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 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, October 26th, 2023. I would now like to turn the conference over to Andrew Tamlin, CFO of Morguard Real Estate. Please go ahead.
Good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to Morguard REIT's third quarter 2023 earnings conference call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management, Tom Johnston, Senior VP of Western Asset Management, Todd Febbo, Vice President of Eastern Office Management, 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'd like to point out that our comments will mostly refer to the third quarter 2023 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 the call.
Overall, we're again pleased with the third quarter results, which showed continued improvement in net operating income on a year-over-year basis. In fact, net operating income for the quarter increased slightly to CAD 30.6 million in 2023 from CAD 30.4 million in 2022, due to steady net operating income results in the retail asset class. Net operating income for the nine months ended September 30th, 2023, increased 4.4% to CAD 92.6 million, due both to the increase in same asset income, plus a one-time property tax refund received in the first quarter for one of the trust's enclosed regional centers in the amount of CAD 2.8 million, which related to vacant space and past failed tenants such as Target.
FFO for the quarter decreased 16% to CAD 14 million in 2023 as compared to a year ago, due to higher costs in the trust's short-term or variable rate debt. Same asset net operating income for the third quarter remained steady from a year ago, buoyed by results from our retail asset class and in particular, our enclosed malls. Overall, our same asset net operating income was flat for the quarter as compared to a year ago. Interest expense has increased 20% to CAD 16 million for the quarter on a year-over-year basis. The impact of lower debt on a year-over-year basis has been offset by higher short-term borrowing costs due to the higher interest rate environment we find ourselves in. Higher interest costs and renewals of mortgages have also been a factor.
The trust has approximately 26% of its debt is variable at September 30th, 2023, which is elevated from approximately 18% at year-end. We anticipate that this number will decline by the end of the year as we work on renewing some of this debt on a long-term basis. The trust will continue to monitor this and would expect to see it somewhat elevated in the near future. As mentioned previously, our enclosed mall results continue to rebound from the downturn we saw under COVID. In the third quarter, we have seen more than half of our enclosed malls have double-digit increases in sales per square foot as compared to 2019. Pine Centre in Prince George, for example, is up more than 35%. This has led to positive rental growth upon renewals for tenants at our enclosed mall assets.
We are continuing to see a bounce back of the performance of these assets. During the quarter, we had a CAD 52 million fair value loss in our real estate properties, which was attributable to a 25 basis point increase in cap rates for our office asset portfolio. This compares to a CAD 73 million fair value loss recorded a year ago. The REIT's PCME or operating and leasing capital reserve, was established to be CAD 25 million for the year. However, the trust has spent CAD 26 million as compared to a reserve of CAD 19 million for the nine months to date, and capital in the amount of just CAD 13 million spent last year at this time. We are expecting elevated capital needs above the reserve amounts in future quarters into 2024.
Approximately CAD 9.5 million of this increase is due to enhanced leasing capital for this year. Otherwise, contractor delays from last year and some catching up spending from past years has contributed to this increase. Our overall occupancy level of 90% at September 30th is relatively unchanged from last quarter and down from 91% a year ago. This decline is attributable to the softness in the office market, which continues to see its challenges. We are seeing this downturn primarily in our Ontario office assets, whereas our office assets out west are holding occupancy or even increasing. Now for an update on our leasing efforts. In 2023, there is approximately 73,000 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's also approximately 133,000 sq ft in office space still coming due in 2023, and we believe we'll renew virtually all of this space. We feel positive about getting some good uplift in rental rates for the 82,000 sq ft industrial space coming due in 2024 as well. Looking ahead to 2025, I note that we have 525,000 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 have renewals for approximately one half of this space, and we're having good conversations with all tenants. This will become a multi-tenant building at that point.
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. 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 31st, 2020, and is now in overhold. For most of the time since then, the province did not want to pursue renewal discussions. However, this has now changed, and we are engaging with them about the renewal of this space. At this point, though, it is too early to tell how this will conclude.
Turning to financing and liquidity, the trust has CAD 126 million in liquidity at the end of the third quarter, which is comparable to CAD 121 million at the end of 2022. The trust completed two new financings this quarter on unencumbered strip assets for total proceeds of CAD 36 million. During the fourth quarter, there was a scheduled paydown of CAD 8 million from the Penn West Plaza renewal completed a year ago. Further, we expect a paydown of CAD 30 million in the fourth quarter for renewing a mortgage on an enclosed mall. We do expect that there will be limited opportunities about financing available during 2024. We are especially pleased with the results from Pine Centre in Prince George, British Columbia. This mall now has a new Save-On-Foods grocery store, which opened at the end of September.
This has led to leasing opportunities in this mall, including Lululemon, Sephora, H&M, and others. The addition of grocery further complements the strong anchor tenant profile at this mall. The trust has also announced a re-merchandising development project at St. Laurent. This is intended to strengthen the tenant mix and promote long-term growth through targeted investment in discretionary retailers. This cost is expected to be approximately CAD 13.5 million and is expected to take 24-36 months to complete. The trust is continuing to have conversations with new tenants for this mall and also existing tenants about possibly expanded space. Wrapping up, we are pleased at the resiliency of our assets and the improved results and activity levels from our enclosed mall and retail segment.
While there still is room to grow to get back to pre-COVID results, 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. If you have a question, please press star one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. If you would like to withdraw from the question queue, please press star two. If you're 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 of TD Cowen. Your line is already open.
Thanks, good afternoon. First, first question, just on the valuation, the office properties and the change in cap rates there. Did I catch that correct? You said 25 basis points it went up? Because the MD&A kind of looks like it was up 70, 70 basis points.
You might be looking at the year- to- date, Jonathan.
No, I think I've got June 30th. It was a weighted average of 6.9, and now you have 7.6. In any event, what was, w hat's actually, what's behind the increase? There hasn't been a lot of transactions. I'm just curious as to the thought process of increasing that.
Well, it's really just a challenging office environment, as, you know, as I'm sure you're well aware. You're right, there isn't really many transactions happening in the office asset class these days. However, our internal valuations team continue to look at surveys and data from surveys, and they just thought it was appropriate to make these adjustments based on that data.
Okay. That's fair enough. Secondly, on the mortgage, on your mortgage book, n ext year, it looks like you have 64% loan-to-value. I think in your prepared marks, you said you expect limited upside potential, but can we expect to see any pay downs on some of those renewals?
It's possible. Nothing in the first half of the year, but it's something that we're monitoring. We do have an unencumbered asset pool to tap into as well. But you know, we're not really looking at any major financings as part of that, for sure.
Okay. What sort of like CAD 430 is quite a bit for you guys. What's sort of the cadence of that over the course of the year? Is it evenly split or front- or back-half loaded?
I would say it's, it's probably evenly split throughout the year.
Okay. Lastly, on the two mortgages you did in September, both on retail properties, what was the loan-to-value and spread that you were able to achieve on those?
They were about 60%, 60% to low 60s, give or take, from a loan-to-value, and spread was around 190 basis points.
Okay. What would you expect for office spreads right now?
Higher than that. Higher than that. I'm not sure I can give you an answer on that, Jonathan, but it's, it's-
Not 190 basis points?
It's not 190 basis points , that's for sure.
Okay. I guess lastly, just to close it out on the 430 next year, how much of that would be office versus retail?
Off the top of my head, it might be about half and half, but I can get you a better answer on that offline.
Okay, thanks. I'll turn it back.
Thank you. Your next question comes from John Sheehy, private investor. Your line is already open.
Thank you. Hello, everybody. Thank you for taking my call. I would love to hear your current thoughts about development opportunities within your portfolio, starting with how you plan to move forward with Burquitlam Plaza, and then whatever other properties you think have the most interesting future potential. Thank you.
At this point, Burquitlam would be the property that we would be looking at first for development. Right now we're just working on the entitlements for that. We need to get through that first. I don't know that there—we do have other development opportunities in the book, but there's not anything that would be at kind of ready to go, John.
I'm just thinking, looking out, say, five years or 10 years, to get a sense of how much potential there would be at some of the sites, like you have a downtown Ottawa site that you've accumulated several parcels over time, and then the St. Laurent Shopping Centre has a lot of growth potential. There's a new subway stop right there. Just any thoughts that you could share about where those might have room to grow five to 10 years from now?
That would be the right timeframe, five to 10 years from now. You know, there's still entitlements to get on some of those sites. We have partners on some of those sites as well. So, I think that's the right timeframe.
Then, with regard to the Burquitlam Plaza, do you have any expectation about how you would finance your capital requirement for that, or would you look for a development partner for it?
I could see us looking for a partner on that, but, you know, it's still a little bit too early to tell, John.
Okay. That's great to hear. Thank you very much.
Thank you.
Thank you. Your next question comes from Tom Callaghan from RBC Capital Markets. Your line is already open.
Hey, guys. Good afternoon. Just first one for me, Andrew. Just want to make sure I heard right in the prepared remarks. In terms of that overhold, out in Alberta with the government tenant, did you say you're now discussing options with them? Is that? Did I hear right?
That's right, yeah. For the longest time, they had just said, you know, "We'll get back to you when we get back to you.
Right. Yep.
And so it's pretty, pretty quiet. So now at least we're having conversations. It's tough to really know where they're gonna go, but, you know, the good news-
Got it.
is that we're having dialogue.
When you say tough to know where, is the expectation still they'll look for that space or to keep that space, or it's more broad in terms of options here going forward?
Yeah, sorry. What I meant was by like, terms and like-
Got it.
you know, the term of the, term of the renewal and, stuff like that, so.
Got it. Yeah. Okay, that makes sense. And then just maybe switching gears on occupancy levels, like, you know, they ticked up a bit there, I think, on a sequential basis in retail and office. Can you maybe just provide some color there and outlook? I know retail, is there anything seasonal in there that'll roll off into 2024? Or was that more kind of, you know, the same type of momentum you guys have kind of talked about the last few quarters?
Do you mind me talking about retail, John?
Sure thing, Andrew. Hey, Tom. John, retail, during this time of year, typically sees seasonality in its occupancy. We're entering the holiday season, so you'll see a bigger pop in Q4 when we post results. Some of that is also good momentum on leasing. Retail, as Andrew has indicated through his opening remarks, has seen pretty good renaissance over the course of—since, since us coming out of COVID. It's commingling of both good occupancy from good leasing and also seasonality somewhat. Again, more of it will be seen in Q4.
Got it. Got it. And then just any color on, on the office side of things? Like I, I know you guys kind of called out the divergence between Ontario and, and Alberta. Is that something you kind of continue to expect to see or any color there?
Yeah, we have seen a divergence in between the two provinces. You know, we've seen real good leasing activity in Alberta, which is good news. There has been some struggles in Ontario. I would say going forward, it's, you know, it's probably gonna be flattish to maybe a little bit down. You know, I don't think there's anything that is really immediate that we need to worry about in the next couple quarters.
Got it. Thanks. Appreciate the call, guys. Turn it back.
Okay. Thanks, Tom.
Ladies and gentlemen, as a reminder, if you have a question, please press star one. There are no further questions at this time. We'll hand over the call to Andrew Tamlin. Please go ahead.
Thank you, everybody, for joining the call. We appreciate your time and look forward to next time. Thank you. Have a good night.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.