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Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust Second Quarter Conference Call. [Operator Instructions]. This call is being recorded on Thursday, July 27, 2023. And I would now like to turn the conference over to Mr. Andrew Tamlin. Thank you. Please go ahead.
Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's Second Quarter 2023 Earnings Conference Call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Senior Vice President of Western Asset Management; Rick Clermont, Assistant Vice President of Office Asset Management; along with Rai Sahi, CEO and Chairman of the Board.
Thank you all for taking the time to join the call. Before we jump into the call, I would like to point out that our comments will mostly refer to the second quarter 2023 MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we make on this call. Overall, we are again pleased with the second quarter results showed continued improvements in same asset metrics on a year-over-year basis. In fact, net operating income for the quarter increased 3% to $30.5 million in 2023 and due to improved same-store NOI growth in the retail asset class.
Net operating income for the 6 months ended June 30 increased 6.5% due both to the increase in same asset income plus a onetime property tax refund for one of the Trust enclosed regional centers in the amount of $2.8 million that was recorded in the first quarter. FFO for the quarter decreased 8% to $15 million in 2023 as compared to a year ago due to higher costs in the Trust short-term or variable rate debt. Same asset net operating income for the second quarter improved 2.4% from a year ago, buoyed by an 8% increase in same-asset results for our enclosed mall portfolio. This represents the ninth quarter in a row where we've achieved improved same-asset results on a year-over-year basis.
Interest expense increased 14% to $14.9 million for the quarter on a year-over-year basis. The impact of lower debt on a year-over-year basis has been offset by higher short-term borrowing costs due to the higher interest rate environment that we find ourselves in. Higher interest costs on renewal cost of mortgages have also been a factor.
Consistent with year-end, the Trust has approximately 19% of its debt is variable, and the Trust will continue to monitor this and would expect to see it somewhat elevated in the future. As mentioned previously, our enclosed mall results continued to rebound from the downturn we saw under COVID, in particular, our Malls in Western Canada, including Pine Centre and Prince George are exceeding expectations. These have translated into increases in rental growth, percentage rent and specialty leasing opportunities. We are also pleased to add opportunities of discriminating tenants such as H&M, lululemon and Sephora at a variety of our locations across the country.
These additions are solid endorsements to both our tenant and customer base. Sales at our Malls for the most part have either bounced back or have exceeded the pre-COVID results. This speaks to the trend of folks going back to the mall to do in-person shopping. During the quarter, we had a $15 million fair value loss in our real estate properties, which was all attributable to more conservative leasing assumptions in our office portfolio. This compares to a $12 million fair value gain recorded a year ago. The REIT's PCME or operating and leasing capital reserve was established to be $25 million for the year. The Trust has spent $14 million as compared to a reserve of $12.5 million for the 6 months. We are expecting elevated capital needs in future quarters into 2024 above the reserve amounts. This is due to both contractor delays from last year, some catch-up spending as well as some elevated leasing capital for upcoming renewals.
Our overall occupancy level of 90% at June 30 is relatively unchanged from last quarter and down slightly from a year ago. This compares to the occupancy from the start of the pandemic, which was 93%. We are seeing continued softness in the office leasing market. However, there are pockets of increased activity, including Calgary and certain suburban office assets. This speaks to the fact in most cases, we've been able to keep tenancy at our quality assets.
And now for an update on our Leasing efforts. In 2023, there is approximately 237,000 square foot retail GLA coming due. We do expect that every retail tenant larger than 5,000 square feet to renew their space. There's also approximately 294,000 square feet in office space still coming due in 2023, and we also feel good about the vast majority of this space as well. I do note that there is 13,000 square feet in Ottawa that will be vacated. We see no issue with the 28,000 square feet of industrial space renewing in 2023, which all should be done with a good uplift in rates.
Leasing discussions for retail opportunities have definitely picked up in the last year as both current and prospective tenants now have a better handle on what to expect going forward. This has led to numerous conversations about various opportunities at our properties across the country. Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal on December 31, 2020, and is now an over-hold. While they have verbally told us that they expect to renew, they have unfortunately still been focused on their response to the pandemic and other initiatives, which have taken priority.
Our experience is similar to Alberta landlords who have the provincial government as tenants. And I do note that this space has remained occupied over this entire time frame. Turning to financing and liquidity. The trust has $102 million in liquidity at the end of the first -- at the end of the second quarter and $323 million in unencumbered assets. These numbers are comparable from year-end and first quarter. This quarter was a quiet quarter for mortgage renewals with just 1 renewal, resulting in approximately $3 million in up financing proceeds. The Trust does have elevated mortgage renewals for the rest of 2023 and 2024, which management is working on. We do expect that there will be limited opportunities of up financing available during this time
We are especially pleased with the results from Pine Centre in Prince George, British Columbia. This mall will have a new Save-On-Foods grocery store opening shortly which has also led to leasing opportunities with discriminating tenants such as lululemon, Sephora and others. While the construction efforts with Save-On-Foods has seen delays, which is not uncommon these days, the marketplace is excited about all the new tenants. The construction is now complete, and we expect the tenant to be open near the end of the third quarter. The addition of grocery further complements the strong anchor tenant profile at this mall. The trust has also announced a refresh of the lobby and front edge of Rice Howard Place located in Edmonton, which will cost approximately $5 million.
The Trust owns 20% of this asset. The trust has also announced a remerchandising development project at St. Laurent. This is intended to strengthen the tenant mix and promote long-term growth through targeted investment in discriminatory retailers. This cost is expected to be approximately $13.5 million and is expected to take 24 to 36 months to complete. Wrapping up, we are pleased with the resiliency of our assets and the improved results and activity levels from our enclosed mall and retail segment. While there is still room to grow to get back to pre-COVID results, we have seen positive results in the last year or 2. We are looking forward to continued positive leasing conversations for our assets. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery-anchored, have performed well.
Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of government office tenants. We continue to be positive about our business and the objective of building value for our unitholders. We look forward to continuing to execute our strategy, and thank you for your continued support. We will now open the floor to questions.
[Operator Instructions]. And your first question comes from the line of Jonathan Kelcher from TD Cohen.
First question, just on the retail portfolio. Obviously, doing very well. What sort of uplifts do you expect for maturing leases over the balance of this year?
Jonathan, John here. When you say maturing leases, do you mean large format guys? Do you mean just in general?
I mean more in general, I wouldn't -- the large format guys probably not a ton, but more of the medium buying guys.
Yes, exactly. Those large format guys typically have flat and/or nominal growth in built-in and/or part of options. So it differs depending on where the asset is located across the country. When it comes to our strip assets, again, it's been pretty much steady state throughout the last 3 years. As Andrew noted during his commentary, it's pretty stable there. So not tremendous NOI growth profile. When it comes to enclosed malls, some of them have done exceptionally well. Andrew just noted, Prince George BC as one case in point where Pine Centre has done with all the investment the REIT has made in that property over the course of the last 18 months.
So the lease is rolled there with all the new anchors we've added, Winners/HomeSense obviously, Save-On-Foods, Andrew referenced the in-line CRU, we should see some noticeable uplift on renewal and new opportunities. But in general, what we've also seen in the last, call it, 12 months is a lot of retailers are starting to come back and demand more in-line space. People are returning to the mall. So it's made of the opportunity for us to roll up rents on renewals for stabilized tenants, tenants who have been there for a long time are more productive. So I can't really put a number to it. But all in all, on an overall level, we see still some uplift on renewal rents going forward.
Okay. And then it sounds like demand is pretty good right now. So would it be fair to expect occupancy to sort of climb through the back half of this year?
So occupancy in retail has been pretty good even dating back to 2020 when we saw the corners of that ensued in the first wave of COVID. We've been pretty good in terms of retaining low 90% to mid-90% occupancy depending on which assets we're talking about strips versus the enclosed malls. So -- and it always gets more elevated during the latter part of the year because people are looking for opportunities during the holiday season. So there's always going to be an uplift in occupancy as we get closer to the Christmas season notwithstanding.
Okay. And then just switching to office. I think it's in the MD&A that 136,000 square feet was renewed by the Federal Government. What sort of -- what does the new rent look like on that space?
Do you mind taking that one, Rick?
No problem. It's Rick Clermont. So in Ottawa for the new deals we've done with them, their renewals, they'd be in the around that $18 to $20 rate as a face rate for basic rent. And with the governments, you don't tend to provide any incentives, it's truly just fitting up a bit of their space.
Okay. So is that I think your total renewals are at $33.50. So is that like a step down from what it was?
The $33 I have to see what -- where you're getting that one from. But the -- as far as the basic rent for those ones, they were -- there's a bit of a step down, but not to the extent of the $33 in terms of the face rate from the government. The problem with the government is that some of the deals that were in the past had -- they were base here, so they're basically semi gross deals.
What I'm quoting you right now are the basically net deals, direct. So there's a big -- there was a mix in this property or these properties had -- it's a blend of gross and net. So if you do net them all out, you'd be basically cleaned down, I would say, on average about $2 to $3 on the square foot on the renewals from the deals that were done about between more or less 10 years ago.
Okay. And it looks like they gave back 9,000 square feet of space. Is that something -- is that a government type thing? Or is it something you're seeing with other tenants? How is basically general leasing going?
I could touch on the government first. The government in Ottawa, they're a bit unpredictable still. But if they have large sizes, we're kind of talking to other landlords. Anybody that -- any space that's, let's say, less than 30,000 square feet are more at a risk of them potentially not renewing. But as far as larger ones, they tend to have been renewing. In that one they renewed the rest of the complex and gave back 2 floors only. So they renewed basically 2 towers of 18 stories basically in both buildings and gave back 2 floors only.
Okay. Yes, sorry, go on.
Tom, do you -- why don't you just comment on what you're seeing out West, just maybe some general comments.
Yes, happy to do that. Jonathan, Tom Johnston. Generally, in the West, I would -- Calgary is definitely being a very resilient market that we're seeing right now. And when I say resilient, that's basically saying that there is not a big give back in space anymore, and there's not a lot of sublease coming to the market. So we're seeing the large oil and gas companies now committing to space maybe growing a little bit, but not a lot, but definitely not giving back and then starting to enter into some extensions.
And then good activity in the Calgary suburbs as well. I would argue Edmonton is probably the most challenged market. Some again, we're not seeing a lot of space come back to the market, but we're also seeing some tenants move to some suburban locations with some of the struggles that's happening in the core in Edmonton. And Vancouver is, I would argue, is sort of peaked on the sublease space that's come back to the market. I would say it's peaked and should flatten out. So I don't think you're going to see a lot of demand. But I would say the bad news and the sublease and all that space that's hitting the market has peaked.
[Operator Instructions]. And your next question comes from the line of Tom Callaghan from RBC Capital Markets.
Just a quick one for me on the same -- or along the lines of the St. Laurent remerchandising development project there you noted, just -- I think it's fair to say that the balance sheet will remain the priority here. But are there any sort of other targeted redevelopments or projects like this one that you guys are considering here over the near to medium term?
No. No. I think this is really it, Tom. We've gone through a bit of a process in assessing the needs for St. Laurent. We've come up with this plan. We're targeting some discriminating tenants and probably take a year or 2 to kind of work through that plan. But there might be some other one-off smaller type things that we do, but certainly not anything else is on the drawing board.
[Operator Instructions]. There are no further questions at this time. Please continue.
Okay. Thanks, everyone, for joining the call, and look forward to speaking to everybody next time. Have a good night.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.