Q2 2021 RioCan Real Estate Investment Trust Earnings Call
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Yeah.
Good day, ladies and gentlemen, and welcome to the real can real estate investment Trust second quarter 2021conference call. At this time all participants are in a listen only mode. After management's presentation. There will be a question and answer session and instructions will follow at that time.
I would now like to hand, the conference over to Jennifer suits Senior Vice President and General Counsel you may begin.
Thank you. Good morning, everyone of my name is Jennifer <unk> Senior Vice President General Counsel and corporate Secretary for Rio can before we begin I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on Rio Hence website earlier this morning before turning the call over to Jonathan.
I'm required to read the following cautionary statement and talking about our financial and operating performance and in responding to your questions. We may make forward looking statements, including statements concerning <unk> objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs plans estimates intentions and similar statement.
Concerning concerning anticipated future events results circumstances performance of our expectations that are not historical facts. The statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward looking statements and discussing our financial and operating performance and in responding to your questions.
We will also be referencing certain financial measures that are not generally accepted accounting principle measures GAAP under Ifr F. These measures do not have any standardized definition prescribed by IRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers non-GAAP measures should not be considered as alternatives to net earnings are comparable metrics determined in accordance.
With IRS as indicators of REO gains performance liquidity cash flow and profitability Rio Can's management uses these measures to aid in assessing the trust underlying core performance and provides these additional measures. So that investors may do the same.
Additional information on the material risks that could impact our actual results and the estimates and assumptions we apply the making these forward looking statements together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended June 32021, and management's discussion and analysis related thereto as applicable together with Rio cans most.
And annual information forms that are all available on our website at www Dot SEDAR Dot Com I will now turn the call over to Jonathan.
Thanks, Jennifer and thanks to all of you for joining us today.
The real pleasure to be here on person with real camps fully vaccinated senior leadership team for here in 1 boardroom and were setting the tone for a safe return to a more normalized environment.
I'm impressed by the innovation the drive and commitment to our business shown every day by the executives in this room and also the people, but they leave the combined strength of our portfolio and our team's expertise has translated into strong quarterly results really demonstrate real cans resilience stability and its <unk>.
The potential.
We delivered robust operational and financial performance in spite of Lockdowns that extended through much of the quarter.
Our performance in my mind with some price of the not surprising when you think about it if youre standing of virtually any prominent intersection or community and Canada's major markets. There is a real Ken property close by now the importance of this well positioned physical space.
Been rediscovered over the past 18 months early conclusions about the struggles of retail of given way to the recognition of the people want more engagement and more control and their shopping experience for.
1 of <unk> struggled with stolen struggled was stolen packages ill fitting online clothing orders ruined parcels of saddam's snow and rain on my front porch and I would tell you that from this I would say the importance of bridging that last mile GAAP between distribution centers and consumers' homes has become critical.
The stores May now operating in different manner, I mean, they are continuously evolving but they are absolutely critical in the delivery chain.
We're helping our tenants evolve their space to move along with these emerging trends and help solidify our REO cans and its tenants place in that last mile delivery chain.
The programs like real can't curbside collect from these are just small examples of this evolution, we intend to continue to formulate new ways to ensure that our properties maintain critical role in the effective and the effects of last 1 on movement of goods between retailers and their consumers.
Rio can properties of our vital component of the communities in which we operate be the grocery anchored open air retail residential or mixed use and we possess all of the tools required to evolve these great properties to maximize long term value for our unitholders as.
As vaccinations accelerating and restrictions start lifting across the country. It's clear the REO candidates emerging perfectly positioned to capitalize on pent up consumer activity that will benefit our tenants and ultimately you our unitholders.
As ever Rio can't story is 1 of the strength stability and value creation.
The Canadian real estate leader in ESG, and we continue to gain recognition for our commitment to responsible growth.
We achieved in the ESG rating upgrade by MSCI are of Morgan Stanley Capital International for the third consecutive year. We earned the 2021 Green lease leader designation and we were recognized as 1 of the top ranked real estate firms and corporate Knights Best 50, corporate citizens in Canada for the second consecutive year.
We progressed, our DDI focus by publishing our inaugural the policy and launching at the scholar.
Scholarship program, we also celebrated private loans with a series of cultural initiatives to drive awareness and support for the LGBTQ2 plus community.
We're going to build on this momentum and we're going to continue to take actions to maintain our status as an industry leader in sustainability.
Now, let's shift the focus over to our Q2 operating results.
We had our best rent collection rates since the start of this pandemic for the total of 94, 9% of our rental revenue collected for this quarter and approximately 95% of july's rents as of yesterday.
Rent collection continues to improve as tenants resume regular business activity.
As of this week essentially all of Rio Tinto tenants are open for business.
Also as we've constantly consistently seen rent collection of improves as tenants received funds from stimulus programs and as our vigorous rent collection efforts bear fruit. So these numbers should change and should improve.
We are well on the path of pre pandemic collection rates.
Tenants are attracted to our exceptionally well located properties and this is evidenced by our ongoing leasing momentum.
Of that and our great leasing team completed 1 for millions of square feet of new and renewed leases this quarter alone for.
For context, our new leasing in the quarter was equivalent to that of the same quarter in 2019, which was of course pre pandemic.
We completed the 100, new deals totaling 372000 square feet and an average rent per square foot of $22.82, which is well above our portfolio average of just around $20 per square foot. This trend really demonstrates our ability to grow rent even in the midst of pandemic lockdowns.
The majority of these new leases were completed with strong covenant tenants, primarily personal services specialty and essentially retailers.
New leasing spreads of 9.2% provided another clear indication of the healthy upside between our average portfolio and market rents.
We continue to see the well capitalized forward thinking retailers are seizing on the opportunity to lease well located space, which of course, Rio Kent has an abundance.
Our <unk> and same property NOI results continue to steadily recover.
They still reflect the direct effect of COVID-19, and pandemic related provisions however, as the pandemic subsides the impact of these provisions will continue to lessen.
At <unk> 40 per unit of <unk> increased by 14, 3% when compared to the same period last year same property NOI increased by 7.8% for the second quarter and it's going to continue to improve as occupancy levels trend back to their historic norms are committed occupancy was 96, 1%.
By quarter end, and we are confident that our encouraging leasing and operating metrics will continue to result in organic <unk> growth.
This confidence is of course, both bolstered by the obvious strength and resilience of our tenant base real Ken generates more than 91% of its annualized rental revenue from grocery anchored mixed use in the open air centers.
The solid tenant base also perfectly positions us for the improvement in growth in all operating metrics as the impacts of Covid diminish.
Turning now to Rio can living and REO cans ongoing developments, so residential projects of really a cornerstone of real cans development programs. So much. So the residential development represents close to 83% of our 41 million square foot development pipeline.
We currently have more than 200 operational residential units across for buildings and Toronto, Ottawa and Calgary.
This growing portfolio was the source of income diversification and NAV growth for the trust.
Our public health measures ease and with that in person tours at our properties resumed this resulted in notable progress at Brio in Calgary, which was 94% leased as of August 4th which is up 20% since we reported in the first quarter.
This is an outstanding result, given that as you may recall real commence leasing of the height of the pandemic.
Pivot and Toronto launched in December of 2020, it's now close to 50% leased and Theres been a dramatic acceleration in leasing activity in the 3 weeks since the province entered the stage III.
I believe that the implications of this recent residential leasing momentum spend really further than our multifamily residential portfolio.
The enhanced demand for urban transit oriented mixed use properties signifies a true validation of <unk> growth strategy and a testament to the strength and resiliency of these communities in which we operate.
Our REO kind of living portfolio continues to expand we recently commenced pre leasing on litho of 210 unit project in Toronto and latitude for 219 of the project in Ottawa store.
<unk>, which is the 61 unit.
Boutique mixed use residential projects rental in Toronto, the little Italy will commence its pre leasing in October of this year.
The opportunity to tour the building late last month, and like all real cash living buildings, the spectacular I mean the.
The spectacular on so many respecting the design the location and the amenity offering.
Every indication that theres going to be strong lease up velocity at each 1 of these sites.
We anticipate the REO kind of living portfolio will include more than 10500 residential units either completed or in different phases of development by 2023, which of course adds diverse NOI and that to our balance sheet. The.
Portfolio includes the 3 condo projects comprising nearly 250 units currently under construction.
The tower use the uptown in Oshawa, and 11 why be in Yorkville are essentially sold out.
Queen in ostrich condos in Toronto launch mid pandemic and its 399 units are already close to 92% closed sold.
These have been tremendously successful projects on which over a 4 year period real Ken we'll see a full return of the capital we invested plus impressive anticipated gains of approximately $140 million.
These gains provide an alternative source of revenue and also serve as the valuable <unk> bridge to supplement our productive core commercial portfolio.
During the second quarter real can also announced a new strategic approach for the development of mixed use residential condo projects.
This is the trust selling the majority of its interest in these projects, while retaining project oversight as general partner and Soul development manager.
This partnership structure enables Rio cancer, Leverages pipeline of prime locations and equally importantly, it's established development platform to efficiently raise capital and also helps us mitigate development risk and earn management fees along with the promote the consistent fee stream of flex the unparalleled expertise in managing the entire development.
<unk> from a zoning all the way through to unit sales.
Converge, which is of 535 unit mixed use residential project located along the Queensway and Toronto marks the first independent condo launch under the real can living banner.
REO gains and mixed use development projects continue unabated through the pandemic and we anticipate completing 590000 square feet of development by the end of this year.
As always we continue to look ahead to ensure growth through sustainable development of <unk>.
Pipeline is zoning entitlements as 1 of the largest in the industry the translates into lucrative opportunities to convert properties to their optimal uses of proven cycle that will continue the payoff in 2021 and long into the future.
We're going to use the SaaS pipeline of air rights and seek out of partners to enhance value reduced exposure and equally important to be rewarded for our deep and experienced development on residential platform through our global fee structures.
Now I'm going to take a moment of briefly highlight our ongoing and very active capital recycling initiatives the.
For the quality of our assets and our established management expertise continue to attract strong valuations and investment from well respected institutional funds and enable us to monetize the value that we've created in our portfolio.
As of August for the total of $420 million of dispositions were closed at a weighted average cap rate of 4.6% the.
Trust further incidents of firm or conditional agreements to dispose of 100% or partial interest in a number of properties for total sales proceeds of an additional $420.8 million, including the recently announced sunlight transaction between.
Between close firm and conditional deals we expect to net proceeds of approximately $841 million.
At an average cap rate of 376% assuming of course that all of these transactions are finalized and the.
These assets range from conventional retail the mixed use the income producing land.
I'm, sorry to non income producing land I should correct myself. These transactions include the sale of a partial interest in development properties or future density and the closing of prearranged <unk> sales, which allow the trust of realized excess density value attributed to the potential redevelopment for highest and best use the volume of deals illustrates the transaction activity in the <unk>.
Retail property market and the strong appeal of our assets to a variety of buyers of the.
Proceeds are going to work hard for our unit holders the capital is going to be allocated towards paying down debt and funding development, which sets us up well for our future sustainable growth.
We also continued to invest on the strength of our team as you know I firmly believe that our incredibly integrated and experienced executive benches of the driving force behind Rio cans, adaptability and growth and I'm happy to announce that we further strengthened the team with the recent appointments to exceptional leaders.
We recognize the importance of the strong brand and the differentiated culture and as such Terry Andrea Anomalous was promoted to senior Vice President of people and brand effect of June of this year, Terry the trusted leader who's been with real Ken for more than 5 years. She has held a variety of roles that include responsibility for marketing communications and most recently human <unk>.
<unk> <unk>, new role elevate sort of our senior management team, which is working collaboratively Coca collaboratively with the team to differentiate our brand and further develop our talent and reinforce the culture of excellence here for you again.
Dennis for Sui will start as <unk> CFO effective September 7th of this year Dennis is a proven leader with the breadth of financial knowledge and relevant experience. His career spans more than 18 years of the depth of experience in financial management business leadership and corporate strategy.
And the finance expertise Dennis is going to be a strong addition to the team in 2 primary areas for Rio Tinto, ESG and people and culture.
He has a firm grasp of ESG and deep knowledge of environmental practices in particular, given its firsthand experience with sustainable technologies at NYU.
Dennis is known to be of collaborative and inclusive leader and I'm confident that this effect of relationship and team building skills will complement our team and further strengthen our connections with the investment community and I am looking forward to introducing him to you all and before I turn the call over to Frank of Smith to discuss the financial performance for the quarter I want to first express.
<unk> and Rio can sincere appreciation Frank has been serving as interim CFO for the entire second quarter per expertise for collaboration her outstanding leadership has translated into such a seamless transition period I'm. So impressed with the acumen and commitment of the entire finance team, which has been led so well.
The by Franco <unk> with that I'll now turn the call over to you. Thank you Jonathan and good morning, everyone.
The progress is being made in moving into the post pandemic environment and we are all delighted to return to our gathering spaces and I note that I certainly hear it well.
Well reopening is well underway and the end of the third.
Third wave of the pandemic of extended lockdown through much of the second quarter as Jonathan highlighted despite this operating environment reopened delivered strong Q2 operating results on all fronts.
Q2, <unk> per unit for <unk> and.
An improvement of 5 for 2014, 3% over Q2.2020.
The main driver of this year over year change, but the lower pandemic related provision of approximately $14 million and we also recognized $2.7 million in the interest cost savings and $1.9 million in higher residential inventory gains, which were partially offset by lower other operating income or other other income pardon me reflecting of fee received in 2000.
'twenty for terminating of for repurchase agreement.
With respect to development. It is worth reiterating the development is fundamental to unlocking the significant value inherent in our portfolio.
Focused on mixed use residential development, our pipeline will serve to diversify our income while addressing the need for housing in Canada.
Throughout the pandemic real Ken's development program continued to make meaningful progress.
We expect development spend for 2021 to range between $425 million 475 million of decline from our estimate of Q2.2021, mainly due to timing.
Looking beyond 2021, our development spend is expected to taper from this level 3.
3 main drivers of this lower estimated future spend include the delivery of a significant portion of the wealth of sharing the staggered nature of our pipeline and sharing of development costs and risks for existing and new strategic partnerships.
As always we take a prudent approach to manage our development program and maintained our plans to primarily self fund development through retained free cash flow divestiture proceeds of strategic partnerships and accelerated capital recycling to condo per townhouse development.
We expect to keep total ire for S value of properties under development and residential inventory combined as a percentage of growth for the failure of assets at about 10% or lower despite the 15% limit allowed under our credit facility and as of quarter end of this metric the 10, 9%.
Turning to our balance sheet, we continue to maintain ample liquidity and as of June 30, our liquidity stood at $1.2 billion in the form of cash and cash equivalents and undrawn committed revolving lines of credit and other credit facility.
Our mortgage maturities for 2021 for $380 million of which only 42 million have yet to be refinanced and we expect to refinance them in Q4.
In addition, we have the large unencumbered asset pool of $8.5 billion on approach share basis, which generated 60% of our annualized NOI and provided to 2.4 times coverage of our unsecured debt as of quarter end.
At the end of the second quarter, alright debt to adjusted EBITDA with 8 set with 9.
<unk> $9.87 times compared to 10 times in Q1, 2021, and this quarter over quarter improvement was largely due to a lower of pandemic related provision.
Debt to total assets was $44.7 million an improvement from $45..3 in Q1.2021 and for these 2 metrics are long term targets remain at 8 times or lower and the range of 38% to 42% respectively.
Rio has successful capital recycling program and ongoing improvements in operations will serve to reduce these metrics in the near to medium term.
Our cost of debt continued low decline with the weighted average effective interest rate of 339% on a pro share basis, which compares to $3.2 2% at year end 2020.
As of June 30th Reopens unsecured secured debt compensation was $54.46 on the per share basis, and we continue to target shifting this ratio to 70.30 overtime, while balancing various factors such as credit rating implications cost of debt debt ladder and liquidity needs.
<unk> is committed to a disciplined approach to managing its balance sheet and capital structure in order to maintain strong liquidity and financial flexibility.
Our approach has proven critical to navigating through the pandemic and we will continue to position real Ken well as we accelerate growth and invest in value creation initiatives for the long term.
As interim CFO and as the pleasure to have the opportunity to work with all of you and I look forward to welcoming Dennis on September 7 and with that I'll pass the tax Jonathan for closing remarks. Thank you. Thanks, so much frankly of the great for the first quarter on the chair.
Now to wrap this up before we turn it over to questions I want to emphasize how proud I am of how real Ken is really navigated. This challenging time, we continue to demonstrate the ability to create exceptional and successful communities in any context would be the urban or suburban commercial residential or mixed use.
As I mentioned on an open this call real candidates precisely for Canadians want and need to be.
We've got enduring strength stability and growth and the strategy to create lasting value for <unk>.
Poised to thrive now that the economy has reopened and I'm optimistic about the quarters and years to come at the <unk>.
Privilege to lead this incredible team and to have us well positioned portfolio to create value for you. Our unitholders. So thank you very much and now we need this team are here to respond to your questions.
At this time, if you'd like to ask a question Chris.
Chris Star 1 on your telephone keypad again, Thats star 1 to ask a question.
Please.
Hold while we compile the Q&A roster.
Your first question comes from the line of Sam Damiani with TD Securities.
Thanks, and good morning, everyone.
Alright.
Yes, Jonathan I think you mentioned the.
Essentially all of the tenants are open today I didn't see the stack for I guess quarter end, specifically, but I assume it's up a little bit from from Q2.
And I'm, just curious with the reopening of the advanced in Ontario, and Alberta in recent weeks and months.
The leasing activity change in turn the terms of.
Tenant composition.
And activity just for actually I just saw the the new leasing volumes were down a little bit from from Q1, which were exceptionally strong, but just curious what the trends are.
Well I can give you a bit of a bit of an overview and then I'll hand, it over to Jeff Ross.
Out of leasing.
But I think we've been consistent throughout since I would say of the beginning of the year of close to the beginning of the year of where I think of lot of our tenants, including the U S. Based ones are seeing opportunity to grow, particularly in the markets where Rio Ken.
And so we're seeing continuous and sustainable leasing momentum in.
And the vast majority of our of our environments, particularly open air and now increasingly urban environment. There are certainly some areas that are still a little bit slow off the mark like office, where in Toronto in particular, there is still a bit of I would say discovery going on with respect to.
<unk> office users need at this point, but we're confident that we're well positioned in the market from an office perspective that will pick up over time, and we're even starting to now see a bit of that momentum take hold and then enclosed malls.
There is some I would say, there's a little bit of.
Of the.
Slowness in the enclosed mall space relative to the open aerospace the gesture of any more insights for Sam but yesterday on the philosophy of meetings with tenants is off the charts right now the biggest thing we're waiting for was that comfort level to get there to actually get tours going on people on the ground.
And we're seeing a lot more of that and we're starting to see that in the very positively for.
Are tenants that we're talking to you again on the U S who are now getting more comfortable kind of booking trips and you know full well that a lot of those guys really need to work.
The asset before they are ready to commit so.
Again, those meetings continue at a wonderful velocity the service commercial amount of deals are going through the roof lot of government tenders of lot of hard goods.
On the food and <unk> as fast as the unit is coming back to US net velocity has slowed there is a good number of people that are ready to pick them up so right now on being very.
The optimistic about what the next quarter is going to bring us into 2022, but if the talk can then turn to conversion of feeling really good going into 2002.
Okay. That's very helpful and then just quickly.
Between Alberta and versus like Ontario, and Quebec, with the sort of different reopening plans on the strategies I mean is there a difference there in terms of.
Kind of tenant leasing velocity is there any is it any meaningfully different in Alberta today.
No I think all 3 of those provinces are responding similarly, and keeping in mind. The we're really in the major markets in those in those provinces in those major markets are exactly where tenants are expressing interest being so we're not really seeing a market difference, we always say the Toronto as always.
Going to have a little bit more action, but there is no market difference over the last few months and interest between those provinces.
Okay. Thank you I'll turn it back.
Problems and have a good day.
Your next question comes from the line of Mark Rothschild with Ken Kure.
Hey, Mark Hey, Thanks, Good morning, everyone. Just the kind of following on what you were discussing with the Sam the retention rate seems solid yet you still classify about 20% of so of your tenants as vulnerable how should we read into what that means and are those tenants in the.
Bucket that would not be.
You did not retain and how would you expect that the trend going forward with those tenants.
So my view would be the out of the any tenants that we would of loss I would say the and I don't have the science in front of me, but the vast majority of those would have been from that category.
And Thats some of Thats by design quite honestly, we're not working hard to retain some of those tenants that we do believe is sort.
The vulnerable subset.
And that.
That category is the same as it was during the pandemic and I would say that over time the concern surrounding some of those users will dissipate because they are starting to prove that in this environment. This post pandemic and I'd say that with a lot of hope, but also a lot of confidence in this post pandemic world that they will again regain.
The strength of meet some of those attributes that we felt needed to place them in that category of examples would be like do I think the gyms will remain a.
A very problematic use in the future no I don't I think we're all confident that for the Canadian Society will absorb the the need for Jim again.
And there's certainly a lot of restaurants that are in that category as well because of the recovery. They were close but I think it's probably not the recovered during the pandemic. They were closed but I think of as restrictions ease and theres a lot of those tenants that are very well positioned on their businesses are strong. So I think they will move out of that category over time, but just the out of prudence in on.
An abundance of of.
Net of conservatism, we've left the categories in the on the tenants within the pretty much the same.
Because we've just even into Q2 a lot of the more closed for business.
Okay, Great and then maybe just 1 more question congrats on.
Of the strategy to sell the majority of condos.
On the development project and retain the management and earn fees that way.
To what extent of that driven by.
Being more careful with your capital to reduce leverage or that's a strategy that you. Just think is most effective for Rio Ken obviously those projects are in most cases very profitable and you have the capacity to fund them on your own.
Well I think there's a number of reasons that stand behind that strategy Mark.
1 of them as you suggested certainly.
The.
For the diversification of risk.
We also have certain limitations from a from a shift of perspective as to how much condo we can do.
But also.
Something where we think we can really lever our expertise and garner recurring of sustainable fees.
So then this is kind of lumpy condo games, which will still be part of our balance sheet going forward, but we feel this is a way to diversify and prolong and sustain the income flow.
And a little bit more of a predictable and meaningful manner.
We've got some great expertise share, we want to leverage that and get paid for that expertise. So we really do like the plant for that reason, but theres a number of others that the stand behind it as well.
Okay, great. Thanks.
Your next.
Question comes from the line of Tal Woolley with National Bank financial.
Thanks Al.
Good morning.
Let's start out with a more simple housekeeping question first just to on.
The credit rating.
Theres, obviously been they've all of all of the ratings agencies of kind of got a little bit more active over the last couple of months.
For you guys.
What sort of of the debt numbers, you need to hit with S&P.
S&P.
The sort of maintain the maintain the current rating and by when do you need to hit them.
Well I.
I mean, there are sort of paying attention to us, but that is sort of cash that in stone, but I think what theyre looking out of the trends and they really do favor the trend in our net debt to EBITDA that as.
As well as our capital structure, putting more of an unsecured over secured debt and I think of those trends that really have them call. It at Bay right now on quite satisfied with where we're going but we're we're in close contact with Intel.
Letting them know, what our pipeline looks like and where our balance sheet is going based on our on our best Prognostication.
So we havent really disclosed exactly what kind of guidance <unk> given us, but we're feeling confident that we're that we're trending in the very much of the right direction.
Okay.
I'm, just kind of 2 larger sort of strategic question. So.
We've seen some of your peers like Crombie talk about utilizing their open air centers and different ways. They are going to be taking the.
Announced 1 project, where there can be overhauling of tenant on anchor tenant on an open air center in transforming that more into logistics space. Obviously is 1 of the largest.
The owners of open air centers across the country like have you thought about what are some of the new uses for that format to I know, we've talked a lot about mixed use.
A big driver for real can but im wondering if.
Youre thinking differently about open air centers going forward too.
While we think about it on all of the time and what I would suggest to you tell is that the last year and a half has taught us that our existing uses on a lot of the incentives are actually very relevant, particularly grocery anchored centers and the truth is we're at 96, 1% occupancy now and Thats trending up and I think we really have gone beyond the trough, where we were last.
Here. So it's not like we have an abundance of opportunity I mean tenants conventional retailers really very much favor of being in our centers. So.
I would I would not want to forego a great conventional use to put in on all we use that we actually don't have a lot of understanding about like like fulfillment that being said, we're always looking for opportunities within our centers that will drive traffic and so when it comes to things like medical uses or if there are.
Sort of distribution methodologies, we can use like putting in some sort of micro fulfillment as long as it supports and as of the success of the center. We are considering it and we have our tactical out across the country and beyond looking for opportunities to better our shopping.
Experiencing the better the experience for our customers, who are our tenants and if that means putting on micro fulfillment depot or something like that and some of our shopping centers as the opportunities there and we can manage it effectively and its a good allocation of our capital then yes, absolutely we're going to consider but we're not really coming out with the blanket statement, saying that.
By 2020, we want to have micro fulfillment as a fundamental pillar within our business plan I think that's a little too broad of statement. What we are saying is that we want to improve and diversify the use of within our open or open air centers.
And we're going to look at all different types of uses that improve the experience and of course of the cash flow in the shopping pattern.
The long winded answer, but hopefully that helps you no that's good.
Perfect color.
And then just I guess lastly on real can living.
Youre going to be sponsoring youre sort of first independent development.
The portfolio is going to scale up over the next years for the size of some of the publicly traded players that we have out here in Canada now.
And there is such a cost of capital differential and I'm, just wondering like over the longer term as that business scales up is.
<unk> stock the right container for real Ken living over the long haul or should the.
Should you be considering other maybe other other ways to maximize the opportunity to get a better cost of capital for that platform.
I think for now given the scale of it relative to the rest of our balance sheet. It certainly it fits within the Rio can mothership.
At a certain point when we achieve a certain amount of scale, we'll consider whatever creates the total unit holder return for our constituents.
And then on the condos I mean, thats, the rental side and on the condo side I really do favor our new structure, where we really are taking a minority interest, but overseeing the development and getting paid for that the process and I think that is.
I hope is that investors will see value in that proposition and really buying for the fact that we can create value through those non vehicle, but ultimately what our job is of the management team is to create total unitholder return and if we're not getting recognized for the multi res platform of mixed use platform that we're creating here and really kind of living.
Then we will figure out ways to get maximize value out of it but.
But thats something were going on.
Assess as we.
We maintained some scale are retained from scale. So that's that.
Definitely the beauty of it is that the more of these types of assets, we build and own the more flexibility on the more avenues are available to us whether it is hanging onto it within the REIT, which again my mind share to create some multiple expansion and diverse and very solid income or doing other things with it I think we will have a lot of a lot of.
<unk>.
And just lastly on the operational side for real Ken living like as you build the sub I can't remember exactly your you were using an outside partner for property management I believe on the initial sort of buildings.
Is there a point at which you look at bringing that in house and trying to brand of little bit more aggressively to the consumer.
So at this point, we don't have the scale the justify it it's something that we'll look at in the game right now we've got excellent third party managers and in some cases, there are actually partners and very much aligned with us and the ownership of the buildings and we're seeing great results out of our out of these managers I mean really we think they are best in class and representing the REO.
Kind of living brand very well.
But we've built up of really good asset the management function that oversees those managers and we've now expanded the breadth of Rio can living to include all of the skills and capabilities that will allow us to build and oversee ownership of these things, which John Ballantyne is overseeing and I think.
Built up that team and a really effective way, but in so far as the property management goes like I said at this point, it's not something that we're considering.
With any real bigger I think it's something that if we get certain.
Certain amount of scale, it's something we would consider.
Perfect. Thanks, very much of it no problem to all of a great day.
Your next question comes from the line of Ginnie, MA with BMO capital market.
Thank you on demand everyone. Good morning Janet.
A quick question on the condo development JV I'm wondering if the partnership structure.
For our partners.
More of the blueprint.
Maybe it's lots of different partners.
When you look across the portfolio, how do you select which products to be putting on.
The JV.
Investment that condo sales rainfall.
So the.
The answer to your first question is the ladder, meaning that it is it's a prototype the investors that we have in the first deal at birds are I mean again, they're very logical to come into other transactions that we do and to be limited partners and a few of these projects, but it's not a it's not like an open ended or closed ended the fund.
These are these are 1 off partnerships created for each individual transaction and with respect to your second question. It's really I mean, it's the property by property assessment, whether we do it is condo or rental and if we choose to do with condo.
Theres nothing etched in stone, suggesting that we will always go with this methodology in the structure, but we do believe that the is the right alternative for our unit holders and that's something that we will likely pursue whenever given the opportunities. So when we do of electrical condo.
Quite likely that we will go with this with the structure.
Okay. So theres no obligation to go back for the same partners.
How do you some of the partners.
For the process, and then and as of the bucket.
Bucket of Investor that is interested in the peak given that it's a bit of a limited life.
Project as opposed to building lots of of dental.
For sure I mean, multi res youre getting a lot of interest as you know as you saw from our deal with sunlight biggio from that institutional set who simply wants the recurring income and they're very much in line with us from that view just to hold it forever and ever maximize the income we can get out of the project, whereas the architect for the LP investors on our cash.
Condo are looking for the IRR, driven return that hasnt exit and that that to us.
David very much of a different profile than who we are seeing in partnering with on the multi gross rental front.
So I think that and the good news is that there are many entities out there who are very much interested in these types of condo developments, particularly when they are aligned with a well capitalized and increasingly more experienced team like we have here of REO count.
Okay great.
No.
New prototype.
The elevate door develop.
The development pipeline at all on yes, that's a nice at.
The current content.
Hopefully, it's sort of like them.
The 80%.
The expand but you can put on.
The clients.
So.
You talked about utilizing of bandwidth.
Exactly how much volume book half for.
The additional projects on that.
Perfect.
Yes, I mean, we look ahead. We now look ahead of very thoroughly 5 years, and we get a sense of how much capital we're going to allocate towards developments. We of course want to make sure that we are sustaining.
<unk> improvement in our multi reservoir rental units and then we can get a sense of how much we want to allocate to condo projects, because we have a number of viable potential condo projects on our pipeline.
Once we've done that of course.
The last few 1 of each project the more projects you can do so the <unk>.
Short answer to your question is yes, it does increase our ability to do more projects.
<unk>.
So I think that's part of the benefit.
Okay on the bandwidth allows for that expansion at this point.
Yes.
Great.
With respect to <unk>.
On the non core assets, whether they get the molecule that the secondary tertiary market assets can you talk about whether or not there is much of the market per barrel and at this point given that whole net of of how much overlap.
The between the 2 different buckets of less than 10% of the holding.
For us.
Can you just sort of let that none of our grind down ex U.
The other Avenue.
Yes.
So what I would say their journey is debt free.
First of all there is a market for it as we demonstrated by a few transactions that have been done over the course of the loss.
5 years 6 months.
But what I would say is now the we're well over 90% in major markets, which is always our objective it becomes less of the question as to whether they are in the secondary markets and more of a question of are they performing well are the growth prospects or are they assets that simply would be better in someone else's hands and we are on now blind to the.
Fee, meaning that we would just as quickly felt something in a major market than we would in the secondary market. If it is underperforming and we don't really have an answer as to how we can have it become a growth of.
Growth creator.
We are always looking to improve through subtraction, and what I would tell you from our experiences is yes, there is increasingly improving market for those types of assets.
And then my final question is with regard to the parking revenue.
With the still tracking well below 2019 levels I'm, just wondering is it weighted towards.
On the office driven parking or retail traffic.
We need to see.
Got it sort of path.
On the level I'm going to hand that over to John Bonn to address the.
Yes. It is really tied more to the office components of the retail component of ex Gees properties, we expect to add back to office programs kick in.
For the various companies across our portfolio, we will see a market the increase in the program revenue you're right. They are probably about 40% now of what they typically are so we expect through the end of the third quarter and started the fourth for them to ramp back up.
With probably back to full capacity in the new year of 2022.
And as the.
The only parking or is it more committed municipal parking.
The committed parking has held up for the most part of it's more daily market.
Okay great. Thank.
Thank you very much everyone.
Thanks, John do you have a great day.
Your next question comes from the line of Howard Leung with Veritas investment.
Thank you good morning.
Just wanted to turn back to the real Ken Levine I noticed that a lot of interest.
To all of the can.
Can you give us an idea of the.
On the typical fee structure and what what.
It'll be based on what it's looking like at least for the bridge.
Yes.
So for for so Youre talking about just the condo LP because real kind of living is obviously correct kind of for breath and just the condo LP.
It's really quite simple I mean, we get work fees for development management.
We do I mean, when we sell the land 2 of the limited partnership there <unk> there was a.
The capital creation through that sale.
But the the fees are really work fees and.
Oversight of.
If we take care of financing there's fees for financing so very much of a typical standard the fees and then there is also a promote structure. We're assuming we clear our hurdle on IRR for the project, we get in the outside or disproportionate amount of the.
Of the proceeds from the sales of the ultimate units.
Andrew I don't have the has anything to add to that no thats exactly what it is where feasible.
Right right, yes that seemed to make sense.
For for the involvement that you guys have.
And just maybe on the on the accounting for the future.
Future partnerships.
Do you consolidate them.
Or because you're on the minority interest.
You want just kind of 1 of the reminder on that.
Yes, good morning.
That particular store.
<unk> share is.
The account it.
Just given the criteria on how complicated kind of this analysis can sometimes be but in particular that 1 is.
The joint venture an equity accounted.
Right, but I guess it yes.
And again, it will depend on the circumstances and for future projects whether the.
Consolidated order for equity accounted.
Yes, we will tend to I think follow basically the same principle, but as you know each of each each deal will be very specific to the circumstances and the the partnership agreement. So it will require obviously.
The negotiations and analysis.
It's quite of technical areas of the accounting standard so.
We will that we will do our best to Keith.
Structure of it accordingly.
Oh, yes.
That makes sense.
It's definitely a very clinical standard.
Just wanted to turn to the the top tenants.
The kind of disclosure you had there.
It looks like overall.
Average rent per location of annualized mine per location for the tenant has has.
<unk> increased the number of locations that have gone down for the top tenants that would.
Would you just say, it's just from the disposition strategy or is there anything you'd like to call out of them.
On a more diverse tenant base.
I think largely it's.
For the disposition strategy on us getting enhanced rents out of out of those who are outside of that that list, but I think it's largely the disposition strategy.
Okay.
That makes sense.
Thanks, Thanks for all.
I'll turn it back no problem on our navigate day.
Okay.
Your next question comes from the line of <unk> <unk> with RBC capital markets.
Good morning, Tommy.
Good morning, Hello, everyone.
I wanted to maybe just come back to the leasing compensation.
Of the reopening does ramp up can you maybe comment on how the leasing strategy how did the evolving at the stage in terms of the duration range debt, maybe pushing for more aggressive leasing spreads.
And maybe just thoughts on inducements at this stage growth.
As we look at 2 of the next 12 months.
Yes, I'll start and then I'll hand, it over to Jeff again for some of our color there, but I think.
We've put ourselves on a good position pre COVID-19 and we started seeing the benefits of kind of.
Improving our portfolio through the disposition process. So the we can be on a good negotiating position with our tenants obviously during COVID-19 that pretty much ceased and now that we are on the low caused the positive side of the pandemic.
We're starting to get more favorable negotiating environment, where we can start to talk about much more conventional terms.
Where capital is no longer necessarily enhanced and where there is sort of year over year increases embedded in the leasing now the 1 exception there and this is by design and we're fine with it is when youre talking about urban environments and mixed use properties that are in like the downtown cores on.
Oftentimes you want the right types of tenant mix I mean, we always want the right types of tenant mix, but in those cases, you want tenants that are local you want tenants that fit within the development that you are creating and in order to get those tenants because theyre not nationals. Sometimes you do have to be a little more creative in the deal structure you do shorter term.
You do points deals you do provide them with some capital and we think that Thats, a worthwhile tradeoff because were effectively betting on their businesses and then in 2 years once they stabilize we will review those terms to reflect a more normalized situation.
But I think and then of course, the enclosed malls there is still a bit of softness there. So we're having to be a little more aggressive with some of the ti for providing but Jeff correct me if I'm wrong on the open air centers, where the bulk of our income is coming from it's kind of getting back to business as usual. It really is yes, it's much more reflecting pre pandemic.
<unk>, but the 1 thing that we've always been known for is the speed of the lifecycle of our deals for very quick to respond, but we're actually not putting the brakes on the slowing down a little bit to scrutinize the strength of the tendencies of lot more than we ever have in the past not that we weren't always carefully where we want to know like the strength of the new tenant is coming on to understand the endpoint of <unk>.
And more than ever we're pressing for them to have skin in the game as well we're prepared to put up capital for the right type of tenancy, but we want to make sure. It's not always hold in the shoulder, but making sure that they've got.
As much invested in the individual units as we do so we are spending a lot more time looking at it and wherever possible changing that tenant mix, where it makes sense getting the service commercial or the hardwood guys in where maybe you had a run the other fashion and again fashion is never going to completely disappear from our portfolio, but we are just a lot more.
And then as tendencies opened up a little bit over the last year were repositioning some of these tendencies to make the model of the centers themselves flow a little bit differently, moving some tenants around and coming up with a better layout for the individual centers. So we're very much paying attention to it.
Absolutely yes.
On.
That's good to hear that the strategy is.
She is the momentum seems to be picking up for sure.
Coming back to the comments on enclosed malls.
Can you see tenants look to migrate out of some of that space, whether it's in your portfolio or the others into some of your opening airspace.
Yes.
As it was before the.
Theres tenants that are looking at both sides of the looking both unemployed.
And the.
Our still maintain their position in close centers.
So we're seeing the ones that were active on both sides to continue to do so we haven't seen a whole lot of new entry.
Entrants into the enclosed mall world, but listen I'll walk. These centers every week every day and there are for.
<unk> falls in there and there are opportunities.
I don't think that this means the end of the enclosed malls and I think over the next year or 2 youre going to start to see some new board start to flow into that vehicle for that.
And I'll add to that and I think thats, a really appropriate answer but going back to why we got into the open air business in the first place it was to create a cheaper alternative for tenants, who wanted to not have a significant cam and tax load.
And 1 of convenient parking right in front of the centers and I think nowadays tenants of certain certain of the.
The necessity based tenants. The we cater to are very much in favor of that type of environment versus the economics that attached to an enclosed mall environment. So they really are still favoring that open air center environment, because of those economics and Im not sure thats going on at anytime soon.
We're doing well and maintaining a really good environment for our enclosed mall tenants, but I do think and I'm sure Jeff will agree that the universe of those tenants is not growth at <unk>.
First is maintaining itself.
Yep great.
Got it maybe just 1 last 1.
<unk> support starts to come off for tenants with respect to the series later this year what types of conversations are you happy with them in terms of maybe providing some extension of support.
If any at all to the to the balance of the year EPS 2022.
I'll hand that over all of our Harrison our head of operations. Thanks, Bobby I mean, the conversations with tenants right now really focused on the getting them back on their feet and the reopening I suspect as we get closer to October 23, there will be from conversations with.
With the surge of eligible category of our of our tenants that are moving to extend the assistance program.
But right now not really the focus of our conversations with tenants. It's really what can we do to help them real successfully.
The things start to open up.
And then just lastly on the officers any better sense as to how what proportion of your tenants are receiving support.
If we use our rent collections are the results as a proxy I would say for our category III incentives, which are mainly of our independent.
For which the program is primarily the design.
The vast majority of them are participating in the program successfully.
And obviously of the amounts of the financial support they are getting is a byproduct of whether or not they were forced to close the able to maintain.
Some level of operation.
On the.
On the deviation in sales.
On the realized so I would say participation is very high for eligible tenants.
The program is working for them and we are benefiting from it as well as the.
Cash flows.
The subsidies on to us in the form of rent.
And then the percentage of our portfolio of of that makes up for the revenue.
In percentage I don't think of I don't think we are of the precise math of it in order to be disclose the Tommy but it's.
It's not insignificant and I think a lot of the the questions that I've been fielding from investors.
The dots of presuppose, what Youre thinking is okay, what happens when the <unk> program and and what we will say is of course, there will be some failures, but truthfully, we usually see in the normal course, even in the best of times January being a pretty ugly month, where a lot of tenants to fail and this year, we actually.
Solve virtually non fail in January so my sense of it is youre going to see the same effect that is just going to be license and it will happen in October or November rather than January but I don't think its going to be as significant as you think because of lot of these tenants are exactly the type of the thriving in this reopening environment like restaurants.
<unk> Street from fashion.
Like Jim So I really we don't have a significant concern that there will be fallout over and above what the normal course of b.
Great. Thanks, very much I will turn it back thanks.
Thanks Tommy.
There are no further questions at this time I will now turn the call back to Mr. Gitlin Gitlin for closing remarks.
Well. Thank you everyone for joining us on the call and I know, it's a very busy reporting season, so I am not going to keep you here.
For much longer enjoy your weeks and we'll look forward for catching up with you all soon and thanks for joining us.
Okay.
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