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Thank you for standing by. This is the conference operator. Welcome to the Melcor REIT Second Quarter 2023 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Naomi Stefura, Chief Financial Officer. Please go ahead.
Thank you, Shereese. Good morning, and welcome to our conference call and webcast for the second quarter of 2023. With me on today's call is Randy Ferguson, our Senior Vice President of Investment Properties for Melcor REIT. I will begin today's call with some mandatory statements, and then I'll walk you through a few financial highlights. Afterwards, I'll turn the call over to Randy to walk through our operational highlights.
Our goal is to keep our remarks to a brief high-level review of the quarter and then open up the call for your questions. If you have not reviewed the materials related to this call, including the MD&A and the financial statements, they are available on the Investor Relations section of our website at melcorreit.ca and on sedar.com.
Certain statements made during this call may be forward-looking. For a complete discussion of items that may cause actual results to differ, please refer to the Business Environment and Risks section of our annual MD&A. Second, we report our financial results in Canadian dollars and in accordance with IFRS. We supplement our financial reporting with nonstandard measures, including FFO, AFFO, ACFO and NOI. We believe these measures are important in evaluating our performance, but caution listeners that they may not be comparable to similar measures presented by other companies. These nonstandard measures are defined and reconciled in our press release and in the MD&A.
First, I'd like to apologize for the mixup last week with our earnings announcement and originally scheduled call. Unfortunately, with the changeover to SEDAR+, we had some technical difficulties loading our materials onto the website, which pushed the electronic filing of our materials by 1 day and thereby forced us to reschedule this call. Thank you all for your understanding in this matter.
I will now walk everyone through some of the financial highlights of our results for Q2 2023. Our portfolio continues to produce stable results despite rising costs and inflationary pressures. In the quarter and year-to-date, rental revenue remained steady. Comparative to Q2 2022, NOI increased 3% and remained stable year-to-date. In the quarter, FFO was up 1% to $6.17 million or $0.21 per unit. Management believes FFO best reflects our true operating performance. ACFO was down 7% at $4.2 million or $0.14 per unit. ACFO in the quarter continues to be impacted by increases made at the end of 2022 to our normalized capital expenditures and normalized tenant incentives and leasing commissions. ACFO was also impacted by increases in finance costs correlated with higher interest rates.
We've held our monthly distributions up $0.04 per unit to date since August of 2021. Based on ACFO, this represents a quarterly payout ratio of 83% in the quarter and 88% year-to-date. As of June 30, 2023, we had $3.18 million in cash and $8.6 million in undrawn liquidity under our revolving credit facility.
During the quarter, we successfully secured financing on one of our larger Calgary office assets at a fixed rate of 4.62% for 5 years. We also renewed one of our Class C mortgages for 2 years at a rate of 6.68%. We continue to work with our lenders on a proactive basis on renewals and continue to stagger maturity dates to reduce risk in this uncertain financial market.
During the quarter, we listed our properties in Regina, Saskatchewan for sale. This was part of a strategic decision to focus on our core Alberta markets and focus on debt repayment. Under the rules of IFRS, 3 of these properties met the criteria as properties held for sale and were reclassified on the balance sheet. These 3 assets classified as held for sale are retail properties and have a combined square footage of 198,000 square feet. The asset sales would generate net cash proceeds, which would be used to pay down our revolving credit facility.
I will now turn the call over to Randy to speak to our portfolio's operations and performance.
Thank you, Naomi. I'm very pleased to share Melcor REIT's second quarter 2023 operational results. While our efforts have produced some stable financial results, we've also achieved some success in a challenging market. To date in 2023, we have 418,000 square feet in renewals and holdovers, which yield a retention rate of 92%.
We've also signed 49,000 square feet of new leasing. Weighted average base rents improved 2% year-over-year, notwithstanding the challenging conditions of the market. Occupancy remains strong at 87%, with commitment on an additional 40,000 square feet, bringing committed occupancy up to just over 89%.
Our leasing efforts over recent months will definitely show some benefits later in the year. The REIT's navigating inflationary pressures on financing costs, operating costs and leasing costs, but notwithstanding, we're proud that our team has accomplished what they have so far in 2023.
Office space, specifically in Edmonton Downtown Employment District continues to be challenging. However, we've managed to hold our weighted average base rents at a steady $13.15 per square foot and have improved occupancy in this asset class to almost 80%. As we move through 2023, we remain focused on our primary goals of value-add through our leasing programs and strong stewardship through our property management services.
I'd like now to open the call to take questions. Shereese, please open the lines.
[Operator Instructions] The first question comes from Tom Callaghan with RBC Capital Markets.
Just first question on the noncore dispositions there in Saskatchewan. Just trying to get a better sense. So I think the retail properties are classified as held for sale and have value of about $32 million. What would the value on the office assets look like for the Saskatchewan side?
The -- just give me a second to recollect, around $10 million, Tom.
Okay. Okay. And then broadly speaking, across that portfolio, do you have any rough sense on LTVs or leverage for those assets?
I do not. We can't -- we do have that information. It's just not at my fingertips for this call.
Yes, no problem. I can follow up after the call there on that side of things. Maybe just switching gears for the -- to mortgage maturities. Now we're just curious on your thoughts for where financing rates could land for those that are coming up on the back half of the year. And then, I guess, just secondly, is the expectation there, broadly speaking, that kind of maturing amounts will largely be matched with proceeds on refinancing?
Yes. So we only have one mortgage left in the current year, and that one is likely going to be a sort of a 1-year renewal at this point while we just sort of work through some tenant renewals. So that one, I think, sort of will renew on a sort of floating interest rate for 1 year.
And then the rest of the sort of looking at next year, they're all sort of retail assets that have relatively low leverage, kind of like 45% to 50%. So I think our current sort of feeling would be that on the 2024 renewals we'd likely go to market and bring those back up to potentially 55% to 60% kind of LTV. So there should be some net proceeds achieved on some of the 2024 renewals.
Perfect. That's good color. And then maybe just a segue there on the retail side, Randy, can you just talk kind of how those assets are performing today relative to your expectations and kind of outlook over the next 12 months?
And then kind of a quick follow-up on that. But have you started to notice any impacts from Alberta's in migration with these assets or are still a little early on that front?
It's still a little bit early on that front, Tom. Our -- overall, our Alberta retail is very, very strong. We're pretty much high 90s everywhere. We -- there's been an evolution, as you well know, in the last 10 years or so where the strip centers, especially grocery-anchored or ghost-anchored strip centers are really becoming service nodes for communities.
So while retail in the traditional sense is there, it's really evolving toward those personal services that include pharmacy, QSR, includes things like neighborhood gyms and medical facilities, the kinds of things that the neighborhood appreciates and wants to have nearby.
And that, I think, that has really played well into our overall plan of master-planning communities and building these commercial centers on the edges of them. And specifically, in terms of our retail assets in Regina, those assets have a very high occupancy.
The assets are of an age. We have recently renewed the major tenants in Towers Mall, both Giant Tiger as well as Saskatchewan Health Authority. So the timing is good for us where we want to make sure that the assets that we have are getting the intensity they need when you're working through down markets or financial times. And we're really putting under a microscope those assets that are of an age and will start to attract a requirement for further capital.
And you know the assets will, in the hands of someone local in the community, will be able to work through those in an effective manner. So as a result of that, they're very attractive to the market right now, and it's very attractive for us to sell. So it's a perfect time.
[Operator Instructions] The next question comes from Alexander Augimeri with CIBC.
I just want to start with the comment on tenant retention through lease amendments. Any color on what assets are affected and if it's a onetime amendment or a broader issue?
Well, I think probably one of the key renewals was in our Lethbridge property, where we just concluded a renewal with a 76,000 square foot tenant. The -- that number would also include the renewal of the Bay in the same property. Generally, a lot of it has been -- well, the noncore office assets have seen some success in renewal. And it is businesses who -- everybody's kind of digested the economic changes in the world and the changes in their costs.
And we're finding a lot of businesses that are now just saying, okay, we're all in this together. Let's get back to work. So we're seeing that kind of pickup in volume as a result of that. People are being careful. But for those that have got a good experience from their landlords, they're stepping up and renewing.
Just a follow-up. So would you say it's sort of lower rents for a set amount of time for the amendment? Or...
Interesting. We're -- because you're renewing a 5-year deal or a 7-year deal and you're renewing it at the same rent, we walk around with our face a little long because after 5 years, you think the rent should go up. But the supply and demand pressures mean, for the most part, we're renewing at very, very similar rates. Sometimes, we'll get a little bit more rent and sometimes a little bit less, but more or less, the rents are remaining stable.
Thanks for the color on that. I had a further on SP-NOI. It was a strong year, I think, mainly on the timing of expenses and recovery, it seems. But should we expect the full year number to be more in line with historical values?
Sorry. Yes, I think that's probably realistic. I think you're right. There is definitely like timing differences quarter-over-quarter from like an operating expense perspective. I think in line year-over-year is probably realistic. We are seeing some increased utility costs going forward. which will probably start to hurt NOI a bit.
So obviously, utilities are recoverable. But insofar as we don't have occupancy at 100%, that could potentially start to impact NOI a little bit. But I think all in all, flat is probably fair.
Okay. Great. Yes. And just the last question here on the assets held for sale. Do you have any update on interest received on them or buyer profiles?
Yes. It's early days, Alexander, because we just recently listed those assets. But I can say that in those early days, the brokers will firstly go to their pool of investors who they know are attracted by those kinds of assets. As a result of that, we have what I would call too strong and too weak offers for our retail assets, but it's a work in progress. A couple of those offers we're going to be working this week.
The broader market is still looking and contemplating. But I would -- I'd characterize the retail as strong interest out of the gate, and the office is soft interest out of the gate.
Okay. Okay. Good to hear. And sorry, the last follow-up on that is the fair value changes, were they mostly related to the held-for-sale assets? Or is that something else?
No. There were some small, small changes to the held-for-sale assets. Larger changes would have included a sort of 75 basis point change in cap rate on our Lethbridge assets. So because it's a large asset with cap rates increasing there, that probably had the biggest impact on the fair value in the quarter.
This concludes the question-and-answer session. I would like to turn the conference back over to Randy Ferguson for any closing remarks.
Thanks, Tom and Alexander, for your questions. In closing, we'd like to thank our leasing operations and management teams for the hard work they've done this past quarter. We're very proud of them. And also our finance had been in HR, communications and IT teams who, without their support and enthusiastic support, we wouldn't be as far along as we are. So thank you all for taking time with us and for reviewing our results. We know your time is valuable, and we appreciate your participation. And we look forward to reporting on the year as a whole when we meet next. Thank you for today's call, and have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.