© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen, and welcome to the Morguard REIT Fourth Quarter for the year ended December 31, 2022 Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, February 16, 2023.
I would now like to turn the conference over to Mr. Andrew Tamlin. Please go ahead, sir.
Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's fourth quarter 2022 earnings conference call.
I'm joined this afternoon by John Ginnis, Assistant Vice President of Retail Asset Management; Tom Johnston, Vice President of Western Asset Management; and Todd Febbo, Vice President of Eastern Asset Management. 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 fourth quarter 2022 MD&A and financial statements, which have been posted to our Web site. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we would make on the call.
Overall, we are pleased again with the fourth quarter results, which showed continued improvement in the same asset metrics from a year -- on a year-over-year basis. Net operating income for the quarter increased 6% to $33.5 million in 2022 due to continued improvements in our enclosed mall portfolio results.
Net operating income for the year was flat at $122 million. However, the improved operating results for the full year is offset by the decline in one-time lease cancellation fees in the amount of $2.5 million. FFO for the quarter also increased 6% to $19 million in 2022 as compared to a year ago.
Same-asset net operating income for the fourth quarter improved 5% from a year ago, buoyed by an almost 10% increase in same-asset results for our enclosed mall portfolio. This represents the seventh quarter in a row where we have achieved improved same-asset results on a year-over-year basis. For the year, our same asset net operating income is up 3% primarily due to a 10% increase for the enclosed malls.
Interest expense has increased 6% to $14 million for the quarter on a year-over-year basis. The impact of lower debt in the amount of $25 million 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.
For the year, interest expenses rose marginally or 0.5%. We continue to see interest expense increasing in 2023, notwithstanding our decline in debt. This is due to both an elevated amount of mortgage maturities in the next 2 years in addition to the fact that the Trust has approximately 18% of its debt as variable.
As mentioned previously, our enclosed mall results continue to rebound from the downturn we saw under COVID. This rebound started in late 2021 with our malls located in Western Canada and has continued throughout 2022 with our Ontario malls. These have translated into increases in percentage rent and specialty leasing opportunities.
We are also pleased to add opportunities of discriminating tenants such as Lululemon and Sephora at some of our Western Canada locations with possibly more to come. 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 exceeded the pre-COVID levels. This speaks to the trend of folks going back to the mall to do in-person shopping.
In general, we found that it was a solid holiday season for our enclosed malls and their tenants. We are pleased with the results from Pine Center in Prince George, British Columbia as well. 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 and Sephora with potentially more to come.
Rent arrears and deferrals continue to decline. The receivable balance for tenants has decreased from $9.2million at the end of last year to $5.4 million at the end of this year. While the uncollectible overdue amounts have been allowed for, there is still cleanup needed to document certain abatements to be granted. The vast majority of these amounts outstanding are from the Ontario malls and stem from pre-2022 arrears. At this point, the amount of bad debt expense that we are seeing is very comparable to pre-COVID levels.
During the quarter, we had $113 million fair value loss from our real estate properties as we are required to adjust these assets to fair market value under IFRS. This represented a 25 basis point expansion of cap rates for all enclosed mall retail and office assets in response to market changes and valuation parameters.
Combined with earlier 2022 adjustments, we've recorded $149 million fair value loss for the year as compared to $61 million last year. The REIT's PCME or operating and leasing capital reserve was established to be $25million for the year, which is back to normal levels. We spent approximately $22 million of this with contractor and other delays being the primary reason why the full amount was not spent.
We do expect to be more active in operating capital spending in both 2023 and 2024 as we catch up on delayed projects and look at higher leasing volumes, which may result in a higher level of necessary leasing capital. Our overall occupancy levels at 91% at December 31 remains consistent with the year ago. This has only changed slightly from the start of the pandemic, which was 93%. This speaks to the fact that in most cases, we've been able to keep tenancy at our quality assets. I do note that we have a single tenant industrial asset for which the tenant did not -- did not renew in the fourth quarter. We are working to find a new tenant for this asset.
And now for an update on our leasing efforts. In 2023, there's approximately 475,000 square foot in retail GLA coming due. We do expect that every retail tenant larger than 5,000 square feet to renew their space. There is also approximately 385,000 square feet in office space coming due, and we 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 and a further 19,000 square feet at 77 Bloor, which will be vacated. We see no issue with the 62,000 square feet of industrial space renewing in 2023. 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.
Office leasing discussions on the other hand, were gaining some momentum, are still somewhat muted as tenants are still trying to figure out what their office needs will be like over the long-term in a post-COVID world. 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 it is now an overhaul. While they have verbally told us that they expect to renew, they have unfortunately still been focused on the response to the pandemic and other initiatives, which has taken priority. At this point, we are looking at 2023 in order to get this completed. Our experience is similar to other landlords who have the provincial government as tenants. I do note that this space has remained occupied over this entire time frame.
Turning to financing and liquidity. The Trust has $122 million in liquidity at the end of the fourth quarter and $345million in unencumbered assets. These numbers have changed from $185 million and $315 million a year ago. Looking specifically at mortgage renewals, we had $44 million in mortgage pay downs in the fourth quarter, most of which related to a $35 million pay down associated with the Penn West Plaza renewal.
The Trust is continuing with the Save-On-Foods development job at Pine Center, which entails the retenanting of the former Lowe's premises into a new 38,850-square-foot Save-On-Foods grocery store. Construction efforts are now mostly complete. We expect to be able to turn it over to the tenant early in the second quarter. The addition of grocery further complements the strong anchor tenant profile in this mall and as advanced leasing discussions with some discriminatory tenants looking to come into this marketplace.
Last quarter, the Trust announced that it reached an agreement with Teamtown to convert the empty Home Outfitters space at Heritage Town Center in Calgary into a 34,000 square foot retail store focusing on sporting goods. This project will cost approximately $3 million from a landlord perspective and will be completed in the first quarter of 2023.
Wrapping up, we are pleased that 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 levels, we have seen positive results from the last year. 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.
Thank you. [Operator Instructions] Your first question comes from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks, good afternoon. First question is just on the enclosed retail portfolio, the same-property NOI strong in the quarter, but strong all year. Maybe give a little bit more color on what drove that? And I guess what are your expectations for that portfolio for 2023? Where do you think you can get to occupancy to?
Do you mind fielding that, John?
Sure. No, problem, Andrew. Hey, Jonathan thanks for the question. You’re right. Retail has seen a resurgence, particularly in 2022. We didn’t really know what to expect starting -- beginning the calendar year. Coming out of COVID restrictions, particularly here in Ontario. But to answer your question directly, what drove that really is net new demand, and our ability to roll up our income that was disproportionately hit during the pandemic in this sector. So we feel very positive, as Andrew said in his opening remarks about the business.
Going forward, there was a lot of restructuring that ensued in 2020, and we saw the impact of the income on the sector accordingly. So we've been very, very diligent in trying to roll some of that back. We've dealt a lot with our receivables, as Andrew noted in his opening -- in his remarks as well. So again, a combination of net new leasing, our ability to renew tenants at higher rents as part of the in-line CRU component. And so we feel very positive on the business moving forward.
Okay. And what -- like you ended the year at 93% or just over 93% occupancy. What -- how much -- what would you say is a stabilized number you'd be happy with?
So in the mall-based portfolio, it's evolving in terms of kind of particularly in the mid-market sector. But our hope is that achieving a 95% stabilized occupancy in the enclosed mall segment, it's probably something we're looking to achieve. The strip center portfolio is a little bit different. Then typically has a higher stabilized do just given the nature of the asset being a niche-based asset portfolio.
Okay. And then just turning to the balance sheet. You do have a bunch of debt rolling over 2023, 2024, what sort of loan to values do you think you can do right now? And what interest rates are you looking at?
Thanks, Jonathan. So yes, there are higher amount of maturities coming up in 2023 and 2024. We're looking at doing loan-to-values in the 50% to 60% range. There's probably not going to be a ton of availability for op financing. There's going to be certain opportunities. But we'll be looking at kind of what we can do there. And in relation to your question on interest rates, they're probably going to be in the range of 5% to 6%, hopefully a little bit less than that, but that's kind of what we've been budgeting.
Okay. So you're saying 50% to 60%. But if I look at your chart, it kind of has the maturing loan-to-value at 65%.So would that imply some -- some actual pay downs this year? There will likely be a net pay down, yes. Yes. Okay. Thanks, all. I will turn it back.
Thank You. [Operator Instructions] Your next question is from Tom Callaghan from RBC Capital. Please go ahead.
Thanks, good afternoon. Just a quick follow-up there on the maturities and the debt side of things. Just in terms of fixed versus variable rates, I think you had mentioned, Andrew, now kind of at 18% exposed to variable. That's up quite a bit quarter-over-quarter, and I know related to the refinancing there. But is that something you're comfortable with here in the short-term given interest rates? Or are you going to look to kind of fix some of those rates in the coming quarters?
We'll be monitoring that, Tom. I think the thinking on interest rates changes, it's a very fluid environment. So I don't want to kind of make any promises on that. So we will be monitoring that. And if we think it's appropriate to go fixed on that, that would we will. But it is something that we're monitoring. .
Yes understood. That’s all for me. Thanks, guys.
[Operator Instructions] There are no further questions at this time. Please proceed, Mr. Tamlin.
Well, thanks, everybody, for joining the call and looking forward to talking to everybody again next quarter. Thank you.
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for participating. You may all disconnect.