Choice Properties Real Estate Investment Trust

TSX:CHP.UN

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. Welcome to the Choice Properties Real Estate Investment Trust's Second Quarter 2023 Earnings Conference Call. Today's call is being recorded.

I'd now like to hand the conference over to your first speaker today, Erin Johnston, Vice President Finance. Please go ahead.

[Erin Johnston, executive]

Thank you. Good morning and welcome to the Choice Properties Q2 2023 conference call. I am 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 today by providing a brief recap of our second quarter performance and provide an update on our transaction and development activity in the quarter. Ana will discuss our operational 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 then responding to your questions, we may make forward-looking statements that include statements regarding Choice Properties objectives, strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, intention, 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 risks and uncertainties that could cause actual results to differ materially from the conclusions in those 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 Q2 2023 financial statements and management discussion and analysis, which are available on our website and on SEDAR.

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

[Rael Diamond, executive]

Thank you, Erin. Good morning, everyone, and thank you for joining us today. We are pleased with our second quarter results, delivering another solid quarter. We delivered strong same asset cash NOI growth of 4.35% and FFO growth of 5%. This was driven by strong leasing and active asset management.

While inflation remains elevated and investors continue to be cautious, fundamentals across our 3 strategic asset classes remain strong. Our financial and operating performance in the quarter demonstrates the continued demand by necessity-based retail centers, well-located generic industrial assets and transit-orientated residential buildings. Robust tenant demand for space within our properties continues to drive momentum in our leasing pipelines, and in our ability to drive rent growth, which Ana will speak about in a moment.

One trend that we continue to see since our last quarter update is in regard to the transactions market. The market has been impacted by uncertainty in the financing markets and we continue to see a slowdown in transactions with wide bid/ask spreads persisting. To spot this, our team continues to be hard at work, looking for opportunities to execute on our capital recycling program with a focus on ensuring we maintain our high-quality portfolio.

In the second quarter, we completed $103.1 million of transactions, including $101.2 million of dispositions. Our dispositions were focused on continuing to exit office, to get advantage of strong market fundamentals in assets we consider non-core, and improving the quality of our retail portfolio.

We completed the sale of 1 of our final 2 non-strategic office assets in the quarter, disposing of metropolitan place in Dartmouth, Nova Scotia for proceeds of $30.4 million. This disposition complete Choice's office assets in Atlantic, Canada. We are actively marketing our remaining office assets in Calgary.

On the theme of selling non-core assets, during the quarter we leveraged the strong market for data centers and closed on the sale of a data center adjacent to the Loblaw head office in Brampton for net proceeds of $74.2 million. Lastly, we completed the dispositions of a single tenant retail site in Cornwall, Ontario, for proceeds of $10 million. The site, which had been docked since 2019, and was tenanted by large box home improvement retailer on a long term lease. Our team was able to facilitate the sale of the asset to a buyer while capitalizing on the remaining value of the lease by negotiating receiving a lease termination payment of $7.4 million from the existing tenant.

While transactions have slowed, our developments are progressing very well, and the team continues to focus on delivering on our development pipeline. In addition to our ongoing retail intensification program, we are on track to complete approximately 1.6 million square feet of industrial space and 2 residential projects this year.

During the quarter, we recommenced servicing and site work at Choice Caledon Business Park. Servicing for the entire site is expected to take approximately 18 months and cost approximately $165 million at share. Once complete, Choice will have a fully graded service site at a land cost of approximately 1.1 million per acre.

We're also pleased to report that for the first phase of this development, we have entered into an approximately 90 acre ground lease with Loblaw with rent commencement in the first quarter of 2025. The lease has an initial term of 25 years with 2% annual rent steps. The total cost of the first phase with Loblaw, including land, servicing and Phase 1 specific costs, expected to be approximately $125 million at share and yield between 7.25% and 7.75%. For future phases of the site, our leasing team continues to see strong interest and is working through proposals with potential tenants.

Subsequent to the quarter, our team also completed leasing at our development in South Surrey, BC, leasing the entire 353,000 square feet for initial term of 10 years. With the completion of this lease, our revised yield is now expected to be approximately 10.75% with a total cost of approximately $72 million.

The advancement of each of these projects demonstrate our team's ability to create value and add high-quality assets to our portfolio. We continue to focus in the short term on the opportunities available to us in our retail and industrial development pipelines and continue -- we continue to deliver strong returns despite heightened interest rates.

With that, I'll hand it over to Ana, to provide more color on our operational results. Ana?

[Ana Radic, executive]

Thank you, Rael, and good morning, everyone. Our portfolio continues to perform well. Leasing activity is strong and our tenants continue to demonstrate their resilience. Occupancy remains near full at 97.4%, and we are seeing strong rental rate growth across our 3 strategic asset classes.

During the quarter, we had approximately 1.1 million square feet of lease expiries. We renewed 743,000 square feet at an average spread of 21.1%, and we completed 116,000 square feet of new leasing that commenced in the quarter. We experienced negative absorption of 212,000 square feet. Over half of this was the result of an industrial expiry in our Ontario portfolio, where we chose not to renew the tenant. We then leased the space to the neighboring tenant at an average rent that was 170% above the previous expiring rent. The expansion commences in August of this year, resulting in only 2 months of downtime. The balance of the negative absorption was primarily related to 3 retail vacancies, which I will speak to shortly.

In our approximately 44 million square foot necessity-based retail portfolio, occupancy decreased slightly to 97.7%, primarily related to 3 retail vacancies. The largest being a 33,000 square foot location in Waterloo, Ontario, where we negotiated an early lease surrender and lease surrender payment from the in-place tenant. The full space has been re-leased to No Frills, with rent commencing in the fourth quarter of this year. The remaining decline was due to the closure of one Nordstrom location in Edmonton and 1 Bed Bath & Beyond in Dartmouth, Nova Scotia. Both spaces totaled 39,000 square feet at our share. We are very close to finalizing a deal to backfill the Bed Bath & Beyond location and continue to work on backfilling the 18,000 square foot space vacated by Nordstrom Rack.

We had 306,000 square feet of retail space naturally expire in the quarter, and we completed 264,000 square feet of renewals, resulting in tenant retention of 86%. The renewals were completed at rents 19.6% above expiry. Included in our renewals was a 28,000 square foot space, where the expiring rent was reduced during COVID, and then renewed at current market rents, which resulted in an increase of 100%. Excluding this deal, spreads were still very strong at 13% above expiry, making this the highest quarterly retail leasing spread we have recorded.

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. We continue to see strong demand for our retail centers as evidenced by our sustained high occupancy, despite recent bankruptcies that have impacted the entire retail market.

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 rent. The quality of our tenants and our focus on necessity-based retailers continues to provide resiliency in our portfolio. Many retail tenants continue to move ahead with their plans to grow store count and relocate to superior sites. We are working to accommodate several such retailers by relocating and rightsizing existing tenants at our centers, enabling us to increase rents, drive asset value as well as enhance the tenant mix at our sites.

While overall industrial leasing activity has moderated slightly in the second quarter of 2023, industrial demand remains strong. The national vacancy rate at 1.9% remains well below the historical 15-year average of 4%, and net rental rates continue to rise.

Occupancy in our industrial portfolio is 97.3%. While remaining close to full occupancy, this quarter marks a slight decline of 10 basis points, primarily due to the temporary 2-month vacancy of 122,000 square feet in Ontario, which I spoke of earlier. The remaining 56,000 square feet was primarily due to rollover in Alberta.

We have re-leased over 80% of the total space vacated this quarter to new tenants with rent commencing this year. We had 661,000 square feet of industrial leases expire in the quarter, of which we renewed 474,000 square feet at rents 22.3% above expiry.

In Ontario, 33,000 square feet of expiries were renewed at rent, a 110% above the expiring rent. We have significant embedded rental rate growth in our industrial portfolio. And with our current national average in-place industrial rent at $8.57 per square foot and our average in-place rent in Ontario at $8.18 per square foot, we expect to deliver strong rental rate growth across our industrial portfolio.

The industrial asset class continues to experience elevated demand, and we continue to transact at rents well above current in-place rents. We believe that well-located new generation distribution space will continue on an upward trajectory, though not at the same pace we have seen over the past few years, and rents in older generation buildings will likely moderate sooner.

There are 49 Loblaw leases expiring in 2024, consisting of 48 retail locations and 1 industrial site. Subsequent to the quarter, we renewed 46 of these leases totaling 2.77 million square feet at a weighted average extension term of 4.9 years. In addition, Loblaw has conditionally agreed to renew 2 additional retail leases totaling 70,000 square feet for 5 years at a 10% increase, and we expect these renewals to be finalized in the fourth quarter.

The total base rent across all 48 locations is increasing by 7.5% over the total expiring rent. One small grocery location of 18,000 square feet has been closed for 5 years and was not renewed. We are very pleased with the outcome of the Loblaw renewals, the ongoing stability their anchor tenancy brings with it, and the quality of the necessity-based tenants we are able to attract to our grocery-anchored portfolio.

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

[Mario Fatica, executive]

Thank you, Ana, and good morning, everyone. We are pleased with our financial performance in the second quarter as our business continues to be well positioned to deliver on our financial goals. Our reported funds from operations for the second quarter was $183.6 million or $0.254 per unit. Included in FFO for quarter was lease surrender income was $8.4 million. There were no other significant or usual onetime items.

On a per unit diluted basis, our second quarter FFO of $0.254 per unit reflects an increase of approximately 5% from the second quarter of 2022. Strong same asset NOI, lease surrender income and higher interest income from mezz loans was offset by higher borrowing costs and higher G&A costs driven by inflation and a competitive talent market.

Occupancy remained strong at 97.4% and contributed to our strong same asset results. Same asset cash NOI increased by $9.6 million or 4.3% compared to the second quarter of 2022. By asset class, retail same asset cash NOI increased by $6.1 million or 3.4%. The increase was driven by strong leasing, higher capital recoveries and contractual rent steps.

For the remainder of 2023, we expect retail same asset cash NOI to trend back to our target range of 1.5% to 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.

Industrial increased by approximately $2.4 million or 6.7%. This increase was primarily due to higher rental rates for both renewals and new leases completed as well as contractual rent steps. And mixed-use residential and other increased by approximately $1 million or 14.6%, and this increase was due to improved residential occupancy and other revenues.

Turning to our balance sheet. Our IFRS NAV increased 1.1% to $13.55 per unit, an increase of $106 million over the last quarter. NAV growth was driven by $88 million of fair value gains in our investment properties, partially offset by the fair value adjustment on our investment NOI properties of $31 million, where we're required under IFRS to mark-to-market this investment to its trading price as of June 30th.

We continue to take a transparent and conservative approach to the valuation of our investment properties. In the second quarter of last year, a rising interest rate environment driven by inflationary concerns led us to adjust our retail cap rates, reflecting our belief that a higher cost of capital would put downward pressure on property valuations. We are now seeing this reflected in external appraisals in a challenging transaction markets, confirming our approach to hold retail cap rates since our revaluation last year. That being said, we have recorded fair value gains in each asset class every quarter since then, driven solely by cash flow growth and major development milestones.

Current quarter fair value gains on investment properties are mostly property specific and primarily driven by industrial leasing, retail cash flow growth and transaction activity. We had minimal financial activity in the quarter. We ended the quarter in a solid financial position with strong debt metrics and ample liquidity. Our debt to EBITDA ratio was 7.4x, and we have over $1.4 billion available on our credit facility, and this is further supported by approximately $12.5 billion of unencumbered properties.

Subsequent to the quarter end, we repaid the $200 million Series B senior unsecured debenture upon maturity on July 5, 2023, using proceeds drawn on our credit facility. This debenture had an interest rate of 4.9%. With strong demand from lenders, translating into relatively low credit spreads, we're well positioned to fund our remaining capital requirements in 2023 at a reasonable cost. We expect to fund our remaining capital requirements through the unsecured market. As for us, there is no longer a meaningful spread between unsecured pricing and what we're seeing in the secured market.

So overall, this was once again a very solid quarter. Our results reflect the stability and resiliency of our retail portfolio and the growth potential from strong industrial fundamentals. And with that, we remain confident in our ability to deliver on our 2023 outlook.

Now Rael, Ana, Erin and I would be glad to answer your questions.

[Operator]

[Operator Instructions] Our first question is from Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

So just on the Loblaw renewal done, I think you mentioned 7.5% rental spread. So just to be clear, does that mean 1.5% on an annualized basis?

[Ana Radic, executive]

It's actually a 7.5% from '24 -- from the expiring rent, and it's flat for 5 years. So we get the full 7.5% in year 1.

[Himanshu Gupta, analyst]

Okay. And just to clarify, Ana, I mean, is there like a negotiation involved when you do the renewal? Because I think the based on the formula, you can go up to 10% increase on the renewal here.

[Ana Radic, executive]

That's correct. The renewal provision is standard in all of the Loblaw leases. And it's -- the renewal is to be at market rent. However, it can't exceed 110% of the expiring rent, but nor can it be less than the expiring rent. So there's a floor of 0 and a ceiling of a 10% increase.

[Himanshu Gupta, analyst]

Okay. Fair enough. And then I think there was 1 lease remaining, which was not renewed. Any color on that?

[Ana Radic, executive]

It's a small store in a very small market in Ontario, and our transaction team is looking to dispose of it. It has -- very immaterial.

[Himanshu Gupta, analyst]

Got it. Okay. And maybe you know, just turning to your same property NOI guidance. First half of the year is very strong, mid 4%. And I think your guidance was unchanged at 2% to 3%. Are you expecting more retail vacancy in the second half of the year in your guidance? Are you baking in some vacancy uptick here?

[Rael Diamond, executive]

No, Himanshu, actually the NOI will remain strong. It's just that the compare to base now is higher. So therefore, the growth number is lower, and it's just math, but it's still very, very strong and it will be at the high end of our range.

[Himanshu Gupta, analyst]

Okay. And my last question is on the Ontario industrial portfolio. I think you mentioned in place rents are like low $8 range. So what do you think is the mark-to-market on this industrial portfolio in Ontario? And what rates are you signing leases in GTA these days?

[Ana Radic, executive]

Yes. So the market rents in Ontario range due to size and location, but they're generally -- we're doing deals that are between $15 and $18 a square foot.

[Operator]

The next question is from Mark Rothschild with Canaccord.

[Mark Rothschild, analyst]

Mario, maybe just following up on your answer there as far as the same property NOI growth. So are you saying that the growth should remain in this 4% range in the second half of the year? Or that the NOI will remain consistent and still grow but because it was stronger the second half of 2022, the pace of growth will get more like 1% to 2% in the second half to average out to the guidance for the year?

[Mario Fatica, executive]

Yes, it's the latter, Mark, exactly. There won't be a big vacancy and there's nothing that's going to impact the occupancy or the number of the NOI. It's just a comparator -- the comparator level is higher.

[Mark Rothschild, analyst]

Okay. Great. And then in regards to the industrial fundamentals, there was a comment made that maybe the growth is moderating. Are you expecting to see rents continue to rise in your markets for the industrial properties you own? Or are you seeing that rent growth maybe has just peaked based on what tenants can afford to pay?

[Ana Radic, executive]

No. I think what we were referring to was more of the fact that they've risen by 20%, 30%, 60% in some markets. We are still seeing rental rate growth, but not at the historical levels. And the tenants are paying the market rents despite the increase from their current in-place rent, which as we mentioned, was sort of $8, under $9, $8.58 a square foot.

[Mark Rothschild, analyst]

Okay. Maybe just one last question, just on the data center lease, data center sale rather. Just provide some color on what the -- how that worked with the payment to the tenant to get out of the lease. Was that requirement of the purchaser?

[Rael Diamond, executive]

Mark, it's Rael. It wasn't a requirement. We actually took it to market, knowing Loblaw was going to downsize their space. We worked a formula with Loblaw that we shared in the upside and the payment to them was based on that formula. And like, it just speaks to the power of the relationship that we have with Loblaw, that we can do things that others cannot do with the tenant, and just the transparency in the business sort of allowed us to essentially achieve our goals, unlocking value at a significant -- capturing value that wasn't really captured on our balance sheet and allowed Loblaw to get a re-lease and get a payment.

[Operator]

The next question is from Lorne Kalmar with Desjardins.

[Lorne Kalmar, analyst]

Maybe turning back to the industrial portfolio. It doesn't look like there's much less to mature in the GTA for the remainder of the year. What do maturities look like for the region in 2024?

[Ana Radic, executive]

Yes. So in 2024, our industrial, about 40% of it actually is in Ontario, about 43%. Yes, we have 1.7 million square feet rolling in '24.

[Lorne Kalmar, analyst]

Okay. And then maybe just following on that, would you expect, given the mark-to-market there, some jump in same property NOI as those leases are renewed?

[Ana Radic, executive]

Yes, absolutely. The average in-place rent in 2024 on those leases is actually sub $8. So we do expect strong growth on those renewals.

[Lorne Kalmar, analyst]

Okay. Great. And then it looks like you guys started doing pre-leasing at the element in Ottawa. Just wondering how that's going so far?

[Ana Radic, executive]

It's going well. We're actually about 25% sort of pre-leased, including just validating sort of tenant applications, but it's -- there's been strong demand.

[Lorne Kalmar, analyst]

And how have rents been relative to pro forma?

[Ana Radic, executive]

They've been in line with pro forma, probably a little bit higher than we expected.

[Lorne Kalmar, analyst]

Okay. And then just last one. With the Phase 1 of Caledon getting underway, I know Loblaw going in there. What's sort of the thoughts on timing for the balance of the project, balance of the phase of the project I should say?

[Rael Diamond, executive]

Yes. So it's going to take us, call it, 18 months to fully service the site. And during that time, we're going to be looking for other tenants. But -- so hopefully, we'll have something to report in the next few quarters, but likely you won't have income coming from another tenant until probably later '25, '26, assuming we can get some decent traction soon. But Loblaw's commences in Q1 of '25, rent.

[Operator]

The next question is from Gaurav Mathur with IAA Capital Markets.

[Gaurav Mathur, analyst]

Just on cap rates in the residential and mixed-use segment. Could you provide some color on what's driving cap rate compression there since the beginning of the year?

[Rael Diamond, executive]

It's a function -- you're referring to our MD&A table, which shows our cap rates coming down. It's because we're selling non-core asset at higher cap rates. And the remaining assets are core assets. So that's what's driving it down.

[Gaurav Mathur, analyst]

Okay. And just on the follow-up to that segment, how should we think about future development activity as construction costs continue to increase?

[Rael Diamond, executive]

Yes. I think construction costs have definitely moderated in that. So we're probably 12 months away from any of our sites being truly shovel-ready. And we're going to make a decision at that time, because right now we're in a truly unique position that we have lots of opportunities available to us in both residential -- sorry, in both retail and industrial. And we're really pushing the development on the commercial, just given the interest rates are, but hopefully we'll be in a position to commence the residential as they're closer to being obviously shovel-ready. We're just not in that position yet.

[Gaurav Mathur, analyst]

Okay. Fantastic. And just lastly, switching gears to the balance sheet. Is there a targeted leverage range that you're focusing on?

[Mario Fatica, executive]

Yes. So right now, we've been working at a 7.5x debt to EBITDA or a case it goes a bit lower or a bit higher, but we felt at that level, it gives us a lot of flexibility to operate and deal with any timing of development spend.

[Gaurav Mathur, analyst]

Okay. And then just what moves the needle higher or lower? If you could just provide a little more color on that?

[Mario Fatica, executive]

It would just be timing, timing of financing, timing of EBITDA.

[Operator]

The next question is from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

Really just wanted to focus in on the retail leasing. So Ana, I wonder if you wouldn't mind, give a little more color on the 20% renewal spread in the quarter, I guess, 13% adjusting for the pandemic relief. I guess, is that kind of uplift expected to continue in the near term? What sort of tenants are driving that sudden spike in rent growth?

[Ana Radic, executive]

I think it's definitely driven by increased demand Sam. It's -- we're just seeing that as we're seeing strong tenant retention and general optimism for retailers, it's a real mix of tenants, both like necessity-based, the banks, fashion as well in our power centers, where the fashion retailers were coming off maybe a little bit lower rents, but -- so that's also a factor in the spread. So I would say there -- I don't know, it's still be 13% coming in the subsequent quarters, but definitely in that sort of higher range for us.

[Sam Damiani, analyst]

And just on the pandemic relief, like how much of that is now unwound or is still left to go? And how long do you think it will take to fully unwind those relief provisions that were granted?

[Ana Radic, executive]

As I think most are now unwound. We had tenants who were -- this was 1 of the last ones, I think we had a few fashion tenants that in the previous quarters, but nothing material remains in terms of kind of COVID-related concessions.

[Operator]

The next question is from Tal Woolley with National Bank Financial.

[Tal Woolley, analyst]

I just wanted to circle back on sort of your comments about the development pipeline, and how you're focusing a little bit more near term on advancing commercial projects because of the interest rate environment. I guess how long do you think that sort of view on how to allocate your development capital will persist? And what do you sort of need to see in the market to advance more residential stuff?

[Rael Diamond, executive]

Yes. Look, I think for us, as I said earlier, we're just in a unique position that we making a really good spread over where we developing the commercial product to where the cap rate is. So use the one in Surrey right now, like we developed it to call it, tenants recorded yield and cap rates in Vancouver modern generic industrial would be like half of that. So we're making a lot of money. And for us is we're very focused on keeping a strong balance sheet, and we're not going to allow that to -- we don't allow our leverage to creep up. So if it means deferring the rental to start, because we had fair opportunities available on the commercial, we'll keep doing that. And on many of our residential sites, as you know, like it's excess land, and we continue to collect rent from the existing tenants. So it's not like there's much of a carry on the land. But I think the short answer to your question Tal is, we need to see -- we need to believe that our pro forma -- realistic pro forma will deliver us. We actually create NAV growth, otherwise, we shouldn't be doing it.

[Tal Woolley, analyst]

Okay. And then I apologize, -- I had my phone cut out a little bit while you're talking about the retail piece. I was just curious, is there a specific type of tenant that drove the size of the termination fees this quarter? Or is it just a bunch of little ones?

[Ana Radic, executive]

It was really 2 tenants. So just a general kind of merchandise tenant where we -- they had a few years left on the term and they were still paying rent, but -- and then we were able to negotiate a termination that was about $800,000 and then re-lease it to No Frills, and the other was as Rael spoke about like a home improvement tenant who was dark, and also in Ontario, and so we negotiated a lease termination. They had 13 years left on their term. So it was a significant remaining obligation that resulted in a $7.4 million lease surrender fee, and then we sold the site to another -- to a user.

[Tal Woolley, analyst]

Got it. And then just lastly, on the Caledon site, you're sort of down the path. Was there a particular rationale for going with the ground lease structure versus something more traditional? And given that you're sort of seeing, I think, a development yield in the mid tenant with a ground lease, was there potentially more on offer if you've done the full development, you think?

[Rael Diamond, executive]

Sorry, Tal. I missed the second part of your -- so would you repeat the second part of your question?

[Tal Woolley, analyst]

Yes. I was just trying to understand with the ground lease sites, what was the driver for going with that particular method as opposed to a more traditional like owning the building, doing the rest of the element and getting compensated for that. But I think you're getting a pretty great return on the ground lease. I'm just wondering if there was more on offer if you had done more of the project.

[Rael Diamond, executive]

Yes. Like firstly, from a macro point of view, we do like land leases. And if you think about the most secure form of real estate, truly a land lease, and because the tenant invests a lot of improvements in their building, and if they don't renew, you essentially get a free building. We and Loblaw, I mean East Gwillimbury, we've done a land lease structure. They're investing a lot of capital as they've reported in East Gwillimbury, and we use that same structure on Caledon, and it truly, and works for us, it's quick and it's low risk, and we're getting a really good return, and then it allows Loblaw to control the timing of their capital investment into the building. But -- so that's what drove our decision.

And the other thing just on land leases in general, I'd say we're probably one of the few, if not the only REIT, who's actually been doing land leases on rental buildings with development partners. And I think that just speaks to how we think about it, that we're really focused on long term. We try to generate long-term income and also in a phenomenal shape with our balance sheet. We don't need the cash right away. And I think that's where we are so unique in the Canadian REIT landscape.

[Operator]

The next question is from Sumayya Syed with CIBC.

[Sumayya Hussain, analyst]

Just first a follow-up on the renewal of the Loblaw leases average term of almost 5 years. And I believe the renewal last year was closer to almost 8 years. Just wondering what would explain the difference in the average terms between last year than this renewal?

[Ana Radic, executive]

Yes. Last year, we renewed some of the leases for 5 and 10 years. So essentially 2 options to extend were exercised, and that's why there was a bit of a weighted longer average lease term. And that was -- we had a desire to secure some of the larger superstores that we're rolling that year in Atlantic Canada and Loblaw's is comfortable doing that. So that's sort of was the reason for our decision to do a longer term. And this year, we were happy with the 5-year extension, and we'll.

[Rael Diamond, executive]

Yes. I think so the other thing as Ana said, is like essentially all -- like essentially 100% of the leases were renewed. The one that was not renewed was closed for multiple years, and we're waiting out the lease term, and we intend to sell it. And from our point of view, it's a great story. And again, it speaks to the power of the relationship with the tenant.

[Sumayya Hussain, analyst]

And just looking at the leasing you did on the Surrey industrial center. Just wondering about the profile of the tenant today and also any info you can share on the escalators on that lease?

[Ana Radic, executive]

It's a high covenant tenant. We can't disclose who they are right now, but they're a national tenant, a national retailer, but they're on lot lots already. And the growth, the average rental rate steps for 3.95% over the 10 years, so, annually.

[Sumayya Hussain, analyst]

Okay. And just lastly, Rael, anything changed on your stance on the Allied Units for the first lockup expiring last month?

[Rael Diamond, executive]

No, nothing's changed. Look, we'll sell it when we need the capital and that we see that the shares are trading closer to what we perceive its value, but nothing's changed. Right now balance sheet is in great shape, and we're very happy that they completed the data center sale, because it puts their balance sheet in really good shape. And that's it from us.

[Operator]

The next question is from Pammi Bir with RBC Capital Markets.

[Pammi Bir, analyst]

Loblaw had previously indicated plans to sell some real estate. Are you anticipating any further acquisitions from them this year? And can you maybe just talk about what sort of cap rates you're seeing on transactions that are in the market?

[Rael Diamond, executive]

So the short answer is yes, we do intend to still continue purchasing from Loblaw. Like what we said at our Investor Day is that we want to be balanced from a capital recycling point of view, and we've done a very good job so far in recycling assets at very good value to Choice unitholders. And we probably have identified around another $100 million that we will do towards the end of this year or sometime early next year just as far as magnitude.

I think the cap rates are, Pammi, is that a year ago, we wrote out our retail cap rates about -- sorry, about 40 basis points. So we wrote our values. We increased cap rates about 40 basis points. And I think what you're starting to see is appraisers are starting to get closer to that number now. And I think that's where things are trading, but there's definitely been more groups who are very hesitant to buy assets with negative leverage. So I -- where they're paying more in interest expense or interest rate than they will or they're earning on the assets. And there's definitely been a tone change on that front, whereas previous or earlier this year, people willing to do that, but definitely, there's been more of a tone change.

And I would also say that every transaction that's traded has a unique story to it. So often, there was debt in place or someone really coveted the asset, but it's generally a unique story. But there's definitely been a slowdown in volumes.

[Pammi Bir, analyst]

Got it. Maybe just coming back to development. If you look ahead -- I know it's still ways out for 2025, but I think I only see 1 project slated for completion. How do you see the pipeline growing over the next, call it, 12 to 18 months to 2025? And what could that look like in terms of what you're delivering in that year?

[Rael Diamond, executive]

Yes. Look, we have a lot of commercial development that keep us busy for the next 5 to 7 years. And remember, the commercial development is a lot shorter in the time to develop it. So for example, in Phase 1 in Caledon, we're going to deliver it in Q1 of '25. So I think as we start getting leasing traction or as we ready to go on a spec development, you'll see more come in. But we have several more phases, as I said, in Caledon and in East Gwillimbury, and we are seeing leasing interest. And we expect to keep that going.

And then on the residential side, as we said earlier, we do expect to start construction as things are showed already, although you wouldn't see income come for a few years, it takes 3 to 4 years to stabilize the asset. But hopefully, you'll start seeing something in the pipeline over the next 12 to 18 months.

[Pammi Bir, analyst]

Okay. And then just maybe sticking to your comments on resi. I think you are now planning condo completions scheduled for, I think, the second half of this year. And so should we anticipate the closings on those condos like starting end of this year or into more -- is that more 2024?

[Mario Fatica, executive]

It could be towards the end of this year or '24, and it's in that area Pammi, yes.

[Pammi Bir, analyst]

Okay. And then just lastly, the strategic alliance agreement, I think, was renewed earlier this month. Just curious, were there any changes that were notable relative to the prior agreement? Or any update there?

[Rael Diamond, executive]

No, no changes, automatic renewal.

[Operator]

Next question is from Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

Just a follow-up question on balance sheet. So credit facility of $200 million was used to pay down, I think, unsecured debenture expiry. What is your plan to put permanent financing? And what interest rate are you expecting now?

[Mario Fatica, executive]

So yes, I mean, as I said, the unsecured market will be probably the most effective way to go right now, given the gap between secured, unsecured, just for us, it's gotten narrower. And so as Rael said, we have a few dispositions still on the go, that will determine if we can use proceeds to pay down the line or we can do a financing. So we'll just keep watching it. It's only a $300 million. So it's not a big number, but that will be the deciding factor. And also the volatility right now, you're seeing a bit of interest rate volatility as central banks keep moving. So there's no worry to see, but there's a window that makes sense, and we have visibility on future cash flows, we'll take advantage.

[Himanshu Gupta, analyst]

And Mario, do you have a sense what will be the rate if you were to, I mean, access the unsecured debenture market? Is it like still mid-5 or is it even tripping higher than that?

[Mario Fatica, executive]

It depend on the time of day, but yes, right now like our spread is around 2.20% and if you were at a -- you're 5.5%, 5.6% per tenure and the thing is the yield curve is pretty flat when you go from kind of 7% as well. So 10% is a spot that would work and the pricing will be good.

[Operator]

There are no further questions at this time, we'll turn it back to the presenters for any closing remarks.

[Rael Diamond, executive]

Thank you, Chris. To summarize, we're very pleased with our second quarter performance. Our high-quality portfolio, ongoing focus on operational excellence, development opportunities and balance sheet strength uniquely position us in the Canadian REIT landscape. We remain really confident in our ability to execute on our strategic priorities and drive long-term NAV growth.

Thank you for your interest, your investment in Choice, and for joining us this morning. Have a great weekend.

[Operator]

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