 million fair value loss in our real estate properties, as we are required to adjust these assets to fair market value under IFRS. This represented a 25 basis point expansion of cap rates for all enclosed mall, retail, and office assets in response to market changes in valuation parameters. Combined with earlier 2022 adjustments, we've recorded a CAD 149 million fair value loss for the year as compared to CAD 61 million last year.
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 22 million of this, with contractor and other delays being the primary reason why the full amount was not spent. We do expect to be more active in operating capital spending in both 2023 and 2024 as we catch up on delayed projects and look at higher leasing volumes, which may result in higher level of necessary leasing capital. Our overall occupancy levels at 91% at December 31st remains consistent with a year ago. This 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.
I do note that we have a single tenant in industrial asset for which the tenant did not renew in the fourth quarter. We are working to find a new tenant for this asset. Now for an update on our leasing efforts. In 2023, there's approximately 475,000 sq ft in retail GLA coming due. We do expect that every retail tenant larger than 5,000 sq ft to renew their space. There is also approximately 385,000 sq ft in office space coming due, and we feel good about the vast majority of this space as well. I do note that there is 13,000 sq ft in Ottawa that will be vacated and a further 19,000 sq ft at 77 Bloor, which will be vacated.
We see no issue with the 62,000 sq ft of industrial space renewing in 2023. Leasing discussions for 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. 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 what their office needs will be like over 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 31st, 2020, and is now in overhaul.
While they have verbally told us that they expect to renew, they have unfortunately still been focused on the response to the pandemic and other initiatives, 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. I do note that this space has remained occupied over this entire time frame. Turning to financing and liquidity. The trust has CAD 122 million in liquidity at the end of the fourth quarter and CAD 345 million in unencumbered assets. These numbers have changed from CAD 185 million and CAD 315 million a year ago.
Looking specifically at mortgage renewals, we had CAD 44 million in mortgage pay downs in the fourth quarter, most of which related to a CAD 35 million pay down associated with the Penn West Plaza renewal. The trust is continuing with the Save-On-Foods development job at Pine Centre, which entails the retenanting of the former Lowe's premises into a new 38,850 sq ft Save-On-Foods grocery store. Construction efforts are now mostly complete. We expect to be able to turn it over to the tenant early in the second quarter. The addition of grocery further complements the strong anchor tenant profile in this mall and has advanced leasing discussions with some discriminatory tenants looking to come into this marketplace.
Last quarter, the trust announced that it had reached an agreement with T&T Supermarket to convert the Home Outfitters space at Heritage Town Centre in Calgary into a 34,000 sq ft retail store focusing on sporting goods. This project will cost approximately CAD 3 million from a landlord perspective and will be completed in the first quarter of 2023. Wrapping up, we are pleased that 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, we have seen positive results in the last year. 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.
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 the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please move the handset before pressing any keys. One moment please for your first question. Your first question comes from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks, good afternoon. First question is just on the enclosed retail portfolio that the same property NOI, strong in the quarter, been strong all year. Maybe give a little bit more color on what drove that, and
I guess what are your expectations for that portfolio for 2023? Where do you think you can get the occupancy to?
Do you mind fielding that, John?
Sure. No problem, Andrew Tamlin. Hey, Jonathan Kelcher. Thanks for the question. You're right. Retail has seen a resurgence, particularly in 2022. We didn't really know what to expect starting beginning of the calendar year coming out of COVID restrictions, particularly here in Ontario. To answer your question directly, what drove that really is net new demand and our ability to roll up our income that was disproportionately hit during the pandemic in the sector. We feel very positive, as Andrew Tamlin said in his opening remarks about the business going forward. There was a lot of restructuring that ensued in 2020, and we saw the impact of income on the sector accordingly. We've been very diligent in trying to roll some of that back.
You know, we've dealt a lot with our receivables, as Andrew noted in his opening, in his remarks as well. Again, a combination of net new leasing, ability to roll, renew tenants at higher rents as part of the inline CRU component and so we feel very positive about the business moving forward.
Okay. What are you... Like, you ended the year at 93% or just over 93% occupancy. What would you say is a stabilized number, a number you'd be happy with?
In the mall-based portfolio, it's evolving in terms of tenants, particularly in the mid-market sector. You know, our hope is that achieving a 95% stabilized occupancy in the enclosed mall segment is probably something we're looking to achieve. The strip center portfolio is a little bit different. That typically has a higher stabilized occupancy just given the nature of the asset being a needs-based asset portfolio.
Okay. Then just turning to the balance sheet. You do have a bunch of debt rollover, 2023, 2024. What sort of loan to values do you think you can do right now, and what interest rates are you looking at?
Thanks, Jonathan. Yes, there are a higher amount of maturities coming up in 2023 and 2024. You know, we're looking at doing loan to values in the 50%-60% range. There's probably not gonna be a ton of availability for op financing. There's gonna be certain opportunities, but, you know, we'll be looking at kinda what we can do there. As in relation to your question on interest rates, you know, they're probably gonna be in the range of 5%-6%. You know, hopefully a little bit less than that, but that's kind of what we've been budgeting.
Okay. You're saying 50%-60%, but if I look at your chart, it kind of has the maturing loan to value at 65%. Would that imply some actual paydowns this year?
There will likely be a net paydown, yes. Yeah.
Okay. Thanks. I'll circle back.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question is from Tom Callaghan from RBC Capital. Please go ahead.
Thanks. Good afternoon. Just a quick follow-up there on the maturities and the debt side of things. Just in terms of fixed versus variable rates, I think you had mentioned, Andrew now kind of at 18% exposed to variable. That's up quite a bit quarter-over-quarter and I know related to the refinancings there. Is that something you're comfortable with here in the short term given interest rates or are you going to look to kind of fix some of those rates in the coming quarter?
We'll be monitoring that, Tom. I think the, you know, the thinking on interest rates changes, it's a very fluid environment. I don't wanna kind of make any promises on that. You know, we will be monitoring that, and if we think it's appropriate to go fixed on them, then we will. You know, it is, you know, it is something that we're monitoring.
Yeah, understood. That's, that's all for me. Thanks, guys.
Once again, ladies and gentlemen, please press star one should you wish to ask any question. There are no further questions at this time. Please proceed, Mr. Tamlin.
Thanks everybody for for joining the call and looking forward to talking to everybody again next quarter. Thank you.
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for participating. You may all disconnect.