Q2 2022 RioCan Real Estate Investment Trust Earnings Call

You're well aware that RioCan's commitment to enhance the quality of our offerings started long before the pandemic and in fact accelerated during the pandemic environment. We continue to sell low-growth assets and advance our major market presence.

Over 92% of our income is now generated in the VECCOM market.

On average, the people shopping at RioCan's properties have a household income of $129,000 and come from a population base of over 206,000 people within a 5km radius of our centers.

We also invested in our physical properties, technology, ESG, and the dynamic team here at RioCan.

Those improvements and investments are now paying significant dividends.

Since 2020, we've delivered a combined total of 1.1 million square feet of successful development, mainly in Toronto.

That number is expected to increase to 2.5 million square feet of new development completions by the end of 2023, including our iconic Toronto development, the well.

We now have 2,005 residential rental units in the portfolio with another 1,134 under construction.

Demand for these units has continued to demonstrate the desirability of the RioCam Living offering.

The resilience and diversity of our tenant mix is markedly enhanced, with over 95% of our tenants classified as strong, stable or compelling traffic drivers.

Our standing as an ESG leader in the commercial real estate sector has only improved.

Simply put, our efforts over the years are yielding results now, and we'll continue to bolster our success despite market volatility.

The scarcity of quality retail space further enhances our competitive advantages.

It's safe to say that in major Canadian markets, very little new retail supply has been created in the past decade.

Replacement costs for well-located retail are now well above market values. Now I'm going to illustrate that with the numbers.

The implied value of our income producing properties and our current unit price is about $330 per square foot. Now if you compare that to the cost of constructing new retail, it's quite illuminating. In the GTA with the high construction cost and market value of land included, the cost to construct new retail is in the range of the mid $600 per square foot.

This tells us a couple of things. First, there's a clear gap between valuations and replacement costs.

Second, it's virtually impossible to buy land and construct new retail without a substantial increase in market rent.

It's only feasible to build new retail on land that's already owned or as part of a high-density mixed-use development.

This means a quality retail space, the kind that we at RioCan offer is and will continue to be in short supply.

Meanwhile, particularly in the GTA, the population continues to grow, driving demand further upward.

These conditions are entrenched and reinforce our confidence in the sustainability of solid operational performance well into the future.

Yes, as I mentioned a moment ago, there are numerous unknowns that linger in the environment. Our stakeholders have voiced their concerns about how these factors impact RioCan and I'd like to address these questions.

First, I'll talk about the recessionary environment, specifically the viability of retail during a prolonged economic slowdown if in fact that arises.

86% of RioCan's tenants are categorized as strong and stable. These businesses have stable rent-paying ability, strong covenants, and reliable foot traffic.

They provide the day-to-day essentials consumers require in any economic climate.

I'll pause here for a moment to reflect on our performance in Alberta over the last 10 years.

Now I use our performance in Alberta as a logical barometer as our portfolio composition in that province mirrors that of our national portfolio.

It comprises largely open air, necessity based retail, and has exceptional demographic profiles.

The Alberta market has been in the throes of a resource-based economic slowdown for the better part of a decade. And within those 10 years, the operational metrics for our assets in Alberta were equal to, or better than, our national portfolio.

In as much as anyone can draw any conclusions in this uncertain environment, we feel that our consistent performance in Alberta in the face of an economic downturn is indicative of our portfolios resilience and viability in any market condition.

Our leasing results support that conclusion as demand for our space continues to be high, driven by national grocers, discount retailers, beauty, medical, and pharmacy users.

Next, I'll address concerns about rising interest rates.

Now we're fortunate to have a debt ladder, because we always have, that helps us to shield the impact of violence spikes and interest rates.

We have $411 million of debt due for the remainder of 2022. Now, as Dennis is going to tell you, we will benefit from our $250 million hedge of the underlying GOC bond, which will drive down the actual cost of the remaining financing for this year.

In 2023, we won't have the benefit of those hedges on new financing, and there will be an impact on our FFO results.

But due to the timing of 2023 debt maturities, the FFO impact will be weighted more to the second half of the year.

It's also important to note that the overall impact, even if rates continue to increase, will be offset by numerous positive FFO factors, including gains from the scheduled sale of condo units and increasing NOI from development deliveries and organic growth from our existing income producing portfolio.

Finally, there's inflation.

This impacts us in several ways, including an impact on consumer spending and increases in construction costs.

As I already mentioned, much of our tenant base provides necessity-based goods that consumers need in any economic cycle.

Many of our tenants have the ability to pass through inflation to their customers.

That said, some of our prominent retailers, including Wal-Mart, have indicated that inflation drives shoppers to avoid high margin discretionary items in favor of lower margin necessity items.

This is a concern but will not, in our view, impact the long-term viability of our largest tenants as they have a long and strong track record and sizable balance sheets.

With respect to construction costs, well they've been impacted by sustained year over year inflation for many years now.

The vast majority of Reocanes in the grant construction projects have fixed contracts, which provide a high degree of cost certainty.

When it comes to new project starts, RioCam will continue to exercise a high degree of discretion, scrutiny, and judgment in assessing whether costs and revenue conditions are suitable before we proceed.

Our future development sites are typically active retail sites that currently generate high quality income.

As such, when conditions suggest that timing isn't favorable for development, we can simply elect to wait.

Now, I'm not for a second downplaying the obvious volatility in the macro level environment, but we face these conditions confident that we have strategically and responsibly managed every aspect of our business over which we have control.

Our efforts over the years have set RioCan up for success. We're hitting our stride and executing on key growth initiatives.

We remain confident in our growth trajectory and the ongoing demand for our scarce and high quality real estate.

The objectives in our five-year plan were established with purpose and conviction.

In concert with RealCan's many differentiating attributes, these objectives are achievable in almost any environment.

Aligned with our strategic pillars, we'll continue to grow responsibly and sustainably. We'll continue to support this growth by investing in talent and structuring our team to maximize alignment with our objectives.

With this in mind, I'm pleased to announce the recent appointment of Oliver Harrison to the position of Senior Vice President Leasing and Tenant Experience.

This hybrid role was designed to support our commitment to customer centrism by optimizing value to our tenants from lease execution all the way through construction, onboarding, and renewal.

I'm also pleased to share that RioCan's Board of Trustees continues to evolve with the recent election of Marie-José Lamothe. Ms. Lamothe is well known for her expertise in global branding and digital transformation.

Her experience is especially relevant for RioCan as we continue to support our tenants through the merging of e-commerce and physical retail.

With that, I'm delighted to turn the call over to Dennis Blassuti to take you through our balance sheet metrics and provide insight into how an active disposition program has supported them. Dennis, over to you. Thank you, Jonathan, and good morning to everyone on the call. With a very volatile market backdrop, RioCan had a very productive quarter.

We have a lot of ground to cover this morning as we discuss the fundamental strength of our business and the attributes that will drive our success in any environment.

First, as Jonathan mentioned, we had another strong quarter operation. This is driven by our best in class team and high quality portfolio which continues to deliver results.

These results and the outlook for our business gave us the confidence to once again reaffirm our FFO guidance for 2022.

FFO per unit was 43 cents for the quarter. This year over year growth of 7% was driven by the straightforward building blocks that we laid out at our investor day.

Same property NOI growth and development deliveries.

SPNOI growth for the quarter was a robust 6.2%.

when we adjusted for the impact of the pandemic related provision as well as

legal and property tax settlement gains in the prior year, our high quality operations posted a solid 3% SPNI growth.

Our development deliveries and ongoing development activities also contributed with growing residential rental income, gains on condo sales, and fees we earned as development manager. All together, development activity added three cents per unit.

FFO in Q2 was also impacted by some restructuring costs. Excluding these costs, FFO per unit was 44 cents, or 10 percent growth over the prior year quarter.

Our strong operational performance and development program also provides us confidence in our growth expectations for 2023.

From the perspective of our fundamental building blocks, we anticipate SPNOI to remain strong as the robust leasing activity in the current year will translate into full year NOI next year.

We expect to deliver an industry leading 1.7 million square feet of development over the course of this year and next with the commercial components of the well expected to meaningfully contribute to FFO in 2023 as the majority of that project will be delivered and earning rent over the second half of this year and the first half of next. We have provided additional information on this timing on page 43 of our MB&A.

We also note that the impacts of the current higher interest rate environment on the 2023 FFO have been muted by our financial risk management activities. Namely, in 2021, we preemptively refinanced $250 million of debentures and $345 million of mortgages at very attractive rates. Our weighted average interest rate on 2021 financing was 2.6%.

That left $448 million of debt due in 2022.

We hedged $500 million of the GOC component of the plan's 2022 financing at an average rate of 1.56% per 7-year box.

which has been significantly below the actual rate.

In April , we utilized $250 million of the hedge when we raised a seven-year debenture at an effective rate of 3.83%.

As Jonathan mentioned, we intend to utilize the remaining hedge for final activities that we expect to complete in the coming months.

As a result, the interest rate impact on 2023 FFOs relating to financing activities completed in 2022 has been minimized.

Looking at our 2023 Refinance requirements, those are distributed throughout the year, again, reducing the impact of 2023 FFO. To assist with modeling, we have provided a breakdown by quarter on page 44 of our investor presentation on our website.

We continue to evaluate all options for these finance activities to ensure that we optimize the cost of funds and our financial flexibility.

Now, turning to our development spending.

We reduced our guidance for the year by 50 million to a range of 425 to 475 million. This is the result of minor shifts in timing of projects following strike activity by certain traits in the second quarter that are now resolved.

Looking forward, our base rate consumption of annual development spend of about $500 million per year and the five year plan that we presented at investor day remains unchanged.

We continue to believe that our development pipeline, which includes 16 million square feet of zone density, is an attractive use of capital. However, we do have the ability to scale this back into macro environment in more or less. As Jonathan mentioned, we have the ability to pause projects that remain productive retail assets until the market is ready.

I would also point out that the projects that contribute FFO in our five-year projections disclosed at investor day are already underway. Any potential deferrals mentioned in our comments today would be related to the start of new projects that would be delivered beyond that five-year horizon.

With that said, we would have the ability to pause projects and reduce spend by approximately 25% in 2023 and 50% in 2024 if required and be imprudent. Beyond those years, spend is virtually all discretionary.

The balance over development spend in the two years mentioned is already under construction and substantially contracted so the exposure escalation is mitigating.

Moving now to our evaluation.

We booked a 46 million fair value loss in the quarter. We took a targeted approach to this, which I will unpack further.

Within that number is $108 million of reductions in fair value, largely related to enclosed will be secondary market affects.

Given discussions we've been having in the market, we see these types of assets which comprise a relatively small percentage of our asset value as being at the highest risk of impact in a rising rate environment.

This was offset by a 41 million increase in the fair value predominantly related to higher NOI forecasts across many of our properties driven by a strong leasing activity in the first half of the year.

We also recognize the $21 million gain on development properties, predominantly relating to advances of our lease side and shoppers' well-branded projects.

On an overall basis, we view our asset values as relatively conservative, and the following two factors support this assertion.

First, we took write-downs as of December 31, 2020 of 527 million as a result of the COVID pandemic and we did not reverse much of this in spite of strong, in spite of strong half a level performance.

Our cumulative fair value movements from that point until now remain in a lost position of $410 million.

Second, we have taken a conservative approach to value density.

95% of the value for our properties under development recognized on our balance sheet related to projects that are currently under construction.

We ascribe relatively low value to the remainder of our zone density as we apply a strict set of criteria before we recognize that value.

We can also look at our evaluations from a cap rate perspective.

We note that our weighted average calculate today of

5.33% compares to 5.28% pre-pandemic at the end of 2019, in spite of market evidence of cap rate tightening over the past couple of years.

However, it is important to note that this five basis points increases on an absolute basis.

On a same property basis, our weighted average cap rate is 18 basis points higher than it was at the end of 2019 as a result of the above noted write-backs. This increase was partially offset by 13 basis points decrease in cap rates related to asset mix as portfolio quality improved through the development, deliveries and acquisitions combined with a disposition of lower quality assets.

While rising rates pose a potential risk to our values going forward, and we continue to monitor markets closely.

We believe these mitigating factors combined with our income growth and advancement of our development pipeline provide defensive attributes.

Next, I wanted to add a few comments regarding our capital allocation for the quarter. Our asset sales program has progressed well with $123 million of completed disposition during the first half of 2022 and a total of $376 million when adding firm and conditional deals. These were at an average cap rate of 6.7% as we have been selling lower quality assets further improving our overall asset quality and recycling that capital into more productive uses.

During Q2, we allocated capital from disposition proceeds and retained earnings to our development program as well as unit buybacks to our NCIB, which totaled 129 million or 6 million units. This is in addition to the 8 million units that we repurchased in Q4 of 2021.

We see these buybacks as an attractive use of capital.

At recent unit prices, these repurchases this quarter reflect an implied cap rate of over 6%. This implies that the unit price of these purchases was at a discount for income producing properties and ascribes effectively known value to our development pipeline.

Express another way, the price implies a value of approximately $340 per square foot of our income producing properties or 230 per square foot based on our income producing properties plus zone development properties.

When compared to the replacement cost metrics that Jonathan mentioned earlier, these numbers are quite compelling.

To round out my comments, I will briefly highlight some of our balance sheet metrics.

Our net debt to EBITDA continued to trend downwards and was at 9.4 times at the end of the quarter. We finished the quarter with 1.4 billion of available liquidity and unencumbered asset pool of 9.2 billion. These items provide us with substantial financial flexibility.

Our unencumbered asset pool has decreased slightly since year end as we have added construction loans to development projects and sold some unencumbered assets.

We expect to see three trees further in the next quarter and we are in process of raising approximately $300 million through secured mortgages. We are doing this tactically given the current disconnect in interest rate spreads between secured and unsecured debt markets. At the same time, we continue to seek opportunities to raise low-cost CMHC secured financing where it makes sense.

In the long term, we are not changing our strategies to move to a greater proportion of unsecured deaths and maintaining a large unencumbered asset pool.

We hope the information provided in our material and on this call helps our unit holders to better understand why we believe that the quality and resilience of our portfolio, combined with our strong balance sheet, position RioCan to perform well in any environment.

With that, we have concluded our remarks and we'll pass the call over for questions. Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question.

The first question today comes from the line of Sam DiMali from TD Securities.

Please go ahead, your line is now open.

Thanks and good morning everyone. Congrats on a great quarter. First question is just on the pace of dispositions and further NCIB activity. I wonder if you could give us a sense as to how we should expect dispositions to look in Q3 and Q4 and resumption of the NCIB.

I'll hand it over to Dennis for any further color. I hope you're doing well, Sam. And I think this position, as we had suggested coming into the year, are largely based this year on qualitative assessments where we can make our portfolio better, sort of addition to subtraction. And we didn't really rely tremendously on the quantitative element of this position this year as we have more so in years past. So we didn't set …

dramatically high targets for disposition and we're well on track to be well within those targets in terms of the dispositions that we're doing. Most importantly though some of those dispositions will make our portfolio better and higher performing and higher growth. The disposition market is not dead by any stretch. We are actively in the midst of a few transactions on various types of assets in various geographies within Canada.

And I don't think we've disclosed exactly what our target is for the rest of the year, Dennis. No, I think you just mentioned that we have the 370 if we include the firm and conditional to close out. Yeah, so I think that's an accurate sort of gauge on where we're going to be. And then with respect to NCIB, as Dennis mentioned, we've been very active. I mean, it really is a compelling use of our capital at this point. And in terms of our plans going forward, it really does depend on...

per minute. It's something we would absolutely, I think, be prudent to consider as a logical use of capital. Dennis, anything further to add? I think that's bang on. I think the numbers in terms of the value accretion, you know, replacement cost metrics, et cetera, are very compelling, but we absolutely need to be, I'd say, appropriately cautious in this environment, make sure that we keep, always have one eye on our balance sheet, on our liquidity, and before we make any of those decisions. So we'll continue to monitor.

over the balance of 2022.

So I'll start then hand it over to John Ballantyne. I think that what we're doing is actually getting closer to historic norms with about 100 basis points separated into two. And I think it just speaks to the different nature of tendencies that we are putting in place where there is a little more work and a little bit more time involved between the time to sign the lease and the time they move in. For instance, the well, these are more complex processes in mixed use environments.

where again it just takes a little bit longer for the tenant, for the landlord work to be completed and then ultimately the tenant work to be completed. But as I said, I don't think, I think what was the anomaly was how we tightened that gap so significantly over the last couple of quarters. I think, you know, we expect it to be somewhere in this range, not far off it going forward, maybe a little bit lower, but I think it just generally is in keeping with the nature of tenancies that we're now entering into. But John , over to you. Yeah, I would agree with that. I would say the historical norm is

leasing pipeline.

look at the list of all the potential leases and discussions on how does that look today versus historically? Are you seeing any sign of slowdown in?

I guess retailers, you know, interest in committing to new leasing.

Yeah, I'll answer that as well Sam. You know, it's really the supply and demand dynamic to the market right now. We are very much benefiting from that, especially on the larger box side. We have had some tremendous response from grocery operators over some available space in three different markets to the point where we're seeing some competition there for this space. So obviously that really benefits pricing. If you look at kind of the list of major retailers in Canada being...

I want to be the bigger banks taking a little bit longer to divide up and put people in but for the most part we're very happy with glossy with demand and with Existing tenants wanting to keep their space as well. You know our retention of 93% is well above our historic norm It's something that we will definitely see go down as we get a little more picky and choosy over the next Three or four years, but again demand has been great

That was great. Thank you very much and I'll turn it back.

Thank you.

The next question today comes from the line of Mark Rothschild from Canaccord. Please go ahead, your line is now open.

Good morning. Kind of continuing on the point you were just addressing that there hasn't been a ton of new retail development and obviously not much.

near the assets that you own, but are you seeing this slowing down even more to the point that it would impact rental rates?

does rising development costs and rising costs in general impact the rental waste you're getting and specifically would this lead to better leasing spreads over the next year or two.

Yeah.

I think that the market dynamics are very favorable for landlords such as RioCan where we own space in high demographic neighborhoods and we are definitely seeing that the ability to replace and create new space has become very, very, very difficult and that means that and I think couple that Mark with the reconciliation.

that occurred during COVID where I believe a lot of retailers, and I say this with a lot of discussions in the background with our retailers, they have recognized the importance of being able to distribute from these stores. And so that along with the supply-demand constraints have I think increased the desirability of our shopping centers and it has created upward pricing tension and we believe that it will continue to do so.

of any of these new retail developments all the time. And even with them, we're building on pretty existing land that's carried out at a very low cost base. And even with that, it becomes challenging to make these projects pencil without pretty good market adjustments. If we layer in the market value of land, if someone were to go out and actually buy that land and build new retail, our view is that it'd be virtually impossible to make the numbers work right now at current market breadth.

At some point, that pricing dynamic has to give if supply is to come on. But unless it's part of a high density mixed-use project or on a pre-existing land, we really think that the economics are very, very challenging for anyone to develop.

Okay, thanks. I'm just following up on the numbers that you gave Jonathan. Am I understanding that while you expect the leasing express to be strong, you don't expect it to generally be in the double digits?

Well, again, what I said, Mark, was that our guidance of high single digits over the course of five years is something we stand behind.

Okay, great. Thanks. I'll leave it there.

Thank you.

The next question today comes from the line of Mario Saric from Scotiabank. Please go ahead, your line is now open.

Thank you, good morning. I just want to turn to the occupancy, the in-place of 96.2% embedded within your guidance for the year. Can you remind us of whether you believe you can maintain or slightly increase that occupancy by your end?

Yes, I think it is certainly something we're comfortable saying that we can maintain and slightly increase. I mean, as we said, the conditions are very favorable and truthfully, I mean, we believe that the numbers we are at is almost as though we are stabilized. So I think once you start getting 98% committed, you actually can't really or don't want to go much higher than that, but there's still a little bit of room there.

In terms of the well, it was noted that the least or in discussions at 81%, that's up 200 basis points quarter over quarter, given we're approaching completion of construction over the next 12 months, can you give us a bit of sense in terms of the trajectory and expectations of getting that to 91% up to a stabilized figure?

So we feel that the, given that the physical plant is now much closer to being completed and some of the retailers that we're trying to get at the, that we're confident that we will get at the well are those that really, you know, they're more local in nature, they're not ones to sign at least two or three years in advance.

We feel that now that we're in that sort of home stretch of the last 12 months, we will be able to start increasing that occupancy number on a consistent basis, month over month, until we do have our grand opening. Remembering too that the grand opening is just really a date for a ceremony. We will be opening tenants in advance of that date and I think that the leasing velocity, just given the momentum of the site, given its aesthetic.

given that there's a lot more hype around it right now we'll continue to to you

to I think move towards full occupancy at a reasonably consistent pace. So we are not in the least bit concerned about getting the appropriate tenant mix there in the appropriate time before that grand opening date. I can't promise you that it'll be 98% occupied within a year, but I think again, for us the more important outcome is the tenant mix and we feel confident that we'll be getting close to that over the course of the next medium.

John , is that accurate? Yeah, that's accurate.

Costs of deals have not increased over and above what we're seeing in just general construction cost increases. For more information, visit www.fema.gov

But as far as dealing with tenants extracting higher rents, we are not paying higher tenant allowance packages.

My last one is just pertaining to the asset, so if you have any discussion for distribution, I would be fair to say that those are mostly concentrated in closed mall, part of the portfolio and secondly, what would be the mortgage that attributes associated with those potential distribution being a kind of a generally seen clear vote, I would be good to have.

I love the gun. So I would say that there is an emphasis on and being close more portfolio, but that's not the entirety of it. We are focused just on lower growth assets. And the debt attributes really vary. As you know, I mean, our unencumbered tool of assets is significant, which means that some of the assets we are going to sell will be free and clear. But some of them do have mortgage attached to them.

And those rights given today is market given the fact that most of them have been refinanced over the last five years. They're generally favorable mortgages at this point, which make the salability of them enhanced. And Andrew Duncan, I'm not sure if you have any to do that to that. No, that's bang on, John . It's a mixed bag. There is some enclosed components, but there's also some unclosed components that are lower growth. And some have leveraged on the property level, leveraged on them, and some don't. Great.

And then in terms of expected timing on the position.

This is a Q3 event, we do think it can bleed into Q4.

It could bleed into Q4. I think the number that we've given in terms of properties that are under contract, those could definitely bleed into Q4.

Yeah, I would probably just do it tomorrow just looking at it. Just to kind of spread them pretty evenly over the future and before from a conservative perspective.

One more general question for me. I think RioCan has been one of the most active in terms of the share buyback. The management team has been pretty responsive to your change in cost of capital, maybe relative to some others. You've laid out this five-year strategy recently. The implied cap rate is up about 65 basis points this year.

there's the volatility in the public markets that we're seeing.

Change.

Anything on the strategy on the margin.

No, I think what we've said is, you know, in the way we raise debt capital, we did suggest in our investor day that we were going to look to lean more into the unsecured market rather than the secure, given the volatility in the unsecured market right now and the pricing differences Dennis had referenced in his remarks. We are going to tactically start looking at some unsecured, oh sorry, some secured debt just given that price difference. But overall, again, if I look at that...

objectives, those pillars that we came up with were intended to be versatile and be in place regardless of the economic backdrop. What I would kind of add and Jonathan said it exactly right, things like shifting to more of a secured financing in the short term, that's a tactic not a strategy. Likewise, I made some comments around our ability to defer development starts if that came to pass and that would be a short term capital preservation move.

But again, that's a tactic on strategy. You know, everything we're saying, we're really trying to highlight the ability, our flexibility to adapt in these volatile times, but in terms of the long-term goals, we're not changing those.

Okay, thank you.

Thank you.

The next question today comes from the line of Tami Burr from RBC Capital Markets. Please go ahead, your line is now open.

Thanks, good morning. Good morning, Tom. Just just just just just given the comments around the 2023 refinancing you mentioned some higher anticipated costs there and then you'll submit some comments around you know same property and why. What can you share with us in terms of you know maybe your thoughts on hitting perhaps that you know that five to seven percent annual average annual story of epiphalagraph target for next year. Thank you. Thank you.

Yeah, I think those comments were directed at, that I made earlier, were directed at the fact that we believe that is achievable. I think the steps that we've taken from a financing perspective this year, Protect our FFO and our interest expense next year, we've given some more detail on the timing of some development ramp up, including...

you know, one thing we do want to clarify and you'll see in our MD&A is that there's actually a very small gap, if any, between what we define as completion on the well and rent commencement. And that's because the fixer interiors are so much longer at the well than our typical retail sites that we took the conservative approach of not calling them complete until in fact that extra work was done.

Putting all those pieces together, we feel pretty good about hitting in that range. Certainly there are risk scenarios that exist, but in almost any environment we feel good.

Great, thanks for that. You mentioned earlier that net effective rents haven't really changed, but just looking at maintenance cap X and TI's, they are running maybe a little above last year, but still below your guidance. You've also done, of course, some more leasing this year. So, I'm just curious, what are tenants asking for today that might have changed, say, versus pre-COVID, whether it's the lease terms or maybe even the types of inducements? Well, again, I think, and I'll turn the mic over to the next speaker.

any sort of outside measure of TI's. And with respect to landlords work, really it's also very similar other than that work has gotten more expensive for us given the inflationary environment in construction costs. But tenants also of course ask for low growth and we ask for high growth. And there's a dynamic there that you obviously have to negotiate. And thankfully given the market, we are able to extract reasonable year over year growth in many cases from our tenants, which is why.

landlords work, not a lot of rent-free concessions and reasonable growth year over year. John , you have more color on this?

Yeah, the only thing I'm going to add, Pami, is, you know, further what Jonathan said earlier about, you know, tenants are really embracing the fact that their physical space is, you know, the fact of fulfillment centers for the consumers. They want to be able to get people in and out as efficiently as possible. So we are spending more time with them to make not just their units better but our shopping centers more contingent to people getting in and out of the center square point. So that means...

Working with parking areas, working with shipping areas, giving larger back of house. You know, as Jonathan mentioned in his script, we now have created something called our Tenant Experience Department. That's to do exactly that. It's not just to build out specific tenant space, it's really to have a white glove treatment with our tenants to ensure that they're maximizing the efficiency of their space. So again, it's not necessarily costing us more, but we're putting more intensive resource efforts into it. And with that, I'll turn it over to Jonathan.

It's a great point, John . And I think the other things we're doing is just investing in technology and other elements that make the tenant experience better so that we are in a better position to ultimately get better economic terms from our tenants because they will ultimately, when needed to make a decision to be in a RioCan center or elsewhere, we hope will elect to be in a RioCan center and be willing to pay for the services that they

to have that benefit of all of these services that we would like to offer to differentiate ourselves.

Thanks, and that's great color just maybe on that point, better terms. Are you getting better annual steps in the leases and some of maybe your stronger markets, like, give you the GTA and just and if you can kind of share what those steps might be. And if they're being built in on an annual basis.

It's certainly something we're attempting and it's really a tenant by tenant. Historically in Canada you saw steps every five years, but based on our experience down in the US where there was more than normal to actually get annual bumps, we've started instituting that in as many leases as we can here in Canada. And it really is market dependent and tenancy dependent, but we are able to negotiate that in many cases. And we believe our wildcard southeast does this. It's a tiny comprehensive treatment because it is made up of almost every part of Canada doesn't enjoy a

With respect to the actual percentage of growth each year, I think it's in line with some of the same property on the line numbers that we're trying to achieve. It might not be 3%, but it certainly, we attempt to achieve 2% growth bumps each year. But as I said, that really does vary wildly between tenancies. John , do you have any further comment on that? No, the only thing I'd add to that is we try for a 2 to 3% year. I would also say tenants are really trying to extend these terms out longer than the typical 5-year rule.

They're also trying to tie up space before expiring. So we have a bunch of national guys coming to us in two years in advance and they want to lock in space now and it really gives us the benefit of building a mass future growth.

Thanks. Just last one for me, just coming back to the wealth, any update on the types of tenants that you're speaking to on the retail side and on the balance of this space and any changes in the strategy just given the broader economic backdrop? Again, I'll start and then hand it over to John , but no, we're not – first of all, we're not changing the strategy. We really do want the appropriate types of tenants that define that downtown west –

totally appropriate within that context. And that's been our strategy for a number of years and it hasn't changed at all based on this economic backdrop. This is a generational type of asset, one in which we feel that a blip in the economic backdrop is not gonna alter the way in which we fashion it. John , any further color on that? No, I think you got it all. Again, emphasis is really on food right now, especially in filling in our market.

I'm not gonna name names necessarily, but it is that mix that both Jonathan and John mentioned. So we have necessity-based type tenants like a 16,000 square foot pharmacy, a 15,000 square foot medical office, a dental office, et cetera, these types of, a couple of bank branches. So these types of things that residents need day in and day out. We have a large food purveyor.

We have the Market Hall and then some proprietary brand type athletic wear types as well. So, getting that mix is, you can see it's a pretty wide swath.

Thanks very much. I'll turn it back.

Thanks very much. I'll turn it back. Thanks, Tommy. Thank you.

The next question today comes from the line of Tao Wu Lin from National Bank Financial. Please go ahead, your line is now open.

Hi, good morning, everyone.

Morning Hello

Just to put a bow on the guidance conversation, it seems to me like basically based on what you're seeing you feel comfortable with the growth outlook for 23 and for the remainder of the plan that you had laid out earlier this year. Is that a fair statement? Okay.

Yeah,

Okay. When you're looking at new projects right now, I'm just wondering if you are...

looking at a new residential project.

Would you be more likely to kind of look at the condo prospects for that property or the rental prospects for that property?

Well, I think we are looking at it the same way we always do, which is one, it is site-specific. So it really depends on how many units we are planning on creating. And if it is like we sense that there's too much absorption for multi-res rental, we're also going to supplement that with some condo. Two, we're looking at sort of the balance sheet within that project. And oftentimes, as you know, building multi-res rental alone is quite...

quite cost prohibitive and your going in yields are not tremendous and we look at everything on an IRR basis, not necessarily going in yields because that doesn't tell the whole story. But oftentimes you're aided by the sort of the upfront cost recovery and profit that you get from a condo building and that helps you succeed in building your multi-res rental building. We have a defined ambition to get to between $55 and $60 million of residential NOI within.

that five-year period which is now, you know, we're six months into it, so call it four and a half years. So we, and we believe that is the right thing to do for our company long term and for our unit holders. So we will still continue to build multi-res rental, but of course we will supplement it with condo where it makes sense. So I know that's a bit of a vague answer, but it really is project specific, but from a overall corporate objective perspective, we are still very much focused on growing our multi-res.

and having the RioCam Living brand utilize its scale and its capabilities to make those environments really, really exceptional for our residents, which will, of course, in the long term provide much needed living space, but also provide, I think, enhanced rents and growth for our organization.

And can you just remind me, is there a big difference in like the development charges or associated fees with respect to building a rental versus condo?

Well, the big difference is that we get charged HST on building a multi-res rental property and we do not get charged HST when we build condo. That gets flowed through to the ultimate buyers. So, I mean, again, I'm not going to criticize taxation policy, although I will point out that it does make it a little more difficult on a multi-res rental project to make the numbers work. Based on that, and I think, again, if we are seeking enhanced supply...

some consideration for fees related to doing affordable rental in certain jurisdictions where there's an affordable housing policy like in Toronto where there's the open-door policy where there's a break on some development charges related to those units you are delivering that are affordable. But overall whether it's a condo unit or market rental unit fees and development charges are exactly the same.

Okay, my last couple questions are more on the retail side. Just to go back to your earlier discussion on the grocers, they had sort of been pretty quiet in terms of growth, you know, sort of prior to COVID.

When you are talking to them now, what are they seeking? Is it about relocating into bigger box sizes? Is it about absolute unit growth? Or are we looking at new entry?

What do you think drive the growth in that category?

Yeah, I think it's a combination of things. The color that I get from speaking to some of the high level executives at the national grocery changes, one, a lot of them have acquired new banners that they want to expand. Some of them have discount banners that are doing better or just sort of are requiring more growth than their mainline banners, so they want to grow those out as well. And some have ancillary businesses like pharmacies, which are very hyper aggressive.

for any boxes that open up that are, I would say, that can accommodate grocery stores because of these expanding profiles.

Okay, and nothing new on the entrance side then, no major new entrance or anything like that that you're seeing at this point.

No, more just expansion of smaller, newly acquired properties like T&T for instance, or Farm Boy, or I know No Frills is also, Loveless is looking to expand them aggressively. So those I think will keep us busy and I think will definitely, I think our grocery store teams here have done a remarkable job of evolving and I think because of that evolution they're going to be thinking new.

opportunities, but I have not heard like some of the US biggies, like Aldi and Lidl. We've always kept an eye on. I haven't heard anything definitive about them and their Canadian expansion plans, if any. So it really is just the same players in Canada looking to expand and extend.

Okay. And then now that the duck has somewhat settled on COVID across the retail landscape, I'm just wondering, as you look around, are there opportunities out there where do these episodes getzarier?

large retail platform like yourself could be a little bit more opportunistic in retail like I'm thinking maybe

There's street front, you know, that, you know, obviously in certain parts, certain areas of sort of under pressure or, you know, office retail.

any other parts of the retail sort of space complex that you could be getting more involved in.

Well, I think the first place we turn to is Inwards, and we have some tremendous properties that can use some more attention within our own portfolio, and that's something that we're hyper-focused on investing and actually making our own portfolio better, not just through these massive redevelopments into mixed-use properties, but also even our ubiquitous suburban shopping centers, just making them, as John suggested before, making them more amenable to

to providing the services that our tenants need to make their stores better in this kind of hybrid online environment. But in terms of other opportunities, the truth is retail in Canada has fallen into the hands of some very well-heeled and responsible balance sheet heightened entities that aren't really desperate to sell en masse. So there might be certain opportunities around the edges where if available, we will certainly look to avail ourselves of.

But I don't think they're that rampant. And I think everyone is sort of waiting for a shoe to drop based on higher interest rates that all of a sudden the market's going to fall off a cliff from a values perspective allowing people like us to have a tremendous amount of opportunities. But it's not just interest rates that create pricing. It's also flow of capital, flow of funds. And we have a sense that there's a lot of people with capital who really like the retail space. And so I don't think there's going to be like...

large scale opportunities out there, but you can rest assured that if they exist, we will find them and try our best to take advantage of them. So that's really what I will say there. I don't know, Dan, if you have any further thoughts on that. I think that's bang on, and it's one of the reasons why quarter in and quarter out, we talk about our liquidity, both as a defensive position for us going forward, but also as an opportunistic position with our L

The rising rate environment does create some opportunity down the road as people get jammed up by refinance etc.

Okay, that's perfect. Thanks, gentlemen.

Thanks, pal. Thank you.

The next question today comes from the line of Jenny Marr from BMO. Please go ahead, your line is now open.

Thanks. Good morning everyone. I just want to ask about the debt strategy. Dennis, I'm not sure if you had mentioned what the gap between unsecured versus secured debt is. So if you could give us that, that'd be great. And then you also talked about leaning a bit more towards secure debt for some of the near-term maturities. And I'm wondering, tactically, is there a view of playing around with short-term versus long-term in order to get a more attractive cost to capital or...

is the preference to really turn that out as long as possible. Yeah, so I think, yeah, thanks Jenny. I told you, the first question is that we have been seeing in the neighbourhood of what's called 75 to 85 basis point gap and spreads between secured and unsecured on financing that we're active in right now. So that is a fairly substantial disconnect, so we will take advantage of our secured asset pool to do that. And, you know, I think…

It's hard to know exactly why that is. There's a lot of fun, slow dynamics and market dynamics out there that people have to think about. But I think one thing that a mortgage lender does at a business level that a fixed income portfolio manager can't necessarily do is they are underwriting down to the asset.

So, they are taking the couple of months that it takes to go lease by lease through an asset, get comfortable with the credit quality and underwrite on a very different risk basis than a typical fixed income investor can do and we think that is helping the viewpoint there. It would be interesting to see how these converge over time but that's where it stands today. We are active on $300 million of secured financing now.

that we use to refinance our upcoming maturity of our adventure in October . And we are looking at seven-year because we have a hedge in for seven-year on the GOC component. So that kind of takes care of the balance of this year. As we go into next year, so we don't have any major financing after that until we get into the first half of next year. So our mantra right now is just making sure we know what all our options are.

So we're looking at terms, we're looking at type of debt of all types and we'll continue to do that. We always have to have one eye on the ladder and the risk so our preference would be to go longer. The way the curve is right now it actually is kind of attractive to go longer but again the way the markets move these days it's hard to know how that lasts but we have an inverted curve that the 7-10 year end of that curve.

Do you look at the 5 to 7% FFO period of growth discreetly year by year? Or is there room to say in five years time you look back and if you get to an annualized number of 5 to 7% that that's satisfactory as well? Like how should we think about your goals on a year by year basis?

So our model that we put out on investor day was an average five year, so it's a CAGR basis over that five year period, so there could be bumps in the road.

You can always find scenarios that could be negative, but we think they would be temporary. So you read that in the market, things like stagflation, low growth, high interest rates. To be honest, at this point, it wouldn't do much to impact 2023 because we've advanced a lot of the leasing already and taken care of a lot of the financing, but you start getting into 2024, maybe that's an issue. But in the fullness of time with the five-year plan, these things tend to normalize and we feel comfortable.

early 23.

Okay, great. Thank you very much. I'll turn it back.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to our President and CEO , Jonathan Gitlin.

Thanks, Bailey, and thanks everyone for hanging out with us this morning and for reading through our results. And we're very pleased with where we are and where we're going and looking forward to speaking to you all again very soon, or at the very least next quarter when we report a game. Thanks.

Thanks, Bailey, and thanks everyone for hanging out with us this morning and for reading through our results. We're very pleased with where we are and where we're going and looking forward to speaking to you all again very soon, or at the very least next quarter when we report again. Thanks!

Thank you all for your participation. You may now disconnect your line.