Q4 2021 RioCan Real Estate Investment Trust Earnings Call
Good day, ladies and gentlemen, and welcome to the.
Real estate investment Trust.
Our third 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.
Instructions will follow at that time.
I would now like to hand, the conference over to Jennifer.
Senior Vice President and General Counsel you may begin.
Thank you and good morning, everyone I'm, Jennifer Smith, Senior Vice President General Counsel and corporate Secretary for Rio can before we begin I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on reopens website yesterday evening before turning the call over I'm required to.
Read the following cautionary statement in talking about our financial and operating performance and in responding to your questions. We may make forward looking statements, including statements concerning reopens objective its strategies to achieve those objectives as well as statements with respect to management's beliefs plans estimates intentions and similar statements concerning anticipated future.
Events results circumstances performance or expectations that are not historical fact these statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward looking statements.
In discussing our financial and operating performance and in responding to your questions. We will also be referencing certain financial measures that are not generally accepted accounting principle measures GAAP under Ifr F. These measures do not have any standardized definition prescribed by <unk> and are therefore unlikely to be comparable to similar measures presented by other reporting issuers non-GAAP measures.
Would not be considered as alternatives to net earnings were comparable metrics determined in accordance with IRS as indicators of Rio can performance liquidity cash flows and profitability Rio <unk> management uses these measures to aid in assessing the trusts underlying core performance and provides these additional measures. So that investors may do the same additional information on the material risks that could impact.
Our actual results and the estimates and assumptions we 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 ended December 31, 2021, and management's discussion and analysis related thereto as applicable together with Rio <unk>. Most recent annual information form that are.
All available on our website at Www Dot SEDAR Dot Com I will now turn the call over to Mr. Jonathan given our president and CEO . Thanks.
Thanks, so much Jennifer thanks to everyone, who has called in today and thank you also to my incredibly talented senior management team who is here with me.
Today for this call.
So Q4 like the rest of 2021 demonstrated the quality of <unk> portfolio, the resilience of our tenants and the talent of our people.
The distribution increase we announced yesterday clearly indicates our confidence that we will deliver sustainable growth and strong returns for our unit holders.
Also give guidance and we provided this guidance as it simply makes management, even more accountable to its unit holders.
But I am not going to downplay the challenges that the commercial real estate industry faced throughout the year.
2021 was volatile tenant shutdowns lasted into the summer and there were numerous phases of restrictions on retail throughout 2021.
The euro ultimately ended with additional disruption courtesy of <unk>, which incidentally paid a visit to the gillon household which was unwelcome as well.
That said, it's important to recognize that these volatile and uncertain time strengthened our confidence in Rio <unk> competitive advantages and its vision for the future.
Critical nature of physical stores has been emphasized not diminished during COVID-19 .
Theres been a distinct merger of physical and online retail simply put COVID-19 raised questions about the future of retail.
Two years later many of those questions have been answered and our confidence in retail, particularly necessity based major market open air retail has been reinforced.
Sumer behavior confirms the Canadians will they want to control their shopping experience and physical retail stores will continue to play a critical part of their lives.
E Commerce and physical retail just coexist they've got a relationship and there is every indication that well placed physical retail exactly the kind of Rio Tinto plays a vital role in this relationship.
Are we going to focus today on our fourth quarter results. I also wanted to discuss our strategy for growth, which builds on our foundational strength and the value that is really inherent in our portfolio.
<unk> committed to responsible growth to summarize this means a prudent approach to capital management. It means reinforcing our ESG leadership position and it means ongoing investments to enhance our great culture. The.
The results of these investments, we're very evidenced in 2021.
And you've heard me say before that our commitment to ESG is organic it's not manufactured it makes good business sense supports long term value creation and it will certainly accelerate the positive momentum we saw this year.
Our efforts were recognized in numerous ways in 2021, including the award of a five star rating and the <unk> real estate assessment for the second year in a row.
And we're going to continue to advance our ESG initiatives as we enhance the quality of our portfolio and accelerate our growth.
This growth trajectory is also tied to our culture, which in my humble opinion differentiates Rio can drive results and it retains develop and attract top talent.
We advanced our cultural roadmap and our employees responded with the highest engagement scores in Rio Kansas history.
Our 2021 employee engagement results place Rio Ken in the top decile of similar size companies.
These outstanding achievements can only happen with an exceptional leadership team.
On that note I want to acknowledge two important changes to our senior leadership team here at Rio can Fran.
<unk> Smith has been promoted to SVP of finance Frank has been with <unk> for five years and recently stepped into the role of interim CFO as always she executed with excellence process is an experienced finance leader who is deeply respected both.
<unk> <unk> and within the real estate industry.
John Ballantyne, who has been promoted to chief operating officer and many of you have had the privilege of working with John throughout his short 27 year career here at <unk>.
Highly respected as a strategic thinker and an industry expert he is a champion for Rio Kim our employees and the communities in which we operate and as real estate IQ is invaluable in driving long term unit holder value.
Let's turn to our operational results.
Fourth quarter saw excellent momentum in our operating results with key operating metrics moving closer to pre pandemic levels.
Several large scale deals were completed and occupancy climbed to 96, 8%.
Important to note that retail occupancy buoyed the overall results and then the euro at over 97%.
Retail tenants continue to seize the opportunity to lease our well located space.
This further demonstrates the well located professionally managed physical spaces like the ones in <unk> centers are hard to come by and highly valued.
The spread between committed and in place occupancy tightened, reflecting the intersection of accelerated new retail openings and Rio cans ability to quickly turnover this valuable space.
Rent collection, which is still a closely watched metric in 2021 ended the year at 98, 6%. Despite the many lockdowns and restrictions we faced.
Leasing velocity was also healthy with blended leasing spreads of four 6% for the quarter and six 3% for the year.
Same property NOI increased by four 9% in the quarter.
A real kind of living residential rental portfolio also gained a lot of momentum.
Pivot at young and Shepherd in Toronto saw significant traction in the last quarter shifting from 62, 5% leased in Q3 to close to 85% as of February nine.
Another success story with Litho and Toronto are great mixed use development, which launched in July 2021, an increase from 27, 6% in Q3 to 61, 9% as of February nine.
In addition leasing commenced the two new residential properties within the portfolio latitude in Ottawa and Strada here in Toronto.
Early indicators are showing excellent demand for both of these dynamic projects.
Ryokan living and its partners are seeing strength and they're for sale condo projects with 1481 units released for sale in 2021 with 94, 4% sold as of February nine.
The profit expectation for Rio came from its existing condo projects is approximately $191 million.
<unk> per unit for the quarter was <unk> 46, an 18% increase over the same period last year.
<unk> unit at the year end was $1 60.
We're confident that our leasing capabilities and our efficient operating practices will continue to result in organic growth.
We're working hand in hand to evolve our commercial spaces. This is necessary to solidify Rio cans and our tenants role in that last minute our last mile delivery chain.
We envision what retail will need to be in four or five years, and we're starting to affect those changes now.
<unk> has enviable locations that goes without a doubt, but we won't rely on this factor alone we want to make our offering stronger for our customers are.
Our objective is to distinguish ourselves from others.
We continue to refine and further fortify our tenant mix, we're strategically investing capital into our properties to provide a consistent look and feel and finally, we're implementing textbook. So our technology solutions, such as our REO can't connect portal to enhance our tenants experience.
Now as you are aware development is also a critical component in Rio Cairns growth strategy investors have been patient over the last five years as we built up our capabilities and invested in zoning entitlement and construction.
We were clear minded in our objectives, we're confident in the income and NAV growth that will result from conversion of the zone lands into well located income producing mixed use assets.
Our in house development team delivered more than a quarter of a million square feet, a dynamic mixed use and purpose built residential rental completions in 2021.
Now as we complete development, we're breaking ground on new ones, we're achieving zoning on others and we're initiating zoning approval on still more.
This virtuous cycle will continue to be demonstrated long into the future.
And we're now at a critical inflection point. This is the first year, where the value of our development deliveries will exceed our development investment a trend that we expect to continue for years to come.
I am certain our unit holders will reap the benefit of the resulting NAV increases long into the future.
One of our most notable development projects as our flagship mixed use development the well.
Solid progress continued with the construction of the commercial component, which includes office and retail and it is now approximately 82% complete.
Approximately 90% of the office space is leased and retail leasing has gained significant momentum nearly 62% of the retail space is leased or in late stage negotiations with various tenants.
We've been very thoughtful in our approach to selecting tenants for the well our intention from the outset was to ensure the tenant mix is curated so as to enhance this extension of the King West community at the same time, we're creating.
Destination designed intended to draw traffic from far beyond the immediate radius.
The well will be completed over the next 12 months to 18 months and the retail component is expected to open in the spring of 2023.
To summarize the continuous improvement of our portfolio is happening concurrently with development deliveries.
<unk> will translate into a positive NAV outcome.
Youre going to see significant buildup of our NAV over the next few years, because the conditions will supported namely improvements in our shopping centers the increase resiliency of our tenant base the delivery of developments and of course better market conditions as this pandemic subsides.
Rio can't story continues to be one of reliable high quality income and steady responsible growth.
We've proven our ability to execute in the face of unprecedented challenges. Our focus continues to be on a long term strategy to maximize the value of this great portfolio and grow our business.
We have a dedicated team enduring strengths stability and the vision to execute and create value for you our unit holders I want to thank our whole <unk> team for their never ending commitment and contributions this past year and to our unit holders for their continued dedication and confidence in Rio can now happy to turn the call over to our CFO .
Dennis will suit.
Okay. Thank you Jonathan and good morning to everyone on the phone.
As Jonathan mentioned Rio can continue to see positive momentum throughout the business, which has translated into strong results 2021 had its challenges, but it also prove the resiliency of our business.
This resulted in <unk> for the Euro of $1 65 per unit, which benefited from continued improvement in our same property NOI and a partial year contribution from development that were delivered during the year. These benefits were offset by reduced NOI associated with that.
Unpacking that a bit further we note that the current year <unk> included debt prepayment costs associated with early repayment of certain debentures in mortgages as well as onetime compensation costs.
These items had a combined impact of the <unk> per unit.
Our same property NOI increase for the year was three 4%. This has continued to improve over the course of the year with the increase of four 9% in the fourth quarter as compared to the same quarter of the prior year.
This figure includes the benefit of lower pandemic related provisions.
Compared to the prior year, however, even when excluding the impact of provisions we achieved NOI growth of 1% in the fourth quarter, which further evidence is the continued improvement across our operations as the impact of the pandemic decrease.
Jonathan mentioned, our continued cash collection during the quarter the strength of our tenants is also reflected in the decrease in these pandemic related provisions.
About $2 9 million of provisions.
Provisions during the quarter compared to $9 million in Q4 of 2020.
This was $17 2 million for the year compared to $42 5 million in 2020.
We expect the need for provisions will continue to reduce going forward for some context, our annual accounts receivable provisions in the three years prior to the pandemic averaged only 850000 per year.
On a revenue of one of over $1 billion.
That's quite remarkable.
We also note that our ethical payout ratio for the year was 62, 6%, which is within our sustainable target range that we expect going forward.
During the quarter, we continued to improve our balance sheet, our debt to EBITDA improved to $9 six times compared to 10 times at the end of the third quarter, driven primarily by increased EBITDA.
We expect this to continue to improve other development projects come online over the next 18 to 24 months and we anticipate to achieve our target of less than nine times during that timeframe.
We made meaningful progress towards our objectives to increase our percentage of unsecured and secured debt and to extend our debt level.
And during the fourth quarter, we issued $450 million seven year unsecured green debentures at an interest rate of two 3%.
We used $250 million of these proceeds to repay our series B debentures, which had an interest rate of 375%.
The remaining proceeds along with the draw their lines were used to repay $385 million of secured mortgages during the quarter.
Following this all of our 2022 mortgage maturities were repaid and our <unk>.
Secured debt as a percent of total debt is 41% down from 46% at the end of the third quarter.
Our unencumbered asset pool currently stands at $9 4 billion.
We will continue to drive the secured debt percentage tap down, but it will take time, we monitor potential penalties on early mortgage repayment and interest rates on those mortgages compared to rates on unsecured debt.
Going forward, we intend to use secured mortgages only for a residential asset given the prices pricing advantages in the asset class.
We have also taken steps to manage our financial risk by entering into hedges to lock in the government of Canada rate for planned future financings.
It's not our business is speculate on interest rates, but rather we saw.
<unk> way to provide increased certainty in the context of the current rate environment.
We also have liquidity.
Currently a $1 3 billion.
This includes the $250 million increase in our corporate line of credit subsequent to quarter end.
Maintaining this level of robust liquidity ensures that we are prepared to take advantage of opportunities when they arise while protecting ourselves from potential risks.
Next I wanted to add some color to an important point that Jonathan raised earlier.
As we mentioned we've reached a point in our development program, we expect to see project deliveries outpaced spending and.
In the early stages of any development program. There is a buildup of spending in the balance sheet that is not producing any income or.
Our investors have been patient with us through this period to period as we are currently amassed over $1 6 billion of assets under development of our balance sheet.
In 2022, and 2023, we expect these patients to be rewarded and we expect to deliver projects with a cost of approximately $700 million per year. During this time period, while spending approximately $500 million development projects.
To give you a sense of scale. These deliveries represent a total of one 5 million square feet of net leasable area at our share as well as 653 calendar years.
Looking forward, we expect this flywheel effect to continue as we are at a point of development program, where we will regularly deliver completed projects as new ones commence.
Finally, we have provided certain got guidance in or at least that I would like to highlight.
As Jonathan mentioned, we have increased our distribution by six 5% to an annual amount of $1 <unk> per unit.
This is supported by <unk> <unk> per unit growth with a target of 5% to 7%, which amounts to a range of $1 68 to $1 71 per <unk> per unit.
Growing the distribution commensurate with <unk> per unit growth is sustainable and ensures that we can maintain our targeted payout ratio, which is a range of $55 to 55%.
This range of payout ratio ensures that we can retain the cash flow required to advance our development pipeline and.
In our property improvement, while balancing our objectives associated with balance sheet strength.
For 2022, we forecast development spending of 475 million to $525 million plus spending on revenue enhancing capex of $30 million to $35 million.
As noted on our Q3 Conference Conference call. This spending is funded predominantly through retained cash flow plus project level debt. This is supplemented with asset sales, including the proceeds from condo sales as well as partnerships with top institutions.
We plan to dive deeper into our strategy and our target at our Investor Day on February 20, <unk> and we encourage all of you to attend.
With that I'll pass the call to the operator to open the line for questions.
Yes.
Thank you, Sir ladies and gentlemen, if you have a question at this time.
Press Star then the number one on your Touchtone telephone.
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One moment for our questions.
And our first question comes from.
Sam.
From TD Securities you May ask your question.
Thanks, Good morning, everyone.
I just wanted to start off on the guidance, which is which is much appreciated.
Five years to 7% do you have that broken down with and without inventory gains for 2022.
And also is there an implicit sort of same property NOI growth.
Behind that guidance as well.
Sure Sam so.
For the next couple of years, we should assume about 20% to $25 million of inventory gains which are included in that number.
So you can pull that out and same property NOI will be in the range of 3% to 4%.
For 2002, and that would be including changes in bad debt.
Hence I assume Dennis correct.
Okay.
And if we look to your comments earlier in the presentation, Jonathan on the future of retail.
Enhancing the resiliency of the portfolio wondering if you could shed a little more light as to how you envision that sort of playing out for Rio camp. How do you does it change in the portfolio to improve the resilience.
Sure. So I mean, there's a few factors in that Sam and thanks for calling in and good morning to you.
One is there are certain assets that we have will continue to shed from our portfolio, which we don't think are as relevant in today's.
Economy as they once were and so again some of those are secondary market assets some might be.
Enclosed mall assets and so I think we'll continue to do what we've been doing before which is pruning some of our lower growth assets that again are harder to I would say a harder to evolve into today's current demands from our tenants secondly, within the properties that were keeping there is a tenant mix that I think in order to stay relevant.
In order to stay on top of consumer trends needs to continuously evolve and change and I think Jeff and his team have done a great job of assessing which tenants are viable and logical going forward and which ones we feel might be challenged in today's environment.
So we are making changes to that tenant mix, they're very logical changes and I think they will make us more resilient going forward again switching over to more necessity based purveyors and in some cases, it might not be tenants with amazing covenants, but they just have some great uses that will really add to the shopping center.
And the flavor of the shopping center.
Then I would say the last thing we are going to do or would do many things, but one of the other things I would highlight is the experience you get out of Rio can't Center, I know that John Valentine and Oliver Harrison are working hard to ensure that the physical space is improved.
For many years I think <unk> has benefited from tremendous locations and I think our tenants benefit from the attributes that a company having those great locations, but I think there is.
There is a keen recognition that we've got to do more and we've got to put some some real capital, which is part of our part of the budget for this year into those properties to make them have a consistent look and feel to make them be more visitor friendly and to also evolve the physical space. So that there are these hybrid models. These.
These omni channeling models available to our tenants, which just means changing the drive aisle changing the entrance and exit ways and creating better signage.
Spin them with loading in and also maybe helping them demise and create new space within their existing space. So as to facilitate buy online pick up in store and other types of let's call them new generation shopping practices. So I mean, just some examples Sam there are of course more than that but I think those are a few that.
That resonate.
That's great and maybe just one last quick one for me I don't know if jeff's on the line, but the occupancy is increasing nicely.
Pretty close to pre pandemic, we've seen very little in terms of retail store closures or bankruptcies in the last couple of months any comments on this.
Tenant watch list the size of it versus historical ranges and what you're expecting going forward in terms of.
That demand.
No listen we have a lot of blood letting over the last couple of years I think that took a lot of the tenancies that were anemic. There is always going to be tendencies on that watch list, but it's certainly done slimmer and smaller and I will just tell you overall the cadence of meetings that we're having with tenants looking to kind of reset themselves I've never seen the more strategic.
And they are right now.
Most of these moves we are having with not just our top 50 tenants, but across the portfolio of new guys coming in like I said the team to kind of over the top so the interest is certainly outpacing the guys that were concerned about we're always laid eyes on that but right now I cannot tell you. There is any one of any substance that I'm overly concerned about in the immediate future.
And I would add to that Sam I think thats, great color and I would add to that that we.
I think I had mentioned on this in this forum before that.
We were expecting January to have some fallout as it typically does a lot of tenants historically have held bonds through the Christmas season, and then they will they will sort of call. It a day in January and we're also expecting that to coincide with the completion of our conclusion of government support and so far and Im looking.
John Ballantine just to confirm this but so far we have not seen that type of fallout that we would've expected in fact, our tenant base is holding up quite nicely as the odd exception, but I think thats the general state of.
That's correct Jonathan.
No major followed at this point and as Jeff said, not an unexpected near term.
That's great. Thanks for the color. Thanks Pam.
And speakers our next question from Mark.
From Canaccord. Please proceed with your question.
Thanks, and good morning, everyone, Hey, Margaret.
In regards to the leasing spreads can you maybe expand a little bit on if you saw some difference or if you're seeing some difference in the types of retail that you own.
Yes, I think.
John Welcome to comment on this but I would say that the open air <unk>.
Suburban and urban centers or the main.
Drivers of the leasing spread and then I think some of the enclosed centers. We have are a bit a bit of a laggard and again leasing spread is such a sensitive such a sensitive metric and in this case I would say that we had one deal where we replaced a dark.
Dark supermarket with a.
Our lives living breathing supermarket tenant it was at a slightly lower rent, but it was the right thing to do for the property and I think that alone.
John remind me of that alone I think hit the statistic quite quite severely right. Yes, I think if you pulled that out of the quarter, we would've been on a new leasing spreads closer to 8% eight 5%.
What I would add to that agree with Jonathan the grocery anchored open air is where we are seeing the biggest lifts in the rental spreads I would say on the close side. It has been a bit muted we were very careful through the pandemic not to solve any problems or tyranny that tenants may be having on the ability to pay rent by locking in on any deals so to the <unk>.
Extent that we did renewals on the <unk> closed there were more shorter term and basis in term and were.
On the lower rent spread side.
Maybe just following up on that would it be fair to say based on the guidance and what you commented on the same property NOI guidance. You mentioned in regards to Sam's question that youre anticipating stronger leasing spreads over the next year or two and the guidance that you talked about.
I think we've said that our objective on leasing spreads to be in the mid to high single digits and we're confident that we can maintain that.
Okay, great. Thanks, I'll leave it there thanks.
Thank you Mark.
And speakers. Our next question from Jaime Bear from RAC VC capital You May proceed with your question Hello Pony.
Alrighty.
Luckily we got the name right one company.
Yes.
Well, it's just another question, maybe coming back to the guidance.
The assumptions you provided.
I think you said, 20% to 25.
Gains too.
4% same property NOI growth plus you've got.
Daniel development completions coming on.
That would seem to suggest perhaps something more than 5% to 10%.
Growth.
I'm just curious is there something offsetting dispositions, perhaps or something else.
Yes, that's exactly it probably so.
We would have a disposition negative offsetting that basically because we had such a large disposition program.
This year that that does net off some of those.
Yes, like the full year impact of the $850 million of dispositions for 2021, coupled with some of the additional dispositions that we plan on doing in 2022, which again become more quantitative or qualitative and quantitative those will have an offsetting impact.
Okay.
It could be 2022 dispositions as being something much lower than.
Oh, yeah, it'll be much more moderate and as I've said before I think the the lion's share of the dispositions that we do in 2022, if I could read the tea leaves will be largely qualitative rather than quantitative we're not doing them for equity or capital raising purposes.
I would say more so we're doing them to really power of the portfolio and prune. Some of the assets that are lower growth and then there will be the odd transaction, where we bring in partners on some development land, but I think other than that youre not going to see the same velocity.
As you saw in 2021.
And just on that in our Investor presentation on our website, we show a range of 100 to 200, a year going forward.
Pretty wide range, but.
Do these things opportunistically and that level as well helps support our funding we don't need more than that and we don't need more than 100.
To deal with what we have coming for that development funding perspective.
Okay perfect.
Just on the.
Yes, Ian Tid, obviously, you're quite active last quarter.
Just curious how you feel about remaining active.
And again, just thinking about how you are balancing that capital allocation decision between again.
Fair amount of development spending to go but also try to manage leverage as well.
I mean, I can start and handed off to Dennis but again, it's a balancing act as always and this year sorry 2021 in particular.
We ultimately ended up selling a few more assets than we thought at lower cap rates than we thought and it allowed us like we had a target in terms of disposition on how much debt. We wanted to pay down while we exceeded the target in terms of capital raised and given that we were trading in my mind quite substantially below NAV. We thought it was an appropriate use of <unk>.
Capital allocated towards the NCI be and again, we will always view it in comparison to some of the other uses of capital, but given that we were able to fully fund our development.
Needs through our retained cash and given that we were able to pay down debt quite substantially and started trajectory of net debt to EBITDA decreases that we think will be favorable over time than we thought it was a good use of the remaining capital to two acquired back our units and again like I said that was larger.
Driven by some of the really good favorable results, we got from selling some of these assets referred cap rates that were astoundingly low.
But I'll turn it over to Dennis for Todd any color do you think thats, Sir yes, I think the guidance that we had excess capital from the asset sales that we use that to repurchase essentially almost the exact amount to repurchase the units, we would have purchased a bit more but.
Limits on how much we can purchase and hence the IV program.
Going forward of course the valve.
Capital decisions out.
You mentioned the development spending and I just wanted to highlight.
Just a bit of it.
Kind of high level math, but how we how we think about that.
We.
$150 million of retained cash flow every year.
That when you gross that up for 60% to 65%.
Project leverage net debt to cost <unk>.
Metric not necessarily loan to value that.
That takes you to a bit north of $400 million.
So then if you added another $100 million.
Asset sales or partnerships et cetera.
That gets you the rest of the way there.
When you think about just the return of proceeds from condo sales.
We have.
And at that 20% to 25 million.
Dollars.
Condo gains is actually $50 million a year of proceeds to $100 million over the two year period. So that's.
Really how we fill that gap so we're.
We're fully funded on our development program, we don't need to.
<unk> equity any other way.
And so then from there it's any excess capital we.
We will allocate those dollars, where we think we can get the best return.
Alright. Thank you for that just last one for me just on the retail leasing as well.
On the or the incremental leasing story.
Compare on the latest round relative too.
The initial round that you announced last year, maybe relative to your pro forma.
Yes, they are holding up.
We thought they were going to be.
No we haven't seen any slippage in we're kind of holding to the budget pro forma numbers that we have across.
Across the board.
Okay.
Great. Thanks, very much I'll turn it back thanks Tommy.
And our next question from Howard Liang from various investments you may ask your question.
Thanks, Doug.
One two.
Let's turn back to be at the NCI and just follow up on that.
Is that I guess.
57% guide doesn't include any potential buyback given the comments on <unk> being fully funded elements could we see some more buybacks this year.
You are correct, we don't have any buybacks in our in our plan for this year at our formal budget that supports that guidance. So thats correct I think it would depend on how the stock trades.
We had a color lockout and.
And all things of capital, but it is not explicitly included in our plan and of course those vendors.
Okay.
That's good to hear.
<unk>.
And on leverage just saw that.
Your variables that had gone up to I think it's closer to 9% now.
At the end of December and your thoughts about where where we could see that.
At the end of this year.
Maybe higher interest rates.
Yes, so I think the one thing I should just be clear on that variable debt is only our.
Our lines are corporate wide and construction lines to all of our long term debt in terms of debentures mortgages et cetera is all fixed and so thats why that number can ebb and flow a bit over time, depending on R.
Our liquidity requirements and timing of other other long term issuances, so I think.
I would expect it's going to stay around these levels, we will have some construction loans wrap up with some new projects, but we're also taking out some construction loans on completion projects that completed projects. So those types of things that should balance out.
But it certainly is it's definitely not a strategy to have.
Floating rate debt within our long term.
That portfolio.
That makes sense and I guess as you go through the development program.
Patient <unk>.
And next year, we should see.
Some of that construction debt.
Maybe go down or I guess, maybe fluctuate.
Yes, it'll be the construction that will be taken out with permanent debt.
As we go forward, so youre absolutely right on that at the same time, we will start new projects over the next couple of years as well so.
I would say you're probably right that over the next couple of years. It comes down but I don't think it's all that material and.
Got a long term strategy to contain any floating rate debt.
Okay.
And then just one last one.
The revenue side.
Any sense.
When you look when you think about your forecast for 22 compared to this year.
Is that going to look like or is it is it mostly the same or can you see.
From this year.
Yes.
I think the objective is that youll see some increases I'm not sure how material that will be but as we venture more into the.
The service, providing business, particularly on condo projects, where we are instituting programs similar to what we did in the verge condo project, where we become a general partner and a development manager of holding only a 20% interest in project, we expect that those types of revenue or fee.
Revenue generating exercises will increase and then of course as we bring on more partners or in some of the projects that we have completed come to Finalization there'll be just general work fees for managing our asset managing those properties, but I'm not sure. It would constitute a material increase for 2022.
And the range I think we're around 15, this year will be a little bit higher than that in 'twenty, two but I wouldn't say material difference.
In 2002, I think we'll see that ramp up as we go.
Sure Jonathan.
You can find more and more of these opportunities.
Increase.
The fees that are available to us, which given the demand for these types of projects. We think can be substantial over time, while the demand for these kind of projects and the demand for the expertise that we currently possess within Rio can to effectively develop and manage great mixed use projects.
Okay.
And it.
Kind of more medium and longer term.
To probably grow.
Yes.
Thanks, Howard take care.
And our next question from Tal Woolley from National Bank Shannon You May proceed with your question.
Sure.
Good morning, Jonathan how are you.
I'm good.
Just wanted to talk a little bit about sort of a <unk>.
Green lighting, new developments, you sort of outline what you think.
So our capital spend will look like over the next couple of years.
How has your thinking evolved over the course of the pandemic and given the changes in financial markets too like how youre sort of strike, how youre thinking about putting together new developments some of the obvious thing that kind of jump out to minded like condo versus purpose built rental.
Office versus the resi mix in a mixed use development can you just talk about.
How youre thinking has evolved over the course of Pan out whether you are confident you can still hit.
Adequate development yields going forward.
Yes, I think that.
We're long term long range thinkers.
Always and so there have been some trend shakeups throughout the course of the pandemic, but they havent really altered our view, which is based on the foundational conclusion that there is a housing shortage, particularly in the GTA and if we can provide that housing whether it's rental or for sale there will be a vibrant market for it and we will.
I'll be doing the city good in the province Goodbye, providing it.
So we are going to continue forward in searching for opportunities within our portfolio to build those types of assets.
It has been the one big thing that's changed throughout the course of the pandemic is cost of ramped up but.
But we look at everything we're not looking at going in yields were looking at a project over a 10 year period, and what the IRR would be and we feel confident and given the dynamics out there that if we continue to build.
Residential properties, there will be a sustainable growth within those investments and that overtime. They will our unitholders will reap the rewards of that sustainable growth and so even though our going in yields may have flipped a bit based on where we were two years ago because of these increased costs. The overall IRR throughout the <unk>.
Term of the of the project I think will be still attractive and then also you have to think about it from the basis of where we are coming from we've got these great land holdings. They are underutilized when they are covered to the tune of 25% by a retail building. They are massive parking lots and they are really really well positioned and so for us too.
To go out and sort of exploit that wonderful landholding is the right thing for us to do as stewards of our unitholders money and.
In terms of the mix between condo and rental it's one of those things that we decide on a site by site basis, we don't necessarily have a.
And to be wide goal on how many condos were going to develop it is not our core business.
When we do it as I suggested before we're now morphing more into a project manager general partner and ultimately development manager for other individuals.
That allows us to get continuous fees through the door, but it also allows us to bring in some capital on the front end. So that we can fund and make more viable some of the rental residents.
Full developments that we anticipate carrying out so again, it's a bit of a balance, but I would say by and large in answer to your question. Our strategy has not been altered substantially by virtue.
Two of the pandemic, Dennis anything to add to that.
No.
Alright.
Hopefully that gives you some color.
Yes, no thats perfect.
And I think one of the things you mentioned to you and sort of.
Probably measure such as what you want to focus on going forward is this idea of customer centric.
I think sometimes we focus a lot on net rents in step with tenants had growth.
And what do you think are some of the tangible benefits you can deliver.
Tenants going forward, yes, it's a great question and one that that our operations team spend so much time contemplating.
And there are certain things that were doing operationally that just provide for more efficiency I think we're taking advantage of our national scale and buying things now procuring things services goods et cetera on a national basis, which seems trite, but the truth is we used to do it regionally and it was illogical and inefficient.
From a property tax perspective.
Ben I would say more aggressive over the last couple of years in our appeal process and I think thats reaped a lot of benefits as well towards our tenants.
And also it's using technology to make things a little more run a little more efficiently changing the way, we light heat cool and.
Ultimately clean a lot of our properties, which is not only good from an ESG perspective, but it also saves our tenants quite a bit of money and then also lowering our overhead right like we charge back quite a bit in head office expenses and I think one of the things that we've done quite well over the last couple of years is mine those expenses and keep them.
Fairly limited and I think our tenants will serve to benefit from that because you are quite right. They don't care about net rents they care about the gross occupancy costs Oliver.
Add to that.
I'll just add that I think around the technology piece, it's really doing our best to make sure that we are able to.
Communicate with our tenants more efficiently.
And Jonathan had mentioned that we will be rolling out our Rio can connect Tennant portal.
In the second quarter of this year.
<unk>.
At Investor Day, we will give you a little bit more color as to what that will look like and how that will improve our tenant experience, but beyond that John I think you covered it all right.
Okay and then.
Lastly, going back to.
The 5% to 7% if appropriate unit guidance.
Dennis are you able to start comment a little bit about how much the world kind of baked into that number because I think when I had been modeling.
Presume that you'll start to see some cash rents.
Later this year, but.
Andrew see capitalization youre not running full tilt occupancy.
It was probably going to be kind of a marginal impact in 2022 that 'twenty 'twenty three is really where.
The office space would really start to kick in is that a fair way of thinking about it.
Yes, I think youre, absolutely right, the well will open up.
In terms of the office tenants, taking occupancy now, but you're right. We won't have cash rent starting to kick in until the middle of the year and a bit more later in the year. So the well from a contribution perspective on the commercial side.
We all see that stronger pickup coming in.
'twenty three.
And then at that point in time 'twenty, three we'll start seeing delivery on the residential side to come in and that will ramp up and headed into 2024. So that gives us a bit of a steady run rate on growth from the well, but from a development deliveries perspective in terms of <unk>.
2022 contribution most of that is going to come from a number of these residential projects that Jonathan mentioned.
Earlier in terms of.
<unk> and strata in.
And the various projects we have at all.
Okay.
And sorry, maybe I'll just sneak in one more.
C. J D. We haven't talked about that in quite some time.
We have been some changes going on there in terms of the strategy.
Can you just give us an update on what Youre thinking about I know that you've got the development application in Montreal.
And what's going on.
Thinking about some of the other site.
Yes, I think the operations at HBC are reasonably strong.
Their operations in the U S are much stronger, but they see some pretty good.
Pretty good results out of their operations here, particularly some of the downtown in well located mall locations that we own with them. So they while they might be shrinking their footprints in certain locations the ones that we own with them. They certainly seem very very bullish about and so I think it's going to be status quo with respect.
To that JV for the at least the short to medium term Tao.
I think the only really real difference to that is as you mentioned there have been some inroads made with respect to.
I guess densification and both Montreal, and I think Vancouver, There's also some work being done.
Those are really just really I think a good program of creating value from I would say some of the best physical locations in Canada, what we do with that who knows at this point again once those stores will remain operational and remain paying rent to the joint venture, but in the future there could be some really significant.
Upside in those well located properties.
Okay. Thanks very much.
Have a great day.
Again, if you would like to ask a question. Please press Star then the number one and you touched on <unk>.
<unk>.
And Sir our next question from JD Mall from BMO Capital markets. You May proceed with your question.
Thanks, and good morning, Hey, Jamie.
I wanted to pivot to the Montreal multifamily rental acquisition could you. Let US note that was an opportunity that came about through a relationship or was that a marketed process.
I'm going to turn it over to Andrew Duncan.
Thanks for the question.
We are actively keeping our io for opportunities across the country.
This was won through a brokerage relationship that got brought to us it wasn't a broadly marketed but it was one that we found an opportunity on.
Okay.
This is the first acquisition you've done of <unk>.
Rental apartments.
Would you characterize this as opportunistic like you sort of mentioned or would you think about this as another leg I guess on your multifamily growth strategy.
I would say that it's going to be opportunistic we are going to be relying predominantly on our development pipeline for the buildup of our multi res assets, but we have ambitions as to how large we want that income stream to be and if we can supplement so just supplement the existing pipeline with some with some.
Acquisitions that align with the overall look and feel of other REO cam living assets, meaning that they are new highly monetized major market close to transit.
And we can buy them Opportunistically, then we will take advantage of that but it won't be something that we rely on it will be something that will be more opportunistic.
Okay and this is a fairly new asset that correctly. It sounds like there are a couple of more coming out.
Very new.
Just recently.
Okay.
Do we think about the cap rate on these assets that you sold a 50% interest in essential at about the three five and then it came out about a four.
Now, putting aside any cap rate moves.
In the near term is that a good band to think about what kind of returns better.
Patients you would have for potentially buying more multifamily assets or potentially selling at the market.
It's a little bit hotter.
If you look at going in yields of the main indicator then yes, I would say actually on the higher on the higher end side it would be lower than the three five at this point I think the market has heated up quite substantially even since we sold the central or the 50% interest in the central So I would say it's somewhere between.
Three and a quarter in four in a quarter for the types of assets that we would either look to sell or buy.
And I think that's that seems to be.
Anything only getting stronger.
It seems to be an essential insatiable demand for them and Theres really not a lot being built so that I think that's the kind of band that I would suggest is out there.
Okay.
Turning to your commentary about expanding into real Ken type tenants.
Could you maybe expand on what incremental with that and then specifically when you mentioned fulfillment is that really utilizing the current space for fulfillment processes or are we starting to drift into.
Battreal like property.
So it's a great question, Jenny I mean that sincerely and that it is something that's a bit.
Misunderstood, we don't have a lot of opportunity to create fulfillment space in our portfolio. We are on our retail portfolio 97, 2% occupied and the vast majority of space that we have remaining is small in nature and would not be able to it doesn't have the attributes that you need to build a proper fulfillment.
Center fulfillment centers are not our expertise and it is something that we unlikely we'll build up in terms of expertise. So while it sounds really cool to be in the fulfillment business Rio Canada, only and gently in that business in that we provide space to tenants who are utilizing it a little bit differently. These days and I think there has been.
Almost a merger of traditional shopping space with with fulfillment space. So I always say that we provide fulfillment space just with a nicer facade and so it really is our tenants utilizing it for more of a fulfillment architecture now than anything else.
So just to be clear and I don't want them to be any misunderstanding about it we're not getting into the fulfillment business de novo.
Trying to build industrial facilities at this point before we had open land and our partner approached us about maybe building something out it would be a peripheral exercise it would not be core to REO camp.
Okay.
Talk about like medical education, I will like like what is incremental about the intra Rio can approach I presume you've had maybe a few childcare centers here and then medical offices does it just mean that youre going to have a more concerted effort to this property type or how should we think about it.
Change in the strategy with incremental yes, I would say, it's totally I mean look everything at Rio Canada is incremental because we have such a large base. So it depends on how you define what is material versus incremental but I think Jeff and his team have and they have a.
On a per view now on the types of tenants that we're talking about and I'd say, it's more than just the light initiative. They are seeking out as a first option a lot of these governmental uses healthcare uses libraries welcome centers.
And I think ambulatory uses that were in hospitals that are now looking to be moved outside of hospitals, Jeff if I mischaracterized that let us know.
No, we're very strategically seeking out and there are different groups to work on governmental rfps or work with institutions and we've over the last number of years really work to get those relationships tight and now we're reaping those rewards as we're certainly responding to everything Thats out. There ahead of time, we've become expert in that area and we kind of have.
Feel felt about what theyre looking for so it's very much an active part of our leasing program and journey. There's also like the motivation there one typically theyre great covenants, but two they tend to be really favorable co tenants with a lot of our existing tenants. So when we talk about the notion of being customer centric, we are spending more and more time speaking.
With our larger tenants figuring out what kind of co tenants they want what drives traffic to their businesses and I would say that more often than not this type of use.
Which has a lot of visits and a lot of people who are looking to consume has been viewed very favorably by our existing tenant base. So it's not done just on a whim, it's done with a view to making our overall portfolio more viable more sustainable and just.
Really resilient going forward.
Okay.
But my last question is with regard to the bad debt provisions and I'm wondering if you can comment on.
Hayden of how that.
Sean I think it was flat sequentially in Q4 I'm not sure.
<unk> had any impact on that improvement measure, but what are you thinking in terms of how that burns off and do you think it gets too and I hope.
Secondly, you get that $850000 normalized run rate.
Dennis had mentioned is that something that you think.
We can do over the next 12 months.
Yes ill take that one I think I think that is that run rate isn't view in the next 12 months I mean, it's such a hard environment to predict anything at this point given.
The rise fall at flow kind of like constant resurgence of the stupid.
Stupid virus, but that being said the way we're viewing it now is quite optimistic and we don't think that as we mentioned in our prior in a prior question. Our tenants have shown that they have been able to withstand this last round of lockdown and we are not seeing a lot of fallout on bad debt as a result of it and so.
Based on that we're quite confident to say that the provision will dissipate continue to do so and get to a normalized space within the next 12 months I think that's fair to say, yes, I think.
Another piece that I would just layer on that as the balance sheet side of the provision at the end of the year up $17 million.
Provision sitting on built up in the balance sheet, which will.
We will unwind.
Over time and that helps protect us.
So for a bit as well in that five to seven range.
One reason why there's a range is because we.
We do take assumptions on.
Potentially continuing provisions over the course of this year, you'll still above that quite a lot less than we've had in the past few years, but still potentially.
A couple of million a quarter now.
Where we stand today as always.
Kind of ebbs and flows but.
<unk>.
Jonathan John said earlier.
Feedback of the tenants right now is quite strong. So we will continuously evaluate this over the over the course of.
Q1.
Again knock on wood as Jonathan has often said we can't count this.
Stupid virus out but.
Didn't really have much of an impact it wasn't in our consideration in our Q4 provision.
At all because at that point, we were dealing with.
Just.
Some of the tenants that are big deals.
Okay. Dennis So just to clarify are you, saying that in your guidance, you've baked in about $2 million per quarter of bad debt expense.
Correct.
Within the right great. So okay.
Could be at more of the higher end of the range or the lower end of the range depending on how the environment plays out this year with the.
With.
Fred to COVID-19.
Yeah, I mean, that's the big caveat right, but.
I think you're modeling 2 million a quarter, you're thinking about the run rate starts to approach our normalized.
Fair to say that that could be upside to the guidance all else being equal.
I would say it would push us more towards the high end of the guidance rather than above the range of the guidance.
Okay. Okay.
That's very helpful. Thank you very much.
No problem journey have a great day.
And speakers there are no further questions at this time I will now turn the call over to Mr. <unk>.
Lynn for closing remarks.
Well. Thank you I know everyone on the call has a very busy time period here with reporting season underway and we just wanted to thank you for listening in and thank you for your.
Following Rio Cam as intently as you do and we will look forward to speaking to you again at our Investor day on the 20 <unk> of February and then if not then when we report <unk> results. Thanks, everyone have a great day.
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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