First Capital Real Estate Investment Trust
TSX:FCR.UN
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First Capital Real Estate Investment Trust
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Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT's Q2 2022 Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Alison. Please proceed with your presentation.
Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our Q2 MD&A, our MD&A for the year ended December 31, 2021, and our current AIF, which are available on SEDAR and our website. These forward-looking statements are made as of today's date and except as required by securities law, we undertake no obligation to publicly update or revise any such statements.
During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this call.
I'll now turn the call over to Adam.
Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our Q2 conference call.
In addition to Alison, with me today are several members of the FCR team, including Jordie Robins and Neil Downey, who you will hear from shortly. The second quarter was another busy and productive period for FCR.
The hard work of our talented team, coupled with our strategic focus on high-quality, grocery-anchored and mixed-use properties located within Canadian neighborhoods with the most compelling demographic profiles continue to deliver solid operating results.
But before we get into the quarter specifically, I'll spend a moment on our 2-pronged real estate strategy that we had discussed last on our conference call a few months ago. Our roots are largely in grocery-anchored retail properties located in neighborhoods with superior demographics.
These assets are primarily merchandised with necessity-based retailers in urban and top tier suburban markets. Examples include our properties in Vaughan, Mississauga and Oakville to use GTA examples. We remain focused on this type of real estate in all of our core markets.
It is the largest component of our portfolio, representing roughly 70% of our asset base to-date. We aim to continuously improve the value of these existing centers through merchandising mix enhancements, property improvements, redevelopment and or increasing rental rates through leasing activities.
These assets typically provide a compelling combination of stability and growth, particularly with the benefit of FCR's platform. We have a proven track record over two decades of extracting maximum value from these types of properties. It is our intent to apply our value-add capabilities to more of these centers and in fact, have added a great one in the GTA subsequent to quarter end.
The second part of our real estate strategy involves properties situated in Canada's most urban markets or as we refer to them, super urban neighborhoods. These communities are the most transit connected and desirable in terms of where the majority of people want to live, work and socialize. They are also the most dense. These super urban FCR assets are primarily grocery-anchored mixed-use properties. Examples include our portfolios in Yorkville and Liberty Village, two large positions that alone represent approximately 15% of FCR's total portfolio.
Our 24 million square foot development pipeline is also focused on properties within our super urban strategy. Over time, these neighborhoods have produced the strongest population growth and have the greatest barriers to entry for new supply. As a result, retail sales per square foot in these neighborhoods have generally grown at the highest rates. In many cases, there exists an opportunity for intensification of low-density properties. In time, they can be redeveloped into multistory mixed-use developments with meaningful amounts of both FCR type retail and much needed residential.
Besides Yorkville and Liberty Village, other examples of super urban properties are our Christie Cookie development site in Toronto, False Creek Village in Vancouver, Brewery District in Edmonton, Mount Royal Village in Calgary and Griffintown in Montreal, among others.
For both types of FCR's properties, so stable grocery-anchored centers, mainly in top-tier suburban neighborhoods and primarily grocery-anchored mixed-use properties in super urban neighborhoods, supply is and will continue to be constrained given replacement costs are now well above market values.
In addition, tenant sales are continuing to rise and leasing demand from tenants remains elevated. This combination of factors should bode very well for future rent growth for both types of assets in our portfolio. With the prospect of an economic slowdown higher today than last quarter, it's also important to note that our portfolio has demonstrated tremendous stability through previous recessions given our prime locations and necessity-based nature of our tenant base.
With that strategic framework as a backdrop, we'll now move into the second quarter. We all know how critical leasing is to our business, and it's been a validating bright spot for FCR for a long time and through various economic cycles and world events.
The strength we have demonstrated for quite some time now continued in the second quarter with over 800,000 square feet of leasing at very healthy rent increases. This contributed to solid same property NOI growth of 6% or 3.8% without bad debt and lease termination fees for those who prefer to exclude them. It also contributed to our average in-place rental rate increasing to an all-time high for the 24th consecutive quarter.
Our retail portfolio continued to see broad-based strength across geographies and property types. Last quarter, we noted the positive momentum that had started to surface in our new residential rental assets in Toronto. That momentum accelerated through the second quarter with rental rates and demand strengthening. In Toronto's Liberty Village, our King High Line residential property is fully stabilized, where market rents have increased by roughly 10% in the last three months alone and are continuing to rise. Our even newer Station Place asset is leasing up according to plan and is now roughly 70% leased with rents exceeding pro forma.
We expect stabilization to occur in Q4 of this year. We also made investments during the quarter to advance our real estate strategy and our development program specifically, which Jordie will review. And while we didn't have substantial closings in the quarter, we advanced several dispositions that we remain active on.
To take advantage of the large disconnect between our intrinsic value or NAV and our current trading price, we implemented an NCIB during the quarter and repurchased approximately 4.6 million FCR units for a total of $71 million. The $15.23 average price per unit represents an implied cap rate in the mid-6% range and a price per square foot of approximately $350, which is less than half of replacement cost.
Today, repurchasing FCR units provides the best risk-adjusted opportunity that we have available to us, even if asset values modestly decline in the short term. So we will continue taking advantage of this to the extent the magnitude of the disconnect persists. This quarter, we continued to deliver on our ESG commitments outlined in our 3-year ESG road map that can be found on our website. Fresh on the heels of last quarter's announcement as been recognized as one of Canada's greenest employers, we achieved our 127th LEED certification at our Chartwell Shopping Center in Scarborough, Ontario. This brings our portfolio to 4.4 million square feet of LEED-certified assets.
In addition to this milestone, FCR received two certificates of excellence from BOMA Canada, one for our head office property at 85 Hana and the second for our Brooklyn Town Center. Thank you to our ESG and operations teams who passionately make our properties and our company better. While accolades are nice, it is clearly not why we do what we do. We've discussed many times that our approach to ESG has many tentacles and that the philosophy is deeply ingrained in our culture. One priority in our ESG plan has been to foster biodiversity in our neighborhoods.
As an example, we know bees play a critical role in a functioning ecosystem. So we were pleased to add an additional five new beehives across the country, totaling 16 in our portfolio. And we've installed our first urban farm at our head office in Liberty Village, which will yield approximately 300 pounds of vegetables that will be donated as fresh organic produce to the Second Harvest Food Bank. Reducing the impact of climate change on our cities and neighborhoods takes all of us. Partnering with our tenants in mutually beneficial green lease agreements leads to higher performing buildings and healthier, more sustainable communities.
We're very pleased that FCR received the 2022 Green Lease Leader Gold award issued by the Institute for Market Transformation and the Department of Energy's Better Building Alliance. We have been at the forefront of environmental best practices in the Canadian real estate industry for well over a decade, and I know our team appreciates this recognition.
We'll provide more updates on ESG in the future. And in the meantime, the ESG section of our website is regularly updated and has a wealth of information on our activities. So overall, a busy and productive quarter with healthy and strengthening operating metrics. We are a real estate company first and foremost. And accordingly, we will continue to focus on our real estate and executing our strategy.
And with that, I will now pass things over to Neil.
Thank you, Adam, and good afternoon to all of our call participants.
For my remarks today, I will begin by referring to Slide 6 of the quarterly conference call deck that is available on our website at fcr.ca. Q2 funds from operations of $61.2 million or $0.28 per unit decreased by 20% from $76.1 million and $0.34 per unit in the prior year. As is often the case, our other gains, losses and expenses, or OGLE for short, tend to cause variability in our quarterly results. This past quarter was no exception.
As shown near the bottom of Slide 6, Q2 results included other aggregate losses and expenses of $3.1 million versus other net gains of $17.5 million in the second quarter of 2021. This $20.6 million year-over-year swing in OGLE adversely impacted FFO growth by more than $0.09 per unit in Q2 of this year.
For your reference purposes, there are more details provided on the OGLE amounts on Slide 8 of the deck. In short, substantially all of these amounts relate to a single listed security position, specifically the shares of Procore Technologies, Inc. For a bit more historical context, FCR made an investment of approximately $6 million into a private company called Honest Buildings in 2018.
This was part of the FCR innovation initiative. We invested in Honest Buildings because we were a user of the technology, and we saw its appeal. Subsequently, Honest buildings was acquired by Procore and in May of last year, Procore went public, which ultimately provides a liquidity opportunity.
So now having monetized our shares, we know that this entrepreneurial investment yielded a profit of more than $9 million, equating to a 32% IRR over FCR's 4-year hold period. And notably, having liquidated this position in full, we generally expect to see a lot less movement in our other gains and losses and expenses over the next few quarters.
And so focusing on the performance trend of our core real estate business, Q2 FFO prior to OGLE of $64.4 million equated to $0.29 per unit. This was a solid 10% increase from $58.6 million or $0.27 per unit in the second quarter of 2021. Returning to the top of Slide 6, you can see that Q2 net operating income of $107 million increased by $3 million or 3% from $104 million in the prior year. Lost NOI related to disposition activity was $1.9 million in Q2 and lease termination receipts were only $55,000 versus approximately $300,000 in the prior year. Same-property NOI growth was $5.5 million, equating to a strong 6% increase.
This growth was driven by higher base rents from contractual steps, new and renewal leasing and higher variable revenue contributions to NOI as well as lower bad debt expense, which was specifically $2.2 million lower on a same property basis. A small detractor from Q2 same-property NOI growth was the lower lease termination receipts that I previously mentioned. Excluding the year-over-year change in lease termination fees and bad debt, Q2 same-property NOI growth was a solid 3.8% positive.
On a sequential basis, Q2 net operating income was approximately $5.7 million higher than in Q1 of this year. There were three contributing factors: firstly, higher variable revenue contributions to the tune of $2.4 million to NOI, higher base rents from steps, new and renewal leasing, including residential NOI added $1.8 million, and there was some benefit from higher CAM recoveries equating to approximately $1.5 million.
Turning to interest and other income of $4.3 million for the quarter, this roughly doubled from $2.1 million last year. Higher loan balances at $189 million at June 30 of this year versus $77 million at June 30 of last year, was the key driver. Q2 G&A expenses of $8.7 million increased by $700,000 or 9% year-over-year. The Q2 expenses were consistent with the Q1 expenses of this year. Our business is relatively stable in terms of staff complement and business activity.
And at a high level, we continue to guide you towards a near-term run rate of approximately $9 million per quarter. Turning to Slide 7, you can see FCR's first half results and the comparatives. I'll be brief with two points. The REIT generated solid organic growth of 4.1% in the first half; and secondly, FFO prior to other gains and losses and expenses of $126 million or $0.57 per unit was an increase of 11% over $114 million or $0.51 per unit in the first half of last year. Moving on to our operating performance metrics on Slide 9.
The portfolio rounded out Q2 with an occupancy of 95.6%. This level is consistent with 95.5% at Q1 of this year and is 30 basis points lower on a year-over-year basis. During the second quarter, we had 52,000 square feet of tenant possessions set against 112,000 square feet of closures. In addition, we had 84,000 square feet of leasable areas subject to closures for redevelopment. Most of this or 78,000 square feet was at Cedar Bay in Toronto.
Moving to Slide 10, we turn to the subject of leasing velocity. On this front, the Q2 cadence was good, while the spreads were very good. Q2 renewal leasing volumes for 510,000 square feet, this was down from an exceptional Q1 in which velocity was 838,000 square feet. On the other hand, it was ahead of 452,000 square feet of re-leasing activity in the fourth quarter of last year. Q2 renewal leases were affected at an average increase of 11% when measuring the first year renewal rent of $21.12 per square foot relative to $19.02 per square foot on the final year of the expiring lease.
Including new leasing for future possession, total Q2 leasing velocity at FCR share was 691,000 square feet. And on a platform basis, total Q2 new and renewal leasing volume was 818,000 square feet, which is the number that Adam mentioned earlier. As referenced on Slide 10, our average in-place portfolio net rents reached $22.72 at June 30 of this year. FCR's in-place net rent per square foot continues to make new highs. Growth during Q2 was $0.17 per square foot during the quarter, and on a year-over-year basis, it was $0.63 per square foot or 2.9%.
The year-over-year growth was driven by rent escalations and renewal lifts, which provided 68% of the growth. If we add in the impact of new tenant openings net of closures, the total contribution to growth increased to more than 80% of the $0.63. Slide 11 provides distribution payout metrics on an FFO and AFFO basis. In Q2, our AFFO payout ratio adjusted for OGLE amounts was 44%, three percentage points lower than Q2 of last year. On Page 12, we continue to provide our adjusted cash flow from operations measure.
Recall, ACFO is calculated quarterly, but the payout ratio is derived on a trailing 12-month basis. Our Q2 ACFO was $76 million, for the first half of the year was $119 million. Both were higher than their prior year comparatives. With trailing 4-quarter ACFO of $251 million relative to $95 million of cash distributions, the ACFO payout ratio was 38%. This seems like an appropriate juncture at which to touch on the subject of net asset value.
Our net asset value per unit at June 30 was $24.46. This was a decrease of $0.09 per unit or 0.4% relative to March 31. The change in Q2 NAV had three major components. The first is a $109 million fair value loss on investment properties. I think it goes without saying, but to be totally clear, this reduced our NAV.
The impact was $0.49 per unit. Our Q2 valuation approach was property specific as opposed to a more broad-based or blanket change in cap rates and discount rates. In the quarter, there were actually $13 million of aggregate fair value increases on properties, but these were more than offset by $122 million of gross fair value losses. Second influential factor behind the change in our Q2 NAV was our NCIB. We believe that repurchasing our units at a deep discount offers compelling risk-adjusted returns and the activity supported our NAV by $0.19 per unit in the quarter.
And the third factor was our low payout ratio. Retained cash flow after paying our distributions plus other gains also added approximately $47 million or $0.21 to our Q2 NAV per unit. Providing an update on capital deployment, as summarized on Slide 13, we invested $38 million into development, leasing and residential development during Q2. Most of this capital was invested into assets located in Toronto, Montreal and Vancouver. Through the first half of the year, total CapEx was $72 million, including $45 million into development and residential inventory.
We've previously discussed expectations for development expenditures, including investments into residential inventory to be within the range of $150 million to $200 million for the year. Mostly due to project timing, we are now guiding towards investments within the range of $110 million to $150 million this year.
In addition to investing directly into real estate assets, of course, we also invested indirectly into real estate assets at what we see as a deep value investment through our normal course issuer bid. During Q2, we repurchased 4.6 million units for a total investment of $71 million. Turning to financing activities on Slide 14.
During Q2, we arranged $310 million of first mortgages secured by two properties. FCR's share of the loan balances was $133 million. The loans included a $160 million 4.82%, 10-year fixed rate loans secured by King's Club Residential, that was funded on June 9. We also secured a $150 million, 4.96% 2-year fixed rate loan against Station Place funded on June 17. FCR had previously hedged its interest rate exposure on 100% of the Kings Club residential financing at our share.
That lowered the effective cost of the funding on the 10-year loan to approximately 2.9%. On Slide 15 of the presentation, you'll see a summary of some of our key debt metrics. FCR continues to demonstrate stability and strength in key balance sheet metrics. At June 30, total liquidity was $818 million. Excluding construction facilities, quarter end general corporate liquidity was $665 million.
The REIT ended Q2 with a sizable $7.1 billion pool of unencumbered assets, albeit down from $7.4 billion at year-end 2021, specifically due to the recent mortgage financings. These conclude my prepared remarks.
I will now turn our call to FCR Chief Operating Officer, Jordie Robins, provide some commentary on property investments, operations and development.
Thanks, Neil, and good afternoon.
As you've heard, Q2 was a very solid quarter with meaningful core FFO growth, same-property NOI growth and lease renewal growth. The continued progress in these operating metrics, along with the advancements we've made with our development pipeline, highlight the strength of our high-quality grocery-anchored portfolio and its prospect for growth as we look ahead. Let me start today discussing the results of our leasing program in Q2 as it's the best leading indicator for our business. In Q2, we completed 818,000 square feet of leasing.
This leased area comprised of 628,000 square feet of renewals and 190,000 square feet of new deals at 100%. This represents a 100,000 square foot increase in new deals over Q1. Our focus is, as it always has been on high-grading and improving the merchandising mix in our centers. Some of the notable new large space deals we completed this quarter include a 60,000 square foot Canadian Tire lease at Stanley Park in Kitchener. Canadian Tire will pay market rent with escalations through their term.
They replaced the form of 54,000 square foot Walmart who paid a flat and well below market rate -- market rent. We also completed a 17,000 square foot lease with Ashley Furniture at Fairway Mall in Kitchener. Their presence at the center will support and strengthen the tenant mix and expand its geographic trade area.
In the former Anthropologie space in Yorkville, we entered into a 14,000 square foot lease deal with another renowned -- to be announced international fashion retailer. This exceptional retailer chose Yorkville for its first Canadian location based upon the luxury brand co-tenants, including our recently announced Balenciaga deal that we brought to the market.
Essential retail in our portfolio continues to outperform across the country in terms of the number of renewals and the percentage increase in average rents. During the quarter, we renewed six grocery stores and 37 medical, QSR and personal service users. As Neil mentioned, the renewals we secured this quarter were strong at 11% and just under 13% if one excludes all fixed rate renewals. Our focus remains on increasing these spreads, both in the first year of the lease and over the lease term of the leases. This strategy has resulted in an average rental rate growth over the term of these renewals in excess of 13% and almost 16% on all non-phased renewals.
The quality of our assets, along with the broader impact of this strategy have positively impacted our average rental rate per square foot as well, which this quarter grew to a new all-time high of $22.72. While our occupancy rate of 95.6% is below our Q4 2019 all-time high, it remains in line with our 95.8% 10-year average.
More important, it of course does not account for committed deals or deals under negotiation, specifically, we have a 1.2 million square foot leasing pipeline made up of new and renewal lease agreements under negotiation and executed leases where the tenant is not yet in possession. In time, as this pipeline matures and converts, it should have a positive impact on both our occupancy and our FFO. Turning to investments.
It was a very quiet quarter in terms of completed transactions. We purchased a small but importantly, $3.5 million strategic or a tuck-in asset that forms part of our assembly on Montgomery Avenue in North Toronto. We will complete the 13 property assembly when we closed the final property in the fourth quarter this year. We also sold a 40,000 square foot two tenant property in Edmonton, for $10.25 million at a premium to our IFRS value. As set out in our disclosures, we still have $243 million in assets held for resale.
So while closing on transactions this quarter we're limited, we have been busy moving other disposition opportunities forward, and we'll share details with you on this work when appropriate. Finding compelling investment opportunities continues to form an important part of our business, while always a challenge, we have an ability to surface and unlock value that others may not be able to see or to underwrite.
We possess this ability because of the depth of our retail relationships and our experience. In 2021, for example, we purchased a single-tenant asset in Central Toronto based on what some considered was an aggressive cap rate for the income in place. However, we view the rate for the lease, which was set to expire in 2025 as meaningfully below mark.
Given the site's proximity to a new LRT station, we also saw the near-term development potential of the site to the extent we didn't come to terms with a tenant on a new lease rate. This past quarter, we renewed this lease early and effective April 1, 2022, the tenant began paying market rent. Now as a result of this early renewal, the unlevered yield on our investment increased by over 200 basis points. We're now working on executing other opportunities that we had identified to enhance the potential yield even further. It's this ability to find real growth and to create value that differentiates FCR.
It's also why in this environment, we remain opportunistic. Our development team has been very busy this past quarter as we continue to advance entitlements for the 24 million square foot of incremental density in our pipeline. This density is primarily residential and once approved and developed, it will support and grow the neighborhood in which we've invested. The most compelling aspect of our development pipeline is the flexibility it affords us. As density in our pipeline is approved, we can either crystallize its value by selling a partial or a 100% interest, develop the density as part of our active development program or simply hold on to it and continue to benefit from the income in place.
This optionality is even more important in the current environment. To date, we've submitted for entitlements on 16.4 million square feet of incremental density, representing just over 70% of our pipeline. This quarter, we secured entitlements for 240,000 square feet of primarily residential density at Olde Oakville, directly adjacent to the Oakville GO station.
This quarter, we also submitted an application for 236,000 square feet of residential density on our Montgomery Avenue property in Toronto that I mentioned earlier. This property sits adjacent to our approved two Tower Yonge and Roselawn development property and will no doubt deliver synergies given this proximity.
For the balance of 2022, we're gearing up to submit for another 1.3 million square feet of principally residential density. Today, over 8 million square feet of our development pipeline is now entitled with a further 1.2 million square feet of approvals expected by year-end 2022. But submitting for entitlements is only the first step. We've been able and continue to execute on our active development program. Specifically, 200 Esplanade, our 75-unit rental building in North Vancouver is progressing and on schedule for a 2023 delivery.
Construction in the former Walmart space is underway at Cedarbrae Mall in Toronto. Excavation is nearing completion and concrete forming has begun at Edenbridge, our 209-unit condominium development located on our Humbertown Shopping Center lands. 88% of these units at Eaton bridge are sold. Shoring and excavation at 400 King Street West, our 460,000 square foot retail and residential condominium development is underway, where 97% of the units have been sold. Demolition of the existing structures on our 138 Yorkville development site and our 510,000 square foot retail and residential rental project at Yonge and Roselawn are also both underway.
While significant in scope, we've insulated ourselves well on most of our projects from the impact of the current inflationary environment. On our high-rise projects, we've secured construction financing and have already awarded 65% to 90% of our trade contracts and so have fixed a large portion of our costs. We've also awarded 100% of the trade contracts and our two active retail projects at Stanley Park in Kitchener and Cedar Bay Mall in Toronto. We're further protected given the bulk of our pipeline as residential rental in Ontario and Vancouver. These markets are supply constrained and seeing strong rental velocity and growth that serves as a hedge against the current cost inflation and as a safeguard for related development profit.
In short, Q2 was a very solid quarter, highlighted by strong core FFO growth, same-property NOI growth and leasing spreads. It was a quarter that once again demonstrated the strength of our portfolio and the strength of our team.
And with that, operator, we can now open it up for questions.
[Operator Instructions] And the first question is from Tal Woolley. Please go ahead.
Hi, good afternoon. I'm just wondering if we can talk first about CapEx. So you've sort of scaled down your guidance for this year. If we look -- if you're looking forward into 2023 and beyond, would you sort of expect that sort of $100 million to $150 million envelope to be the right amount? Or if we're thinking out further, we should think sort of more in that $200 million range?
Tal, it's Neil. I think you should probably anchor your midterm assumptions around that $200 million number. There's obviously a bit of pushback in terms of the timing this year, but think about $200 million annually as you look out to next year and beyond.
Okay. And then with the distribution going back up next year, I'm just wondering then should we -- what sort of quantum of dispositions then should we be expecting that at that point on an annual basis?
Tal, great question. Again, at a very high level, I think it makes sense to think about the disposition program roughly matching the investment in development. What we do expect to generally shift over time, however, is as you know, the character of those dispositions. We spent a long time or a number of years now gaining quite a menu of entitled properties from a density perspective. And so we would generally be expected to be mining more of that density value out of the portfolio over time.
Okay. And then just on leasing costs, and I apologize, I haven't had time to sort of run the numbers myself here. So I'm asking maybe something that's relatively obvious. But just on leasing costs, like has the cost of leasing changed at all like dramatically through -- or sorry, I shouldn't say dramatically, but has it changed much through COVID, pre and post COVID, how you're like -- or is it -- has it remained pretty steady?
Tal, it's Jordie. I would say to you, it's remained pretty steady. We don't see any significant, in fact, really any differential from pre to post-COVID.
Okay. And then on the Amberley acquisition, can you give an estimate of the price per square foot paid?
Yes, it was around $450 a foot on a price per square foot basis.
And fair to say there's some redevelopment plans along with that?
So when we underwrote the asset, we identified multiple avenues to increase NOI and value. Redevelopment would be down the list in terms of the opportunities we see. There's some near-term stuff that we think we can execute well before any material redevelopment is required. So I would say it's more of a long-term element of the transaction of the property. And yes, I wouldn't expect anything material in the short term from a redevelopment perspective.
Okay. And then just finally, the weighted average term on your fixed cost debt, it's sort of dip below four years here. I appreciate the debt capital markets have provided, we're asking you a lot of questions at this point. But how are you sort of thinking about managing term right now versus costs when you're refinancing?
No, another good question, Tal. To put a bit of context to that shortening of course, it's been largely a function of the company selling more assets than it's acquired. So that process has naturally resulted in us paying off debt and shortening the term.
I would say we're at a point sort of where we don't anticipate that, that term will continue to shorten and that we will be looking to do some financing before we approach year-end, and we'll probably be in the 7 to 10-year range on that financing would be our general expectation.
The next question is from Dean Wilkinson. Please go ahead.
Thanks. Afternoon, everybody. This probably goes into Neil's wheelhouse. On the NAV, Neil, those components, how comfortable are you recognizing it was property specific, but the overall cap rate is still at 5. How comfortable are you with that number sort of given where historical spreads are and given what we've seen in the bond market? And then the second part to that is, of the $109 million that was the fair value write-down, was that portending some negative same-property NOI? Or was there some math around that 10 basis point increase in the discount rate.
Well, Dean, there was a lot of math in there. That's the way property valuations tend to work. Maybe to give you a little bit more context, firstly, I did reference the fact that it was not a broad-based or blanket change. It was asset specific. I did mention that on the downside, sort of the gross fair value markdowns were $122 million.
And we won't talk about specific assets. What I'll let you know is that 80-ish percent of that $122 million of fair value markdowns probably was attributable to 10 assets. And in those instances, some did have some cash flow revisions as it related to estimated stabilized rents or time to lease or capital to lease, along with some changes in discount rates and cap rates and some were -- simply were more cap rate and discount rate related in terms of the valuation changes.
And then you're referencing those off of -- I mean there's an absence of transactions. So sort of how are you just sort of backing into the metrics that you used there?
Yes. So obviously, what you're pointing to is the great challenge of the hour for all real estate companies that report on a fair value basis. And so I think what we really did is we went through the portfolio with a critical eye, understanding that it's a little more challenging today to be very precise about values in general. And in doing so, as I indicated, there were 10 assets that accounted for the bulk of the adjustments.
All right. That's good. Just switching over to the debt side of things, and I guess you've sort of said, given the current environment, the debenture market is not sort of -- in your future. How are you looking at sort of dealing with those debentures as they come up? I mean you've got 2-250, something like that at the end of the year, another 300 next year.
I mean, you can't put a single property mortgage there. Would you be looking to finance that off of sort of short-term credit facilities then terming out the debt on an individual property basis or doing some kind of cross-collateralized debt or like just how are you going to approach that?
Yes. So principally two ways in the short term. Jordie made reference to our held-for-sale assets, so that's a meaningful source of capital. And as indicated in our late May press release, we clearly indicated our preference for the mortgage market given the spreads in the unsecured debt market today. So we were active in the mortgage market recently.
We see very strong lender appetite for assets that are of the character and quality owned by FCR, i.e., principally food and drug anchored community shopping centers. And so it's our general anticipation that we will be into the market as we go through the back half of this year seeking some mortgage financing.
And those high 4s are still indicative of where you think you could put that debt on?
Yes. So Again, I'll give you some very high level indicative numbers. If we think about a 5-year or a 10-year government of Canada bond today, the yield on the same -- is the same on both of them in about 2.8%, very roughly. And obviously, this would end up being asset-specific and LTV specific. But today, we should be thinking probably by the spread of 175 for a 5-year and maybe 200 basis points for a 10-year. So that gives you an indication as to where those mortgage rates would likely be.
Well, it's cheaper than it was five weeks ago already.
The next question is from [indiscernible]. Please go ahead.
Hello. I wanted to drill into the large decline in property operating costs quarter-to-quarter. So they were down by $3.6 million quarter-on-quarter to $71 million, of which $1.1 million can be explained by the 3-year tenant recovery. And is the remaining $2.5 million decline structural in nature? Or is there timing of approvals you need to consider? And was there anything else that would be required to adjust?
Thanks very much for your question. I really apologize. We didn't fully get it on our end. So maybe if you don't mind repeating the question perhaps a touch more slowly.
Yes, sure. So I wanted to drill into the large decline in property operating costs quarter-over-quarter. So they were down $3.6 million to $71 million, of which $1.1 million can be explained by the prior-year tenant recoveries. And is the remaining $2.5 million decline structural in nature? Or is there timing of accruals we need to consider? And was there anything else that would require us to adjust that figure on a run rate basis?
Yes. Okay. Thanks, Victor. It's Neil. I think we got that. So the answer is there is nothing specific that you should think about adjusting. It's probably just timing and accrual-related. Having said that, the $1.2 million or whichever number that you referenced there, you're correct in that there was a prior period adjustment as it relates to CAM. So you can adjust for that.
Yes. And regarding your assets held for sale, I know you touched upon that a bit. But how would you characterize your appetite and ability to sell assets today versus three months ago? So how market looks like now? And when can we expect that these assets will be sold?
Yes. Look, it's a very good and timely question. Our appetite remains the same. The environment is slightly less constructive today, but still constructive. And we've been very clear, we've gone through a major portfolio transition over the last three years.
We've sold about $1.5 billion of assets or 15% of the total portfolio while at the same time, adding about $1 billion. So we're a lot happier with the portfolio today when we look ahead. And so our pricing expectations are also very high. And so our appetite remains the same. It will be very important for us to achieve pricing that we're very happy with.
We think that's still possible. But we acknowledge it will be slightly more challenging in this environment than, say, several months ago. So good news is we're still active on several files at price points that we're satisfied with. And so we'll continue to work on those and hope to get them done.
Got it. Yes. And lastly, in terms of your IFRS value, can you remind us of the magnitude of the difference between Q2 '22 NOI run rate and the NOI using your IFRS value? And also, would your stabilized cap rates incorporate actual acquisition activity? Or is it more nuanced than that?
So in terms of the stabilized cap rate, no, it does not assume acquisitions. So it's strictly limited to the portfolio that we have in place during the reporting period or at the end of the reporting period. The first part of the question, Neil, do you want to take that?
Yes. Sorry, could you specifically repeat the first part of the question about NOI?
Yes, sure. Can you remind us of the magnitude of the difference between Q2 '22 NOI run rate and the NOI used in your IFRS?
I don't believe we've specifically disclosed that difference in the past.
[Operator Instructions] And the next question is from [indiscernible]. Please go ahead.
Hi, everyone. Thanks for taking my question. I'm just talking on behalf of Sam from TD. On the NCIB, that was a fairly fast pace of repurchases during the month of June. If your trading price doesn't rise, is there anything holding you guys back from maintaining that pace? And is there any limit on the leverage impact you would allow?
Hi, it's Neil, again. Thank you for the question. Look, I think standing back, what you should basically think about is it's a three variable equation insofar as, firstly, we do have objectives in terms of maintaining a leverage ratio that we described as being in the mid-40s in terms of debt to assets. So within the construct of that, more asset sales versus fewer asset sales will result or are likely to result in more unit repurchases versus less. And then, of course, the other or third variable is the unit price itself.
So I think that's the sort of framework by which to think about it. As you've all seen, we're making our monthly filings on our NCIB activity. So there will be a filing at this point within a matter of about 10 days.
Just another question. On your 2022 zoning entitlements. I was wondering if you had any reason for that delay. I believe last quarter, it is expected to be around 2 million square feet and now it's about 1.4 million. I was just hoping to get some color on that.
Sorry, Gordon. Ask your question again, I didn't quite hear the back end of it.
Yes. So just wondering if there is any reason in particular for the delay in the expected 2022 zoning entitlements. Last quarter, I believe it was expected to be 2 million and it's now around 1.4 million?
Well, I think the first part of the question is we have received some entitlements in Q1. So it would account for some of it. I have to double check the number to be certain, but if there is, in fact, a delay, it would be as a result of a delay at the city, in particular, there's one file in particular, York Mills and our belief was going to get through actually this past quarter.
Okay. And this is my last question. In regards to your Q3 acquisition in Pickering, could you tell us the going cap rate and how you expect it to perform over the next couple of years?
Yes. I mean, look, we typically don't disclose cap rates on acquisitions, but it was a competitive process. Our understanding is there was a cluster of groups in and around a similar price based on conditionality and execution risk, we were selected as the successful purchaser. Due to our desire to allocate capital to our NCIB and for strategic reasons and hopes to grow a new partnership that we started, we did bring in a partner at that market cap rate.
Our expectation is that over the next 10 years, we can grow that yield by roughly 200 basis points on an unlevered basis without the requirement for any redevelopment or intensification, which we do feel the property has the opportunity to do so. Yes. So that's the color that we can provide.
[Operator Instructions] There are no further questions registered at this time. I would now like to turn the conference over to Adam.
Okay. Thank you, operator, and thank you, all of our participants for attending our conference call today and for your continued interest in First Capital. We continue to work hard, and we continue to look forward to updating you on our progress in the months ahead. Thank you, and we hope you enjoy the rest of your day. Bye-bye.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you all for your participation.