Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Slate Retail REIT Second Quarter 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star then one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. I would now like to turn the call over to Madeline Sarracini, Investor Relations. You may begin your conference.
Thank you operator, and good morning everyone. Welcome to the second quarter 2019 conference call for Slate Retail REIT. I am joined today by Greg Stevenson, Chief Executive Officer, and Robert Armstrong, Chief Financial Officer. Before getting started, I would like to remind participants that our discussion today may contain forward-looking statements, and therefore ask you to familiarize yourself with the disclaimers regarding forward-looking statements, as well as non-IFRS financial measures, both of which can be found in management's discussion and analysis. You can visit Slate Retail REIT's website to access all of the REIT's financial disclosure, including our Q2 2019 investor update, which is available now. I will now hand over the call to Greg Stevenson for opening remarks.
Thank you, Maddy, and thank you everyone for joining the call today. We continue to gain momentum in the second quarter, and our achievements reflect both the team's tremendous efforts and highlight the durability and attractiveness of the REIT's grocery anchored and necessity-based portfolio. Strong organic growth continued throughout the quarter. We ended the quarter with an occupancy rate of 93.3% and executed on more than 324,000 sq ft of leasing. Our proactive approach to leasing has resulted in almost 50% of all 2019 renewals completed by the end of the second quarter. We also achieved an industry-leading 96.8% tenant retention ratio, demonstrating that our properties continue to be highly sought after by tenants in our markets. As a result of these efforts, we achieved a 2.9% increase in same property NOI year-over-year and a 4.4% increase when including the growth from recently completed redevelopment projects.
Of the last 12 quarters, the REIT has now had 10 quarters of positive same property NOI growth. We continue to make progress in our disposition pipeline, selling one property in the quarter for $7 million. Year to date, we have sold three properties and two out parcels for $35 million at a weighted average 7.5% cap rate. Proceeds from dispositions have been used to pay down debt, as well as fund our redevelopment projects that we anticipate will deliver an accretive 15.6% yield. The third quarter will continue to be busy from a disposition perspective with seven properties currently under contract, totaling over $36 million of expected proceeds. As importantly, following the completion of our targeted disposition pipeline, we will have excess funds to recycle capital into higher quality accretive acquisitions.
We will also have excess funds to continue to delever our balance sheet and continue to bring our LTV toward our target levels as we did in Q2. As a result of completing several major leasing projects, our capital spend is trending back toward historical levels. This has resulted in our AFFO payout ratio declining from 103.1% in the first quarter to a healthy 87.9% in the second quarter. As a result of continued growth and income from leasing activity, along with reduced capital spend, we expect the decline in our payout ratio to remain intact. Units of Slate Retail continue to generate substantial excess yield, today above 8.6%, and we believe continue to represent an attractive investment opportunity. To summarize, we are ending the quarter with a 93.3% occupancy rate.
Steady NOI growth was achieved, bolstered by redevelopment projects being completed, and property dispositions have been completed at a weighted average 7.5% cap rate, which compares favorably to where units of Slate Retail REIT are trading. The AFFO payout ratio was reduced to a healthy 87.9%. All such factors contributed to a very strong quarter. We are encouraged by the positive underlying fundamentals in our portfolio that will set the stage for our team to execute on the business plan ahead and deliver stable and growing earnings for our unit holders. We thank you for your continued support, and I will now hand over the call for Q&A.
At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for a brief moment to compile the Q&A roster. Your first question comes from Sumayya Hussain with CIBC. Your line is open.
Thank you. Just firstly on the asset sale program and progress. What timeline are you expecting for that full amount to be sold, and how much do you see potentially spilling into 2020?
I think the target remains the same, which is going to be somewhere between $150 million-$200 million. We think by the end of Q3, we'll be, at the very least, somewhere between $75 million and $90 million. Call it more than halfway done. I think our pricing will be where we expected it to be, which is in the 7.5% cap rate range. I think it may not be all by the end of the year, but by Q1 of 2020. I think the important thing is that we're very encouraged by two things. One is that we continue to believe we'll hit our pricing. Two, I think the pricing on the $36 million we have under contract right now is inside of the 7.5% cap rate.
I think three, all of the assets we're selling are non-core assets. Both sort of standalone ad parcels as well as assets where we've executed our business plan, or where we think we can deploy those proceeds into higher growth opportunities. When you think about selling assets in the lower tier of our portfolio, at a 7.5% cap rate, I think it speaks to what we think the rest of the portfolio is potentially worth.
Right. The $36 million that's, I guess, held for sale in Q3, is that net or gross proceeds?
That's gross.
Thank you. I'll turn it back.
Your next question comes from Himanshu Gupta with GMP. Your line is open.
Thank you. Good morning, guys. Just to follow up on the disposition questions from Sumayya, on the $36 million under contract. You mentioned inside of 7.5 cap rate, how does that look on a dollar per square foot basis? Also, can you speak about the profile of the buyers? Is there enough liquidity in the private market bidding for these non-core assets?
The dollar per sq ft number is $150 a foot, roughly. The liquidity is there for single assets. I think what we continue to see, and it's certainly not just us, if you look at our U.S. peers who have, I think, executed very successfully on disposition pipelines as well at attractive cap rates. Ours is certainly no different, and there's lots of capital out there for what we own, which is neighborhood necessity-based strip centers today that generates an excess yield, particularly for a lot of private buyers in an interest rate environment that we're in, which I'll describe as a low interest rate environment, and these assets generate healthy yields. We're encouraged by the liquidity, we're encouraged by the demand.
I think that we'll be able to execute sort of on our dollar amounts as well as on the cap rate targets that we set out coming into the year.
Sure. Just switching gears on the leasing side, anchor renewals. Five leases were signed, I think at a rental spread of 0.2%. How much did you spend there? What was the lease term for these anchors? Are you satisfied with the rental spread of 0.2% relative to 3%-5% in the recent quarters?
Yeah, I think it's always quarter dependent, and that'll jump around a little bit. This quarter there was anchors renewing, and it happened that some of the anchors this quarter had fixed options and they renewed. I think to your point on the cost, the nice thing is when you renew an option, there's no cost to the landlord. We get an extra five years of term, which means an extra five years of cash flow. There's lots of positives. It didn't cost us a lot of money, but it's fine. We're very okay with it is the short answer.
Yeah, I would add as well, Himanshu, that on the strip side, we're still seeing really, really strong rental growth there. I think this is just more a matter of timing. We'll see anchors kind of pop along and continue to do options. On the strip tenants, we're continuing to see 5%-6% increases on average, and we don't think there's anything to stop that going forward.
Sure. Based on your conversation with grocers, what are you seeing in terms of them thinking creatively about the future space and new formats? Also, are you seeing any closures of traditional grocery centers which are not able to invest in properties like Publix or Kroger?
No, I think what we've been saying for a long time now is finally making its way into the press, which we're hopeful is beneficial to the sentiment and for our business. This is a tremendously stable sector. It's necessity based, people are still going to the grocery store and buying groceries. I think what's also now being written about a lot, and Amazon is talking about this themselves, so you don't need to hear it from us, is bricks and mortar is not an option. It is a necessity for these folks in the grocery space. It's what we've been saying all along. You need it. These are last mile distribution centers, I think that the Krogers, Publix, Walmarts, Albertsons of the world, and now Amazon, are all talking publicly about the importance of bricks and mortar. They're investing in their stores.
They're investing in our stores. They're renewing at our stores. Sales are trending up and things are positive. I think that nothing is really changing from last quarter or the seven quarters before. I think that grocers will continue to try and figure out a way to leverage their store footprint, and that will be to the benefit of Slate Retail REIT.
Sure. Probably the last question from my side. Leases signed but not commenced. I think it was around $1.7 million last quarter. Did any of that kick in in quarter two? How much more leases do we expect to commence in the second half of 2019?
That amortized down because some of it came in. That number is still north of $1 million for the REIT. Between the redevelopment pipeline money coming in and the signed but not paying leases, you're north of $3 million of NOI just there that we expect. Again, we continue to think, as Bobby highlighted, we'll continue to see growth in NOI from renewals on shop space, renewals from anchors. Our new leasing spreads continue to be 40%-50% because our rents are under market. You'll see growth there. We've got growth coming from a number of different places. Our expiry profile, if you were to look at it, our rents are $10, give or take, for the next few years. We anticipate the growth to continue.
Sure. Thank you. I'll turn it back.
Again, it is star then one on your telephone keypad to ask a question. Your next question comes from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks. Good morning. Just with respect to the proceeds on dispositions, what are your thoughts with respect to the NCIB, versus reducing leverage?
I think we'll continue to execute on the disposition pipeline. As we've done in the past, I think we'll continue to look at all options, whether it's leverage, unit buybacks, looking at asset acquisitions, the distribution, all of those things. I think that we'll be patient, and I think we see a lot of opportunities out there in investing in direct real estate as well, and we'll continue to weigh that against each other. I think the nice thing for Slate Retail REIT and those proceeds coming in is that at 7.5 cap or below, which is where the next $36 million is going to come in, is that whether it's units or real estate, both will be very accretive uses of proceeds for the REIT, which is what I think we're most excited about.
Right. That's helpful. Can you maybe expand on the commentary in your letter around the rising demand from tenants at some of your centers coming from underperforming enclosed malls? Just curious, what types of tenants are these, and which markets are you seeing this play out in?
Yeah. It's reasonably consistent across the portfolio. As we highlighted in the letter, the strip center demand has been strong for a number of years because there's been no new supply. If you have a good center like we do, and I think one of our competitive advantages is we're bringing both capital as well as an institutional team to markets where that may be lacking. I think that's another source of demand for us. Sort of as we talked about, you've got malls, which we don't own, enclosed shopping malls, and you've got tenants leaving those malls looking for strip centers or places they can go where there's traffic, which is what grocery stores drive. They can come to our centers where operating expenses are much lower, rent is much lower, but now they have visibility, and so it's starting to pick up.
The weighted average occupancy for U.S. REIT strip center space over the last five years has been 95%. It's been tremendously stable in the face of all the headlines that you've read. Mind you, those are now starting to change. I think what we wanted to highlight, because we spend every day in this space and this may not be as obvious to others, is that if you think about owning one of these businesses, being in a dying mall relative to moving to a strip center, there's a lot of favorable reasons to do so, and that's started to happen more for us, and it's why you've seen our leasing pick up, and we're not alone. I think the results across the U.S. strip center space in general have been very positive. I think for Slate Retail REIT, this is certainly one of the reasons.
Thanks for that. Just last one for me. At Eastpointe, with respect to the new Kroger lease, can you provide some color on their decision to take that space and perhaps interest that you're seeing on backfilling their box?
Yep. We've done a few, sort of maybe to Himanshu's question earlier, of grocers investing in their space. The answer is where they have great assets, the answer is yes, they're still doing it. Eastpointe is certainly one of them. We've got a very productive Kroger there doing very strong sales. They wanted to grow their store. They know the market. They know markets where they want to grow. That was one of them here. We have a very good relationship with Kroger. This was one of the developments that we've worked on with them. We've done a few others in the portfolio where they come to us as opposed to we go to them. This was another one of those.
We're very excited, we've already got a lot of leasing activity on their box, I think that that's something that we'll either be able to announce in Q3 and if not, Q4 at the very latest. That is the largest vacancy in our portfolio today. Leasing up that Kmart box with Kroger is great for the REIT, then backfilling the Kroger box and taking their rent, which I think we can do three to four times higher than what Kroger was paying on the rent, I think will be a great news story for the REIT, the guys have done a tremendous job working with that. Thanks to Kroger, we have got a great relationship there, the six years or seven years we've spent investing with them is really starting to pay off.
Thanks very much. I'll turn it back.
Thanks.
There are no further questions at this time. I will now turn the call back over to Madeline Sarracini.
Thanks everyone for joining the second quarter 2019 conference call for Slate Retail REIT. Have a great day.
This concludes today's conference call. You may now disconnect.