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 SLAIT Retail REIT Second Quarter 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the call over to Madelyn Saracini, Investor Relations. You may begin your conference.
Thank you, operator, and good morning, everyone. Welcome to the Q2 2019 conference call for SLAIT Retail REIT. I'm joined today by Greg Stevenson, Chief Executive Officer and Robert Armstrong, Chief Financial Officer. Before getting started, I'd 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 SLAIT 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, Matti, and thank you, everyone, for joining the call today. We continue to gain momentum in the Q2 and our achievements reflect both the team's tremendous efforts and highlight the durability and attractiveness of the REIT's grocery anchored in the 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 square feet of leasing. Our proactive approach to leasing has resulted in almost 50% of all 2019 renewals completed by the end of the Q2.
We also achieved an industry leading 96.8 percent 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 1 property in the quarter for $7,000,000 Year to date, we have sold 3 properties in 2 outparcels for $35,000,000 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 Q3 will continue to be busy from a disposition perspective with 7 properties currently under contract totaling over $36,000,000 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. In addition, we will also have excess funds to continue to delever our balance sheet and continue to bring our LCV toward our target levels as we did in Q2. Finally, 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 Q1 to a healthy 87.9% in the 2nd quarter.
As a result of continued growth in 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 percent 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 reader 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 unitholders. We thank you for your continued support and I will now hand over the call for Q and A.
Your first question comes from Sumayya Hussain with CIBC. Your line is open.
Thank you. Just firstly on the asset sale program in progress. What timeline are you expecting for that full amount to be sold? And how much do you see potentially spilling into 2020?
So I think the target remains the same, which is going to be somewhere between $150,000,000 to 200,000,000 dollars We think by the end of Q3 we'll be at the very least somewhere between $75,000,000 $90,000,000 so 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 and 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 2 things. 1 is that we continue to believe we'll hit our pricing. 2, I think the pricing on the $36,000,000 we have under contract right now is inside of the 7.5% cap rate.
And I think 3, all of the assets we're selling are non core assets, both sort of standalone outparcels as well as assets where we've executed our business plan or where we think we can deploy those proceeds into higher growth opportunities. So 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. And the $36,000,000 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 and good morning guys. Just to follow-up on the disposition questions from Sumayya on the $36,000,000 under contract. So you mentioned inside of 7.5 cap rate. How does that look on a dollar per square foot basis? And also can you speak to the about the profile of the buyers?
Is there I mean is there enough liquidity in the private market bidding for these non core assets?
The dollar per square foot 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 generate 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 you can these assets generate healthy yields. So we're encouraged by the liquidity. We're encouraged by the demand. And 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, sure. And just switching gears on the leasing side anchor renewals. So 5 leases were signed, I think, at a rental spread of 0.2%. How much did you spend there? And what was the lease term for these anchors?
And I mean are you satisfied with the rental spread of 0.2% relative to like 3% to 5% in the recent quarters?
Yes, I think it's always quarter dependent and that'll jump around a little bit. This quarter was just there is 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. So we get an extra 5 years of term which means an extra 5 years of cash flow. So there's lots of positives, it didn't us a lot of money, but it's fine.
We're very okay with it is the short answer.
Yes. I would add as well, Manchu, that on the Strip side, like we're still seeing really, really strong rental growth there. I think this is just more a matter of timing, but we'll see anchors kind of pop along continue to do options, but on the strip tenants, we're tending to see 5% to 6% increases on average. And we don't think there's anything to stop that going forward.
Sure. And based on your conversation with grocers, I mean, what are you seeing in terms of them thinking creatively about the future space and new formats? And 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 it's 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, which is this is a tremendously stable sector. It's necessity based and people are still going to the grocery store and buying groceries. And 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 along.
You need it. These are last mile distribution centers. And I think that the Krogers, Publix, Walmarts, Albertsons of the world and now Amazon's 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. And I think that nothing is really changing from last quarter or the several quarters before. And 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 SLA Retail REIT.
Sure, sure. And probably the last question from my side, leases signed but not commenced. I think it was around $1,700,000 last quarter. Did any of that kick in, in quarter 2? And how much more leases, I mean, do we expect to commence in the second half of twenty nineteen?
Yes. That amortized down because some of it came in, but that number is still north of $1,000,000 for the REIT. So there's between the redevelopment pipeline money coming in and the signed but not paying leases, you're north of $3,000,000 of NOI just there that we expect. And then again, we continue to think as Bobby highlighted, we'll continue to see growth in NOI from renewals on shop space renewals from anchors and then our new leasing spreads continue to be 40% to 50% because our rents are under market. So you'll see growth there.
So we've got growth coming from a number of different places. And our expiry profile if you were to look at it our rents are $10 give or take for the next few years. So we anticipate the growth to continue.
Sure. Thank you. I'll turn it back.
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, yes, we'll continue to execute on the disposition pipeline. And 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 $36,000,000 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.
All right. That's helpful. Just on 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?
Yes. I mean it's reasonably consistent across the portfolio. And it's 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. And 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. So I think that's another source of demand for us.
But 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. I mean the weighted average occupancy for U. S. REIT strip center space over the last 5 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. And so 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 just 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 started to happen more for us and that's why you've seen our leasing pickup and we're not alone. I think the results across the U. S.
Strip center space in general have been very positive. And I think firstly, retail, this is certainly one of the reasons.
Thanks for that. Just last one for me. At Eastpoint, 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?
Yes. So we've done a few sort of maybe to Himanshu's question earlier of grocers investing in their space and the answers where they have great assets. The answer is yes they're still doing it and Eastpoint is certainly one of them. We've got a very productive Kroger there doing very strong sales and they wanted to grow their store. They know the market and they know markets where they want to grow and that was one of them here.
And this was we have a very good relationship with Kroger and this was one of the developments that we've worked on with and we've done a few others in the portfolio where they come to us as opposed to we go to them. And so this was another one of those and we're very excited and we've already got a lot of leasing activity on their box and I think that that's something that we'll either be able to announce in Q3 and if not Q4 at the very latest. So between that is the largest vacancy in our portfolio today. So leasing up that Kmart box with Kroger is great for the REIT and then backfilling the Kroger box and taking their rent which we think we can do 3 to 4 times higher than what Kroger was paying on the rent. I think it will be a great news story for the REIT and the guys have done a tremendous job working with that.
But thanks to Kroger, we have got a great relationship there and the 6 years, 7 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 Madeleine Saracini.
Thanks everyone for joining the Q2 2019 conference call for SLAIT Retail REIT. Have a great day.