CA - Choice Properties Real Estate Investment Trust (PPRQF) Q2 2023 Earnings Call Transcript
2023-07-21 16:10:24 ET
Choice Properties Real Estate Investment Trust (PPRQF)
Q2 2023 Earnings Conference Call
July 21, 2023 10:00 ET
Company Participants
Erin Johnston - Vice President, Finance
Rael Diamond - President and Chief Executive Officer
Mario Barrafato - Chief Financial Officer
Ana Radic - Chief Operating Officer
Conference Call Participants
Himanshu Gupta - Scotiabank
Mark Rothschild - Canaccord
Lorne Kalmar - Desjardins
Gaurav Mathur - IAA Capital Markets
Sam Damiani - TD Cowen
Tal Woolley - National Bank Financial
Sumayya Syed - CIBC
Presentation
Operator
Good morning and welcome to the Choice Properties Real Estate Investment Trust Second Quarter 2023 Earnings Conference Call. Today’s call is being recorded. After the speakers’ remarks, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker today, Erin Johnston, Vice President, Finance. Please go ahead.
Erin Johnston
Thank you. Good morning and welcome to the Choice Properties Q2 2023 conference call. I am joined here this morning by Rael Diamond, President and Chief Executive Officer; Mario Barrafato, Chief Financial Officer; and Ana Radic, Chief Operating Officer. Rael will start the call today by providing a brief recap of our second quarter performance and provide an update on our transaction and development activity in the quarter. Ana will discuss our operational results, followed by Mario who will conclude the call with a review of our financial results before we open the lines for Q&A.
Before we begin today’s call, I would like to remind you that by discussing our financial and operating performance and in responding to your questions, we may make forward-looking statements that include statements regarding Choice Properties objectives, strategies to achieve those objectives as well as statements with respect to management’s beliefs, plans, estimates, intention, outlook and similar statements concerning anticipated future events, results, circumstances, performance or exceptions that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in those forward-looking statements. Additional information on the material risks that can impact our financial results and estimates and the assumptions that were made in applying these – making these statements can be found in the recently filed Q2 2023 financial statements and management discussion and analysis, which are available on our website and on SEDAR.
And with that, I will turn the call over to Rael.
Rael Diamond
Thank you, Erin. Good morning, everyone and thank you for joining us today. We are pleased with our second quarter results, delivering another solid quarter. We delivered strong same asset cash NOI growth of 4.35% and FFO growth of 5%. This was driven by strong leasing and active asset management. While inflation remains elevated and investors continue to be cautious, fundamentals across our three strategic asset classes remained strong.
Our financial and operating performance in the quarter demonstrate the continued demand by necessity-based retail centers, well-located generic industrial assets and transit orientated residential buildings. Robust tenant demand for space within our properties continues to drive momentum in our leasing pipelines and inability to drive rent growth, which Ana will speak about in a moment.
One trend that we continue to see since our last quarter update is in regard to the transactions market. The market has been impacted by uncertainty in the financing markets and we continue to see a slowdown in transactions with wide bid/ask spreads persisting. Despite this, our team continues to be hard at work looking for opportunities to execute on our capital recycling program, with a focus on ensuring we maintain our high quality portfolio.
In the second quarter, we completed $103.1 million of transactions, including $101.2 million of dispositions. On dispositions, we are focused on continuing to exit office taking advantage of strong market fundamentals in assets we consider non-core and improving the quality of our retail portfolio. We completed the sale of one of our final two non-strategic office assets in the quarter, disposing our Metropolitan place in Dartmouth, Nova Scotia for proceeds of $13.4 million. This disposition completes Choice’s office assets in Atlantic Canada. We are actively marketing our remaining office assets in Calgary. On the theme of selling non-core assets during the quarter, we leveraged the strong market for data centers and closed on the sale of a data center adjacent to the Loblaw head office in Brampton for net proceeds of $74.2 million.
Lastly, we completed the disposition of a single tenant retail site in Cornwall, Ontario for proceeds of $10 million, the sites which had been docked since 2019 and was commented by a large box home improvement retailer on a long-term lease. Our team was able to facilitate the sale of the asset to a buyer while capitalizing on the remaining value of the lease by negotiating, receiving a lease termination payment of $7.4 million from existing tenants. While transactions have slowed, our developments are progressing very well and the team continues to focus on delivering on our development pipeline.
In addition to our ongoing retail intensification program, we are on track to complete approximately $1.6 million square feet of industrial space and two residential projects this year. During the quarter, we commenced servicing and site work at Choice Caledon Business Park. Servicing for the entire site is expected to take approximately 18 months and would cost approximately $165 million a share. Once complete, Choice will have a fully graded service site at a land cost of approximately $1.1 million per acre.
We are also pleased to report that for the first phase of this development we have entered into an approximately 90-acre ground lease with Loblaw with rent commencement in the first quarter of 2025. The lease has initial term of 25 years, with 2% annual rent steps. The total cost of the first phase with Loblaw, including land, servicing and Phase 1 specific costs expected to be approximately $125 million and yields between 7.25% and 7.75%.
For future phases of the site, our leasing team continues to see strong interest and is working through proposals with potential tenants. Subsequent to the quarter, our team also completed leasing and our development in South Surrey BC leasing the entire 353,000 square feet for initial term of 10 years. With the completion of this lease, our value is now expected to be approximately 10.75%, with a total cost of approximately $72 million. The advancement of each of these projects demonstrates our team’s ability to create value and add high-quality assets to our portfolio. We continue to focus in the short-term on the opportunities available to us in our retail and industrial development pipelines and continue – which continue to deliver strong returns despite heightened interest rates.
With that, I will hand it over to Ana to provide more color on our operational results. Ana?
Ana Radic
Thank you, Rael and good morning everyone. Our portfolio continues to perform well. Leasing activity is strong and our tenants continue to demonstrate their resilience. Occupancy remains near full at 97.4% and we are seeing strong rental rate growth across our three strategic asset classes.
During the quarter, we had approximately 1.1 million square feet of lease expiries. We renewed 743,000 square feet at an average spread of 21.1% and we completed 116,000 square feet of new leasing that commenced in the quarter. We experienced negative absorption of 212,000 square feet. Over half of this was the result of an industrial expiry in our Ontario portfolio, where we chose not to renew the tenants. We then leased the space to the neighboring tenant at an average rent that was 170% above the previous expiring rent. The expansion commences in August of this year, resulting in only 2 months of downtime. The balance of the negative absorption was primarily related to three retail vacancies, which I will speak to shortly.
In our approximately 44 million square foot necessity based retail portfolio, occupancy decreased slightly to 97.7% primarily related to three retail vacancies, the largest being a 33,000 square foot location in Waterloo, Ontario, where we negotiated an early lease surrender and lease surrender payment from the in-place tenants. The full space has been released to no frills with rent commencing in the fourth quarter of this year. The remaining decline was due to the closure of one Nordstrom location in Edmonton and one Bed Bath & Beyond in Dartmouth, Nova Scotia. Both spaces totaled 39,000 square feet at our share.
We are very close to finalizing a deal to backfill the Bed Bath & Beyond location and continue to work on backfilling the 18,000 square foot space vacated by Nordstrom Rack. We had 306,000 square feet of retail space naturally expired in the quarter and we completed 264,000 square feet of renewals resulting in tenant retention of 86%. The renewals were completed at rents 19.6% above expiry. Included in our renewals was a 28,000 square foot space, where the expiring rent was reduced during COVID and then renewed at current market rents, which resulted in an increase of 100%. Excluding this deal, spreads were still very strong at 13% above expiry, making this the highest quarterly retail leasing spread we have recorded.
Demand for retail space remains high. While tenants are dealing with rising costs and labor challenges, they are not suspending their plans to grow or relocate stores. We continue to see strong demand for our retail centers, as evidenced by our sustained high occupancy despite recent bankruptcies that have impacted the entire retail market.
As I’ve mentioned on past calls, there is very little new supply being built. This is driving tenants to existing centers and adding upward pressure on market rent. The quality of our tenants and our focus on necessity based retailers continues to provide resiliency in our portfolio. Many retail tenants continue to move ahead with their plans to grow store counts and relocate to superior sites. We are working to accommodate several such retailers by relocating and right sizing existing tenants at her centers, enabling us to increase rents drive asset value, as well as enhance the tenant mix at our sites.
Well, overall industrial leasing activity has moderated slightly in the second quarter of 2023, industrial demand remains strong. The national vacancy rate at 1.9% remains well below the historical 15-year average of 4%. And net rental rates continue to rise. Occupancy in our industrial portfolio is 97.3% while remaining close to full occupancy this quarter marks a slight decline of 10 basis points, primarily due to the temporary 2 months vacancy of 122,000 square feet in Ontario, which I spoke of earlier. The remaining 56,000 square feet was primarily due to rollover in Alberta. We have released over 80% of the total space vacated this quarter to new tenants with rent commencing this year. We had 661,000 square feet of industrial leases expiring the quarter of which we renewed 474,000 square feet at rents 22.3% above expiring.
In Ontario 33,000 square feet of expires were renewed at rents 110% above the expiring rent. We have significant embedded rental rate growth in our industrial portfolio. And with our current national average in place industrial rent at $8.57 per square foot and our average in place rent in Ontario at $8.18 per square foot. We expect to deliver strong rental rate growth across our industrial portfolio. The industrial asset class continues to experience elevated demand, and we continue to transact at rents well above current in place rent. We believe that well located new generation distribution space will continue on an upward trajectory so not at the same pace we have seen over the past few years, and rents and older generation buildings will likely moderate sooner.
There are 49 Loblaw leases expiring in 2024 consisting of 48 retail locations and one industrial site. Subsequent to the quarter we renewed 46 of these leases totaling 2.77 million square feet at a weighted average extension term of 4.9 years. In addition, Loblaw has conditionally agreed to renew two additional retail leases totaling 70,000 square feet for 5 years at a 10% increase. And we expect these renewals to be finalized in the fourth quarter. The total base rent across all 48 locations is increasing by 7.5% over the total expiring rent. One small grocery location of 18,000 square feet has been closed for 5 years and was not renewed. We are very pleased with the outcome of the Loblaw renewals. The ongoing stability there anchored tenancy brings with it and the quality of the necessity based tenants we are able to attract to our grocery anchored portfolio.
I’ll now pass the call over to Mario to discuss our financial performance.
Mario Barrafato
Thank you, Ana and good morning everyone. We are pleased with our financial performance in the second quarter, as our business continues to be well positioned to deliver on our financial goals. Our reported funds from operations for the second quarter were $183.6 million or $0.254 pre unit. Including FFO for the quarter was leased surrender income of $8.4 million. There were no other significant or unusual one-time items. On a per unit diluted basis, our second quarter FFO $0.254 per unit reflects an increase of approximately 5% in the second quarter of 2022. Strong same asset NOI, lease surrender income and higher interest income from mezz loans was offset by higher borrowing costs and higher G&A costs driven by inflation and a competitive talent market. Occupancy remained strong at 97.4% and contributed to our strong same asset results.
Same asset cash NOI increased by $9.6 million or 4.3%, compared to the second quarter of 2022. By asset class, retail same asset cash NOI increased by $6.1 million or 3.4%. The increase was driven by strong leasing, higher capital recoveries and contractual rent steps. For the remainder of 2023 we expect retail same asset cash NOI to trend back to our target range of 1.5% to 2%. As we start to lap the impact of higher occupancy rental rates and interest on capital recoveries in the second half of the year. Industrial increased by approximately $2.4 million or 6.7%. This increase was primarily due to higher rental rates for both renewals and new leases completed, as well as contractual rent steps. And mixed use residential and other increased by approximately $1 million or 14.6%. And this increase was due to improved residential occupancy and other revenues.
Turning to our balance sheet, our IFRS NAV increased 1.1%, $13.55 per unit, an increase of $106 million over the last quarter. NAV growth was driven by $88 million of fair value gains in our investment properties partially offset by the fair value adjustment on our investment NOI properties of $31 million where we are required under IFRS to mark-to-market this investment to its trading price as of June 30. We continue to take a transparent and conservative approach to the valuations of our investment properties. In the second quarter of last year, a rising interest rate environment driven by inflationary concerns led us to adjust our retail cap rates, reflecting our belief that a higher cost of capital would put downward pressure on property valuations. We’re now seeing this reflected in external appraisals in a challenging transaction markets confirming our approach to hold retail cap rates since our revaluation last year. That being said, we have recorded fair value gains in each asset class every quarter since then, driven solely by cash flow growth, and major development milestones.
Current quarter fair value gains on investment properties are mostly property specific and primarily driven by industrial leasing, retail cash flow growth and transaction activity. We’ve had minimal financial activity in the quarter, with in the quarter and the solid financial position was strong debt metrics and ample liquidity. Our debt to EBITDA ratio was 7.4x and we have over $1.4 billion available on our credit facility. And this is further supported by approximately $12.5 billion of unencumbered properties. Subsequent to the quarter and we repaid the $200 million Series B senior unsecured debenture upon maturity on July 5, 2023. Using proceeds drawn on our credit facility, this debenture had an interest rate of 4.9%. With strong demand from lenders translating into relatively low credit spreads, we’re well positioned to fund our meeting capital requirements in 2023 at a reasonable cost, we expect to fund with the remaining capital requirements to the unsecured market. As for us, there is no longer a meaningful spread between unsecured pricing and what we’re seeing in the secured market.
So overall, this was once again a very solid quarter. Our results reflect the stability and resiliency of our retail portfolio and the growth potential from strong industrial fundamentals. And with that we remain confident in our ability to deliver on our 2023 outlook.
Now Rael, Ana, Erin and I would be glad to answer your questions.
Question-and-Answer Session
[Operator Instructions] Our first question is from Himanshu Gupta with Scotiabank. Your line is open.
Q - Himanshu Gupta
Thank you and good morning, everyone. So just when the Loblaw renewal done, I think you mentioned 7.5% rental spread, so just to be clear, does that mean 1.5% on an annualized basis?
Ana Radic
It’s actually a 7.5% from ‘24 from the expiring ramp and flat for 5 years, so we get the full 7.5% in year 1.
Himanshu Gupta
Okay. Okay. Thanks. And just to clarify, Ana, and it’s really like a negotiation involved when you do the renewal. Because I think the based on the formula, you can go up to 10% increase on the renewal.
Ana Radic
That’s correct. The renewal provision is standard and all of the Loblaw leases, and it’s the renewal is to be at market rents. However, it can’t exceed 110% of the expiring rent, but nor can it be less than the expiring rent. So there’s a floor of zero and a feeling of a 10% increase.
Himanshu Gupta
Okay, okay. Fair enough. And then I think there was one lease remaining, which was not renewed, any color on that?
Ana Radic
It’s a small store in a very small market in Ontario. And our transaction team is looking to dispose of it, it has a very material.
Himanshu Gupta
Correct. Okay, thank you. And maybe just running to your same property NOI guidance, first half of the year is very strong, made 4%. And I think your guidance was unchanged at 2% to 3%. Are you expecting more retail vacancy in the second half of the year in your guidance? Are you baking in some vacancy up ticket?
Mario Barrafato
No, Himanshu, to actually, the NOI will remain strong is that if the comparator base now is higher, so therefore the growth number is lower, and it’s just math, but it’s still very, very strong. It’ll get behind of our range.
Himanshu Gupta
Okay, awesome. Thank you. And my last question is on the Ontario industrial portfolio, I think you mentioned in Playcentre, like low $8 range. So what do you think is the mark-to-market on this industrial portfolio in Ontario? And what rates are you signing leases and due to your research? Thank you.
Ana Radic
Yes. So yes, the market rents in Ontario, range due to size and location, but they’re generally we’re doing deals are in between $15 and $18 a square foot.
Himanshu Gupta
Okay, thank you. I will turn it back.
Operator
The next question is from Mark Rothschild with Canaccord. Your line is open.
Mark Rothschild
Thanks. Good morning. Mario, maybe just following up on your answer there as far as the same property NOI growth. So are you saying that the growth should remain in this 4% range and the second half of the error or that the NOI will remain consistent and still grow up? Because it was stronger in the second half of 2022 the pace of growth will get more like 1% to 2% of the second half to average out to the guidance for the year?
Mario Barrafato
Yes, it’s the latter mark. Exactly. The – there’s – that won’t be a thing they can see. And there’s no, there’s nothing that’s going to impact the occupancy or the number of the NOI. It’s just a comparator, the comparator levels higher.
Mark Rothschild
Okay, great. Thanks. And then in regards to the industrial fundamentals, there was a comment made that maybe the growth is moderating. Are you expecting to see rents continue to rise in your markets for the industrial properties you own? Or are you seeing that rent growth maybe has just peaked based on what tenants can afford to pay?
Ana Radic
No, I think what we were referring to was more the fact that they’ve risen by 2030, 60% in some markets, we are still seeing rental rate growth, but not at the historical levels. And the tenants are paying the market rents, despite the increase from their current in place rent, which as we mentioned was sort of a under $9, $8.50 a square foot.
Mark Rothschild
Okay, thanks. Maybe just one last question just on the datacenter lease, as the NSS sale rather, just provide some color on what the – how that worked with the payment to the tenant to get out of the lease was that requirement of the purchaser?
Rael Diamond
Hey Mark, this is Rael. It wasn’t a requirement. We actually took it to market, knowing Loblaw was going to downsize. And there is basically we worked out a formula with Loblaw that we shared in the upside, and the payment to them was based on that formula. And like it just speaks to the power of the relationship that we have with Loblaw, that we can do things that others cannot do with the tenant and just the transparency in the business. So, it allowed us to essentially achieve our goals unlocking value at a significant cash that wasn’t really captured on the balance sheet and allowed Loblaw to get of the lease and get a payment.
Mark Rothschild
Okay. Thank you very much.
Operator
The next question is from Lorne Kalmar with Desjardins. Your line is open.
Lorne Kalmar
Thanks. Good morning everybody. Maybe turning back to the industrial portfolio, it doesn’t look like there is much less to mature in the GTA for the remainder of the year. What do maturities look like for the region in 2024?
Ana Radic
Yes, so in 2024, our through industrial about 40% of it actually is in Ontario, about 43%.Yes, 2.7 [ph] million square feet rolling in ‘24.
Lorne Kalmar
Okay. And then maybe just following on that, would you expect given the mark-to-market there, some jump in same property NOI as those leases are renewed?
Ana Radic
Yes. Absolutely, the average in place rents in 2024 on those leases is actually sub-$8, so we do expect strong growth on those renewals.
Lorne Kalmar
Okay. Great. And then it looks like you guys started doing pre-leasing at the element on auto, I was just wondering how that’s going so far.
Ana Radic
It’s going well. We are actually about 25% sort of pre-lease including just validating sort of tenant applications, but there has been strong demand.
Lorne Kalmar
And how have rents been relative to pro forma?
Ana Radic
They have been in line with pro forma, probably a little bit higher than we expected.
Lorne Kalmar
Okay. And then just last one, with the Phase 1 of Caledon getting underway, I know Loblaw going in there. What sort of the thoughts on timing for the balance of the project, the balance of the phases of the project, I should say?
Rael Diamond
Yes. So, it’s going to take us 18 months to fully service the site. And during that time, we are going to be looking for other tenants. But it – so hopefully, we will have something to report in the next few quarters, but likely, you won’t have income coming from another tenant until probably later ‘25, ‘26, assuming we can get some decent traction soon. But Loblaw commences in Q1 of ‘25.
Lorne Kalmar
Okay. Great. Thank you so much for the color. I will turn it back.
Operator
The next question is from Gaurav Mathur with IAA Capital Markets. Your line is open.
Gaurav Mathur
Thank you and good morning everyone. Just on the cap rates in the residential and mixed used segment, could you provide some color on what’s driving cap rate compression there since the beginning of the year?
Rael Diamond
It’s a function – you are referring to our MD&A table, which shows our cap rates coming down is because we are selling non-core office at higher cap rates and the remaining assets, our core assets. So, that’s what’s driving it down.
Gaurav Mathur
Okay. And just as a follow-up to that segment, I mean how should we think about future development activity as construction costs continue to increase?
Rael Diamond
Yes. I think construction costs have definitely moderated in that. So, we are probably 12 months away from any of our sites being truly shovel ready. And we are going to make a decision at that time. But right now we are in a truly unique position that we have lots of opportunities available to us in both residential, sorry, in both retail and industrial. And we are really pushing development on the commercial just given where interest rates are, but hopefully we will be in a position to commence the residential and as they are closer to being obviously shovel ready, we are just not in that position yet.
Gaurav Mathur
Okay, fantastic. And just lastly, switching gears to the balance sheet. Is there a targeted leverage range that you are focusing on?
Mario Barrafato
Yes. So, right now we have been working at a 7.5x EBITDA or a case that 3022 goes a bit lower, or a bit higher, but we feel at that level, it gives us a lot of flexibility to operate and deal with anytime you get development spend.
Gaurav Mathur
Okay. And then just what moves the needle higher or lower, if you could just provide little more color on that.
Mario Barrafato
It would just be timing, timing of financing coming up of EBITDA.
Gaurav Mathur
Okay. Great. Thank you for the color everyone. I will turn back to the operator.
Operator
Your next question is from Sam Damiani with TD Cowen. Your line is open.
Sam Damiani
Thanks and good morning everyone. I really just wanted to focus in on the retail leasing. And so – and I wonder if you wouldn’t mind giving a little more color on the 20% renewal spread in the quarter, I guess 13% adjusting for the pandemic relief? Like is that kind of uplift expected to continue in the near-term? What sort of tenants are driving that sudden spike in rent growth?
Ana Radic
I think it’s definitely driven by increased demand, Sam. It’s we are just seeing that as we are seeing strong tenant retention and general optimism for retailers. It’s the real mix of tenants both, like necessity based, some banks, fashion as well in our power centers where the fashion retailers were coming off maybe a little bit lower rents. But that’s also a factor in the spreads. So, I would say they are – I don’t know if they will be 13% and coming subsequent borders, but definitely in that sort of higher range for us.
Sam Damiani
And just on the pandemic relief, like how much of that is now unwound, or is still left to go and how long do you think it will take to fully unwind those relief provisions that were granted?
Ana Radic
Actually, I think most are now unwound. We had tenants who were – this was one of the last ones I think we had a few fashion tenants that in the previous quarters, but nothing material remains in terms of COVID-related concession.
Sam Damiani
Okay, fantastic. That helps and I will turn it back. Thank you.
Operator
The next question is from Tal Woolley with National Bank Financial. Your line is open.
Tal Woolley
Hi. Good morning. I just wanted to circle back on sort of your comments about the development pipeline, and how you are focusing a little bit more, near-term on advancing commercial projects with the interest rate environment. I guess how long do you think that sort of view on how to allocate your development capital will persist? And what do you sort of need to see in the market to advance more residential stuff?
Rael Diamond
Yes. Look, I think for us, as I have said earlier, we have just been in a unique position that we are making really good spread over where we are developing the commercial product twos to where the cap rate is. So, use is the one entirely right now, like we developed it, to call it, tenants record a yield and cap rates in Vancouver modern, generic, industrial would be like half of that. So, we are making a lot of money and for us it’s, we are very focused on keeping a strong balance sheet. And we are not going to allow that to – we are not going to allow our leverage to creep up. So, if were means deferring the rental to start because we have better opportunities available on the commercial, we will keep doing that. And on many of our residential sites, as you know like, it’s access to that and we continue to collect rent from the existing tenants. So, it’s not like there is much of a carry on the land. But I think the short answer to your question, Tal is we need to see –we need to believe that our pro forma – realistic pro forma will deliver us – create an outgrowth, otherwise we shouldn’t be doing it.
Tal Woolley
Okay. And then I apologize. I had my phone cut out a little bit while you are talking with the retail piece, I was just curious, is there a specific type of tenant that drove the size of the termination fees this quarter, or is it just a bunch of little ones?
Ana Radic
There was really two tenants, so just a general kind of merchandise tenant where they had a few years left on the term and they were still paying rents. But – and then we were able to negotiate that termination, that was about $800,000, and then re-lease it to [indiscernible]. And the other was as Rael spoke about, like a home improvement tenant who was [indiscernible] in Ontario. And so we negotiated a lease termination, they had 13 years left on their terms. So, it was a significant remaining obligation that resulted in $7.4 million lease surrender fee. And then we sold the site to another – to a user.
Tal Woolley
Got it. And then just lastly, on the Caledon site, you are sort of down the path, was there a particular rationale for going with the ground lease structure versus something more traditional? And given that you are sort of seeing, I think a development yield limit that is ground lease, or was there potentially more an offer you have done the full development you think?
Rael Diamond
Sorry, Tal, the second part was with –repeat the second part of your question.
Tal Woolley
Yes. I was just trying to understand with the ground lease size, what was the driver for going with that particular method, as opposed to a more traditional like owning the building, doing all – doing the rest of the development, getting compensated for that. and I think you are getting a pretty great return on a ground lease, I am just wondering if there was more on offer if you had done more of the project?
Rael Diamond
Like firstly, from a macro point of view, we do like land leases. And if you think about the most secure form of real estate, and truly a land lease, and because the tenant invests a lot of improvements in their building, and if they don’t renew, you essentially get a free building. We have been – Loblaw, and in East Calgary, we have done a land lease structure. They are investing a lot of capital, as they have reported in East Calgary. And we used that same structure on Caledon and a truly and it works for us. It’s quick and it’s low risk, and we are getting a really good return. And then it allows Loblaw to control the timing of their capital investments into the building. So, that’s what drove our decision. And the other thing just on land leases in general, I would say we probably one of the few, it’s not the only read, who has actually been doing land leases on rental buildings with development partners. And I think that just speaks to how we think about it, that we really focused on long-term, we are trying to generate long-term income, and also in phenomenal shape with our balance sheet. We don’t need that cash right away. And I think that’s why we are so unique in the Canadian REIT landscape.
Tal Woolley
Okay. That’s great. Thanks very much everyone.
Operator
The next question is from Sumayya Syed with CIBC. Your line is open.
Sumayya Syed
Thanks. Good morning. Just a follow-up on the renewal of the Loblaw leases, with term of almost 5 years, and I believe the renewal last year was closer to almost 8 years. So, just wondering what would explain the difference in the average terms between last year and these renewals?
Ana Radic
Yes. Last year, we renewed some of the leases for 5 years and 10 years. So essentially, two options to extend were exercised, and that’s why there was a bit of a weighted longer average lease term. And that was, we had a desire to secure some of the larger superstores that were rolling that year in Atlantic Canada, and Loblaw was comfortable doing that. So, that sort of was the reason for our decision to do a longer term. In this year, we were happy with the 5-year extension and we will…
Rael Diamond
Yes. I think some of – the other thing as Ana said is like, you essentially own like essentially 100% of the leases were renewed. The one that was not renewed was closed for multiple years, and we are waiting for the lease term and we intend to sell it. And from our point of view, it’s a great story. And again, it speaks to the power of the relationship with the tenant.
Sumayya Syed
Thanks for that.
Rael Diamond
It’s good to have you at home.
Sumayya Syed
Thank you. And just looking at the leasing it on Choice Industrial Center, just wondering about the profile, the tenant there, and also any info you can share on the escalator from that lease.
Ana Radic
Oh, it’s a high covenant tenant, we can’t disclose who they are right now. But they are national tenants and national retailer. But there are a lot of losses. And the growth, the average rental rates steps are 3.95% over the 10 years, so annually.
Sumayya Syed
Okay. Thanks. And just lastly, anything changed on your stance on the allied units with the first trial, lot of expiring last month?
Rael Diamond
No, nothing has changed, but we will sell it when we need the capital, and that we see that the shares are trading closer to what we perceive this value, but nothing has changed. Right now balance sheet is in great shape. And we are very happy that they completed the datacenter sale, because puts their balance sheet in really good shape and that’s it form us.
Sumayya Syed
Okay. Thank you, guys.
Operator
The next question is from Tommy Berry with RBC Capital Markets. Your line is open.
Unidentified Analyst
Thanks. Good morning. Loblaw had previously indicated plans to sell some real estate. Are you anticipating any further acquisitions from them this year? And can you maybe just talk about what sort of cap rates you are seeing on transactions that are in the market?
Rael Diamond
So, the short answer is, yes, we do intend to still continue purchasing from Loblaw, like what we said at our Investor Day is that we want to be balanced from capital recycling point of view. And we have done a very good job so far in recycling assets at very good value to Choice unit holders. And we probably have identified around another $100 million that we will do towards the end of this year, or sometime early next year. Just as far as magnitude, I think that cap rates are probably is like, a year ago, we wrote down our retail cap rates about 40 basis points. So, we wrote up values, we wrote – we increased cap rates about 40 basis points. And I think what you are starting to see is appraisers are starting to get closer to that number now. And I think that’s where things are trading, but there has definitely been more groups who are very hesitant to buy assets with negative leverage, so i.e. where they are paying, more on the interest expense or interest rate, then they will, or they are earning on the assets. And there has definitely been a tone change on that front. Whereas previous – earlier this year, people are willing to do that, but definitely there has been more of a tone change. And I would also say that every transaction that’s traded has a unique story to it, it’s often there was debt in place, or someone really covered the asset but didn’t generate a unique story. But there has definitely been a slowdown in volumes.
Unidentified Analyst
Got it. Thanks for the color Rael. Maybe just coming back to development, if you look ahead, I know it’s still ways out for 2025. But I think I don’t see one project slated for completion. How do you see the pipeline growing over the next call it 12 months to 18 months for 2025? And what could that look like in terms of what you are delivering in that year?
Rael Diamond
Yes. Look, we have a lot of commercial development that they keep us busy for the next 5 years to 7 years. And remember, the commercial development is a lot shorter in the time to develop it. So for example, in Phase 1 in Caledon, we are going to deliver it in Q1 of ‘25. So, I think as we start getting leasing traction, or as we are ready to go on a spec development, you will see more come in, but we have several more phases, as I have said in Caledon and in East Calgary. And we are seeing leasing interest and we expect to keep that going. And then on the residential side, as we said earlier, we do expect to start construction as things are shovel ready, although you wouldn’t see income come for a few years, it takes 3 years to 4 years to stabilize the asset. But hopefully you will start seeing something in the pipeline over the next 12 months to 18 months.
Unidentified Analyst
Okay. And then just maybe sticking to your comments on resi, I think you saw condo completions scheduled for I think the second half of this year. And so should we anticipate the closings on those condos like starting end of this year or into more – is that more 2024?
Rael Diamond
It could be towards the end of this year or in ‘24. It’s in that area, Tommy, yes.
Unidentified Analyst
Okay. And then just lastly, the strategic alliance agreement, I think was renewed earlier this month, just curious were there any changes that were notable relative to the prior agreement or any update there?
Rael Diamond
No, no changes automatically.
Unidentified Analyst
Okay, thanks very much. I’ll turn it back.
Operator
[Operator Instructions] Next question is from Himanshu Gupta with Scotiabank. Your line is open.
Himanshu Gupta
Thank you. Just a follow-up question on balance sheet, so credit facility of $200 million was used to pay-down I think unsecured debenture expiry, what is your plan to put permanent financing and what interest rate are you expecting now?
Mario Barrafato
So yes, I mean, as I said, the unsecured market will be part of the most effective way to go right now given the gap between secured unsecured just for us, it’s gotten narrower. And so as Rael said, we have a few dispositions still on the go that will determine if we can use proceeds to pay down the line or we can do a financing. So we will just keep watching it. It’s only a $300 million. So it’s not a big number. But that will be the deciding factor and also the volatility right now, you are seeing a bit of interest rate volatility as central banks keep moving. So there is no urgency, but there is a window that makes sense. And we have visibility on future cash flows we will take advantage of.
Himanshu Gupta
Alright. And Mario, do you have a sense what will be the rate if you were in the math of the unsecured debenture market? Is it like still mid 5 or is it even creeping higher than that?
Mario Barrafato
It depends on the time of day. But yes, right now, like our spreads are at 2.20 and if you are at a 3% or 5.5%, 5.6% for 10. And the thing is the yield curve is pretty flat when you go from kind of 7% as well. So 10 is a spot that would work and the pricing will be good.
Himanshu Gupta
Thank you. I will turn back.
Operator
There are no further questions. At this time, we will turn it back to the presenters for any closing remarks.
Rael Diamond
Thank you, Chris. To summarize, we’re very pleased with our second quarter performance, a high-quality portfolio, ongoing focus on operational excellence, development opportunities and balance sheet strength uniquely positioned us in the Canadian REIT landscape. We remain really confident in our ability to execute on our strategic priorities and drive long-term NAV growth. Thank you for your interest, your investment in Choice and for joining us this morning. Have a great weekend.
Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
For further details see:
Choice Properties Real Estate Investment Trust (PPRQF) Q2 2023 Earnings Call Transcript