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Ladies and gentlemen, thank you for standing by, and welcome to the Slate Office REIT First Quarter 2020 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to turn the call over to Braden Lyons, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the first quarter 2020 call for Slate Office REIT. I'm joined this morning by Scott Antoniak, Chief Executive Officer; Steve Hodgson, Chief Operating Officer; and Michael Sheehan, Chief Financial Officer. Before getting started, I'd like to remind participants that our discussion today may contain forward-looking statements, and therefore, we 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 Slate Office REIT's website to access all of the REIT's financial disclosure.I will now hand over the call to Scott Antoniak.
Thank you, Braden. Good morning, everyone, and thank you for joining the call.Before speaking to our quarterly results, I'd first like to comment briefly on COVID-19. There's no doubt that the emergence of this global pandemic has had a profound impact on all aspects of our lives, including our business. However, our portfolio comprised of quality assets -- office assets and tenants was assembled to provide stability in challenging times like these, and its resilience has never been more apparent. We are pleased to have collected in excess of 97% of April rents in cash, a testament to the quality of our assets, creditworthiness of our tenants and the hard work of our team. We expect May collections to be similarly strong. While the office sector as a whole has faired well in relation to other asset classes with average April rent collections of 92%, Slate Office REIT is amongst the sector's top performers. The REIT's disciplined and consistent approach to acquiring quality real estate assets at a discount to replacement cost and proactively managing these assets to create value has resulted in a highly resilient portfolio. Approximately 61% of REIT's income is generated by government and credit-rated tenancies. The REIT's largest industry concentrations by tenancy are to government and financial services at 14% and 10%, respectively, with less than 2% exposure to the energy sector.Going forward, our priority will continue to be the safety and well-being of our team, tenants and partners. Our asset management team has been in daily contact with our tenants, property management and leasing teams and on-site service providers. As the focus begins to shift towards a responsible and carefully managed reintegration, we will continue to employ best practices at every level. Now just a few comments on the first quarter of 2020. The REIT delivered solid results, and our business was not materially impacted by COVID-19. The REIT completed over 304,000 square feet of total leasing, at an average rent increase of 28.6%. New lease transactions comprised approximately 109,000 square feet at a 21.5% increase while renewals accounted for approximately 196,000 square feet at an average increase of 33.4%. The REIT's weighted average lease -- weighted average term to lease maturity is 5.5 years, with in-place rents on average 10% below market providing continued opportunity to increase rent. We refinanced the Maritime Centre located in Halifax, Nova Scotia, as an implied value increase of $49 million. In total, this transaction provides the REIT with $28.8 million of proceeds, bolstering the overall liquidity of the REIT. REIT's loan-to-value ratio continued to improve, ending the quarter at 58.3%, and we expect this trend to continue until we reach our objective of maintaining leverage in the mid-50s percent range. In many ways, COVID-19 is subjecting our industry to the ultimate stress test, and we are incredibly proud of the performance of both our team and our portfolio. While it's hard to know for certain when we will get back to normal or even what the new normal might look like. What we do know for certain is that there will be an other size. Our commitment to unitholders is that we will continue to work hard, building on the strength of our existing portfolio of assets, while remaining ready to uncover the exciting opportunities that will inevitably arise. On behalf of the entire Slate office REIT team, we wish you good health, and we thank you for your continued support. I'll now open the call to questions.
[Operator Instructions] Your first question comes from Stephan Boire with Echelon Wealth Partners.
So I just had a -- I have a couple of questions. So maybe I'll get back in line after a few. So anyway, as you -- I'm just wondering if you have any -- if you had any discussions with some of your tenants about their footprint post COVID, whether they are looking to maybe rent more space to increase social distancing or decrease their footprint due to employees working remotely?
So thanks for the question, Stephan. I mean, we have ongoing interaction and conversations with our tenants always in the past and especially in the current circumstances. I would say that nobody has made any kind of definitive decisions or views about what this might look like going forward? I think no one knows for certain what the future of office is going to look like. We think there will be certain groups, businesses, others who might consider work at home as a viable alternative. We think that there's a significant number of tenancies who will be looking at increased space requirements for individual people working. So there's probably some balance in there. I would think it's early days for folks to make a decision. As you know, I mean, leasing is a long-term decision. So it's very difficult to make changes on the fly, so to speak. And I think the jury is out a little bit as to what the ultimate future will look like. We're very pleased with the portfolio we have, with the location of our assets and the type of assets that we have. And I think on -- to a certain extent, I think the ability with some of our suburban assets to be able to drive your own car, park in your own spot and go to your own office with the door is attractive versus some of the more highly concentrated situations you find in the downtown Toronto or Vancouver and cities like that.
Okay. And can you tell us what rent collection -- what the rent collection is so far for the month of May? I may have missed it. But I think it was just the month of April in the MD&A.
Yes. We have not disclosed May. It's tracking on a similar trajectory to April.
Okay. And have you had any deferrals as well for the month of May?
Sorry, Stephan, I didn't -- did you say did they default?
No, no, no. Any rent Deferrals?
Deferrals. Yes. Very minimal, which would be consistent with April, representing about 1% of the total collections.
Okay. And how does it work exactly? Is it paid over a number of months or before year-end? Or how does it work? Or is it on a case-by-case basis?
It's on a case-by-case basis. But it's generally paid back in the short term.
Okay. All right. And I may have missed it, but can you tell us what the same-store NOI growth was for the quarter year-on-year, excluding the hotel?
Yes. So of the decrease that was mentioned, the hotel was close to half of that. So you'd get in about, say, $400,000 year-over-year decrease, and that's just due to the vacancies across a couple of different areas in the portfolio.
Okay. So what? Roughly, what, 1.5%, roughly?
Yes.
1.5%. Okay.
Your next question comes from Jonathan Kelcher with TD Securities.
I guess, at the beginning of the year, you guys were targeting 90% occupancy by year-end. Is that still something you think you can achieve?
Jonathan, so we had a really good start to the year with over 300,000 square feet of leasing and a spread of 28% in Q1, of that $100,000 was new leasing. We did have a slight occupancy decrease on a same-property basis by about 68,000 square feet. That will be offset by the 91,000 square feet of leasing that has already been completed but has not yet commenced. So we're slightly ahead if all else was the same.Having said that, the 90% is where we view this portfolio stabilizing. I don't envision the same amount of new leasing for the balance of the year. And thus far, we've pushed out that projection into probably mid or late 2021 as to when we would achieve those -- that stabilized number.
Okay. Are you seeing more renewal discussions? Or is there anybody that you thought might be leaving that's now talking about renewals?
Yes. I mean, the first quarter, while we achieved good leasing results, it was really -- wasn't a full quarter, it was 2.5 months because there hasn't been a lot of leasing activity since the onset of the pandemic. Having said that, tenants that were already in discussions about expanding their existing space, particularly if they're government tenants or other sectors that haven't been as impacted by the pandemic, those discussions continue. In addition, the renewal discussions that were happening already are continuing. And will there be a trend as to more renewals? I think so because it's difficult for tenants to invest the incremental dollars required to move space right now. And then optically and logistically, it's also a challenge from a touring perspective and from an actually physically moving perspective.
Okay. And then just secondly, you -- looks like you walked away from the Florida acquisition. Maybe give a little color as to why? And would you expect to get the deposit back on that?
So certain closing conditions weren't fulfilled. And with that fact said, we're not proceeding with the transaction. And at this point, we'd have no further comment.
And any comment on the deposit?
No.
[Operator Instructions] Your next question comes from Brendon Abrams with Canaccord Genuity.
It looks like leasing spreads were pretty strong during the quarter. And for the rest of 2020, I guess you're saying they're about 25% below market rents. I'm just curious in terms of maybe which areas of the portfolio, these renewals or maturities are kind of located or concentrated in, given the kind of the wide mark-to-market spreads there?
Yes. Thank you. So the leasing spreads we achieved in Q1 were compelling, primarily driven by strong leasing spread in the new leasing that we did in Chicago as well as a renewal that was well ahead of existing rents in Winnipeg. For the balance of the year, the renewals that we have are pretty well spread throughout the portfolio, Brendon, Atlantic Canada, Chicago and Toronto. The 25% is where they are relative to market rents. It's not to say that we'll get all the way to 25%, but it's directionally a positive sign that we will be able to increase rents.
Okay. That's good. And then just last question quickly for me. I know the hotel is probably a small amount of the portfolio. But just given kind of where occupancy levels are across the sector, can you just remind us again maybe what percentage of NOI the hotel might represent on an annualized basis?
Yes. We generally have been projecting approximately 800,000 of contribution. We previously messaged the seasonality of that as well, which I don't have in front of me at the moment, but I can follow-up. And I would expect that to be almost entirely taken away for the balance of the year.
If we go on a run rate basis, Brendon, it would be less than 1% in a typical year.
Yes.
Okay. Right. So it's pretty small.
I mean, there are some -- I would add, just there are some positive signs in New Brunswick. They've now reopened retail and our hotel continues to be open and servicing front line workers and others. And so we do see that there'll probably be a quicker recovery in some of those secondary markets where there's a strong sort of drive to demand from our customers.
Your next question comes from Matt Kornack with National Bank Financial.
With regards to capital allocation, I mean, in light of the announcement on the acquisition and just generally with regards to CapEx, can you give a sense as to how COVID changes your outlook?
Yes. I think -- maybe the guys can speak to the specifics. But before -- like at a high level, Matt, I mean the focus is liquidity and capital preservation and I think you'd probably hear a similar answer from anybody in the industry. I think that's our focus. We entered Q2 with a solid position with respect to liquidity. We completed a financing, which enhance that. We're now not proceeding the Florida transaction. We've been able to pare back capital. We're down to essential life safety-type items and other smaller Maritime Centre being an example where there's direct measurable enhances to income as a result of that CapEx spend, but that's been reduced. So that's where our focus really is. And as you know, like we'll continue to be opportunistic in the future as opportunities present themselves. But for right now, it's very much a focus on liquidity and capital preservation.
Okay. That makes sense. And are -- margins wise, I mean, I assume that most of the leases are net, but are there any potential savings that you're passing on to your tenants or maybe accruing to yourself as a result of less maintenance or costs or otherwise or vice versa?
Absolutely. Yes. Without getting into too many specifics, Matt, there's been deferral programs through property tax and utilities in all the jurisdictions, and we've taken advantage of those. There's been fewer costs. In some aspects, there's been higher cost on cleaning, et cetera, and waste management. But overall, there's been fewer costs because of less people being in the workforce. And we've also, as Scott noted, pared back our capital plans, which to the extent that was recoverable from the tenants will provide some savings to the tenants.
Okay. And I understand that 90% is the aspirational figure. But given where you're sitting on an in-place basis and where spreads have been, excluding the hotel, would you expect the trajectory from same-property NOI growth, all things being equal, assuming there isn't mass bankruptcies and deferrals, et cetera, to trend in the positive direction for the remainder of the year?
Yes. So with respect to occupancy, as I noted, we do still have 91,000 square feet of leasing that has been completed but not yet commenced for the balance of 2020. And then on average, we complete -- historic average, we complete 214,000 square feet of new leasing between quarters Q2 and Q4. So while that might be muted because of the pandemic, we do think that there's still opportunity to grow occupancy through the balance of the year, and that would have a direct impact on our same-property NOI growth.
There are no further questions queued up at this time. I'll turn the call back over to Braden Lyons for closing remarks.
Thank you, everyone, for joining the first quarter 2020 conference call for Slate Office REIT. Have a great day.
This concludes today's conference call. You may now disconnect.