Q2 2021 SmartCentres Real Estate Investment Trust Earnings Call
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The conference is now being recorded.
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Good day, ladies and gentlemen, welcome to the smart centers a REIT.
Okay.
2021 conference call.
I'd like to introduce Mr. Goldberg. Please go ahead.
Thank you.
Good afternoon, Thank you for joining us.
Alright, and Mitchell gold her executive chairman of Smart centers it.
I will be chairing this call.
Joining me on the call today are Peter screen, Chief Financial Officer, Judy Gobian E V P portfolio management and investments in Morrow <unk> Chief Development Officer.
Peter Ford will not be joining us on the call today to extend his regrets as he continues his lee.
Our commentary.
For mostly to the outlook and mixed use development initiatives section of our MD&A, which were posted on our website.
We refer you specifically to the cautionary language on page pages, three and four of the MD&A materials, which also applies to.
Your comments any of the speakers make this afternoon.
Our results this quarter speak for themselves and demonstrate again, what we've been saying since 2015.
When we combined the public and private companies strategically to effect these changes.
Let me summarize this quarter in the following way.
Our intensive mixed use pipeline.
Is into its second year contributing to <unk> and we expect this to be permanent for all intents and purposes.
Our entrepreneurial mindset and culture and core competencies continue to drive profitability and land development through intensifying and repositioning our assets.
Our open format portfolio is an excellent starting point from which both us and our retailers can easily change and we are.
Tenant interest accelerated through the quarter. This is off of our leased occupancy of 97, 3%. Therefore.
Therefore, we expect to see improvement.
Continued improvement in cash flows going forward.
Pages 21 to 23 of the MDA highlights in excess of 55 million square feet.
Updated net incremental incremental density to be built with <unk> with our partners share.
On lands within our owned centers.
And our flagship smart CMC, we closed on 70% of the transit city three condos for 139 units in the quarter generating $12.9 million in <unk> or seven cents.
With the balance to be closed in the third quarter.
Two additional towers T C four and 545 and 50 stories, respectively 1026 units combined.
<unk> sold out or under construction with 20% deposits in place from the purchasers.
The purpose built residential rental tower 451 units, which we call the mill way is under construction.
And we are near completion for the launch of the next phase of high rise condominium and smart BMC named artwork with over 600 units.
We commence construction this quarter on 174 unit rental apartment building along with 228 units seniors residents at our Laurentian place property in Ottawa and.
We also commenced construction this quarter on two purpose built residential towers in Ms Goose, Quebec suburb of Montreal, with our JV partner <unk> with the trust retaining an 80% ownership interest.
We have also commenced the redevelopment of a portion of our 73 acre Cambridge project for residential.
Condos and rental.
And other complementary uses this project sits on our books.
With a $92 million Ifr S value.
Based on our retail rents existing in our 700000 square foot retail center.
Whereas with the recent rezoning.
We are now approved to develop over 12 million square feet of mixed use on these lands.
Okay.
Keep in.
We do all this while simultaneously painlessly, maintaining our conservative balance sheet with ample liquidity.
We will only move forward with capital intensive construction initiatives I've as market conditions warrant.
Sufficient pre sales have occurred.
In the case of condos and only when financing is fully available and in place.
Surely.
On the capital capital recycling front, we now have nearly $200 million in conditional deals in process. So far this year.
At an average of low five cap rates.
Assets are noncore.
And the proceeds will.
Hope fund our extensive development pipeline.
The last.
18 months has been an interesting real life test.
What we have been saying about our portfolio.
That is.
It is a strong.
And strategic one with a lot of embedded value.
Now I would like to turn it over to Rudy Goldman.
Okay.
Thank you Mitch and good afternoon, everyone.
Throughout the quarter, we saw tenants preparing to reopen along with a renewed demand for space from tenants previously waiting on the sidelines, but now ready to lock up new locations.
The acceleration with both small and large tenants asking to be co located with Wal Mart anchored sites, having just experienced the alternatives.
And especially those coming from enclosed malls.
Interest ranged ranges from the fast food resurgence to pet stores medical offices, and even financial institutions.
We have received mid box requests from dollar stores outdoor sports and recreation Houseware stores.
And a surge in demand for larger spaces as well.
Like the T J X furniture stores fitness, even home improvements.
And full line grocery stores.
And while 100% of the REIT properties include grocers as an anchor with shadow anchor and 60% of their REIT tenant basis comprised of essential services are essential services percentage increases to 70% in markets outside of the greater victim area, where our occupancy rates.
At or near 100% in these smaller markets. Our shopping centers are often the essential service hub of the area and our in all cases anchored by a Walmart store.
The shopping basket size and frequency in these markets continue to increase our segments of the population relocate from the downtown core.
This not only strengthens our shopping centers, but further enhances the opportunities to intensify on our existing lands in these markets.
Our tenants continue to work with us to adopt by expanding their E commerce product lines. This delivery model pickup and space utilization, all while striving to maintain customer loyalty and sales.
And we adhere to support them every step of the way.
As we have highlighted previously Walmart plans to spend $3.5 billion over the next five years to make the online and in store shopping center experience simpler faster and more convenient.
This continued commitment to its retail operations in Canada speaks to the ongoing strength of Walmart and its growing ability to drive traffic to our centers.
As you know virtually all of our revenues from shopping centers are from open air centers, providing a safe and comfortable environment for customers to practice physical distancing, while shopping for their everyday needs.
For Q2, we completed nearly 260000 square feet of new leasing improving our leased occupancy to 97, 3%.
With regard to our premium outlets both in Apple are now open and are at full occupancy.
While sales were impacted during the period when they were operating only with curbside pickup sensory.
Since reopening we're seeing traffic counts that are already approaching the pre pandemic levels of 2019 and sales.
Have shown great resiliency.
With higher conversion rates than in the past.
With the pent up demand and accumulated savings being reported and the recent reopening of the U S. Canada border, we hope for and expect a strong fall and Christmas shopping season.
By June 30th we completed nearly.
3 million square feet of renewals nearly 73% of 2021 maturities.
And finally, while small independent retailers make up only 6% of our contracted rents.
They are an important component of the Canadian economy, and our portfolio deserving of our focus and assistance throughout this period.
As Mitch said previously we are built for heavy weather.
Our high quality portfolio will continue to adapt intensifying with residential another real estate asset classes.
Strengthening with an expanding tenant base, improving customer traffic and a leading occupancy rate.
And of course reliable and growing cash flows.
And now I will turn it over to Peter Sweeney.
Thank you Rudy and good afternoon, everyone.
We have continued to focus on further fortifying the strength of our balance sheet, even during these most uncertain times.
In this regard we note the following highlights for the second quarter of 2021 as compared to the comparable quarter in 2020.
Number one.
In keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets.
Unsecured debt in relation to total debt increased to 70% from 65%.
And our unencumbered pool of assets continued to grow.
Increasing by approximately $293 million to $5.9 billion and.
And as we maintain our strategy to continue to repay these maturing mortgages. We expect these metrics to further improve in the future.
Please note that this strategy permits as further agility, when considering opportunities and alternatives for our portfolio of mixed use developments.
Number two.
Our triple B high credit rating from D. B R. S permits us to continue to attract that capital at low interest rates for longer terms.
And in keeping with our strategy to take advantage of lower interest rate environments and pursuant to our REIT financing activity over the last 12 months, our weighted average interest rate for all debt continued to decrease and at the ended the quarter was three point to SEC.
9% this compared to $3 four 6% for the prior year.
This 19 basis point reduction is expected to yield approximately eight and a half million dollars.
In savings in annual interest expense, while concurrently we have extended our weighted average term of debt to five three years as compared to four eight years in the comparable prior year period.
Also variable rate debt in proportion to our total debt stack was approximately three 9% at the end of the quarter.
This continued focus on both increasing the weighted average term of our debt and fixing interest rates is deliberate.
And is yet. Another example of the risk mitigation strategy that we've employed to insulate the trust from interest rate volatility volatility.
And then lastly number three.
Our interest coverage ratio net of capitalized interest was maintained at a very strong three eight times level. This in spite of the impact that COVID-19 has had on our operating results over the last 15 months and further confirms the foundational strength and stability.
Of our core business.
Also our adjusted debt to adjusted EBITDA multiple was eight two times as compared to eight eight times in the prior comparable period again.
Reflecting the business is strong and stable ability to fund its obligations with our continued commitment to our balance sheet.
From a liquidity perspective as.
As we look to the immediate future and continue to manage through this current uncertain capital markets environment. In addition to the conservative debt metrics noted previously. Please also consider that when factoring in our new $150 million line of credit that was <unk>.
Pleated subsequent to the end of the quarter together with the $250 million accordion feature associated with our existing Undrawn $500 million operating line.
Our liquidity position exceeded $1.1 billion at the end of the quarter. This after reflecting the repayment of $323 million in maturing series T debentures prior to the end of the quarter.
Recall also that the next series of debentures in our portfolio does not mature until may of 2023.
And notwithstanding the challenges associated with Covid over the last 18 months. Our business has continued to demonstrate its ability to generate sufficient cash flow to fund our operating needs.
Accordingly, we anticipate a requirement for additional funding over the next 20 months to be limited to construction financing associated with the projects in our development pipeline.
However, we are continuously considering opportunities too early redeemed debentures and mortgages when appropriate and.
And with that I will turn it back over to Mitch.
Yeah.
Thank you Peter.
Sorry, I was muted.
We will now.
Open it up to your questions.
Sure.
Alright, so just to remind everyone to queue up for a question. Please press star one on your phones.
And the first question. We currently have in the queue comes from Mario <unk> from Scotia Capital. Please go ahead Mario.
Alright, good afternoon, and thank you.
So one one quick question on the on the development pipeline.
Which quarter would be very large.
Valuable I think the metrics that you provided on Cambridge alone $92 million or $7 a square foot implied buildable.
It's extremely low.
The question is really when you look at the box on.
Opportunity that lies ahead of you how do you think about balancing the vastness of that opportunity with potentially crystallizing a bit more value in the short term.
Yes.
Okay.
Terry mentioned media mute again, yes, sure no I actually got disconnected right in the <unk>.
Good question.
We're asking about Cambridge as embedded value.
I guess the question is.
Kind of development opportunity.
For decades, how do you do.
The long term opportunity with the potential in this environment given the quality of the assets to monetize some of that long term upside.
So you're not today.
Yes.
Okay.
Via dispositions.
Correct, Yes, yes.
Yes, I mean, we look at it I mean.
Exactly.
Like you're implying I mean, there are going to probably be situations where I.
I guess you know.
We're ready to go on let's say, Cambridge in Pickering and.
West side in May.
Maybe 1900 Eglinton and so.
Given.
What that May mean to us in our balance sheet, we might sell something.
If the prices right.
So this is something.
We will be monitoring everything whereabouts are able to start all the same.
Yeah, Dave So to speak we would probably look to do that so we're we're we're keeping all those channels open. It is a good opportunity at the right price too.
To capitalize on some of that embedded value. We are also involved in exploring the idea of bringing in some potential partners on those projects as.
Another lever.
So raising capital at market. So it's another I'll try another way selling apart interest.
The $200 million of conditional deal that you highlighted at a low five cap.
Evaluation of what were some of the defining characteristics of those transactions that led to the blender.
Yes, we don't have the.
They don't have the.
The development of intensification.
Potential.
So.
One of them has a characteristic.
Beyond that but I don't want to get into that because it would maybe be in a sense the factor.
Revealing what it is and it's still on a conditional period, but but for sure that.
Is that common.
Characteristic is that we don't see them as having sort of any intensification of redevelopment potential in the reasonable near future.
Got it and then maybe somewhat of a somewhat related in the MD&A are in your letter to unit holders and you mentioned the expectation that.
We could start seeing some fair value gains from your IPP portfolio would that be kind of correlated to the pricing that you're seeing on these types of transactions.
Yeah.
We do.
See we have more options, we were fine even a year ago, nothing we did not slowness program Darren.
We also may have even accelerated.
A year ago, but now we do have a tiny bit of.
Maybe I don't know, maybe a little bit of a headwind in respect of our options on the number of these properties.
So there weren't available a year ago.
So yeah were increasing.
Increasing leasing interest interestingly enough, it's not always not all retail REIT.
I'd also retail and then development.
Development options as well.
Okay Alright, My last question just may be shifting focus to the operations.
Q2 showed a marked improvement in terms of same property NOI growth.
Both including and excluding bad debt expense.
Do you have any color or guidance in terms of when.
I think the same property NOI growth to turn positive when we back out.
The bad debt expense year over year.
Hi, Rudy R.
Mary do you want to.
Yes.
As you know in the same quarter last year, we added significant ECL provision in that provision got smaller in quarter, three and smaller into quarter four.
It's significantly less.
And this year as you as you know and we've only seen an increase in tenant interest and an increase in the cash flow is coming in so depending on when the.
The tendencies had taken there.
There.
They are <unk> and bankruptcy filings in the prior year Merial the.
And when it happened in terms of through the trustees and when that happened because the tenant those tenancies paid rent throughout the bankruptcy period called occupancy rent as you know so.
So those rents carried on but those ones that did not go through it we ended up taking that provision so.
When you see it through the three months ended in June and do we see it in September we expected just a continued improvement over the next two quarters. We know what it is now in terms of.
The variance but.
Same properties excluding.
<unk> was.
It was negative.
So so we have seen improvements in each of the next two quarters.
Okay. Thank you for the color that's it for me Youre welcome.
Alright next question comes from Sam <unk>.
Jani from TD Securities. Please go ahead Sir.
Thank you and good afternoon, everyone.
Yes, really just back to the leasing side.
Can you talk about I guess, the most challenged categories.
In the tenant and the tendency today in and what your outlook is for those tenants after the rent subsidy ends.
And I have a follow up question as well.
Sure sure Sam.
It Hasnt changed.
The the.
The ones that are most affected and again, we don't have a lot of these.
The very small independent tenants that are non essential tenants, who are forced to close we have about 6% of that in our portfolio. They are the most affected in our portfolio and again.
Knock on wood, there's been no no filings this year.
In our portfolio and the open format.
So it's been great. The tenants who are carrying on and some are still struggling to pay their full rent given that you've seen the 95% recovery theyre paying part of their rents and they are paying as they get their sirs funding from the government.
That will carry on and we are putting in place deal for every one of those tenants to help them to help defer rent in some cases as you saw with a lower rent to lower their rent in the short term in and help them recover that in the medium and longer term.
So apparel small tenants.
Fitness struggled as you know sit down restaurants would be another category that.
That's struggled because again the they did the <unk>.
They did pick up.
They did outdoor when the weather is good but when the weather isn't that they can't do that patio.
And right now there's a with everything we opening there is a big resurgence of interest it's amazing what started happening in the middle of the quarter of second quarter, and then throughout the quarter and even now so we see we're seeing some very welcome improvement.
I guess just on the on the fashion and the fitness side, they're not really weather dependent for their operations are they how are they doing with the reopening in Ontario.
Well as you know, they're all open everybody's open across the country and in Ontario Limited in Ontario in terms of doing fitness and outdoor outdoor activities.
But as you know.
The fitness guys did receive funding and then receive government and and.
Bank funding and stayed open.
So theres still open they are operating they are paying their rents.
So they are expecting a resurgence people coming back with the double vaccinated.
Whether they implement that as a mandate coming into their premises or not it's still a little up in the air as you know but.
There is a very bullish sentiment of our tenants in the open format space, especially.
Because the traffic has just been very good.
Throughout this period so.
If if if if if that traffic wasn't there wasn't one.
Like again, we're getting the interest in closed mall tenants of similar types of tenants by the way even fitness wanting to be now co located in our Walmart anchored centers. So.
Yeah, it's been it's been very positive.
Thank you and just lastly, with the headlines we're all seeing about the Delta variant is that.
Presenting a bit of an obstacle in terms of clothing clothing lease deals these days.
In closing lease deals.
Not really.
In Canada, I mean that may be an issue in the United States, but in Canada, we have been carrying on.
We are still exercising.
Yes.
Our R R.
Good <unk>.
Intelligence from a from.
From a social distancing perspective in our properties and our premium outlets.
In stores.
So.
This hasn't really been an issue here in Canada. The numbers are small as you know we monitor it across the country municipality by municipality. It did heat up a little bit as you know in Alberta, It did heat up a little bit in parts of Vancouver.
But generally.
People outside and they're shopping in our open air format really makes a big difference in that.
That arena, if you will as opposed to the enclosed mall.
Type, so so not really seeing and again.
Things me.
Change, but not really seeing an impact on our portfolio. The interest is just is just again ramping up.
Okay, great. Thanks very much.
Thanks, Dan.
Alright next question comes from Jamie Mark from BMO Capital markets. Please go ahead Jenny.
Thank you and good afternoon.
I just want to revisit the question about your expectation of putting some more valuable over the next few quarters.
You mentioned that some of it coming from.
Development.
Confident youre full but I just wanted to just get us some more color on sort of what's driving that view.
First of all some of the write Downs you took the last year.
Changes in cap rates or rent.
He used to get more color on what you think is going to drive that over the next few quarters.
Well, Okay Rudy.
Peter do you want to yeah.
Yes, yes, Judy it's Peter Sweeney, what we're hearing journey from the appraisal groups and professionals.
There continues to be or had there has certainly been a return.
To the marketplace of institutional investors chasing investment grade properties, including retail properties and there is again a robust level of demand for these types of properties in the marketplace.
Resulting in a further compression in cap rates. So as we went through the quarter and as we went through the property valuation exercise.
All of the appraisal groups with whom we work I had the same comment on the same theme.
That as we think about the balance of the year.
Again, all things being equal that we should expect to see some compression in cap rates and discount rates on our portfolio of properties.
Okay. So is it fair to say that you know what the timing will be dependent on it.
And more data points in the market.
Uhm.
Yes, I think it's fair to say the appraisal firms journey R. R.
There.
Well there are seeing it already in some of the activity in the marketplace vis-a-vis cap rates being paid or prices being paid on properties that are available.
And when you translate those metrics and that experience against our portfolio again, they're suggesting to us that we should expect to see some compression over the balance of the year.
Okay.
Yes.
I would add to that.
We're seeing.
More.
Contract.
We're getting more calls.
From a particular types.
Q2, two potentially.
Enter the space or.
Yeah.
Invest further in this space.
And the last I guess last quarter than we had when he'd be the last.
So.
Yeah.
The incoming interest in your property.
Like just.
<unk>.
Yes.
Re institutions and others interested in knowing if we're interested.
Enquiring into whether we would be interested in selling.
Interest income groups.
So can you just kind.
Kind of this feeling really cares.
Capital.
The increase in capital.
If.
Moving more and more of its moving into retail you.
Great.
Is it really just cap rate or are we starting to see a little bit more.
Confidence in <unk>.
Hawaii number at the end of last year that was sort of a question mark on it.
It firming up or is it really cap rate driven with telephone conservative guidance.
NOI and NOI growth.
No it's not.
But we're not it's not like.
Okay.
Theyre not touch.
Touch on some bottom feeding kind of as you know.
You know what can we.
Oh, great deal can we make here.
They're they're genuinely feeling like relative to everything else.
<unk>.
All the scary stuff around retail.
Just got tested it didn't materialize quite.
As advertised.
There's I guess, a more you know theres a calmer.
Confident feeling around.
Retail.
No retail is not going away I'm, sorry, I mean, the world doesn't work in black and white.
Retail is changing but it's absolutely going to be here for the foreseeable future for a long time and people are starting to understand that it isn't.
One or the other.
So you know you kind of get the feeling that this is a great test for everybody to watch and observe great experiment in a sense and.
And now that things are opening up people see what the parking lots look like and you can understand.
I understand.
The seamlessness between.
E Commerce and interests cool.
So it doesn't seem as if there is this you know.
Talk to me about retail.
That was irrational, but was there.
Your ago or whatever so there's a certain percentage of that.
Also no it's not like you know how.
How low would you grow at all it's none of that at all.
Okay.
Where are all on the other side of that.
With regards to the Honda development. The New walk project are you able to talk to us about what kind of pricing our return expectations are getting like with it but they have a term b to a similar level as you saw for Q1 to five.
Not at all.
Yes, so just to remind you that <unk> four and five which is the latest ones that we went to market on.
Yeah.
We're sold out.
The average I think of 80 D.
Five I think something plus or minus.
And then.
The the property across the road.
Festival was sold they sold out.
The entire portfolio that they wanted to say I think they held back some I think they averaged.
Over $11.50, a foot.
So with T SEC four and five.
The numbers on that.
The REIT owns 25% of four and five the REIT will own 50% of Archrock.
And <unk>.
You can assume that we're next to the subway. The one I was just referring to is across the road show.
Yeah, So you can sort of.
Assume that we're expecting to do better on a per square foot basis than we did it for inflation.
Okay.
Now how does it go I will tell you construction prices have gone up.
There's no question, but.
But there's no not nearly in proportion to the <unk>.
Pricing difference and the ownership.
Because we sold our respective 50% interests are 25% interest some interest.
Congo partner there.
You know what are pretty good.
Hello, as in low price, but that was early days and there was also.
Yeah, I mean, there were there was early days.
So that is the reason we're not doing it in partnership there is simply because we wanted we want the REIT to get the benefit.
The whole thing when we built the capabilities, but center Corp Centre.
<unk> were and continue to be fantastic partners.
Great and then shifting to the balance sheet.
<unk> made good headway on.
Getting what it ought to be on the unsecured side and it sounds like from the commentary about that number.
Ro.
Oh for that like like you want to get you know is there a specific number in place or is it just going to be more organic overtime as you build up of mortgages.
Can you take that number.
Yes, I think Jay.
Yeah do you want me to take this moment, yeah I was just going to say, we're going to keep doing it until everybody doesn't want that to me.
Property specific mortgages of course, but.
Peter.
Go ahead, yeah, yes, Mitch as REIT journey, we don't have a specific measurement or a metric that we're trying to guide to however, you know I think we've said now for a few years that our goal is to.
For the most part replace maturing mortgages with.
On secured debt and I think as we've mentioned it gives us tremendous flexibility.
As we think about some of the development needs going down that path or into the future with many of the properties that we're gonna be doing mixed use development on so we're finding that if a property is unencumbered. It gives us virtual certainty on flexibility of putting any type of development on any part of that property without.
The need to engage with a financial institution on discussing security. So among other things that's one of the perhaps hidden advantages.
But I think in a perfect ideal world you would see us having a balance sheet that was principally unencumbered save and except for the construction financing initiatives that were incurring.
And to the extent that we've got partners on projects like apartment buildings.
As we think about the future.
The CMA sea is providing very very attractive low rates subject to taking security and those apartment buildings. So that might be the exception. When we think about the future journey for many of the apartment buildings that we will be building, we will likely be at least seriously thinking about mortgages.
Through the CMA sea for those types of buildings.
Okay great.
Last quick question on the $10 million of asset conditional are those unencumbered.
For the most part yes.
Okay great.
So very much on back thanks, guys.
Alright.
Just a question we have comes from Tal Woolley.
From a national Bank.
Please go ahead.
Hey, good afternoon gentlemen.
SG&A fell.
Hum.
I just wanted to ask you know one of our liberate downtown of the city I'm seeing a lot more penguin pick up depots over the last little while I'm wondering is that business starting to get to a scale, where it might make sense.
Two.
Be inside the REIT or two.
Does it not ever really make sense inside the REIT.
Sure.
I mean, I don't know if all of them.
We've already talked about this before but I believe.
Two years ago, I mentioned that it's it's certainly being discussed and it's a possibility.
So yes, we will.
We'll continue to talk about if there has been no intra.
Interest and inquiries from.
Other entities and so yes.
Yes.
I wouldn't dismiss the possibility, it's a growing business it's a.
Growing.
Rapidly both in terms of location and number of parcels that it processes and handles and.
And we've recently signed up Ikea.
And that's been going gangbusters, so, yes, it's a really cool business and we're well on our way to growing Nashville, we were leased some space in Vancouver, we're good.
Getting good coverage in Montreal, and slowly, but surely moving across the whole country.
Yes.
And.
Walmart.
Online grocery business.
They are still running a a shift to direct to consumer ship to home.
Business here as well, it's kind of hard from the outside to know.
You know how serious that is being you know how they're how serious they are taking that but one of the questions. I wanted to just given your relationship with them. Do you have is there is there a way smart <unk> could participate in sort of if they really go fully commit to you ship to home strategy that smart science to participate in building.
Building are developing some of the infrastructure for for that business.
Yes, I mean, I will tell you that I.
I certainly can't speak out of school here on <unk>.
The Walmart rule will be probably announcing but we are involved.
You know on a number of fronts with Walmart.
Which number are there initiatives related to fulfillment.
Procurement and distribution.
But I'll just say that.
You know like a lot of retailers.
Part of it part of the.
Future.
Network is going to actually be you know from the actual retail unit.
Itself.
So that's going to mean certain changes potential expansions in certain places.
For that purpose.
Hey, Yeah, we're involved in some other other.
Other things with them, which.
We call them special projects and that'll.
That'll be.
It'd be something real well announce some.
And in the future.
Okay.
And then just on leasing activity this quarter the spreads on renewals were a little more muted.
Should we anticipate that given that there's been some acceleration in leasing interest that at all.
That will start to improve and was there anything specific in this quarter that kind of cups those spreads flattish.
[laughter] well.
Last year was.
Unique, but Rudi do you want to maybe give some additional color sure.
Yes, I mean as you know.
<unk>.
The renewals for tenancies happen.
Six months three months nine months before the leases actually mature.
So when we're negotiating a renewal in 'twenty, one that's actually being negotiated in 2020 and in 2020, we had.
We're in the midst of the pandemic. So we did not as you saw the numbers when we reported last quarter, we hadn't negotiated a lot of the renewals yet.
Because a lot of tenants who are wondering what their future would be and not sure. They wanted to renew and that they were going to renew they would want to renew at much lower rent. So we are coming out of it.
We are negotiating now going forward for the latter part of the year, but this but the stuff that we had negotiated and we want to lock up the tenants to keep keep the cash flows coming in and keep the occupancy doing well and so on it.
It did reflect that.
That sort of notice period.
So so all of that is to say, we've got nearly 3 million square feet of the 4 million square feet leased up now were about seven.
7%, a large part of that as you know is Walmart renewals and if you took the Walmart side of there it would be closer to 1% by the way.
Without that in there so.
Yes, it is improving and we only expect it to continue to improve as as the outlook.
It continues to improve and this sort of period behind us. This six months lag in negotiation continues to look forward six months, so I hope that helps.
Yes, just looking at your numbers I don't think you guys really disclose like new leasing spreads and then if I'm just thinking about your commentary it's fair to say that we would expect.
Given the surge in interest, but new leasing spreads would actually be.
You know Mitch materially better than renewal spreads.
The short run.
Yeah, when you say new leasing spreads you mean, new leasing spreads in.
We can space for example, as opposed to new leasing spreads any newbuild space, because we're doing both.
So obviously in a vacant space in new leasing spreads will be different and again.
Coming through this sort of unprecedented time I would say this is not.
This is only going to improve our it.
A number of tenants I will give you. An example, a number of tenants that are looking to come in and the new leasing spreads come in to the portfolio that has never been in the portfolio before which includes things like logistics or the types of.
Tenants like appliance that may be in a quasi industrial.
Retail or outdoor outdoor patio furniture logistics last mile kind of even daycares.
The furniture business. For example saw you you have some furniture business in in designer D Depot type centers.
As opposed to pure retail shopping centers. So we've seen a lot of those tenants move upscale and want to be with the Wal Mart anchored sites now.
Wanted to bring them in to the portfolio the out a really good mix in the portfolio. When you bring in daycares in medical and in logistics and people are doing the hub and spoke and you mentioned.
It was mentioned before with.
Doing the delivery right out of your right out of your the premises. So as you know Walmart is doing that.
And you know a lot of them are doing their click and collect.
Best buy has picked up on that now so.
Yeah, we see.
Settling up that space with a lot of newer tenants and.
And they are finding their way into the right mix and now that it sort of come up scale and grocery stores by the way grocery stores coming into the portfolio ethnic grocery stores.
More of the organic grocery store is also calling us up about a lot of our space at one thing.
Being very interested in being in the portfolio. So the interest is.
Has been this resurgence in interest again over the quarter and into this quarter. The third quarter now starting up has been really good.
Okay.
And for some of the new asset classes that you guys are getting into via development like self storage seniors.
Is it like you just strategically speaking are you only interested in building.
Your exposure to those asset classes via development or with smart centers ever look at you.
Acquiring.
You know a portfolio of self storage operations in partnership with smart stop or.
Same thing on the seniors housing side, because you know if you're.
You could scale up those businesses faster because they have an operating component I don't know I just I wanted to ask that question.
Yeah, we're not we're not really able to buying at market. The finished.
Thanks.
So.
But we've looked at it I mean, a couple of cases, where theres some value add for some reason you know hitting the property or whatnot.
Hmm.
We keep our eyes open out there all of those things as.
As well as other forms of.
<unk>.
Real estate that we're getting it giving it to you, but we can't really.
Yeah.
Find anything thats part of it.
Debt.
Hum.
Comes close to the kind of returns that we get doing it in the from the ground up on our owned properties for the most part.
Art.
And those partnerships.
I wouldn't look for a lot of that happening.
But you know who knows what the ROE that there might be opportunities.
We will keep her.
That option open.
Okay, that's great. Thanks, gentlemen.
Thanks, Tom.
Alright. Our next question comes from Pammy beer from RBC capital markets. Please go ahead.
Yeah.
Thanks, and hi, everyone.
Maybe just Mitch going back to your comments on bringing in partners on some of your sites can you maybe just describe the appetite from potential partners, whether it's financial or development partners in markets, like Cambridge or or other markets outside of some of the major markets and how that compares to let's say.
M C or some of your major market assets.
Yeah. So we don't know yet because we haven't actually.
Really tested it but we're about to.
I would only say that it feels like there's just been a sort of a preliminary informal basis. If there is a lot of interest and it would be from all the above because some of our properties are substantial.
Substantially rental some of them are mix condo and rentals some of them.
Our one phase not that many of them, but we do have some that are one reason we have some that are.
Multi phases I mean look at okay. So Cambridge, you know it might be five phases. So does that entity by into you know 50% or whatever.
One of the first phase.
Or does that interest you buy into the entire center with its five phases. So that kind of thing I don't know yet.
But where we were open to all of it because we find the right partner and everything I mean the barrier.
Metrics are your economics or the REIT, we're okay with bringing so went in for all five phases now.
If they come to terms or just doing the first phase so we're pretty optimistic there because we're that flexible.
Gonna be able do hear quite a few good fits and you'd be surprised how many properties there are as.
You mentioned, Cambridge West reached <unk> hundred you know.
But there is there is $407 controlling theres Allison.
There is.
There is quite clear.
It just took them.
Ooh Knowable, so theres Ms goes Theres Labelle.
Material by the way, it's pretty hot there is.
Shelf law I mean.
And I could go on and on theirs.
There's a lot of them, there's more that I didn't name there that are candidates for this so.
With all of that and the flexibility.
Thank you.
We're rightly optimistic that we'll be able to find some some entities out there that would be good partners good fits for us.
Yeah, no for sure I I feel like the risk gets longer every at every quarter in the press release and the MD&A, it's definitely been expanding quite a bit.
In terms of the maybe just coming back to the $200 million dispositions I think that what you mentioned where conditional.
Can you just again provide some context on the markets that those are in.
Can you sort of said fully occupied stable assets or was there some repositioning work required.
Yes, I mean.
Sort of trying to stay away from naming them and standards to just everybody involved we acquire them.
No it doesn't.
It's not ideal should they don't go through and.
No we wanted to go back to the market.
But but suffice to say that.
One of them is just not our bread and butter and it doesn't have a.
It doesn't have.
Any kind of we don't see an angle for any sort of future intensification avoided so.
That's one of the criteria for deciding.
Also that asset I'm, referring to it we're leaving upside for somebody who wants to work at least sit and go through that.
So yeah.
Yeah, I mean, if we don't sell it that's what we were going to do but.
We don't mind, leaving that for somebody else because it doesn't have the REIT.
Redevelopment potential.
So I don't want to maybe if it's okay.
Getting into the geography.
Of them yet.
But suffice to say they werent on our list of.
Redevelopment properties.
Got it just again, maybe is it would it be fair to think that it's quite possible for for the REIT to kind of look to sell let's call. It a couple of hundred million maybe.
Maybe income producing assets over the next couple of years sort of on an annual basis or or is it really not that much in terms of what you would consider perhaps non core assets in the portfolio.
Yes, I mean, we're going to we're going to pull on that.
Bringing in some some partners potential partners on the development properties.
Our capital raising exercise.
What are the capital raising exercises so.
I don't know that we could say we're going to have this predictable.
Annual disposition program, but we.
We are looking to raise the amount of.
Capital that will keep our balance sheet conservative and so yeah. I mean, we're looking at everything all at once Holistically.
So I wouldn't be surprised if we do dispose assets as.
As the years go on that would help.
With that but we won't know to what extent that will be until we finish this.
This other initiatives.
So.
Yeah I mean.
Noncore is.
It's certainly something that.
Cory it's not necessarily just something that can be redeveloped and we've got assets in <unk>.
Certain markets that are just you know.
Walmart debate beer store you know, it's it's a blue chip in AR.
It's a smaller market I mean, that's a very good income.
So not easy to replace income so.
It's not just if whether it's the redevelopment borne out.
But so.
So we don't have a lot of non core assets, but if necessary.
We could sell core assets in the future if if it.
He was in the service of executing our plan and assuming our plan continue to make sense.
Got it maybe just one last one for me maybe it's a two part question for Peter.
Just your comments on potential fair value gains through the back half of the year what any of that include.
Density value meeting, marking any of the land values up to perhaps the sites that are zoned sorry to their value per buildable square foot and then secondly, if you could just remind us on the development spending over the next call. It one to two years.
Yeah, Amit on the first question. The simple answer is no. The appraisers that we're speaking to are not suggesting that.
Their value bumps are a function of enhanced.
Enhanced our entitlements and additional density on the on the site. So really all we're talking about our opportunities to improve values on properties based on compressing cap rates and discount rates.
Yeah.
I'm sorry, what was your second question.
Yes. The second part was just if you could remind us what we should expect from it.
Development spend.
Right yes.
I think our expectation pardon me is for 2021 were in the $200 million range and development spend.
And for 2000, and these are preliminary numbers and they're always changing as Mitch said earlier, we we have every opportunity to pull back as necessary or advance forward as appropriate but for 2022 at least for now we're looking at about $250 million.
That's great. Thanks, very much I'll turn it back.
Alright.
Next question comes from Dean Wilkinson for from CIBC.
<unk> markets. Please go ahead.
Thanks afternoon, everybody I will just keep it to one question.
Peter.
$100 million of noncore sales and the potential for some some mark to market gains in the back half of the year, that's going to naturally delever the balance sheet.
Fair bet.
In the context of how cheap that is are you comfortable where the leverage is right now or is there an opportunity to take that up.
Well I think Mitch.
Mitch earlier mentioned Dean that you know, we're always trying to ensure that the balance sheet maintained its level of conservatism in in every possible way.
And.
All of US know that we've got this.
I would call robust pipeline of development initiatives ahead of us and it's fair to say that those development initiatives will require large amounts of capital some of which will be death, and as Mitch mentioned, a big part maybe additional equity as well.
So when you do the modeling on those needs going into the future Deane I think it's safe to say, we'd rather think about the future from a position of strength, rather than jeopardizing or perhaps putting ourselves in a position, where we might have to limit those opportunities and development.
That's down the road. So if we think about raising capital as Mitch mentioned in selling partial interests to new partners number one number two to the extent that there are value bumps associated with the IRS increments and that those two initiatives result in.
Our improved debt metrics I think that's just an opportunity for us to establish really a new a new level for the balance sheet and if we think about the future all other things being equal if we don't raise another nickel of capital and perhaps there is no further compression of cap rates et cetera, and we have to use that as our.
As our anchor point for incurring additional debt in the future to accommodate the development pipeline I think it's fair to say that we think will be in a good position, but and again I'm. Just we've said this many times over the years, our primary limiter or governor is our overall, our overall debt metrics and will never Jeff.
<unk> the balance sheet, we spent a lot of time and committed a lot of resources to ensure its viability long term and so we do have the opportunity as we move into the future with these development initiatives to pull back as we see necessary but.
Does that mean, it means that at 45 or 46%.
Debt to total assets that were comfortable at that level.
Again, given what we've discussed on this call we would see those levels declining between now and year end and again that will put us that will put us in a we think a strong position to move forward with some of the development initiatives that Mitch has mentioned.
Correct. Thanks.
I just had a simple I'll add to this and say we don't have to do anything we do have a great portfolio and so because it is so we're not going to do anything unless it really you know is safe and are safe includes.
Yeah, Hello debt levels, so really the only thing that really could bite us.
And there's been lots of people smarter than me and smarter than us in.
In the past because it's very subjective but been there done that and you.
You know rather rather be on the ground, we shouldn't read roomier than <unk>.
We are wishing we were on the ground.
<unk>.
[laughter].
Oh.
Yeah.
Operator are you there.
Yeah.
Yes, I'm here.
Any other questions.
Not at this point in time.
Hi.
Okay.
If there are no further questions.
We'd like to thank everybody for joining us today and.
We look forward to being in touch thank you.
Yeah.
Ladies and gentlemen, this concludes the smart centers REIT Q2, 2021 conference call. Thank you for your participation and have a nice day.
Thanks, everyone.
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