Good afternoon. I would like to welcome everyone to the Plaza REIT third quarter 2022 earnings conference call. At this time, all participants are in listen only mode. During the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up your questions. If anyone has any difficulties during the conference, please press star zero for operator assistance. I would like to advise everyone that this conference is being recorded. I will now turn the conference over to Kimberly Strange, Plaza's General Counsel and Secretary. Please go ahead, Ms. Strange.
Thank you, operator. Good afternoon, everyone, and thank you for joining us on our Q3 2022 results conference call. Before we begin today, we are legally obliged to advise you that in talking about our financial and operating performance and in responding to questions today, we may make forward-looking statements, including statements concerning Plaza's objectives and strategies to achieve them, as well as statements with respect to our plans, estimates, and intentions, or concerning anticipated future events, results, circumstances, or performance that are not historical facts. These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements.
Additional information on the risks that could impact our actual results and the expectations and assumptions we apply in making these forward-looking statements can be found in Plaza's most recent Annual Information Form for the year ended 31st December 2021, and Management's Discussion and Analysis for the period ended 30th September 2022, which are available on our website and on SEDAR at www.sedar.com. We will also refer to non-GAAP financial measures widely used in the Canadian real estate industry, including FFO, AFFO, NOI, and Same-Asset NOI. Plaza believes these financial measures provide useful information to both management and investors in measuring financial performance and financial condition of Plaza. These financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similarly titled measures reported by other entities.
For more information on these financial measures and where to find reconciliations thereof, please refer to part seven of our MD&A for the period ended 30th September 2022. I will now turn the call over to Michael Zakuta, Plaza's President and CEO. Michael?
Thank you, Kim. Good afternoon. Our business remains strong and our outlook positive. Like other real estate entities, we face the competing headwinds of inflation, interest rates, and construction delays, and we are carefully managing our business to minimize our exposure to each. We're also continuing with our business plan to grow through developments and redevelopments, active leasing, and recycling capital through disposition of non-core assets despite these challenges. I recently attended the Canadian ICSC conference in Toronto with our leasing team. This was a very good event for growth and development-oriented REIT like Plaza. The growth of our business is largely dependent on demand from Canada's leading essential needs, value, and convenience retailers, and we are currently experiencing some of the strongest demand that we have seen in years.
We completed more leasing activity in the first nine months of 2022 than we did during similar periods in the past five years. During the quarter, we completed 332,000 sq ft of leasing of new space, renewals, and the backfilling of previously vacant space. Year to date, we have leased 1,038,000 sq ft, 647,000 sq ft of renewals, 190,000 sq ft of leasing of new space, and 201,000 sq ft of backfill leasing of previously vacant space. This is the first time in five years that we've reported occupancy of over 97%. As real estate is capital intensive, rising interest rates have an impact on the industry and will have an impact on Plaza's results. We are managing our business accordingly.
We are being more selective in allocating investment capital as we navigate current headwinds and continue to work with grocers, pharmacies, and value retailers. We have five new grocery anchor developments now that are planning their construction with strong pre-leasing in place and a number of other essential needs and value style developments in our pipeline. You will find recent photos of a number of our projects posted in the Q3 2022 presentation in the financial report section of our website. Construction costs remain highly variable across our geography. We have experienced some surprises along with some solid successes. We are experiencing serious challenges delivering some of our projects due to contractors repricing fixed price contracts, labor shortages, and material delivery delays. We have been very successful with our non-core sales program.
Private investors remain active buying smaller properties at low cap rates. The subject of recession is top of mind for many investors. Our portfolio of essential needs and value retailers and quick service restaurants should prosper in a recessionary environment. One of the takeaways that I registered at the recent ICSC was the comments from some retailers and fast food chains that consumers were trading down. This trend should benefit most of our tenants. Additionally, we anticipate that supply chain and construction cost challenges should adjust in our favor as demand slackens. I will now turn the call over to Jim Drake, Plaza CFO. Jim?
Thank you, Michael. NOI this quarter was impacted by operating expenses, which were up over the same quarter last year. Much of this is timing only, as costs normally incurred in Q2 were delayed until Q3, a result of supply chain delays and labor shortages. Same-Asset NOI was also impacted by a few properties that we are improving, where we have allowed certain smaller tenants to expire to replace them with larger, stronger, and more resilient secondary anchor tenants. Even with that, year-to-date, Same-Asset NOI is up 1.4%. FFO per unit for the quarter was CAD 0.104, up 4% over last quarter and down slightly versus last year due to operating expense timing and insurance proceeds received last year. For year-to-date results, it is key to remember that 2021 included CAD 3 million of lease termination income.
Excluding the impact of same-asset and excluding other unusual items such as insurance proceeds and COVID-related bad debt incurred last year-to-date FFO per unit is up 2%. Year-to-date AFFO per unit, adjusted for these same unusual items, was down 1%. Higher leasing costs impacted AFFO, in part due to inflation and in part due to increased leasing activity, which will result in increased revenue going forward. That increased leasing is reflected in our community occupancy of 97.2%, up 100 basis points over last year and a record level over the last 5 years. Strong leasing demand has also pushed lease renewal spreads at 3% year-to-date. Under our development program, given the current inflation and interest rate environment, we are proceeding cautiously, but still have a full pipeline and active projects underway with fixed price contracts in place.
During the quarter, we advanced a number of projects. We started construction on a grocery anchored development in Shubenacadie, Nova Scotia, a community just outside Halifax, and we completed the final phase of Hogan Court, our grocery anchored development in Halifax. We also closed on land in Dieppe, New Brunswick, a community adjacent to Moncton and Welland, Ontario, both of which will be grocery anchored developments. Our liquidity remains solid and at quarter end totaled CAD 63 million, including cash, operating line, and unused development and construction facilities with an additional CAD 5 million of unused facilities on non-consolidated properties. We also had CAD 18 million of unencumbered assets, and our debt to total assets ratio has improved by 120 basis points over Q3 last year, now at 56%. For mortgage rollovers, at quarter end, we had one small mortgage maturity remaining for the year, which will be renewed shortly.
In 2023, we have CAD 31 million of mortgages maturing at a weighted average rate of 4.67%. Loan to value on these mortgages is less than 50%, and a large portion relate to freestanding pharmacies or pharmacy anchored properties. We are confident of renewals. We also have our CAD 47 million Series E convertible debentures maturing in March 2023. The convertible debenture market is currently expensive. If that market for our unit price has not improved before March, we will repay the maturing converts with a bridge loan of approximately CAD 37 million with the remainder from non-core asset sales. The pricing on the bridge loan is anticipated at approximately prime plus 1% or BA+ 2%. Once the unsecured market improves, we would then anticipate replacing that bridge with a new unsecured debt issue.
Finally, on cap rates and valuations, we were not overly aggressive with our valuations when cap rates were compressing. The current pressure on cap rates for certain property types should have less of an impact. Our starting point was relatively conservative. We also continue to see strong demand for essential needs and convenience assets such as ours, and the sales of our non-core assets this year were above IFRS values. Significantly higher replacement costs also act as a barrier to entry and provide further support for our IFRS valuations. Regardless, with the increase in Government of Canada bond yields, we saw a nominal increase in cap rates this quarter and took a CAD 4 million write down. Our weighted average cap rate is now 6.78%. Those are the key points relating to the results for the quarter and year to date.
We will now open the lines for any questions. Operator?
Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by number one on your touchtone phone. You will hear a one-tone prompt acknowledging your request. Your questions will be called in the order they are received. If you would like to decline from the following process, please press star followed by two. Please ensure you leave the handset if you are using a speakerphone before pressing any keys. One moment please for your first question. Your first question comes from the line of Jenny Ma from BMO Capital Markets. Your line is now open.
Hi. Good afternoon.
Afternoon.
Jim, you mentioned in your remarks that Plaza will be proceeding cautiously with respect to development. I'm wondering if you could elaborate more on what it is that's causing that view, aside from the macro, which we all know. Is there anything specific to the markets that you're in? Is it on the labor side, the cost side, that's holding you back or, you know, causing you to be a bit more cautious going forward?
It's not specific to the markets that we're in. It's the macro issues that we're all aware of, being obviously interest rates, pressure on labor and supply chain issues.
Okay. Is that reflective of what your tenants are telling you as well? Because I'm just thinking, you probably have great relationships. You've got a lot of visibility to your tenants. If you have certainty on a project, certainty on the lease and on the cost, and everything, would it make sense to continue to go ahead as per usual?
You may wanna answer that, Jim. Yes, it is, Jenny. You know, we're pushing forward with our pipeline because it's pretty solid.
Mm-hmm.
We like the type of assets that we're going to be developing. You know, tenant demand is not an issue. It's the supply side that's an issue. It's just that, like, you know, cost can really be a challenge today. Again, as I said in my remarks, it's highly variable. There are instances where we get really good pricing and other instances where we can't. We have to be just a little bit more careful and, you know, higher interest rates in terms of how our take-out debt is gonna look like. Obviously has an influence and, you know, means that we have to take a bit of a more cautious approach.
That's fair. When we're thinking about your development deals, I know not too long ago you had taken it down to the 79% versus the 8%-10%. Are you still comfortable with that 7%-9%? Are you seeing any sort of upside on the rents that you're getting on new deals, that will probably offset some of the higher costs that you're probably seeing?
Yeah. You know, rents are definitely higher on all deals that are being done today. In terms of yield, yeah, we're in the 7%-9% spread. You know, average yields are probably, you know, north of 8%. There's probably been a slight deterioration just because of some costs and then deterioration on, you know, on levered yields, you know, based on the fact that, you know, term debt is more expensive.
Okay, great. Lastly, with respect to the convert. Thank you for that color. It's very informative. I'm just wondering over the longer term, is there still an appetite to go back to the convertible market? Remind us how much you have by way of unencumbered assets. Like, is that something you could take secured debt on, or are you still comfortable pursuing a convert when the time is more appropriate?
We have about CAD 18 million of unencumbered assets. Definitely the plan is to go back out to the unsecured convertible market when it's priced better, when our units are trading better.
Okay, great. That's all for me. Thank you very much.
Okay. Thank you, Jenny.
Your next question comes from the line of Gaurav Mathur from iA Securities. Please go ahead.
Thank you, and good afternoon, everyone. Just a couple of quick questions at my end. Firstly, when you're talking about supply and demand dynamics, you know, how should we think about net new store openings across the portfolio as we're heading into 2023?
Sorry, just repeat. Sorry, I didn't get the whole question.
Just thinking about supply and demand. How should we think about net new store openings across the portfolio as we're heading into 2023? Is that something that we can expect it to increase or decrease just given, you know, where supply stands at the moment?
No. If you know, if you look in our MD&A, you can see the stuff that's under construction. I mean, we estimate our delivery dates. But some of those delivery dates got pushed back. Just looking at some of them, you know, are Q4 2023 or Q3. They would have been Q1 or Q2.
Mm-hmm.
We're full speed ahead. You see the in-development stuff. There's a lot of in-development stuff that we plan to put under construction in 2023. It really is full speed ahead. We've got, you know, really good deals organized with what we consider the best retailers, and we're not gonna, you know, back down. We're gonna deliver that product.
Right. Okay. Just lastly, just circling back on development yields. I know you said 7-9%. Just, do you see any change in that over the next sort of 12-18 months, or is that fair to say that'll still be in that range for the moment?
I think the range is solid. Yeah, from what we can observe. Yes.
Okay. Fantastic. Thank you for the call, Michael. I'll turn it back to the operator.
Thank you.
Your next question comes from the line of Chris Koutsopoulos from Canaccord Genuity. Your line is now open.
Hi, good afternoon.
Hi, good afternoon.
Just on the capital recycling front, you know, it appears that demand is held in pretty resiliently for the single tenant, smaller retail properties and pricing is held in as well. You know, just kind of assuming you could sell all the properties you wanted to, how big would you estimate that pool of assets would be?
Jim, you want to take a stab at that?
Yeah, well, I was gonna say, I think what we wanna sell is what we'd like to sell to recycle capital to deal with our converts. We need CAD 10-12 million of capital, in addition to that bridge that I mentioned.
Okay. I guess nothing kind of beyond that.
No, it's not a large program. It's, you know, it's something that we've been doing for a number of years. You know, culling or trimming the portfolio, selling stuff that we think is maxed out, that we think, you know, is not gonna grow in value and offers us very low hurdle rates. That's really what, I guess, drives our thinking.
Okay, perfect. Thanks. I'll turn it back.
Thank you.
Ladies and gentlemen, if there are any additional questions at this time, please press star followed by 1. As a reminder, if you're using a speakerphone, please lift the handset before pressing the keys. Mr. Zakuta, there are no further questions at this time.
Well, thank you for joining us on our call. Operator.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may disconnect your lines.