Good morning, welcome to the PROREIT Second Quarter Results Conference Call for Fiscal 2023. At this time, all lines have been placed on mute to prevent any background noise. Management will make a short presentation, which will be followed by a question- and- answer period, open exclusively to financial analysts. To ask a question, simply press star, followed by one on your telephone keypad. If you'd like to withdraw your question, please press star, followed by two. For your convenience, the results release, along with second quarter financial statements and Management's Discussion and Analysis, are available at proreit.com in the investors section and on SEDAR and 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, levels of activity, performance goals, performance, goals or achievements, or other future events or developments. Forward-looking statements are based on information currently available to management on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove 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 statements. 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 assumptions and risk, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A, dated August 9th, 2023, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as at August 9th, 2023, 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 REIT's IFRS results. For a description of these non-IFRS financial measures, please see the second quarter earnings release and MD&A. Sorry, MD&A. Reconciliation on non-IFRS to IFRS results, as applicable, may also be found in the earnings release and MD&A for the second quarter.
Please refer to the non-IFRS measures section in the MD&A for the second quarter for additional information. I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer. Please go ahead.
Thank you, Colin. Good morning, everyone, welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary. I will start with a high-level overview of our Q2 results. Alison will provide a more detailed discussion on the quarterly financials. With most of our key metrics up over last year, I am pleased with our performance. Our results reflect our solid operating environment and the strength of our balance sheet. We continue to benefit from our long-standing and robust tenant base, as evidenced in our occupancy rate of 99% at June 30th, 2023, which includes committed occupancy. Leasing activity continues to be very favorable. To date, we've renewed 85% of our gross leasable area, or GLA, maturing in 2023 at a 43.2% positive average rental spread.
Same-property net operating income, or same-property NOI, was up 0.8% in Q2 compared to the same period of the prior year. This is due to the occupancy increases in both retail and office sectors, as well as contractual increases in rent and higher rental rates on lease renewals. As I prefaced in our last call, our industrial segment was impacted by a temporary vacancy in a 102,000 sq ft property in Montreal, vacant as of April 1st. The property has been fully re-leased on a 10-year, on 10-year terms, with two tenants, with occupancy starting in Q3 at an average positive spread over previous rents of 55%. When excluding the impact of this temporary vacancy, adjusted same-property NOI was up 3.9% in Q2, year-over-year.
On an annualized basis, NOI from this property will go from CAD 900,000 to approximately CAD 1.5 million with these two new lease deals. Our 2023 fourth quarter results will include the full benefit of this attractive renewal. The temporary vacancy has also affected our AFFO payout ratio in Q2, which amounted to 97.3%. Higher variable interest rates on the credit facility and increased weighted average interest rate on mortgage debt also impacted our AFFO ratio during the current quarter. At June 30, 2023, the industrial segment now represents 80.5% of our total GLA, 70.6% of our total base rent, and 77.9% of our investment property value.
Moving to the balance sheet, I'm pleased to note that we significantly increased our liquidity position in Q2, mainly as a result of our successful CAD 35 million convertible debenture offering that closed in May. We also received a new CAD 10 million term loan in the second quarter. Proceeds from these transactions were used to partially repay our credit facility, with the balance used for general corporate purposes. With respect to our portfolio, we sold one non-core office property in the quarter for a gross proceeds of CAD 2.1 million. On June 29th, 2023, we entered into a binding agreement to sell two other non-core office properties for a gross proceeds of CAD 9.1 million. We intend to continue strengthening our portfolio by recycling assets to capitalize on future acquisition opportunities.
I will now turn the call over to Alison for a more detailed look at our second quarter results for fiscal 2023.
Thank you, Gordy. Good morning, everyone. As Gordy noted, our Q2 results were solid. At June 30, 2023, we owned 129 investment properties with 50% ownership interest in 42 of the properties, compared to 120 investment properties fully owned at June 30th, 2022. At the end of Q2, we owned approximately 6.5 million sq ft of GLA, and we managed approximately 10.8 million sq ft of GLA through our wholly owned subsidiary, Compass Commercial Realty. Total assets amounted to CAD 1.06 billion at June 30, 2023, up 1.6% year-over-year. We achieved property revenue of CAD 24.9 million, a 5.1% increase compared to the same quarter last year.
The increase was mainly due to the change in the number of properties in our portfolio and their related ownership percentages over the last 12 months. Net operating income was CAD 14.5 million, up 1.3% year-over-year, also as a result of the number of properties and ownership percentages in our portfolio. G&A expense was CAD 1.3 million in Q2, in line with our G&A run rate for the remainder of the year. As you recall, we had a one-time CEO retirement cost of CAD 2.2 million included in G&A expenses in Q1 this year. Net cash flows provided from operating activities was CAD 0.6 million in our second quarter, compared to CAD 2.2 million in Q2, 2022, largely as a result of the timing of cash receipts and settlements of payables.
AFFO totaled CAD 7.0 million, down from CAD 7.9 million in the same period last year. The decrease was related to the temporary vacancy in the industrial property that Gordy discussed and higher weighted average interest rates. As Gordy noted, we are benefiting from a strong liquidity position at June 30th, 2023, with CAD 42 million available on our credit facility and an additional CAD 15.8 million in cash. We have CAD 33.8 million of maturing mortgages remaining for 2023, to be refinanced on market terms and in consideration of our overall strategy. The weighted average interest rate on mortgage debt was 3.75% at June 30th, 2023, compared to 3.40% at the same date last year.
As mentioned on our last call, this quarter we refinanced six industrial properties in Winnipeg with a new seven-year mortgage with 5.07% interest rate for CAD 20.5 million. Most of the proceeds were used to repay mortgages maturing in July 2023. debt to gross book value was 50.9% at June 30, 2023, down from 51.3% at the same date last year. Compared to the end of Q1 this year, debt to gross book value was negatively impacted at June 30th, 2023, by our temporary excess cash, cash position, annual property tax payments, as well as the non-cash impact of the fair market value adjustments, mainly in our office portfolio. At June 30th, 2023, the weighted average cap rate of our portfolio was 6.0%.
I will turn the call back to Gordy for some closing remarks before we open the call for questions from our financial analysts.
Thanks, Alison. We remain mindful of the high interest rate environment and the macroeconomic challenges that are still very much a reality.... Despite these challenges, we are committed to our strategy to continue to grow our quality portfolio organically and through disciplined acquisitions in the light industrial sector. This marked my official first quarter as CEO of PROREIT, and I'd like to thank the entire PROREIT team for their dedication and support. We look forward to pursuing our objectives while optimizing our balance sheet and capital allocation to the benefit of all stakeholders. This concludes our formal remarks. Colin, if you could please initiate the question-and-answer portion of this call. Thank you.
Thank you. Ladies and gentlemen, we'll now conduct the question-and-answer session. If you'd like to ask a question, please press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, your first question comes from Mark Rothschild. Mark, please go ahead.
Thanks, and good morning, everyone.
Good morning, Mark.
Hey, so, Gordy, with the, the sale of office properties, can you just maybe give a little more color on, you know, with these sales, was it more opportunistic? Was it just deciding that we've maximized the value from these assets? I know that there's definitely a balance between you wanting to focus on certain property types and not wanting to sell assets where you still see good upside or stable cash flow.
Yeah, this, this was, you know, 2 30,000 sq ft properties that one had a 15-year long-term lease on it with steps, and the other one had 1.5 years left on the lease. We had entertained a bid from a, these are Ottawa assets, from an Ottawa group for the assets. We put it under contract in the just over a seven cap. In the due diligence period, we were notified by the 1.5-year remaining tenant that they would not be renewing. That was pretty advantageous timing to the purchaser, I'd say. That said, you know, we proceeded with the deal with an adjusted price, and so that basically sold at an 8% cap, but on a non-stabilized basis.
You know, the call there is keep the property and re-lease it, which it was under market rent by about CAD 4. I think, I think, a good deal was had here by, by both parties, but it's just, tied strategically to reducing our office exposure.
And to what extent should we expect more of that over the next few quarters?
We've, you know, we started. We had nine office assets. One is, one is jointly owned with our partner in Halifax. After, and we sold one, so we'll be down to six here. Three of them are Ottawa, two suburban office and one downtown office, and then two small, legacy, office properties in Atlantic Canada. It's a difficult office market, as everybody knows right now. We're in no, in no rush for those, but if we get interest on these properties at reasonable prices, we, we'd continue to sell. We most-- we have a mortgage due at the end of the year with most of this office portfolio.
it's just all timely in that respect, whether we refinance some of these properties or, if we're available to sell them by the end of the year, we, we don't need to refinance them, obviously. That said, we could still get short-term financing and, and keep them, and, you know, and they're performing well. it's just, there's no need for a fire sale for any of this stuff, so we're just being opportunistic.
Okay, great. Maybe just one more question in, in regards to the balance sheet. When you look at the debt to EBITDA, is this a level that you're comfortable operating? Do you want to bring it down? Would you allow leverage to go higher? Just how, how you think about that and as far as, you know, the, the way you're going to finance growth?
Yeah. I mean, our target since a long time has been to get to the 50%. you know, and we're at that now, just slightly above. This quarter is a little bit of an anomaly, but we'd like to stay around the 50% range. Q2 is always a challenge for us. We actually pay out CAD 10 million in property taxes in Q2 to the CAD 20 million we owe for the entire portfolio, you know, and don't get it back on over. We only get it back over the next 12-month period. That's a little bit of anomaly for us. I think we've indicated that we'd like to go lower on a debt basis over the next five years with a target of 45%, but we're happy, you know, plus or minus the 50% right now.
we would not, we would not lever up for acquisitions. That's not, that's not in our plan, other than if, you know, just temporary between an acquisition and a sale that was coming.
Okay, great. Thanks so much.
Thank you.
Your next question comes from Jenny Ma from BMO Capital. Jenny, please go ahead.
Hi, good morning, everyone.
Good morning.
Hi, Jenny.
You had a pretty strong rental spread achieved in Q2. I was just wondering if you could give us some more color on how much of it, what, what you were getting for the industrial assets, which I presume is the vast majority of it, and what you're getting from retail?
Yeah. Our industrial spreads like are in the +50. I think 54% was our industrial spread for the quarter. Alison's just pulling up the retail there, but you know, strong industrial, retail, kind of like above average as well. I believe it's 50, 54%. I'll, I'll, I'll defer for that for a second, and I'll, I'll come back with the number. It's just not at the top of my head. But it was.
Sure.
An excess, an excess of 50 on industrial. Then I think retail was almost close to 10% over.
Okay, great. Is that broad-based, or were there certain properties that skew that number, or are you just getting some good leasing spreads all around?
Yeah, I mean, it's, it's pretty much broad-based. The positive leasing spreads we're seeing of significance is Halifax and Southwest Ontario. Winnipeg is a little more muted that way, but still positive leasing spreads. Definitely, we see Halifax, Southwest Ontario, and then, you know, tied to these numbers is the downtown Montreal property in Saint Laurent. That's a 55% spread there on, on basically 100,000 sq ft. That's, that's a pretty good math driver for this quarter.
Absolutely. When it comes to the terms, what are tenants looking to lock in for? Can you also talk about the quantum of rent steps that you've been able to negotiate?
For example, on the two Montreal properties, one has a 3% rent step, and the other has 3.5%. In Halifax, we're achieving 3% rent steps on all of our deals right now. In Southwest Ontario, recent deals that we've done as well were 3% rent steps as well. Three is almost our new base.
Mm-hmm.
Then, every, every so often, we will get to about 3.5 there.
That's every year?
Yeah, annual rent steps. Yeah.
Okay, great.
Jenny.
What about?
Sorry, Jenny, I have that number. It's 49.6-
Okay, cool.
-industrial.
Yeah.
Industrial, year- to- date, and, retail average was 9.1%.
Great. What kind of lease terms are you getting for your renewals?
We're getting 3-5 years in, in Halifax.
Okay.
The two Montreal were 10-year deals, the rest of the country, standard is pretty much five years.
Mm-hmm.
If somebody wants to go longer these days, you know, we're happy to look at it, as you can, as you would expect.
Okay, great. Then lastly, you mentioned the NOI contribution from the Montreal New Deal. I think you said it was going from, is it CAD 900,000 annually to CAD 1.5 million?
Yes. Yeah.
Okay. Do these leases start right at the beginning of Q4?
Yeah. I mean, they're under tenant fit-up right now. Targets would be September first. You know, I believe we're on target for those, but to be safe, we were saying that effective, we should be fully rent flowing by October first through.
Okay. Okay.
Yeah.
Okay, it'd be a full clean contribution starting in Q4.
That is our hope at this point.
Okay. Okay, great. Thank you very much. I'll turn it back.
Thank you.
Your next question comes from Himanshu Gupta from Scotiabank. Please go ahead.
Thank you, and good morning.
Good morning.
Just, just staying on the, the lease expiries, I mean, the remaining lease expiries, this year, I think looks like all industrial as well. Any thoughts there in terms of rental spread expectations?
Yeah, I think we're, we're still gonna have the same, the same lease, leasing spreads. Like, this consistency is pretty prevalent. Most of the leases are Halifax. You know, I think of the leases done this year, 60 of them, of 70 were, were, were Halifax based. We will expect the same basically for the, for the rest of the year. We don't have any indication of any problems in the rest of that 15%.
Got it. Thank you. I think earlier you mentioned, you know, Halifax and Southwestern Ontario continue to be strong in terms of rental spreads and Winnipeg, a bit muted. Are you surprised with Winnipeg, or is it just property specific? Because, you know, market continues to be tight, and we're not seeing much supply there as well.
Yeah, no, I mean, muted is only relative to the other two markets. You know, you're going from CAD 7- CAD 13 in, in Halifax and then Southwest Ontario. You know, we, we went from, for example, on one lease, CAD 4.40- CAD 8.80. You know, Winnipeg was, it was our last deal was CAD 6.30, and it went to CAD 8.30. That's still CAD 2, on, on, 30,000 sq ft. It's just that compared to the other two, it's, it's not, you know, it's not 50%. That's the thing.
Got it. Thank you. You mentioned, you know, the Halifax, most of the remaining leases are due in Halifax, if I, you know, heard correctly. What kind of in-place rents do you have in Halifax, and what are you expecting, for the remaining leases there?
Yeah. When we bought the portfolio, most of the portfolios was between CAD 6 and CAD 7. That's pretty much where the entire portfolio was. November. Weighted average lease term is 3 years on them. You know, we're kind of coming up to a year through, but it's basically, you know, the CAD 6 or CAD 7 going to, to CAD 12 and CAD 13. That's really what we're seeing, but no TI.
Yeah. Yeah, yeah. For sure. You know, like GTA is now talking CAD 20, so I think that CAD 12-CAD 13, I think, very much doable there. Maybe, you know, just turning to the balance sheet, I think you have around CAD 30 million mortgage maturing. Is it all related to office portfolio?
No, there about five that's three small properties. One is already renewed, so there's another small property that's contracted for sale conditionally. So that'll deal with about $1.7 million of it. There's another $1.7 million, which is pay out when it comes due. When you look at the sale of the office, that leaves us about $25 million left for the year. That's Ottawa office with one industrial building in it, if you will. So four properties there, one is actually industrial.
We'll refinance that on a longer-term basis, and then, depending on the other, three assets, two, three assets left there, we may put some short-term financing on it or, or, you know, but they're not long-term holds, so we're not gonna put five- or 10-year money on, on, on, on that mortgage, on those properties when they come due.
Yeah. But is five-year money available on, you know, the suburban office these days? I mean, the preference is clearly going to credit facility or short-term financing on that piece.
No, we've spoken to the lender, which is a large Canadian bank, on those assets, and they're, you know, they're there for us for a short renewal or a 12, 12-month renewal there. You know, those properties, you know, we have full covenant of the REIT there, so they're not concerned about those assets property, those office properties, and they're all over 90% occupied right now. That's not a concern when you have a relationship lender in these situations.
Awesome. Okay, thank you so much, and I'll turn it, I'll turn back.
Thank you.
Thank you.
Ladies and gentlemen, as a final reminder, should you wish to get in queue for a question, please press star followed by one. Okay, there are no further questions. I'll turn it back to Gordon to close out the call. Oh, actually, we do have someone who just came in. This is from, we've got a question from Sam Damiani, from TD Cowen. Sam, please go ahead.
Thanks. Good morning, everyone. I'm not sure if this was asked already, but do you have an update on the backfilling of the 84,000 sq ft in redevelopment?
That's, that's two properties. There's a 90,000 sq ft property there in Quebec City, and the other one is 65,000 sq ft in Montreal, the east end of Montreal. We've got fit up for a 25,000 sq ft lease on the 65 there, so we've made progress that way. The other 40,000 is still, is still available for occupancy. Kind of that's where we are. The 19,000 sq ft property may turn in to just be a, a sale of the property outright. That's kind of an update. All things being equal, equal, the 19,000 property will likely be sold by the end of the year. The only piece left would be this 40,000 sq ft in Montreal.
Okay, great. Besides, Sorry, besides this and the, and the Montreal 100,000, is there any other known or expected vacancies, in the next 18 months or so?
Looking at Alison and thinking, like, No, I mean, those, those two properties were unique in that they, those development properties, in that they had long-term leases on them. Like, the Montreal property was, the tenant was in for 30 years. You know, and COVID hit and, and that changed the demeanor of that property. That's why those two are, are like that. We, we don't see anything big here, coming, coming up in the next little while. Just to finish the, some of the question, I mean, leasing has been strong, but it, you know, one thing we've noted is it has slowed down a, a little bit, just timing-wise, as far as how long it takes to get deals done. Part of it's the summertime as well.
you know, we, we haven't really seen any significant weakness in the markets. A few, few small tenants and things like that, hangovers from, from COVID here and there. There may be some surprises in the next 12-18 months, but we don't really have a lot of knowledge of it at this point in time, everything seems pretty stable.
Yeah.
How's the investment market in Halifax and the Burnside market there? How's transaction activity there, or is it, or is it pretty quiet?
No, it's, it's very good. It's, it's robust. There's, you know, we're still below, I think, 3% vacancy there. You know, we're just about entirely full, actually, for the property, the properties. The challenge always there is tenants expanding or retracting, and can you fit something that you already have, that type of thing. There's not a lot of options for them. For a small bay, nobody's building any small bay there. It's still a very solid market, and as you can see, we're seeing these leasing spreads with, with no tenant inducement. You know, we're really pleased with it, with, and I think our partner is as well. We're happy there. I mean, the, the Halifax economically, it's, you know, there's still five or six cranes downtown and building rental housing, condos everywhere.
Immigration is up, there as well. It's, it's a very robust market down there right now, and we're happy to be, to be in it, that's for sure.
Great. Last one for me is on the dispositions. I know you had CAD 36 million conditional last quarter. You've dealt with a couple. What's the expectation for the balance of the year and into 2024? Are you open to providing vendor financing? Do you feel that's necessary to, to get transactions across the finish line?
Yeah, I mean, it's, it's a tough market out there. You're seeing prolonged diligence periods being requested. I mean, in the, in the good old days, Sam, I mean, when we were buying, you know, we would underwrite a property, you know, before we put it under a contract, almost 30 days due diligence, 10 days close. It's nothing like that now, you know? It's 45-60 days due diligence, then they want, you know, sometimes 30-45 days for close. It's all around the financing. It's all around the debt financing, basically. You know, you know, we talked on one tenant on a deal that, that actually didn't. Just a small asset that didn't go through.
You know, if you put vendor financing behind the, the, the first financing, then they, they still look at the debt service coverage ratio, obviously, and the first lender won't approve it. Even though you would do some things to get a deal done, it's still controlled by the first lenders, whether you can be that creative or not.
Okay, great. Thank you. I turn it back.
Thanks.
There are no further questions at this time. I'll turn it back to Gordon to close out the call.
I just wanted to say thanks, from Alison and I, and everybody at PROREIT, and hopefully, everybody enjoys the rest of the summer. Thank you.
Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.