Choice Properties Real Estate Investment Trust

TSX:CHP.UN

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. And welcome to the Choice Properties Real Estate Investment Trust First 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 of Finance. Please go ahead.

[Erin Johnston, Vice President of Finance]

Thank you. Good morning. And welcome to the Choice Properties Q1 2023 conference call. I'm 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 by providing a brief recap of our first quarter performance and cover the highlights of the quarter. Ana will cover our operating 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, including statements regarding Choice Properties objectives, strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, intentions, 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 the risks and uncertainties that could cause actual results to differ materially from the conclusions in these 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 in making these statements can be found in the recently filed Q1 2023 financial statements and management discussion and analysis, which are available on our Web site and on SEDAR.

And with that, I'll turn the call over to Rael.

[Rael Diamond, President and Chief Executive Officer]

Thank you, Erin and good morning, everyone. We are pleased with our strong start to 2023. Our strong performance is a testament to the quality of our portfolio, the health and resiliency of our tenants, the strength of our balance sheet and the hard work of our team. In addition to our Q1 results, we released our 2022 Environmental, Social and Governance report. We made significant progress in our ESG program in 2022 and are setting the stage for the next phase of our program with key advancements towards fighting climate change and advancing social equity, our ESG pillars. Our ESG program play an important part of our strategy and we'll continue to report on our progress as we execute on our key initiatives.

Turning to our Q1 results. We remain at near full occupancy in our retail industrial portfolios with occupancy at 97.7%. Further, our business delivered strong same asset NOI growth of 4.6%. Our team continued to execute on our strategic framework and in the quarter, we further strengthened our market leading portfolio through capital recycling program and took steps to ensure we maintain our industry leading balance sheet amidst ongoing market volatility. In the first quarter, we completed $268 million of transactions, including $192 million of acquisitions and $76 million of dispositions. In our retail portfolio, we acquired three standalone assets from Loblaw for $99.1 million, which are discussed on our last quarter’s conference call. We also acquired a Shoppers Drug Mart and Dollarama anchored retail asset adjacent to an existing Choice owned [indiscernible] in a strong and growing Durham region for $17.9 million. We also successfully completed the disposition of an Ontario retail asset that was held for sale at the end of 2022 for $23 million. We also added to our industrial portfolio through the acquisition of our development partners’ 50% interest in two new generation industrial buildings at Horizon Business Park in Edmonton, Alberta for $32.1 million. The first building was completed in 2022. The second building, which has been pre-leased to a global transport and logistics company, is currently under construction and is near completion with occupancy anticipated in the second half of 2023. Choice now owns 100% of the site, comprised of six buildings totaling approximately 1.4 million square feet of GLA.

Further adding to our mixed use development pipeline, we acquired approximately a 1.7 acre parcel at Golden Mile for $23 million in the quarter. This transaction unlocks approximately 2.1 million square feet of additional density for the project and demonstrate the strength of our strategic relationship with Loblaw as the site was acquired through a Loblaw option to purchase. As we continue to focus on selling our remaining office assets, in the quarter, we worked with our JV partner on our two remaining Calgary office assets in a transaction that helped simplify our assets from the office asset class. We successfully sold our 50% ownership interest in one asset for $48.4 million to our partner. In exchange, we received our partner's 50% interest in the other current Calgary office assets and provided an vendor take-back mortgage with a face value of $13.5 million. We now have two office buildings remaining in our portfolio. We're actively marketing the remaining property in Calgary and are under [contract] to sell our last remaining Atlantic office building located in Dartmouth, Nova Scotia with closing scheduled by the end of the second quarter of 2023. We also remain focused on continuing to deliver on our development pipeline. During the quarter, we completed several retail intensifications, including a Shoppers Drug Mart, Dollarama and two [indiscernible]. Our two active residential projects continue to be on track to be completed in the second half of 2023.

In our industrial pipeline, we're making progress at our Eastway development site with the installation of offsite services underway. At Choice Caledon Business Park, our teams continue to work through the planning process and our leasing teams are seeing significant tenant interests and are actively working through opportunities. Our 2023 residential deliveries remain on track. In addition to capital recycling, our teams were also proactive on financing in the quarter and continue to take steps to ensure we maintained ample liquidity raising $737 million in debt capital. It is important to acknowledge that the challenging macroeconomic backdrop is bringing with it some tenant bankruptcies, which have been relatively large for the last couple of years. But importantly, our exposure to at risk tenants is very limited. This is not by accident. It is partly a function of us being very disciplined and executing on our capital recycling program. Ana will now discuss progress on backfilling these vacancies as well as our operational results. Ana?

[Ana Radic, Chief Operating Officer]

Thank you, Rael, and good morning, everyone. Our portfolio continues to perform well and we are pleased with our operating performance for the quarter. Occupancy remains resilient at 97.7% and there is strong upward pressure on rents. During the quarter, we had approximately 850,000 square feet of lease expiries. We renewed 682,000 square feet at an average spread of 14.3%, and we completed 84,000 square feet of new leasing that commenced in the quarter. This resulted in negative absorption of 85,000 square feet, which was primarily related to a vacancy in our Calgary industrial portfolio, which I will speak to shortly.

Turning to our three asset classes. Occupancy in our approximately 44 million square foot necessity based retail portfolio increased to 97.9% with positive absorption occurring in almost all major markets. Once again, demonstrating the strengths and quality of our tenants and assets. 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 and we continue to see strong demand for our retail space. 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 rents. We had 537,000 square feet of retail expiries in the quarter and completed 477,000 square feet of renewals, resulting in tenant retention of 88.7%. The renewals were completed at rents 6.4% above expiry. Excluding a 100,000 square foot fixed rate Walmart renewal, our leasing spread for the quarter was 7% above expiry. We also completed 55,000 square feet of new leasing resulting in positive absorption in the quarter. Over 60% of our new retail leasing consisted of discount retailers, quick service restaurants and medical and personal service uses. These categories continue their strong appetite for brick and mortar space, particularly in our grocery anchored centers. We are also seeing strong demand for space at our power centers and have completed 25,000 square feet of new deals with fashion and home decor retailers.

Turning to Bed Bath & Beyond, Nordstrom and David's Bridal for a moment. Of the four, Bed Bath & Beyond locations in our portfolio, three have been assigned pending court approval to DKB Capital, operating Toys R Us, [Rooms & Spaces] and Babies R Us. The remaining location consisting of 21,000 square feet [at our] share has been disclaimed with turnover to us expected in May. We are however presently in negotiations with the replacement tenant for the full space. We have one Nordstrom location in our portfolio where they expect to remain until July 21, 2023. We have interest from several retailers for the entire space. David's Bridal also announced bankruptcy in the US last week. We have two locations in our portfolio, totaling 7,700 square feet at our share as both of these spaces are held in JV arrangements, limiting the exposure to our business. The quality of our tenants and focus on necessity based retailers continues to provide resiliency in our portfolio. Many retail tenants continue to move ahead with their plans to grow stores and relocate to superior sites. We are working to accommodate several such retailers by relocating and rightsizing existing tenants at our centers, thus, enhancing our tenant mix and increasing the value of our sites.

While industrial leasing activity moderated slightly in the first quarter of 2023, industrial demand remained strong. The national vacancy rate remains below 2% and net rental rates continue to rise. Given our low average in place rent, we expect to continue to see strong rental rate growth across our industrial portfolio. We believe that well located new generation distribution space will continue to command a premium with rents in older generation buildings and secondary locations likely moderating sooner. Occupancy in our industrial portfolio is 98.3%. While remaining close to full occupancy, this marks the slight decline of 60 basis points in the quarter due primarily to a tenant vacating 67,000 square feet in Calgary. We had budgeted the space to come back and anticipate re-leasing the space at rents 40% to 50% higher than the previous tenant’s rent. We had 311,000 square feet of industrial leases expire in the quarter, of which we renewed 204,000 square feet of space at rents 44.3% above expiry. In Ontario, 54,000 square feet of expiries were renewed at rents 143% above the expiring rent. We have significant embedded rental rate growth in our industrial portfolio and with our current average in place industrial rent at approximately $8.50 per square foot, we continue to see leasing opportunities at rents well above current in place rents. We also continue to experience positive leasing momentum across our entire portfolio and anticipate we will continue to achieve strong rental rate growth on renewals and new deals as compared to expiring rents.

I'll now pass the call over to Mario to discuss our financial performance.

[Mario Barrafato, Chief Financial Officer]

Thank you, Ana, and good morning, everyone. We are pleased with our financial performance in the first quarter. Our business is well positioned to continue to deliver on our financial goals. Our reported funds from operations for the first quarter was $176.9 million or $24.04 per unit. Apart from non-recurring G&A expenses of approximately $1 million, it was a clean quarter with no significant or unusual one time items. On a per unit diluted basis, our Q1 FFO is $24.04, an increase of approximately 1% from Q1 2022. Strong same asset NOI and higher interest income was offset by higher borrowing costs and higher G&A expenses, driven by inflation and a competitive talent market. In addition, FFO in the quarter was also impacted by cash flow dilution from the Allied transaction of last March. As a reminder, the foregone NOI from the sale of our office properties was only partially offset by distribution and interest income. Occupancy remained strong at 97.7% and contributed to our strong same asset results. Same asset cash NOI increased by $10.4 million or 4.6% compared to the first quarter of 2022. Retail increased by $6.1 million or 3.4% compared to the same quarter last year. The increase was primarily driven by improved occupancy, contractual rent steps and higher capital recoveries. For the remainder of 2023, we expect retail same asset cash NOI to trend back to our target range of 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.

Our industrial portfolio increased by approximately $3.2 million or 8.8%. This increase was driven by improved occupancy and a significant increase in rental rates for both renewals and new leases completed, and mixed use residential and other increased by approximately 1.1 million or 14.3%. This increase was driven by improved residential occupancy and other ancillary revenue. Now turning to our balance sheet. Our IFRS NAV increased by 1.1% to $13.51 per unit, an increase of $107 million over the last quarter. Our NAV growth was driven by $92 million of fair value gains on our investment properties, which was partially offset by downward fair value adjustment on our investment in Allied Properties units of $14 million, where we're required under IFRS to mark-to-market this investment to its trading price as of March 31st. Q1 fair value gains on investment properties were mostly property specific and primarily driven by industrial leasing, retail cash flow growth and transaction activity. Now turning to our financing activities.

Our teams remain focused on de-risking the balance sheet and leveraging the various sources of funding available to us, and we did just that in the first quarter. During the quarter, we completed $737 million of financing, including the issuance of our $550 million 10 year unsecured Series S debentures at a rate of 5.4% and $187 million of secured mortgage financing at a weighted average rate of 5.1% and a term of 13 years. And included in our secured financing was $76 million of 20 year mortgages at an average rate of 5.1%, demonstrating our ability to access cost effective capital across yield curve, while continuing to de-risk the balance sheet. Proceeds from the financing were used to repay $375 million of unsecured debentures that matured in the quarter and to repay a portion of the balance drawn in our credit facility. We ended the quarter in solid financial position with strong debt metrics and ample liquidity. Our debt to EBITDA ratio was 7.5 times and we have over $1.4 billion available on our credit facility, and this is supported by approximately $12.5 billion of unencumbered properties. With our significant financing activity in the first quarter and the continued strong demand we're seeing from lenders, we are well positioned to fund our meeting maturities and capital requirements in 2023. Looking ahead, our business is strong and we're on track to deliver on our 2023 outlook. And with that Rael, Ana, Erin and I, will be glad to answer your questions.

[Operator]

[Operator Instructions] Your first question is from the line of Mark Rothschild with Canaccord Genuity.

[Mark Rothschild, Canaccord Genuity]

Maybe just focusing out on the retail sector where you had good same store NOI growth, and I heard Mario talked about it moderating. There have been some bankruptcies but not too many, and yet you say demand is strong. So maybe you could just talk a little more what type of tenants and how are rental rates trending?

[Ana Radic, Chief Operating Officer]

Rental rates are quite strong. I think that they're trending up relative to our in place rents and relative to the past few years. We're seeing demand across a variety of sectors. As I said in the call, discount retailers are looking to grow. We're seeing also strong demand with respect to the pet sector. Tenants like Canadian Tire, for example, consumer goods, they're also a growing tenant and they have several banners that have an appetite for more space and then smaller retailers, QSR as well. And then also I think there's been a rebound in the fashion sector and we're seeing that in our power centers and also based on sort of consumer spending data that we're seeing.

[Mark Rothschild, Canaccord Genuity]

And Rael, in the past couple quarters, you've definitely spoken about taking a little bit of pause or being slower on new residential developments with the [indiscernible] involved. We clearly have a shortage of affordable housing and it's hard to build affordable housing, but the demand is obviously there. Do you anticipate at any point the next year maybe being more aggressive on starting new projects?

[Rael Diamond, President and Chief Executive Officer]

I think one of the benefits of Choice is that we can develop across each of our asset classes and we’re very active on the retail and industrial at the moment. And on the res, we’re completing two developments. We have one truly affordable housing project at Greenville Grove where Choice has a 50% interest. We’re finalizing our plans and we hope to be in a position to launch over the next 12 months. But I think it's going to be very market dependent and where financing rates are and where we feel construction pricing is. But right now, we're feeling pretty confident that we could be in a position to launch over the next 12 months.

[Operator]

Your next question is from line of Lorne Kalmar with Desjardins.

[Lorne Kalmar, Desjardins]

You spoke a little bit about tenants here -- or where you're seeing strength in tenants. Are there any areas where you guys are a little bit concerned?

[Ana Radic, Chief Operating Officer]

I mean, not really. Again, the tenants that we were concerned about have proven to have faltered, but the demand to backfill that space is strong. So our portfolio is primarily leased to necessity based retailers and grocery anchored, and that we are seeing a lot of demand and resiliency in that segment.

[Lorne Kalmar, Desjardins]

And then recently Loblaw announced they were looking to add some stores and relocate some stores. I was wondering if you can maybe give us some color on sort of how you expect that to effect Choice and whether or not you get to participate?

[Rael Diamond, President and Chief Executive Officer]

I know you saw our Investor Day and hopefully for other participants on the call you managed to see our Investor Day. And as we \demonstrated, we work very closely with Loblaw's real estate team to help them look for new opportunities based on their target areas for growth. And if you think back for the last two years, we have -- from a Choice point of view, we obviously benefited from new investment opportunities. We have been building new Shoppers Drug Mart developments and I believe over the last two years we built 25% of their new stores. And on the industrial side we found them aside for their new DC at Choice Eastway. So we do expect to get a significant amount of the new opportunities from Loblaw and I think that is one of our competitor advantages just that strategic relationship with those major tenants.

[Lorne Kalmar, Desjardins]

And then maybe one last quick one from me. On the Choice Industrial Center, how is leasing going over there? It looks like it hasn't really changed much in the last little bit. Just wondering how you expect that to progress?

[Rael Diamond, President and Chief Executive Officer]

It's progressing well. Ana and her team are working actively with some prospective tenants and we hope to have something to report shortly.

[Operator]

Your next question is from the line of Himanshu Gupta with Scotiabank.

[Himanshu Gupta, Scotiabank]

So just on the Calgary industrial portfolio, some negative absorption in the quarter. So do you see any shift in the strength of overall leasing market or was it just isolated to this property?

[Rael Diamond, President and Chief Executive Officer]

As Ana said through calls -- Ana will speak to the sentiment on the industrial in a moment. But that was really property specific, it's not a sentiment change at all.

[Ana Radic, Chief Operating Officer]

No, not at all. The space is in strong demand. It's generic distribution space. So we anticipate being able to backfill it fairly quickly. It was just a question of one tenant needing more space and needing to relocate in order to achieve that as we didn't have space in the building and then there were a couple of small tenants. So nothing really indicative of a sentiment change by any means.

[Rael Diamond, President and Chief Executive Officer]

And Himanshu, lot to go up when you had almost 100% occupancy. So you can only go down slightly. So it's a small change.

[Himanshu Gupta, Scotiabank]

And any other space you are expecting to come back on the industrial side this year?

[Ana Radic, Chief Operating Officer]

Actually no, nothing material. We are very ahead of our renewals and have strong demand across the main segments of our industrial portfolio.

[Himanshu Gupta, Scotiabank]

And just sticking to the leasing activity and you did mention about the tenant bankruptcies on the retail portfolio. So based on your experience, do you expect more retail bankruptcies as macro slows down or macro concerns continue to be there? I mean, what's your sense for the rest of the year?

[Ana Radic, Chief Operating Officer]

We looked at the portfolio and we don't think there are any ones that will impact us materially. Like when we look at the general retail climate in Canada, a lot of retailers sort of worked through store performance and called their portfolio during COVID. And so generally, those that remain, I think are fairly healthy. And again, with our necessity based portfolio those are performing particularly well.

[Himanshu Gupta, Scotiabank]

And maybe just shifting gears here. Rael, you run a mezzanine loan book as well. Anything you are seeing or hearing there? I mean, we keep on hearing about tight availability of that in the overall market. Are you hearing anything from the developers regarding the availability of debt in the market?

[Rael Diamond, President and Chief Executive Officer]

Our mezzanine loan book is around $400 million, of which $200 million is a VTB to Allied. We've been very selective on who we've loaned money to. They have to be strong partners, well capitalized. I would say the biggest change, Himanshu, is that we obviously are earning more interest income as rates have risen. And then on a few of the sales we've given well secured VTBs, and it's just to help with the financing. But I would say we’re more focused on relationship lending. So I wouldn't say we are as active as others. And for us it's just a great example. Mezzanine probably is a great example of us capitalizing on our strong balance sheet to give us opportunities.

[Himanshu Gupta, Scotiabank]

And just the last question on the acquisition activity. So two retail assets you bought in Calgary. Any sense of [cap rates] on that?

[Rael Diamond, President and Chief Executive Officer]

The cap rates, they start with a six.

[Himanshu Gupta, Scotiabank]

And maybe my next question is, so you bought a couple in Toronto as well. So what was the cap rate spread between Toronto and Calgary, would it be like 50 basis point, more or less?

[Rael Diamond, President and Chief Executive Officer]

It is -- give me a second, let me just see if I have some. We generally don't disclose cap rates but it's around 50 basis point delta.

[Operator]

Your next question is from the line of Pammi Bir with RBC Capital Markets.

[Pammi Bir, RBC Capital Markets]

Just maybe touching based on the Calgary office transactions. Can you maybe just walk us through the background perhaps behind the decision to swap? I know you touched on it briefly at the -- in some of your prepared remarks. And then maybe any color on pricing either on a cap rate range basis if that's relevant on these trades, or maybe how compared to your IFRS values?

[Rael Diamond, President and Chief Executive Officer]

So look, we've had this partnership with the group since 2012, and they're a very good partner. They are longer term holder of office than we were and Calgary Place was the better-quality asset of the two. And they knew that we were interested in selling. And so we just thought it was a very fair transaction where we traded at appraised value. We really focused on the net equity number. The transaction did happen slightly above our IFRS book value. It doesn't really trade on a cap rate basis but the cap rates are high single -- very high single digits. If you were to look on a cap rate basis, it really trades on a price per foot basis. And we are in the process of listing Altius Centre, and we think we can transact on the asset, which helps us strategically to exit office.

[Pammi Bir, RBC Capital Markets]

And I'm assuming these have been written down over the years. I think, as you mentioned, they were bought in 2012 and they've been written down a fair amount. Is that fair to say?

[Rael Diamond, President and Chief Executive Officer]

Yes, significant lockdowns from the purchase…

[Pammi Bir, RBC Capital Markets]

And then just what can you share in terms of the actual occupancy or the leased space in the buildings and what was the remaining least terms, if you have that?

[Rael Diamond, President and Chief Executive Officer]

Yes, [they] around 60% to 70% occupied. I think, Altius was around 70% and Calgary Place was a bit higher. And the lease term is around three years in Altius. I don't have Calgary Place handy.

[Pammi Bir, RBC Capital Markets]

And then just coming back to the roughly $90 million of fair value gains that you did book in the quarter. What was the breakdown there between the property types?

[Mario Barrafato, Chief Financial Officer]

It was kind of fairly spread out. I mean, it was really small spread out across between developments, industrial and retail. And there was no macro theme, they're all property specific. So for retail, it was just another quarter burning off at low rental rates and having a higher rental rate kick in. For industrial, would've been a handful of properties where we just adjusted market rents and based on leasing we're seeing. And then on development, just the advancement of certain properties. So really nothing. And then, yes, so pretty much nothing really eventful in valuations.

[Pammi Bir, RBC Capital Markets]

Last one for me just, again, coming back to the comments around the same property NOI growth and sort of sticking with the guidance for the year, I think, two to three. Now is that primarily driven by the moderation in retail or are you anticipating perhaps industrial to come down from, I think, it was close to 9% in the quarter as well?

[Mario Barrafato, Chief Financial Officer]

Actually, it's some further than that, it's just math Pammi. We had a great second half of last year. So when you just compare you over year, you have higher growth. But as you kick into second half, the base is higher. But no, retail will still be strong, Industrial still going to be very strong. So the dollar value doesn't change. We still have growth but just when you compare it to the prior year, the gap [narrows] a bit.

[Rael Diamond, President and Chief Executive Officer]

Pammi, just let me come back to your previous question. Mario, it’s worth adding that compared to last year, we still -- when we look at our valuations, we took a write down on our retail portfolio last year, so retail compared to last year would still be down. It's really. as Mario said, property specific and it's primarily most of the gains over the last year. I'm not saying that's quarter specific, happened in development and industrial.

[Mario Barrafato, Chief Financial Officer]

Yes, that's a good point, Rael. So we took the big write down in Q2 of last year, but -- and kept retail pretty much where it's at and just as lease -- as months burn off. But everything else we have done is really primarily industrial and development.

[Operator]

Your next question is from the line of Tal Woolley with National Bank Financial.

[Tal Woolley, National Bank Financial]

Just wanted to start off on the management changes at Loblaw and Weston. I don't expect that there would be any read through to Choice. But can you just talk a little bit about what if any impact do you think that has on strategy for the group of companies going forward?

[Rael Diamond, President and Chief Executive Officer]

Look, there is no impact to Choice. And as we have said before, we have a strong relationship with Loblaw and their strategy remains the same.

[Tal Woolley, National Bank Financial]

They’ve also announced, Loblaw was also announced I think they have got slightly under $2 billion of excess real estate. They may look to put on the market over the next couple of years. Do you have a sense of what of that volume, like what would the amount that is sort of suitable for Choice to pursue?

[Rael Diamond, President and Chief Executive Officer]

Look, if you recall our strategic alliance agreement with Loblaw is anything that they sell we get the right of first offer. And of the $2 billion, we are looking at approximately half of it and will happen over the next several years. And our teams work very closely with Loblaw. So what we are not interested in purchasing, they will sell to third parties.

[Tal Woolley, National Bank Financial]

And then I think you are -- officially they’ll pass the one year mark on the deal you struck with Allied last year, and I think the first lockup expires, I think, in a few months on your stake in Allied. Has there been any shift in your thinking around that holding?

[Rael Diamond, President and Chief Executive Officer]

Look, the first lockup expires, as you said, in about three months time. And we haven't changed our thinking, we will sell it when we believe it makes sense to. And Allied in our minds is still the best office REIT in the country and as they execute on the sale of their data center, we think it will alleviate some of the pressures on their stock.

[Tal Woolley, National Bank Financial]

And then just lastly, I guess, the questions probably more for Mario. You know, like, you have raised a lot of debt capital this quarter. What's your sort of thinking around -- and you have a huge unencumbered asset pool in terms of using unsecured versus secured financing. And you guys are also one of the few names on the street right now that are still kind of trading at a premium to NAV. Like, theoretically, you could even consider looking at some equity here if you wanted to try and deliver and do some stuff. Just curious how you sort of thought about your financing mix given where rates are and what your stock rates right now?

[Mario Barrafato, Chief Financial Officer]

We have a lot of options available to us and that's kind of by design. Right now, the client is -- the unsecured debt market is our primary source and so we go to that. And basically, we are comfortable with the leverages right now, and we are able to fund our developments based on that and while keeping the leverage neutral. So right now, we don't need a lot of extra capital right now. So we will just refinance what we have coming due. We'll use the sources that are available. Right now, I think we're getting reasonable pricing relative to others. And so right now we'll stay that course.

[Operator]

Your next question is from the line of Sam Damiani with TD Securities.

[Sam Damiani, TD Securities]

Most of my questions have been asked, so I'll just ask. Mario, you talked about de-risking and the improvement on the balance sheet metrics over there last year or two. Do you see any further need for improvement in this regard just given the market that we're in and the economy that we're in?

[Mario Barrafato, Chief Financial Officer]

Yes, not right now, Sam. I mean, we like the level we're at. We're comfortable. We think right now with what we have as far as our spending, it's very manageable right now. So the real thing for us is just keeping liquidity and keeping optionality in our debt ladder. And so where we had the chance to go 10 year and beyond, again, it was just to de-risk. And you just don't know if it's going to happen, so we're in a position that whatever the market brings us we're able to react.

[Sam Damiani, TD Securities]

And maybe just the last one to follow on, one of Tal’s questions, I think, is just on that $1.8 billion that Loblaw talked about selling in terms of real estate. Can you talk about their progress on selling any to third parties, and how that's going?

[Rael Diamond, President and Chief Executive Officer]

I know, they're in the process of selling a small portfolio to a third party, and I believe it's gone well. But I think they should comment on it.

[Operator]

Your next question is from the line of Gaurav Mathur with IAA Capital Markets.

[Gaurav Mathur, IAA Capital Markets]

A couple of quick questions at my end. Firstly, when you're looking at the liquidity profile and your acquisitions this quarter, it does seem that you're in a position of strength to take advantage of market dislocations. I'm just wondering if there's any asset class or geography, which tends to stand out over the others?

[Rael Diamond, President and Chief Executive Officer]

So look, we are focused on the three asset classes being grocery anchored or necessity-based retail, industrial and then residential. And we’re hopeful that opportunities come our way, but we haven't seen many opportunities that meets our quality criteria that are distressed right now.

[Gaurav Mathur, IAA Capital Markets]

And just lastly with the 2023 guidance and the distribution increase, is there an AFFO payout ratio range, which you're currently targeting?

[Mario Barrafato, Chief Financial Officer]

I mean, right now, our clients have us using our capital spend at 85% to 90% payout ratio and we're comfortable at that level. I think the last couple of years have just shown that our NOI has been really [resilient] and through the pandemic and through various cycles we've been strong. So overall, we're pleased with that payout ratio.

[Operator]

Your next question is from the line of Dean Wilkinson with CIBC.

[Dean Wilkinson, CIBC]

Mario, probably for you. Just quick debt question. Obviously, access to credit is really not a problem despite maybe what some of the headlines are saying. It looks like the pricing on the unsecured and the mortgages is not quite converging, but getting close. What's your thought on the remaining $1 billion of mortgages, and could you see that coming into the unsecured market? And just generally, what's the sense you're getting from mortgage lenders in terms of pricing and availability credit right now?

[Mario Barrafato, Chief Financial Officer]

So we went out and we tapped the mortgage market last quarter. The market is strong and obviously they have their own criteria, they're in favor of certain asset classes, in favor of strong balance sheets. So there's a sweet spot. The only thing that I think we hear is the cost of funds moves. And so there maybe higher costs as we go. But right now, they're still very favorably priced compared to bonds but I think the gaps narrowing a bit. On the bond side, the support and the demand that we saw in our last deal was very strong. And so that I think our pricing, I think, the last deal came in tighter than the original guidance. So they're still -- they're getting -- I think the gap is getting narrower but we need them all. And I think having the benefit of a Loblaw lease really makes it attractive to lenders in this environment. So we think we -- I think we're going to get good pricing in all debt markets.

[Operator]

There are no further questions at this time. I will now turn the call back over to Rael Diamond.

[Rael Diamond, President and Chief Executive Officer]

Thank you, Brent. To summarize, we're very pleased with our first quarter performance. As we look ahead, our business is strong. And as Mario said, we are well positioned to execute on our strategic framework and deliver on our 2023 plan. Our Annual General Meeting will follow this morning at 11 o'clock and we look forward to seeing you there. Thank you for your interest, your investment in Choice, and for joining us this morning.

[Operator]

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.