Q3 2021 RioCan Real Estate Investment Trust Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.
[music].
Good day, ladies and gentlemen, and welcome to the Rio can real estate investment Trust third quarter 2021 conference 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 Davis, Senior Vice President and General Counsel you may begin.
Thank you and good morning, everyone I'm, Jennifer <unk> Senior Vice President General Counsel and corporate Secretary for re Okay. 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 reopens website yesterday evening before turning the call over to Jonathan.
I'm required to read the following cautionary statement in talking about our financial and operating performance and then responding to your questions. We may make forward looking statements, including statements concerning Rio plans objectives and strategies to achieve those objectives as well as statements with respect to management's beliefs plans estimates and attention and similar.
Statements concerning anticipated future events results circumstances performance or expectations that are not historical facts.
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 a conclusion any forward looking statements when 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.
These measures do not have any standardized definition prescribed by EIOPA sooner and 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 of our comparable metrics determined in accordance with IRS as indicators of Brio counts performance liquidity cash flows and profitability Rio hands manner.
<unk> uses these measures to aid in assessing the trust underlying core performance and provides these additional measures. So that investors may be the same additional information on the material risks that could impact our actual results and the estimates and assumptions to be applied in 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 end.
At September 32021, and management's discussion and analysis related thereto as applicable together with Brio hands. Most recent annual information form that are all available on our website and at Www Dot SEDAR Dot Com I will now turn the call over to Jonathan to get one.
Well, thanks, John and thanks to everyone, who called in today I really appreciate the opportunity to speak to you all I'm here by myself, but with Rio cans executive leaders and we're all happy to share our third quarter results with you.
The impact of the pandemic on our day to day lives Thankfully and finally dissipated now.
Now that our tenants can fully participate in commerce, Rio Canada perfectly positioned to capitalize on pent up consumer demand.
We are again firing on all cylinders Rio.
<unk> story continues to be one of reliable high quality income and steady responsible growth.
Our quarter end results were strong clean and sustainable with positive momentum on leasing activity ESG development deliveries and balance sheet improvements, we've successfully navigated the pandemic because the retail bedrock of our portfolio remains solid and high performing.
The majority of our revenue comes from retail tenants to provide the products and services, the consumers' need everyday including grocery stores pharmacies liquor stores and banks.
Experienced experiential uses like gyms, and restaurants, well they went through the pandemic, but they are finding the leg they are becoming viable again and as they did before the pandemic. They produced vibrancy and they give us a foot traffic to all of our retail and mixed use properties.
Sillery revenue, including parking digital advertising and event activation will similarly ramp up as traffic steadily returns to our properties.
Our demographic profile continues to improve as well you can literally standard virtually any prominent intersection or community and Canada's major markets and there is a rio can properties in close proximity.
Retailers are loath to give up the penetrating locations that serve as efficient ways to distribute goods.
They're also looking to expand into such spaces, and that's why retail assets such as those that comprise <unk> portfolio will continue to strengthen operationally and financially.
Favorable commercial conditions, while they're great for <unk>, but they don't stand alone.
We support our business activities by staying in front of changing market dynamics in a thoughtful and responsible manner and that's why I'm going to leave today with a discussion about ESG.
<unk> commitment to environment, social and governance isn't an initiative best practices in ESG are truly embedded in our DNA.
I make this statement with such conviction, because we're supporting our commitment to sustainability leadership through good old fashion measurement and reporting base.
Based on these processes and results we received the top rating of five stars and the grasp real estate assessment for the second year in a row, notably we ranked second in North America amongst our peers and in addition, we ranked first amongst our Canadian peers for public disclosure.
We're also named regional sector leader for mixed use development in our first ever submission and the aggressive development assessment.
Our commitment to ESG isn't driven by recognition for our efforts although they are.
It's driven by a deep understanding that it's essential to responsible growth and it is important to our tenants our unit holders and our employees.
We focus on ESG because it makes good business sense supports long term value creation, and we will accelerate the positive momentum we saw in this past quarter.
Speaking of which let's reflect on our operational results for the third quarter essentially all of <unk> tenants are open across the country.
With approximately 98% of rent collected in the quarter. Our collection continues to resemble the pre pandemic state.
Given the composition of our portfolio the productivity our tenants have shown since reopening and the introduction of new stimulus programs, we really don't anticipate our rent collection to be materially impacted by the lifting of governmental support.
With the trend back to normalcy and something that as was the case for the first 26 years of our existence, our rent collections shouldnt be a significant metric of focus moving forward.
As our overall committed occupancy continues to rise and increased to 96, 4%. Our same property NOI results. We'll also continue to steadily recover.
<unk> per unit for the third quarter was 40.
And these metrics still reflects the direct effects of COVID-19, and pandemic related provisions however, as occupancy trends back to historic norms. The impacts will continue to lessen.
Ongoing leasing momentum reflects a favorable pension recall that before we sort of if you recall that we were hard at work selling lower growth assets long before this pandemic and these efforts resulted in a strong tenant mix and a strong asset base.
Tenants eagerness to capture market share in this omnichannel environment is intersecting with the attractiveness of our high quality locations and compelling demographic profiles.
Well capitalized forward thinking retailers are season on the opportunity to lease well located space, which Rio can has in abundance.
This is evidenced by the fact that we completed nearly 1 million square feet of new and renewal leasing during the quarter and signed 217, new leases, but it is not just the number of leases that we should note here today, it's the breadth and the quality of these tenants that will support our growth and resilience moving forward.
Lease rates continue to trend positively with blended spreads of seven 5% are new and renewal leasing spreads continued to demonstrate the healthy upside between our average portfolio and market rents and our ability to grow rents even in the most volatile of environments.
We're confident that our leasing and operating metrics and our dogged pursuit of efficient operating practices will continue to result in organic growth.
While we continue to drive this growth through our entire portfolio our attention never waivers from our long term strategy and commitment to maximize the vast number of growth opportunities at our fingertips.
I am now going to focus on the capital recycling activity that we benefited from recently the.
The transaction market has rebounded and the cadence of transaction activity is projected to exceed pre pandemic levels.
<unk> is well positioned to thrive in this market is there is increased demand for convenience space well located retail sites, particularly those with future development potential.
We just witnessed a 20 month strength with stretch where the retail landscape. It couldnt have possibly have been more stressed and challenge in defiance of the retail narrative that prevailed through this period, we're sitting with occupancy and rent collection close to historic norms. The security of the income generated by these strong properties results in cap rate compression within the market.
Thats typical of those in our portfolio.
The desirability becomes even more pronounced when the solid income is complemented by the intensification opportunities throughout our portfolio.
As more proof points surface, we will continue to see enhanced net asset values.
We're taking the opportunity to benefit from the disconnect between the private and public markets to trade our assets at attractive pricing relative to the net asset value discount reflected in our current unit price the.
The capital raise we will work hard for our unitholders as this disposition program effectively repatriate capital from low growth or vulnerable assets and allocate it to more beneficial uses strengthening the balance and funding higher to the balance sheet and funding higher yielding more diverse mix use development sites the.
The valuation of our assets in the private market are proof points in our proposition and a strong precursor to the values that we believe will continue to be recognized in our organization.
Turning now to <unk> living and Rio <unk> ongoing development.
We are known as the industry leaders in obtaining zoning entitlements and as a result, we've got one of the country's largest and most advanced development pipelines.
Our pipeline translates into lucrative opportunities to convert properties to their optimal use of proven cycle that will continue to pay off in 2021.
<unk> long into the future.
This pipeline fuels the diversification of our incomes to the delivery of mixed use projects and the creation of NAV over the longer term.
Development proceeded essentially unabated through the pandemic, particularly for mixed use and residential construction in select markets, where housing remain in short supply.
Trust purpose built residential rental portfolio continued to expand and Theres a dramatic acceleration in leasing activity since the provinces progressed in their reopening initiatives.
<unk> residential rental portfolio. Currently includes almost 500 completed units across five buildings and an additional 3500 units, which are now under development.
We're going to deliver approximately 290000 square feet of new space by the end of this year, including two mixed use properties and highly coveted Toronto neighborhoods. Those are litho at Dupont Christie and strata College of Bathurst <unk>.
Once stabilized these new spaces will contribute meaningfully to sustainable growth in NOI and NAV creation.
We continue to demonstrate that we have the expertise to create value in a variety of ways.
As our press release detailed Rio can living also saw robust sales activity and new condo projects.
One example in July Rio Kim living launch the sales for the first phase of verge are mixed use project located on the Queensway in Toronto, We pre sold 96% of 176 first phase units that were released in the second phase is selling at similar velocities.
I believe the implications of the recent residential leasing and condo sales momentum.
<unk> further than our multifamily residential portfolio the enhanced demand for urban transit oriented mixed use properties signifies a validation of <unk> growth strategy and it's a testament to the strength and resiliency of these great communities.
I have complete confidence in Rio can living will thrive in the near and long term. The total NOI from our residential rental operations will continue to increase as we complete new projects throughout this year.
With that I'm going to turn the call over to Dennis facility now who as most of you know joined <unk> as our CFO in September of this year and Dennis has already demonstrated that his breadth of financial knowledge leadership and corporate strategy experience will be a tremendous asset to the trusts. So now for the first of hopefully many many more.
<unk> I give you Dennis.
Thank you Jonathan and good morning to everyone on the line.
First of all I have to say that I'm very excited to be speaking with you in my first quarter as CFO of <unk>.
Jonathan mentioned, our business performed very well during the quarter in the last 20 months have proven the quality and resiliency of our portfolio and our tenants. We have also advanced a number of our development projects, which are significant growth lever that is embedded in our portfolio.
Turning first to our results.
<unk> for the quarter was $126 9 million or <unk> 40 per unit compared to <unk> 41 per unit in the third quarter of last year.
These results were driven by strong operational performance, resulting in a six 6% increase in same property NOI as compared to the prior year quarter.
Our same property NOI increase was the result of strong cash collection of our tenants was enabled us to record a much lower pandemic related provision of $2 9 million compared to $14 4 million in Q3 of 2020.
We also point out that the prior year quarter benefited from inventory gains of $11 4 million compared to none in this quarter and also for millions of <unk> from assets that have since been sold the combined impact of <unk> <unk> per unit.
As Jonathan mentioned, the strength and stability of our tenants has resulted in overall cash collection of 98% for the quarter.
Based on what we see today, we expect cash collection progressively trend towards historical norms and the impact of provisions to remain at low levels in future quarters.
In fact, we decreased our number of tenants that we classified as potentially vulnerable due to the pandemic from 21% in Q2 to 15% at the end of Q3 as a number of our tenants have bounced back very quickly with re openings.
Excluding the impact of the provision same property NOI was down slightly by <unk>, 8% compared to the prior year quarter. This was primarily due to average in place occupancy for the quarter being lower than it was in the prior year quarter. This lower averages was the result of certain tenants, leaving spaces in late 2020, the majority of <unk>.
Which has since been filled with new leases at higher rates.
We note that this lower average occupancy is in contrast to the period end occupancy, which was higher at the end of Q3, 2021% in Q3 2020 on both and in place and committed basis as spaces were filled and leased leases signed towards the end of the quarter, which will benefit our results going forward.
Now moving to some other areas of the business.
During the quarter, we continued to advance our strategy a number of fronts, notably we have been actively recycling capital streamline our portfolio and raising funds to invest in growth opportunities that generate higher returns.
As we recently announced our dispositions for 2021 are valued at $881 million all about $16 million of west are closed our firm deals.
These sales were priced at a blended cap rate of 374%, including $667 million of income producing assets at a weighted average cap rate of 493% based on in place NOI as well as $213 million of development properties.
Needless to say this is a significant amount of equity capital raised at attractive pricing.
As Jonathan mentioned the cap rates that we achieved are supportive of asset values within our portfolio and demonstrate that buyers are willing to pay for development potential.
We have also continued to advance our 40 million square foot development pipeline that is embedded within our existing portfolio.
We believe that this is a very high quality pipeline given that 100% of it is located in Canada six major markets over 80% is dedicated to residential buildings as part of mixed use properties addressing the demand for housing. The vast majority are located in close proximity to key transit lines and over half of the total pipeline has received zoning.
Or are currently in advanced are currently advancing through the zoning process.
The scale and quality of our embedded development provides real counts as a substantial value creation lever.
We have a distinct competitive advantage due to our in house development expertise and our residential focused program branded Israel can living.
In terms of unlocking that value our development team has continued to advance our progress our projects under construction.
Well, our largest development project and one of the largest in North America construction continues to advance on schedule. The base building construction of the commercial component comprising officer retail is approximately 80% complete.
The office component is nearly fully leased and is expected to reach 99, 5%. Following the completion of certain progress leases. The leasing of the retail component is advancing as expected with leases signed with a number of key tenants.
We expect rent commencement for the office component to commit to occur in phases over the course of 2022 and the retail component to follow in late 2022 into 2023.
Our residential rental project that the well is also well advanced and is expected to be delivered in 2023 as well.
In addition to the well we advanced a number of our other projects having delivered two mixed use developments. This year in Toronto, which include both residential rental and retail components. We have three additional projects at Ottawa that will further expand our residential rental portfolio over the course of 2022.
In total we expect our residential projects that are currently in operation or under construction to contribute approximately $35 million of run rate NOI was stabilized and expect to grow. This further as we continue to advance this strategy.
In addition to developing rental projects as Jonathan mentioned, we have been advancing our condo projects. These projects are another mechanism through which we can unlock the value that's embedded in our portfolio. We currently have six condo countless projects underway either a construction of our pre sales and in total these projects will generate approximately 190 <unk>.
Inventory gains as they are completed over the coming years.
We see the execution of these projects as proof points for our ability for the ability of our platform to deliver on the value creation opportunity that is in front of us.
A further proof point for our development capabilities is the fact that third parties are willing to pay us for this expertise in the form of fees for projects, where we have not managing partners.
While this is currently a modest modest income stream for us generating $10 9 million of fees in the first nine months of 2021, we expect to expand this source of sustainable income is there a strong appetite from private investors to participate in our development program.
Of course underpinning all of this is our strong balance balance sheet.
We ended Q3 with $1 1 billion of liquidity on hand, and credit metrics that remains a part of our growth strategy.
Given where we are in the development cycle on a number of projects. We expect our net debt to EBITDA to naturally improve as these projects are delivered over the course of 2022 and 2023.
In addition, we have advanced our financing strategy to shift our debt to a higher proportion of unsecured and to extend the weighted average tenure, we believe that this approach will increase our financial flexibility and decrease risk.
To this end, we issued $450 million of seven year Green debenture and debentures with an all in coupon of 283%.
This issuance was five times oversubscribed, demonstrating the attractiveness of Brio, Kansas debt investors, who are seeking the quality and reliable cash flow that our portfolio offers.
In addition, we announced the early redemption of our 250 million series B debentures and have repaid our plan to repay $154 million of secured financings.
Finally, following the distribution cut earlier this year, we are operating at a payout ratio that allows us to retain a significant amount of cash flows for reinvestment.
We note that our effort our headline <unk> payout ratio of 72, 4% as calculated on a 12 month trailing basis. So still includes periods prior to the distribution cut.
If we look strictly at Q3, 2021 distributions at <unk> the payout ratio was much lower at 61%.
This level of payout ratio allows us to retain approximately $150 million of cash flow for reinvestment in growth initiatives already accounting for the funding of maintenance Capex. When you layer on project level leverage this translates to approximately $400 million of cap capital essentially funding our annual development spend based on current levels.
While there is still much to do in order to move forward our financing financing objectives. These just a couple of examples of how we continuously improve our balance sheet.
And with that I will pass the call back to Jonathan Alright, good inaugural effort.
Yes.
So look what I'll say is that over the last 20 months.
Important of well located professionally managed physical spaces, it's really been rediscovered I mean, there were early conclusions of our retail struggles and I think they have given way to the recognition that people want engagements and control in their shopping experience of bricks and mortar retail isn't an alternative to e-commerce, it's not that bind.
It's an essential part of the Omnichannel experience, bringing that last mile gap between distribution centers and consumers' homes started bridging that last mile gap.
Our REO can't focus as it has always been is on our customers. Our tenants we're committed to evolving our spaces to benefit from emerging trends and help really solidify Rio can and Rio Tinto tenant's place in that last mile delivery chain.
Continue to demonstrate the ability to create exceptional and thriving communities and really in any context, we proactively manage our assets through ongoing investment to ensure our properties responsibly maintain their competitive position and Canada's major markets.
And I've said this previously and I'll say it again <unk> is precisely where Canadian launch and need to be we've got the enduring strength stability and growth strategy to create lasting value.
It's a privilege to lead this incredible team and have us well positioned portfolio to continue our story of reliable income and trusted growth to create value for you. Our unitholders. Thank you again for being here with US today and now we are all happy to respond to your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
One moment for questions.
Our first question comes from Sam Damiani with TD Securities. Your line is now open.
Thanks, Good morning, everyone and congratulations on the quarter, great to see the pandemic getting more and more in the rearview mirror.
Jonathan your comment about.
The impact of the subsidy program, turning over and having no impact on rent collections.
Others have said that as well, but I'm. Just wondering is there something specific that you're sort of referencing when you when you say that.
What gives you that confidence.
Thanks, Tim and good morning to you too.
The information that we get is from tenants specifically I mean, one of the very very faint silver linings of the pandemic is that we have in.
Intensified our day by day discussions with our tenants large and small and we did that for a number of reasons, but a large part of that was to really help them through the process.
Applying for the various government subsidies that were available to them and in doing that we've established I think pretty strong connections with them and what we do with those connections is really seek information from them constantly and what we're getting from a wide variety of tenants as feedback that things have normalized and that the timing.
Of the removal of the stimulus will actually bridge nicely with the return to regular commerce now, we're not suggesting that there will be no fallout. My sense is that every January we typically get some fallout Sam from retailers, who sort of hang on for the holiday season, and then just.
Please.
Close things down come January and February we didn't see any of that last year. We suspect we'll see some of that this January and February but we don't think it will be more than normal course.
But I think that really gives you a sense of where we're getting our information from theres nothing more scientific than that.
That's very helpful. Thank you and it's great to see the occupancy and the leasing traction in the quarter can you maybe parse that out just by some of the segments of the portfolio between grocery power center in closed malls whats the segments are outperforming.
And what segments are lagging the recovery right now.
Sure I'm going to hand, it over to Jeff Ross, our head of leasing.
So on the ground and we have a good finger on the pulse of all of the trends and the tenants that are showing strength and growth in those that are still reluctant to grow so jeff over to you yeah. Thanks, and good morning, So listen we're seeing really.
Pick up across the board both unencumbered.
In our supermarket anchored strips the unclosed and let you refer to as the power centers, we're seeing absolute growth from grocery both national and ethnic <unk> and full service restaurants anytime we have a blip there is somebody right behind to pick it up and the interesting trend that we're seeing a lot of rate methane proprietary retailers.
Like under armour Levi's Nike.
Adidas Skechers stepping up to take some of these on their own account, which adds a lot of credibility to the centers and it certainly gives us the strength of the covenant in behind so we're seeing that as a continued growth model.
Enclosed malls are driving a little bit slower to come back tenants are just stepping back a little bit they want to see footfall continue to come.
Come back to it ends up but funding up what we are seeing is a lot of RFP and governmental request for space and those enclosed malls create an ideal environment for the boxes already exist they can be converted relatively.
Secondly, inexpensively and there seems to be a lot of interest in those so we're continuing to work very closely with all the governments at all levels.
Theyre looking for those type of situations health and wellness continues to drive it as well an awful lot, but I will tell you across the board no matter, who it is we're spending a lot more time scrutinizing, who the new tenancy is coming to ensure that <unk> got some skin in the game and they've got the strength to carry on but right now the velocity and the interest.
From the leasing side has been pretty strong.
That's great color and then I'll turn it back thank you.
Thanks, Tim.
Our next question comes from the line of Mark Rothschild with Canaccord. Your line is now open.
Good morning, everyone and maybe good morning.
A little bit of what you are asking in regards to samit for the leasing spreads can you talk just a little bit more about how do you feel that this is more of a stabilized number.
Back to no impact from Covid or is there still more improvement that you can get and also if you could break it out by just maybe some of the different retail types. If you are seeing trends.
Yes, I think what we've seen over the last couple of quarters Mark as is the trend that we can we.
We believe we will be.
The one thing I've learned not to do is put to two sturdy prediction on COVID-19 because it's currently a pretty resilient model.
Little pandemic and it keeps on coming back when we think it's gone but for right now all signs point to.
Stabilization of normalization in both retail and residential and so we do believe that what we've seen over the last two quarters with leasing spreads same property NOI.
Occupancy improvement is something that is in fact stay apart.
I would say, it's going to be consistent and I think its sustainable and I do think we will get back to pre pandemic levels in the vast majority of those of those.
Categories and in terms of the the categories that are growing I think Jeff put it best when of course, we rely on necessity based retailers to really fill a lot of the spaces and they've come in and taken.
They've contributed to that seven 5% leasing spread in taking spaces that were leased to lower rates.
Good news is they are also very resilient and uses and I think that they will continue to improve our overall tenant mix and Jeff alluded to it but it's absolutely true we as an organization have been very judicious in the types of tenants that we've been putting into our available space and I think that will serve us very well, but in terms of the categories I can't I don't think I can add much more.
Color than than what Jeff had provided and I think there's definitely new categories that have come into play like these governmental and quasi governmental users, which have really filled a lot of space. They bring a lot of foot traffic to our centers and they're well received by their co tenants.
Okay, great. Thanks, that's all for me.
Thanks Mark.
Our next question comes from the line of Tal Woolley with National Bank. Your line is now open.
Hi, good morning, everyone.
Al.
Let's start with Inclusionary zoning, obviously the policy got past district by Counsel can you just give.
Some thoughts about how you kind of see this unfolding with respect to your development plans.
Sure I'm going to hand, it over to Andrew Duncan who is middle name is now inclusionary zoning because so much better.
Andrew over to you and you might want to come with us.
Thanks, Jonathan Hi, Tal.
In terms of impact on our development pipeline from an inclusionary zoning standpoint.
Listen I think we spent a lot of time understanding the policy and specifically understanding the transition rules.
We're very confident that a lot of the near term and medium term projects, we've got in our books.
What we need to do to advance the policy coming into effect to ensure the best of our ability those projects are protected financially.
I would say philosophically as an organization, we don't object to inclusionary zoning, but we do have some issues in terms of how the city of Toronto, specifically is intending to rule out the policy.
And not diving into many of the details of those really consist of the fact that the city of Toronto was asking that inclusionary zoning be borne in the back of developers and owners exclusively without providing any incentives whatsoever.
Beyond that like I said to reiterate we have done the work in advance of the policy come into effect in and work very strictly with the city to understand them to ensure the majority of our pipeline is excluded from it in the near and medium term.
And just to be clear, it's it's 5% purpose built rental to start growing to eight is that the barboursville.
Bob Israel rentals right now is zero.
For the near future and will grow to 5% over the next number of years.
Condominium starts at anywhere from seven to 10, depending on where you are in the city and the jurisdiction and will grow year over year is I would say is the inclusionary zoning policy. The city has put in place is a policy right now it has to be endorsed by the province through a number of mechanisms and they are also committed to one year review.
So I think theres a lot more to happen on inclusionary zoning before it is finalized from a policy standpoint.
I've got this question on my back pocket for the next two years is what you are saying.
Happy to answer it every time.
We've got so much to how we got so much in the pipeline right now that is already zone, which means as it falls outside of this regime.
So the near term impacts for Rio can are quite limited, but as Andrew suggested I mean, we have always been.
Very much on side with with providing affordable housing, we think that the key is actually more supply.
That's obviously it upheld by for us as well because it's difficult to get.
Forget entitlements, but once we have them, we're certainly always looking for ways to ensure that we are helping the city.
<unk> and helping the continued demand.
Therefore for housing and from all different demographic profile. So we're doing what we can to aid in that whether it's policy or not.
Okay.
And then just pivoting to the balance sheet.
You guys always carried a little bit less term on your balance sheet maybe than your peers.
Given that rates have.
It started to move here, a little bit or how are you thinking about or you think about extending the term on the balance sheet. How are you. How are you looking at your your financing strategy.
It served as anything with seven year raise that we just did it gives you an indication that it is an objective of ours to extend out that term.
Hard to do overnight and of course, we have to weigh that against.
The cost of debt, which as you can imagine higher when you are doing longer term debt, but we really do think it is a responsible initiative to expand out that term Dennis I don't if you have any further color on that and I think that's exactly right we will way off.
Cost and tenor as we go through time and look at rates, but with that I think are aligning our.
Ill turn it over time to be a bit closer to the weighted average life of our leases as an example is something that.
That will definitely be chipping away at.
Okay and then my last question is just as we're getting closer to year end here.
With the volume of dispositions that you guys have done.
Sometimes.
Other companies have followed when they pursued that tax position gets a little funky towards the end of the year and they have to do special what is what's sort of your perspective on higher taxes will be with respect to dispositions by the end of the year.
Yes.
We've always had an eye on on tax implications and we plan our processes, including our disposition strategy as well in advance of any given year and we did so with a view to ensuring that there wouldn't be any negative impact or any real material negative impact to our unit holders or to us as an organization. So we plan things very carefully.
Unless Dennis kicks me under the table I would say that there are no real implications from a tax perspective.
The from the.
Physician successes, we've had this year.
Okay, that's great.
And we might have a qualifier no I think I think it's exactly right I think just to be directed and we don't see a need for any.
Any kind of special distribution for sure we may see that percentage a little higher than it's been over the last last few years.
But not a material impact and certainly when we look forward over the next.
Number of years.
Don't see this as being it being an issue we have are.
Our tax situation is manageable to avoid any such.
Very high levels, our special distributions.
Okay. That's great. Thanks, everyone. Thanks.
Our next question comes from the line of Sam <unk> with RBC capital markets. Your line is now open.
Good morning, Bob.
<unk>.
Just in case occupancy again ticked up nicely I guess sequentially just given.
Given all the commentary that you've made around the leasing philosophy of how you see that trending as we work through the next 12 months.
From an occupancy standpoint, and maybe perhaps.
Timing.
Getting back to pre pandemic levels, which were I guess in the mid 96% range.
Well right now our committed occupancy isn't that mid 96 range.
And so we still think there is room for improvement because we are seeing.
Remember, one thing and I alluded to this in mind.
Notes for the call we worked very hard before the pandemic to curtail our portfolio and get rid of a lot of secondary market assets that have low growth a little higher vacancy rates and I think we're really going to see the benefits of that now as we as we emerge from this pandemic.
Pandemic crisis that we have been and so.
So we do feel confident that one the existing occupancy rate of that mid 96 is definitely sustainable and two we're quite confident that we will improve on it and get closer much closer and hopefully eclipse that 97% Mark in the coming year, that's what things are pointing to right now Tommy and again were.
Based on the on the lineup that we have for certain spaces in the major markets, we feel pretty confident about that the one question. Mark of course is always office our office portfolio did take a hit during the during the pandemic.
Jeff and his team have done a great job of filling a lot of the space that was left open or vacant over the course of the pandemic and I will echo that.
Words of our.
Our partner at alloy properties re Michael Emery, we really do believe that office in a place like Toronto will stabilize in the work from home.
Trend will maybe not and but certainly reversed course, a little bit and that will stand to benefit that occupancy overtime, but theres a little less certainty in terms of the timing of that from a retail perspective, though we've got strong confidence in our ability to get that number improved from where it is currently.
Got it and sorry, I would just refer you could you can place nothing committed but Bryan the answer of course is all about.
In terms of your discussions maybe much Kenny can you comment on any perhaps implications that supply chain issue might be adding on there.
Their recovery.
How that might impact leasing velocity if at all.
I mean, Jeff you're again.
Speaking of the terms of all the time are they giving you any color as to what the implications are not yet no. It's been kind of tied to the chest, but no I don't have a whole lot to offer there that's probably dependent on the us.
Grocery you'd probably not so much in hard goods, probably a little more but we have not I mean.
All we've heard is that margins are up sales velocity is up generally across the board and on the experiential side again, thankfully activity's up but we haven't received any scientific feedback regarding the supply chain issues on their businesses.
Okay. So it sounds like really not much in terms of that could possibly impact the pace of new store openings are.
Or anything of that nature.
No I mean look.
The only implications that might have us on our end like we've got a construct these spaces for these tenants and sometimes its existing spaces, where we're bringing in.
We're doing the landlord's work and some of the tenant fit out that is always susceptible to delays because of labor shortages and supply our supply constraints.
But it hasnt really created any material delays, but around the edges it probably will.
Got it.
Mentioned, the private market appetite for us, it's still very strong.
Ted.
Just looking at your fair value gains in Europe cap rates holding relatively steady sequentially I'm, just curious if youre seeing any perhaps downward pressure in the private markets for the asset, particularly.
Particularly retail.
It might drive portfolio value gains over the next.
Several quarters.
Yes for sure I think what we've seen is more of a recent trend a lot of the transactions that serve as proof points for us went firm or closed after the quarter end some of it near the end of the quarter and look we take our approach to <unk> evaluation very judiciously seriously. So we often will get third party appraisals.
Solidify both of those proof points and we're in the process of doing all that right now, but the trends definitely do point to higher valuations for those types of assets, we own and I think that will be reflected over time in our NAV and an <unk> valuation.
So it's just a matter of timing.
Got it.
And last one from me any further updates on retail leasing at the well.
Yes, so I mean, we haven't publicized any specific numbers, but I can tell you from the reports that I get from Jeff and his team quite often is that it's really heating up quite substantially and that makes sense given that the physical space is now available to be viewed by the <unk>.
And it's also now we're about a year away from the opening which which is I think the comfort zone for a lot of retail tenants to commit so we are I.
I think the next report we provide or disclose we will show a market increase that is going to be I think quite.
Quite welcome for the Investor public, but it's not a surprise to us given how we view that asset and just how strong it is and how well it will fit within that community.
Thanks, very much I'll turn it back.
Thanks Bonnie.
Our next question comes from the line of Howard Liang with very does investment. Your line is now open.
Thanks, Thanks for that.
Taking my question then.
Nations Denniston.
Yes.
Earnings call.
Yes, I had a question about the.
<unk>.
Vacancies.
Absolutely.
8%, which.
A lot of the vacancies are concentrated in either in closed malls or secondary markets or are they kind of spread out.
So I'm going to hand that over to John Ballantine. When my first instance is again a lot of the vacancies right now are coming from office, but in terms of the retail portfolio do you think they're spread out or more from enclosed mall, yes, I'd say.
Or a little concentrated in closed malls.
And on the office side I would say as Jeff said earlier, we are getting more traction on the office side.
It's easier when we can take a very detailed look at our portfolio on a property basis. There are always certain larger vacancies that come up not necessarily pandemic related but just based on Expiries. We had a larger one in one of our office towers in Toronto in late.
2020, we're actively battling those there is a bit of a time delay, but you will see occupancy continue to climb as John said earlier.
Okay. Okay. So there's some puts and takes there.
And just kind of looking at the evaluation cap rates for the major markets.
The secondary markets it looks like.
The overall cap rates down has compressed.
Mix shifts towards major markets like secondary markets picked up a bit.
Pit that as you continue to disclose more of these secondary markets.
<unk>.
It gets harder and harder to dispose of some of the events.
Maybe it gets about two less attractive.
Yes. Once you start later earlier were in high demand.
Yes, I think that there's always going to be more demand for our major market assets less demand for secondary market assets, hence our strategy in the first place to exit those markets.
But I.
I would also just say that.
We've sold as much as we're looking to sell in the secondary markets right. We might have the odd sales going forward, but we're now at well over 90% in fact over 91% in major markets. So I don't think its going to really impact.
Don't think youre going to see a lot more sales that come in from those secondary markets.
I think demand is still there for those assets from what we've seen over the last year, we still are getting shallower pool, but there is still there is still a willingness to own those assets by the local buyers are syndicators who've just been priced out of the major markets, so because of that demand.
Limited I don't see the cap rates really.
Increasing too much on those secondary market assets, what I do think will happen is continued demand for major market assets, where and I do think and again. This is crystal balling Howard So don't hold me to it but I really do believe that there will be a significant improvement in pricing over the next year and strong retail assets.
In the major markets.
Yes, I think that's a reasonable conclusion, given it looks fingers crossed we're turning the page on the pandemic.
And then just kind of one last one on a follow up on the well the question, but the retail leasing.
The leasing conversations we're having is there any concern.
And it's.
Prospective tenants are.
Also you're also competing with them.
Too far from the well path, which has a lot of vacancies I think the detail. So is there any pressure from the nearby vacancies in the past.
So my perspective, and I'll be happy to get anyone else in the room to weigh in on this but I think it's actually a totally different market.
And when we look further west for our comparables or competitors rather than east. So we actually think that King Street is where a lot of our competition is and we've created an environment that is entirely different than the path, which is largely <unk>.
Walk through convenience stops, whereas the well it was really destinational and it serves all of the constituents that are already in that community being the ones that we've created and the residential or office or the one surrounding that area, where there's so much residential density that they.
I need a place like the wells to come and experience in shop and enjoy.
So we actually don't think there will be any impact from the struggles that those unfortunate struggled with those top tenants are having.
Again, Jeff I don't have you have any color on that yes, no listen the physicality of the path and the limitation from people in seats in the office is really what's limiting its there and it seems to turn people on an ongoing basis, because they don't want to see this happen again, we are on the street, we are not underground and I'll also tell you.
As you move West University is about four kilometers wide it seems to be a very dramatic and different market to the east and west side of University and as Jonathan alluded to.
Downtown less per year has been searching for some sold some heart.
Our community and we're providing that both in the commercial and in the residential that's going up there and its drawing not just east to west, but north and south because canaccord <unk>, which has a massive development to the cell has never had any real hard to it by drawing over the north side. This is going to create that center of community for that downtown West.
Market, but there is if anything there seems to be tenancies that are looking to look for their new lease on life and get out of the path and come into our type of a center, which is very open very porous open on all sides easy for customers to enter and I think we're a wonderful alternative for the next phase of downtown West.
Okay, that's great color.
And as you mentioned makes a big difference. Thanks, Thanks, again I'll turn it back.
Thank you.
Our next question comes from the line of Janney <unk> with BMO capital markets. Your line is now open.
Hi, Good morning, Hi, Jenny.
And then take advantage of having an inclusionary zoning expert and ask a couple of detailed questions.
The enactment of the policies that are going to go ahead, just wanted to be clear that all the projects that are currently underway will be grandfathered from that but it will be all incremental new approval.
Hi, Jamie it's Andrew again, yes, I guess as it relates to our our pipeline any project that is already zoned as legacy out of inclusionary zoning any.
Any project that is under currently within the zoning process can be legacy node or inclusionary zoning. If a site plan application is made between now and September of next year.
So to the degree we're in that process, we're going to take those steps to be legacy out of it because one of the premises of inclusionary zoning is the.
The incentive is paid for by an adjustment in residual land value and we already own. These properties. So as such we're going to take it we're going to do our best to get get a legacy treatment and not be subject to that future requirement.
The other thing I'd add is our portfolio development portfolio was across the entire country inclusionary zoning as it currently stands the city of Toronto policy.
Correct correct Okay.
That's clear so when we're thinking about the condo component I noticed that the pricing ceiling, but they had mentioned are.
Well below market is that something that they expect the developers.
Are you going to ask you to be selling.
The price cap that I mentioned is that how it works.
Jenny there's two options further developers to comply with inclusionary zoning if they are subject to it one is offering affordable rental units and the other is.
Offering affordable units for purchase.
Would say that it's less financially punitive to offer affordable units per rental than purchase and the set aside rates in terms of the requirements for the number of units is greater in the purchase scenario.
I would anticipate as we proceed through the through people looking at the policy and having to be subject to it you will see a greater proportion of if not the majority of all people of all developers skewed towards providing affordable rental as opposed to purchase but yes all of it in the current policy.
Has to come from the developer in terms of funding it.
Okay, Okay, and you mentioned that there were no incentives being offered to the developer.
Absolutely nothing.
Opening of that discussion.
Offering additional density in exchange for the vessel.
Got it.
Discussion I'll talk about.
And all of the.
Jamie It's a good point all of those things were discussed with the industry throughout the process and the end result is the policy that was approved yesterday, whereby there is no incremental incremental Don density offered the one the one incentive the city's considering as not requiring or has considered as not required parking for any of these affordable units for rental or purchase.
<unk>.
But at the end of the day there is no other incentives all affordable housing that currently is provided in the city Toronto most of it goes through something called open door, where fees are waived and theres a number of incentives provided for a developer Friday affordable units under the new policy. None of that is applicable and I will say that in addition, there is <unk>.
Came out with a program a few years ago, where they.
They use their balance sheet, it's called the <unk> program, where they use their balance sheet to provide.
Cheaper financing to developers, who will adhere to not just <unk>.
Portable housing requirements, but also accessibility requirements and I think I applaud that program is something that still exists and I think that thats something that again I think the PMA C would be.
It would benefit the communities in which the MHC serves if that is is continuously rolled out and continuously taken advantage of by developers, particularly for our rental housing, but thats sort of over and above or different than the inclusionary zoning policy that was just launched yesterday.
Great. That's very helpful color. Thank you.
Looking to the balance sheet it looks like your quarterly guidance.
All per center.
Hi, Karen.
Wide range for the last few years.
The uptick in interest rates I'm wondering.
There is any appetite to maintain it at that at the current levels are an.
In effort to sort of bring that number down.
Floating that no I think we've been pretty.
Throughout all interest rate cycles, we've been pretty consistent with the amount of floating rate debt that we've taken on our balance sheet and I don't think that thats going to move.
Any dramatic way.
Okay. Thanks.
And then with regards to transaction related costs.
On the disposition.
Hello.
Cost all flushed through.
Or should we expect some of that to fall into Q4.
On transaction costs, there were some of the deals that were in our previous press release journey that were.
Actually closed.
In Q4, and some of them haven't closed yet they just went firm yes. So they will be they will definitely surface in Q4.
Okay great.
That's all for me thank you.
Thanks, Jamie.
Again, if you have a question. Please press Star then the one key on your Touchtone telephone.
Our next question comes from the line of Sam Damiani with TD Securities. Your line is now open.
Thank you one last question not nearly as interesting as the last few just on the fourth quarter lots of cash coming in between the debenture and the dispositions I don't know if theres, one redemption being planned but.
Is there likely to be substantial cash on the balance sheet at quarter end.
I don't think we will have cash on the balance sheet at the end of Q4.
Im lines will be substantially available at that point in time, where we are.
Ron a bit at the end of the quarter, we will repay our $250 million.
Debenture series D, which would have been due next may we're going to repay have and they're going to finish repaying. Some secured mortgages and then we'll have the balance will go on to our life.
That's great that's it for me thank you.
Thanks Sam.
There are no further questions at this time I will now turn the call back to Mr. <unk> for closing remarks.
Well just very briefly thank you everyone for dialing in and thank.
Q4, and during the last 20 months with US and we're again excited for certainly the next 20 months or beyond I have a great day everyone.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.
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