Good morning, and welcome to PROREIT Second Quarter Results Conference Call. At this time, all lines have been placed on mute to prevent background noise. Management will make a short presentation, which will be followed by a question-and-answer period, open exclusively to financial analysts. In order to ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. For your convenience, the press release, along with the second quarter financial statements and Management's Discussion and Analysis, are available on PROREIT.com in the investor section and on SEDAR. Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements and non-IFRS measures.
PROREIT's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements or other future events or developments. Forward-looking statements are based on information currently available to management, on estimations and assumptions made based on the factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will be proved to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statement. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.
For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A dated August 10, 2022, available at www.sedar.com. Forward-looking statements represent management expectations as of August 10, 2022, and except as may be required by law, PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
The discussion today will include non-IFRS financial measures. These non-IFRS measures should be considered in addition to, and not as a substitute for, or in isolation from the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the 2022 second quarter earnings release and the MD&A. Reconciliation of the non-IFRS to the IFRS results, where applicable, may be found in the earnings release and the MD&A for the 2022 second quarter.
Please refer to the non-IFRS measures section in the MD&A for the second quarter and additional information. I will now turn the call over to Mr. James Beckerleg, President and Chief Executive Officer.
Thank you, operator, for the introduction, and good morning, everyone. Welcome to our second quarter call. Joining me today in my remarks is Gordon Lawlor, as most of you know, our Executive Vice President and Chief Financial Officer. Also on the call today for questions is Alison Schafer, our SVP of Finance, and Mark O'Brien, our Senior Vice President of Leasing, Operations and Sustainability. Yesterday, we released strong Q2 results, both from an operational and a financial standpoint. Our performance largely results from our increasing presence in the industrial sector, as well as the meaningful operational and leasing synergies we continue to achieve. Last week, subsequent to quarter end, we completed our joint venture agreement with Crestpoint Real Estate Investments, a high-profile institutional real estate investor.
Many of you already know we now co-own an industrial portfolio of 42 properties with them, totaling nearly 3.1 million sq ft of gross leasable area. Save for one property in Moncton, the joint venture portfolio is located in Halifax Burnside Industrial Park, one of Canada's strongest industrial nodes. I, for one, am very proud of this partnership which actually involved two transactions. First, PROREIT and Crestpoint each acquired a 50% interest in 21 properties owned by a third party. The cost to PROREIT was approximately CAD 114 million before closing costs, mainly financed with the proceeds of a 50% interest in approximately CAD 148 million of new fixed-rate mortgages.
The balance was satisfied with cash on hand, and that includes cash from the sale to Crestpoint of a 50% interest in 21 of PROREIT's previously owned properties. That sale to Crestpoint represents the second part of the partnership transaction. In detail, PROREIT sold a 50% interest in 21 properties to Crestpoint for approximately CAD 113.5 million before closing costs. The proceeds included approximately CAD 49 million in cash, I'm sorry, with Crestpoint also assuming a 50% interest in approximately CAD 129 million of PROREIT's in-place fixed-rate mortgages. On a net basis, the cash flow resulting from the acquisition and the sale allowed for a modest reduction in PROREIT's overall debt level and a profit above our carrying value. The overall transaction has many other benefits for PROREIT.
Importantly, it is immediately accretive to our earnings. There is a significant mark-to-market leasing upside embedded in this desirable portfolio. Given its scale, it is a unique opportunity to further increase our footprint in Eastern Canada. Finally, it allows us to leverage our operational platform as the sole property manager of the entire portfolio. Subsequent to quarter end, we also announced an agreement to sell a portfolio of nine non-strategic retail properties to a third party for just under CAD 19 million, prior to closing costs. These properties were all located in Western Canada, totaling approximately 94,000 sq ft of GLA, with closing of that transaction scheduled for later in September. Conclusion of that deal will further weight our portfolio towards the industrial sector and again provide us some net cash for debt reduction.
Let me now turn briefly to our operational results for the second quarter. Our industrial sector now accounts for 80% of our gross leasable area on a pro forma basis, reflecting the two transactions I just spoke to. Generated a solid 4.7% increase in Same Property NOI in the quarter compared to the same period last year. Our smaller retail portfolio also continues to perform well, recording a 3.2% increase in their Same Property Net Operating Income. We actually believe this reflects our focus on necessity-based retail properties with strong anchor tenants in place.
Our office segment, which now represents just 7% of our GLA on a pro forma basis, did record a decrease in Same Property NOI, resulting from a one-time adjustment of CAD 137,000 related to a prior period and a small uptick in vacancy in two of our property portfolio. Part of that vacancy has now been re-leased for a 6-year term successfully, commencing in November 1st of this year at rates above the matured lease. It might also be noted by the analysts listening that when excluding the CAD 137,000 non-recurring adjustment, our overall Same Property NOI increased by 2.2% in Q2 2022 compared to the same prior year period. Rental rates continue to be a growth driver across our portfolio.
Mark-to-market net rent spreads at the end of the second quarter was 24% of our total portfolio and 35% for our important industrial segment specifically. Our occupancies remain firm at 98.3% at quarter end, and I can also report that we have successfully renewed or replaced 82% of the 853,000 sq ft of leases maturing in 2022, achieving an average increase of 12.9% over the maturing rent for those leases. At this point, I'll turn the remarks over to Gordie, who will provide some details on our Q2 financial results.
Thank you, Jim, and good afternoon, everyone. We recorded a solid financial performance in the second quarter. Property revenue grew to 23.7 million dollars, a 33.6% increase compared to the same period in 2021. Net operating income reached 14.3 million dollars, up 33% year-over-year. AFFO totaled 7.9 million dollars, a 36.9% increase compared to the same prior period. These increases were mainly driven by the net transaction activity during the last 12-month period, notably the acquisition of 16 properties and the sale of three non-strategic buildings. Basic AFFO continues to steadily improve, with 86.5% for the second quarter of 2022 compared to 92.3% for the same period last year.
During the quarter, we kept focus on maintaining our strong financial discipline and liquidity position. Debt to Gross Book Value was 51.2% at June thirtieth, down from 58.2% at the same date last year. We remain committed to reducing our Debt to Gross Book Value ratio below 50% over the next few quarters. We have approximately CAD 10 million in mortgage renewals maturing in the next 12 months after you take into account the sale agreement of nine non-core retail properties that Jim spoke to. The proceeds from the sale will be used to repay approximately CAD 14.1 million of related mortgages maturing in 2023, or January actually, with the balance to pay down a term loan. Our liquidity position remains healthy.
At June 30th, we had CAD 28 million available under our credit facility, compared to CAD 38 million at the end of March. This is mainly a result from some negative working capital in the quarter due to annual property taxes, as well as a payout of a small mortgage when it came due. Distributions of CAD 0.0375 per unit were declared monthly throughout the second quarter of 2022. Finally, our weighted average cap rate for the portfolio was approximately 5.7% at the end of the quarter or CAD 155 per sq ft, down from 6.3% at the end of the second quarter 2021. I'll now turn the call back to Jim for closing remarks.
Great. Thanks, Gordon. Pardon me. To conclude, our management team does remain mindful of the current environment with the macroeconomic uncertainty, high inflation, and rising interest rates that we all face each day. However, we do believe our management team and your board continue to focus with discipline on opportunities that meet our laid out objectives. We believe PROREIT is advantageously positioned to further drive both performance and growth as we go forward.
We remain a robust tenant-based REIT, strategically located portfolio. I am very confident the talented team that can generate value for all of our stakeholders again as we move forward. That wraps up the formal remarks for this morning with respect to the second quarter, and I'll turn it back now to the operator to take any questions that there are from participating financial analysts. Thanks very much.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the 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. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. First question comes from Nicholas Teliga of BMO. Please go ahead.
Thanks and good afternoon. With the recent transactions, the portfolio has seen an increase in industrial weighting. I was just wondering your thoughts about the target weightings by asset class moving forward, maybe particularly for retail and office?
It's Jim speaking. Our strategies from a board perspective haven't really changed from what we chatted about last quarter. That is we see a natural evolution going forward of increased weighting in the industrial sector. That will come from currently unidentified but acquisitions when we re-enter that market and to some extent judicial sales of retail and/or office portfolio although the office portfolio is now very small. We don't have a specific target date to move out of those two sectors. Our retail portfolio especially is managed much like a small bay industrial portfolio. It's strongly anchored by grocery anchors or drug stores and national chains of that nature. As you'll see from the numbers, it's performing well. We don't see any inherent important strategy to move away from that sector.
Okay, great. Please go ahead.
Sorry, we're waiting for inbound questions.
Oh, okay. Perfect. Can you just comment on what you see in the transaction market lately and, maybe any implications for pricing?
It's Gordon Lawlor here. You know, we haven't seen many transactions, especially in our markets in the last, give or take, six months. We've seen some GTA industrial deals. We track them, you know, but more airport-related Mississauga, you know, we were the Atlantic Canada deal, if you will. There was that, and then we haven't seen much in Winnipeg or Ottawa. There hasn't been a lot in the last six months. It's that time of year too as well. Besides the noise in the market and whatnot, it's July and August, so we expect some pickup here September, October.
It's been quite quiet for the last six months, so not a lot of markers on deals or cap rates at this point in time, which I think is reflective of most of the REITs that have come out at this point in time on their valuations. Right.
Perfect. Thanks for the color, and I'll turn it back.
Thanks.
Thank you. The next question comes from Lorne Kalmar of TD Securities. Please go ahead.
Thanks. Good afternoon, guys. Maybe just flipping back to the disposition quickly. Was that a marketed deal?
Yeah. Mark O'Brien here. We did market it with a broker to Avison Young. We had it in the marketplace, and we did have some inbounds that we looked at closely. We circled back with one of them. It took some time. Certainly with the uncertainties in the rising interest rate environment, it did drag on. But we did have a marketed deal, and it was. We do have it under contract for sale with a known entity in Western Canada.
Okay. Can you guys give a little bit of guidance on cap?
Yeah. We're on a stabilized basis. It's kind of penciling out to a mid-seven cap. That's a function of a low WALT. These nine properties were in a five-year pool with RBC lender.
They were sort of the weakest of the 19 that we bought in this Rexall portfolio, and actually only two out of the nine are Rexall anchored. These are in secondary smaller markets in Western Canada. We sort of see it as the weaker grouping of the original 19, so reflected in that 7.5 cap.
Okay. The year portfolio be stronger for it. Maybe just flipping quickly to the JV. What do you expect in incremental management fees from managing the 42 properties?
It's Gordie. Management fees will pencil out about CAD 800 thousand. Then incremental fees, including leasing fees, would be another CAD 500 thousand-CAD 700 thousand, depending. You know, give or take CAD 1.3 million-CAD 1.5 million.
That's a net of cost as well?
Yes.
Are there, net of costs associated?
No, net of cost.
Net of cost. Okay, great. Was there a difference in cap rate between the portfolio you guys disposed of for the 50% interest, I guess, and the one that you acquired?
Yes.
Could you give a little color on that?
Yes. It was give or take a 6% on the buy and a 5.2% on the sale. Largely driven by the assets that we sold. The weighted average rental rate we had in the portfolio we had was a little bit lower than what we were buying at. That was part of the reflection of the difference in pricing.
That's very important. Did I see you guys have an additional office vacancy this quarter?
Yeah. There was about 2,500 sq ft that came due in May that they didn't renew. Actually, we were looking at this yesterday. I mean, we think that's it for a bit, if you will. We've had some moving parts in a couple of our buildings, but the exposure here in the next year we don't think is any more than another CAD 70,000. That's an annual number, and then we've got 12,000 sq ft coming on stream at the end of Q4. Hopefully we're in a bit of the upside of this number when we go forward.
Okay. Yeah. You answered my follow-up. Okay. Great. Thank you guys so much for the color.
Great. Thanks.
Thank you. The next question comes from Mark Rothschild of Canaccord. Please go ahead.
Hey, thanks. Good afternoon, guys. You already addressed a lot of what I had. Just maybe you could expand a little bit on how you're thinking about dealing with your capital now with different objectives such as reducing leverage but also wanting to continue to grow.
Mark, it's Jim. Gordie can expand on the comments if he wishes. I mean, our stated objective's out there right now with the incremental cash that's flowing from a couple of these transactions we've spoken of, is to apply towards debt reduction. I think we have chatted with the broader community about liking to see our debt to equity ratio get below 50%, as we move forward, and so that's what we're focused on right now. We have the liquidity in place for opportunistic small deployments of capital if, as and when we see those.
before we do something significant that would involve capital raising, I mean, we want to see stability in the markets, of course, like everybody else and you know, hopefully a decline in our cost of capital.
Okay, great. Thank you.
Okay. Gordie, do you want to add to that?
No, I think that's right. I mean, as far as options and debt reduction, we still have a little bit of expensive debt there, about CAD 6 million, so our goal is to have that gone by the end of year. That's really been our focus, and then we'll see what September brings with people back at the desks and whatnot, and then we'll go from there.
Okay. Great.
Thank you. The next question comes from Brad Sturges, Raymond James. Please go ahead.
Hi, guys. Just, you know, on the back of the latest asset sale, you know, out west, is there anything else that would be earmarked for sale at this point, or is that kind of for now the last kind of the only thing we should see from a transaction point of view at the moment?
Hey, Brad , it's Gordie. I think we indicated a few quarters ago that we had about CAD 30 million circled for the year. You know, we've got two-thirds of that done. It's some smaller properties, some one-offs that may take a bit of time, but that's probably it unless something comes up during the year.
Okay. In terms of the, you know, congrats with the new JV with Crestpoint there. Obviously it's how's the Dartmouth focus. That you know, it's early days in the new JV, but do you see room to expand that JV further? Or is this kind of for now the, you know, the potential size of that JV?
Yeah. Sorry, either one of us could add to that. I mean, we've got a good relationship with Crestpoint. We've transacted with them before. I mean, there's no specific plans on the table. I think if we were looking at other opportunities in Burnside Industrial Park, we would look at them jointly. I mean, we would be happy to expand there further, although at the present time we have, I guess, what the numbers were.
40% of the market, yeah.
40% of the non-owner occupied market. We have a dominant position there.
Yeah. No, makes sense. Lastly, just to go back to the cap rate discussion there and obviously, you know, in terms of your book value, you held steady on the cap rate. Or I guess, would you be waiting to see more transactional data before you make adjustments to your book value? Or how should we think about that over the next couple of quarters?
Yes, it's Gordie . Yeah, I mean, especially in our markets, we haven't seen any movement at this time. Winnipeg, for sure, and Halifax was on point with where we were on our last deals and that. Moncton there's really been no transactions either. Just a little bit of industrial in Ottawa as well. We haven't seen anything as of late, but not dissimilar to other REITs. I mean, we'll review that in the next two quarters. I mean, our cash flow is growing in this real estate as well. It's really looking at cap rates are one thing, discount rates, and then what if there's incremental cash flows. We'll have to look at our portfolio over the next six months to see.
We're not seeing anything drastic in our valuations at this point. You know, it's our responsibility to review it quarterly, right?
Yep. Okay. Thanks a lot. I'll turn it back.
Thank you. Next question comes from Himanshu Gupta of Scotiabank. Please go ahead.
Thank you and good afternoon. Just on 2023 lease expiries, can you remind us how much is coming due for next year? What are your expectations in terms of renewal and in terms of, you know, upside on in placements?
Yeah. Mark O'Brien here. We're for 2023 lease expiries. We have about 825,000 sq ft, and about 85% of that is industrial. Call it 9% retail and 6% office, which is a higher proportion of industrial than our 2022 expiries. That's a net positive, absolutely. You know, again, you know, we talk to market, mark-to-market and on industrial there's. It just seems to keep widening in terms of where we are and where the market is. Again, we're gonna be benefiting from all that mark-to-market leasing spread.
Is there any specific suites you have on the industrial? What kind of leasing spread you can achieve for the next year? I mean, any early discussion there?
We're trending right now, I'm talking about industrial leasing spreads. We're about 22% across Canada. We see the strongest market again in our Burnside market where we're trending 35%. If we look at the mark-to-market for that specific geography, it's actually closer to 50%. Now with the JV where we own 40% of the inventory, we think we can really push that further.
Got it. Okay. Thank you. Maybe, you know, follow up to that Burnside, you know, market you dominate now, almost 40%, market share there. What is the lease term on that portfolio, on the Dartmouth portfolio? I remember it's a shorter lease term there, right?
Yeah. Brad Sturges, it's about three years.
It's about three years. Okay. Clearly I can see, I mean, based on your comment, you can see much more rental upside as some of these leases come into that one market.
Yes, indeed. I mean, Mark can comment, but you know, as of August fourth there, he picked up another 400 tenants, so he's got a busy time here in the next little while. Again, we're seeing CAD 7 rents moving to CAD 9.50 and CAD 10, basically, across the board is what we're seeing. Is that correct, Mark?
Yeah. I mean, we're targeting, you know, 35%-45% renewal spreads for that market.
That's awesome. Thank you. Congratulations again on the Crestpoint deal. Thank you, guys. I'll turn it back.
Thanks very much.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star one at this time. The next question comes from Sumayya Syed from CIBC. Please go ahead.
Thanks. I just have the one question now. Just on the renewal spreads year to date, you've got about 13% lift. Would you have the approximate breakdown by segment?
Yeah, we do. The 22 I mentioned for the industrial, 22.4 to be exact. Office was about 2%, sort of in line with what we were expecting. Retail, we had a little bit of a negative just with a couple of tenants outside tenants who were, where we had to do a bit of a rental reduction. But again, if we just pulled those two retail tenants out of that criteria, we would have been 5% increase on renewal spreads for retail. You know, I would say just generally 22, five, and two.
Okay, great. That's all I had. Thank you.
Thanks.
Thank you.
Thank you. There are no further questions at this time. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.