Q2 2022 SmartCentres Real Estate Investment Trust Earnings Call
And I feel like thunder, I won't let it go. I'm wasted when you're not astray. I don't want to play this game, and lay me down. Cause I don't know where we're going. And I don't know where we're going. Maybe we like any mo- What's up with how you're going?
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The conference is now being recorded.
Good day ladies and gentlemen, welcome to the SmartCentres ARIT Q2 2022 conference call. As a reminder, if you would like to queue up to ask a question, please press star 1. I would like to introduce Mitchell Goldhar. Please go ahead.
Good morning and thank you for joining us on our Q2 conference call. I am Mitchell Goldhar, Executive Chairman and CEO .
And I am joined by Peter Sweeney, Chief Financial Officer, Rudi Gobind, EVP, Portfolio Management and Investments, and Mauro Pombianchi, Chief Development Officer.
Our commentary will for.
mostly to outlook in some of our mixed use initiative sections of our mDNA.
which is posted on our website.
I refer you specifically to the cautionary language at the front of the MDNA materials, which also applies to the comments any of the speakers make this morning.
We are pleased to report that the REIT delivered another solid quarter, demonstrating once again
its ability to consistently drive growth starting with our core asset base.
Since the rest of my commentary is covered in our press release, I will turn it over to
it over to Rudy Gobin to present leasing results.
Thanks, Mitch. Good morning, everyone.
Throughout the second quarter, we saw the underlying strength of our centres in driving, leasing, activity and customer traffic.
Tenants in most categories were back wanting more space and locking up locations in our high traffic centers.
And with virtually 100% of the REITs properties having a full line grocery, a near 70% including a Walmart Supercenter.
A wide variety of tenants were back, adding locations to our well-located centers, including dollar stores, the TJX banners, health and beauty.
the Canadian Tire banners, pet stores, medical, fall wine and specialty grocery.
distribution, logistics, and much more. All driving traffic and improving in our already strong tenant mix in each centre.
Here are some key highlights.
We closed the quarter with an improved occupancy of 97.6% with committed deals. This improvement was widespread across all provinces, including the releasing of two of the previously vacated home outfitter stores, which closed all locations in Canada, and four within our portfolio at the end of 2021.
You may recall that we negotiated a buyout of a significant portion of the remaining 2022 and 2023 rents.
which was recognized in our Q4 results.
So the releasing provides an improved cash flow overall.
We are now close to releasing the last two of the locations at the same or slightly higher rental rates.
With this, we see occupancy continuing to improve in the coming quarters and working to get us back to 98%.
At the quarter's end, we have already completed or near completed 4.2 million square feet of the 2022 renewals, representing 83% of the maturities in the year and at a 3.6% rental rate, excluding anchors.
Over 150,000 square feet of leases were executed for build space during the quarter and I would add with better covenants than the previous tenancies.
New entrants to the market in a number of categories including health and beauty, furniture, sporting goods and QSRs have started with strong interest in our open format.
and resilient portfolio. We continue to work with our tenants, helping them to adapt to their changing needs, which gives them the flexibility they need and only serves to strengthen our partnerships and maintain our high long-term occupancy levels.
We have been fortunate with no predator filings in 2022, which speaks to the high quality of our tenants and trusting that the worst is behind us.
From a rent collections perspective, we ended the quarter at 98.5% and subsequent to the quarter have made further collections relating to the quarter bringing collections to 98.8%.
This is happening simultaneously with higher rental levels and NOI, and we expect further improvement in the coming quarters.
once again demonstrating the stability and the financial strength of our tenancies.
Regarding our premium outlets in Toronto and Montreal, both continue to improve and with the signing of another Aricia in the Montreal Premium Outlets, we are now at 100% occupancy in both centres.
With the pent-up demand, accumulated disposable savings, and the reopening of the Canadian-US border, we are experiencing a solid start to 2022.
From all perspectives, 2022 is recovering nicely and is shaping up to be a strong year in retail and especially in the value segment, an area where we dominate.
As Mitch has said time and time again, this portfolio was built for heavy weather.
Our value-focused tenants are adapting, customer traffic is improving, occupancy and cash flows are back to near pre-pandemic levels, and most importantly, all of this is happening concurrently with the extensive mixed-use development initiatives already identified in over half of our existing centres. Resoning achievements made.
continuing. Current construction already in progress in condos, apartments, retirement, self-storage, industrial and retail as previously mentioned.
and all contributing to significant current and future NAV growth.
With that, I will now turn it over to Peter Sweeney.
Thank you, Rudy, and good morning, everyone.
The financial results for the second quarter reflect the continued steady improvement in our core business.
As Rudy has mentioned, for the three months ending June 30th of 2022, FFO per unit with adjustments
excluding various anomalous items increased by 5.8% or 3 cents over the comparable quarter last year.
This increase resulted principally from improvements in the core business's NOI as compared to the prior year.
Please note that for the quarter we have presented FFO information net of the impact of anomalous items including expected credit losses.
condo and townhouse profits.
income or loss from the total return swap.
and the dilutive impact associated with equity units issued pursuant to the acquisition of the VMC West lands.
IFRS fair value adjustments in our investment properties portfolio represented an approximate $10 million increase for the quarter, principally reflecting changing assumptions used for some variables in the valuation process as a result of the improved leasing environment that Rudy has mentioned.
Otherwise, cap rates and corresponding discount rates did not change in the second quarter, with the exception of an increase in the cap rates used to value the handful of indoor shopping centers in our portfolio.
Total assets exceeded $11.9 billion at the end of the quarter as compared to $11.3 billion for the comparable quarter and on a proportionate non-GAAP basis total assets exceeded $12.2 billion as compared to $11.5 billion for the comparable quarter.
These year-over-year increases are primarily attributed to both acquisitions and fair value gains that have been recorded over the past 12 months.
They say that every cloud has its silver lining, and certainly that was the experience during the quarter for our total return swap.
Given the direction of the Trust's unit price in the second quarter, over 2 million additional notional units were purchased at an average price of $27.85 by the Financial Intermediary during the quarter. Accordingly, by the end of the quarter, the total return swap had approximately 3.5 million notional units with an average price of $28.36.
Recall that this Total Return Swap initiative was implemented last year as an alternative to an NCIB and it has approximately three years remaining before it is expected to be wound up.
It's hoped that over this remaining term that this initiative will continue to provide continued earnings growth while avoiding any longer-term debt financing that is typically associated with an NCIB program.
We encourage you also to read the outlook section in this quarter's MD&A which speaks to the distinctive safety, security and stability of our core business and its ability to endure stormy weather of many types.
Our financial results and the corresponding financial metrics have followed a consistent trend over the last several successive quarters, demonstrating both the safety, security and stability of the business and the steady continued growth in our operating platform.
This foundational strength provides the business with a unique strategic advantage that permits the continued expansion in our development of mixed-use opportunities.
We have also continued our focus on further fortifying the strength of our balance sheet.
In this regard, we note the following strong debt metrics for the second quarter as compared to the comparable quarter in 2021.
Number one, our debt to aggregate assets ratio has now improved to 43% as compared to 44.6% in the comparable quarter. Number two, in keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, unsecured debt in relation to total debt, has now improved to 43.6% as compared to 43.6%.
has increased to 77% from 70% and our unencumbered pool of assets has continued to grow increasing to an excess of $8.4 billion at the end of the quarter as compared to $5.9 billion last year.
We continue to employ a strategy to repay most maturing mortgages.
Accordingly, we expect these metrics to further improve in the future.
This strategy has permitted us to gain further agility when considering future financing opportunities and alternatives for a portfolio of mixed-use developments.
Given the recent increases in interest rates, our weighted average interest rate for all debt increased during the quarter to 3.3% as compared to 3.27% for the comparable quarter last year. We note that this is the first increase that we've experienced now in approximately 10 years.
Rising interest rates by their nature will result in additional interest costs. However, we have structured our debt ladder conservatively to permit staged and manageable maturities to occur over the next several years, and our weighted average term of debt continues at approximately 4.5 years.
As at June 30th, approximately 84% of the Trust's current outstanding debt is fixed-rate debt, which provides tremendous stability during periods of interest rate volatility.
For clarity, we have 200 million and 100 million in maturing debentures in May of 23 and August of 2024 respectively. Accordingly, we are continuing to monitor debt capital markets for interest rate movement. However, we are permitted tremendous flexibility when considering refinancing alternatives for maturing debt, which is a meaningful advantage in this current rising rates environment.
This historical bias to extend both the weighted average term of our debt and fixing interest rates was deliberate and is yet another example of the risk mitigation strategy that we have employed now for several years to insulate the trust from interest rate volatility as we are experiencing in this current rising rate environment.
As we look to the immediate future and continue to manage through the current uncertain capital markets environment, in addition to the conservative debt metrics noted previously, consider also that when factoring in our cash on hand together with our new $300 million facility that was established earlier this year to support the $500 million VMC West acquisition, the $150 million new revolving line of credit that was completed late last year, and the $250 million accordion feature associated with the new VMC West launch,
with our existing $500 million operating line, we have ample liquidity to provide appropriate flexibility for the capital funding requirements associated with our pipeline of development activity.
Currently, we are focused on completing several new construction financing facilities to support the developments that were previously mentioned, including the flagship Canadian Tire site in Leeside, our new industrial site in Pickering, and the Artwalk condominium development at SmartVMC.
And finally, it's important that we confirm our unwavering commitment to our balance sheet.
It has withstood the unprecedented challenges over the last two and a half years. It is permitted to reach development plans to continue without delay or impediment. It is in a position to serve as the backbone to fund and support the vast array of growth-oriented opportunities that lie ahead for SMART Centres.
And with that, now I'll turn it back to Mitch. Thanks Peter and Ruby. As you can tell from our collective remarks and our press release.
The portfolio remains strong and we continue to thoughtfully grow.
We are also continuing to focus on our mixed use intensification program to our smart living residential brand, a name that will soon be synonymous with thriving master planned communities.
on our Mixed-Use Intensification Program to our smart living residential brand, a name that will soon be synonymous with thriving master-planned communities for all Canadians.
With that, I will now turn it over to the operator in addressing your questions.
Yes, of course. Just to remind everyone to queue up for a question, please press star one now.
And I don't see anyone in the queue. Oh yes, we do have someone just give us a few moments to get their name.
Go on, belong.
Thank you.
All right, so first question comes from...
Sam Damiani
Just give me a moment.
Please go ahead.
Good morning everyone.
Thank you and good morning everyone. I guess two questions for me. First off just on the
the funding of the development program. Any plans to step up dispositions or other sources of capital raising in the near to medium term?
Okay, Sam. We are in...
Uh...
in the process of
We're in negotiations with various entities to...
potentially join venture some of our developments.
up dispositions. I mean they do happen.
We don't at the moment have anything significant listed.
per se, for sale.
But we have quite a few now properties that are approved for intensification and we have interest from third parties to commit to those. So that's one of several capital raising initiatives that are going on right now.
Is that something that could get across the finish line within the next 6 to 12 months?
Yeah, oh yeah, it's been going on for...
Goodness, probably more than six months. It does take time, as you know, but I think for sure, I mean, if it gets done, it will get done within the next six to twelve months, yes.
Okay, and these are these are sites where you know, active construction would start in the in the near term, further sort of alleviating the stress on the on the REEDS balance sheet.
I mean it depends on everything but you know one step at a time you know the let's say you know the the joint ventures get it completed then you know together you know of course we would.
decide if you know we're happy with
conditions to proceed. But the idea obviously of doing the joint ventures is to proceed but certainly not going to commit a folly if we don't think it is. But it's obviously a long term, short, medium and long term program.
It's not the only capital raising program, but it is one that's active
So I mean we could sell outright sell sites if we wanted to and thought that was the right thing to do You know not join venture them and not develop them
So these are two examples.
of capital raising programs and obviously we could also sell
outright sell shop, you know retail, but we don't have anything listed. So we are, you know, looking at these things every day, we are very committed to, you know,
putting our balance sheet back where we were and that's what we want.
our options every day and we will get there. It's just a question of...
you know, which way or ways are you going to get there.
I understand. And just my second area of questioning is just on the fair values. Just wondering what your thought process was during the quarter, obviously given the spike in interest rates even though they have come down a bit already but in the context of you know the portfolio with the Walmart leases with you know long-term extensions at flat rents.
Well, I don't know if you're implying that there were.
I don't know what you're implying but I'd say the leases with Walmart are flat or not flat are among the most valuable leases.
there are in retail.
in terms of their security and the value they bring to the center themselves.
So, we don't see them...
We definitely do not see the value of those having gone down.
You know, arguably they've certainly held their own. You know, the rates have moved, but the centers are busier than ever. And the role they're playing in their communities is increasing.
Because, of course, people are shopping for food.
physically more and also because communities are growing and there's no retail growth for all intents and purposes in the markets that we're in. So, it's just kind of like exponential. The sensors are dominant, most of them in their marketplaces and in fact, I think Rudy alluded to the fact that we've got sort of a resurgence of new interest. So...
I don't think, you know, it's a very difficult moment in time to say did they go up, but they certainly didn't go down.
And in terms of other reasons for values to go up or down, yeah, we're in a little bit of an uncertain time. And so we're looking very closely at the values of our properties where we're intensifying because obviously things are a bit in flux right now. But that's temporary. I mean, our intensification program is going to go ahead. It's just a question of doing it safely. So those properties values are.
are increasing, but we've increased a bunch of them already. We're looking at finding the right evaluations for each one of the properties as they get approved or as they get close to getting approved. So, hence long-winded way of just saying that's why we landed where we landed, Sam.
I'm sorry, but I'm trying to say that you basically, you know, within an absence of transaction data points, there wasn't a compelling reason to move the needles in any big way.
Yeah, I wish I had phoned you before you asked that question. That was an eloquent way of saying what I said. Absolutely, yeah. There's not a lot in terms of data points. Intuitively, I think we'll see.
value increases in many of our properties where the approvals continue to You know come through and I feel that our retail is very solid in terms of its current values and potentially You know could see some
some movement upward depending on background macroeconomics, but very solidly I think very in demand. I think they're quite liquid even in this marketplace with no data points.
That's great. Thank you and I'll turn it back.
Great.
Jenny Ma from BMO Capital Markets. Please go ahead.
Thank you. Good morning. I dived a little bit late, so I apologize if my questions are repetitive to what you may have discussed before. But I'm just wondering, philosophically, with some rates having moved as much as they have over a short time period, does it change your longer-term strategy in terms of how you think about advancing projects in your development pipeline, and then also how you think about the balance sheet because you've...
advanced a lot more unencumbered debt over the years to a pretty nice number now but would you be a bit more tactical over the short term to sort of respond to rates or is it or do you really view it as still I guess transitional or something you can manage through without changing your philosophy on either developments or the balance sheet.
I mean for sure we're going to forge ahead. We're not going to flinch in terms of the approval process.
In terms of proceeding to actually go to market, we will...
We'll look obviously very, very carefully before we do that. And yeah, with the cooling off of the condo market, obviously we'll be looking at it.
with these new conditions in mind. I don't think it changes anything really long term for us.
In the meantime, we're operating our shopping centers. There's very few properties where we're deciding between building retail and building residential. So we'll continue to operate our shopping centers. We haven't really moved anybody. We have the right to move most of the tenants where we want to build, but we haven't actually given notice in most of those cases. So we'll continue to operate the shopping center and we'll make the move when we think it's safe to do it.
But ultimately, we do think that we'll get there. And of course, there's a yin-yang with the interest rates, and that is that we hopefully will see some.
backing off of construction costs.
And that doesn't mean there's no market. It just means that for a month or two there, there was seemingly virtually no market. But there is a market for housing. And so it won't miss, it's a 40-story tower. It may not get sold out over a weekend, but it may get sold out over six months or 12 months, and that's fine. Something actually quite healthy about that. So we'll continue to forge on, but when it comes to pulling the trigger and actually...
building. We will be looking left and right and up and down and everything before we actually proceed. But nothing is going to change in terms of our efforts and our energies towards the intensification program.
So, in the press release, you talked about how the floating rate debt on the construction loans have impacted sort of the development pipeline. Do you just sort of see it as something you have to absorb as part of the developments and that you'll manage the balance sheet over the longer term appropriately or does that itself give you pause or cause you to renegotiate or change your negotiations in terms of how you underwrite rental rates?
Well, it's not all rental. I mean, you know, but yeah, I mean rents are okay. I mean, it's obviously, I mean.
It's dynamic.
If it was all one way and you know rates going up and costs are staying where they are
pricing is going down and demand is going down, that equals we're not going to proceed.
But, you know, embedded in our pro forma, you know, is always these variables that you're, these data points that you're referring to and of course, you know.
we will, you know, we will, if it makes sense, if the returns are risk adjusted, interesting.
enough to proceed will proceed but you know obviously the
The equation has changed but doesn't mean that the equation isn't good enough to proceed. We're not going to blindly proceed.
We're going to impute it all and decide whether it's something we can proceed with. Remember, we're not buying land. We own the land. We're not out there acquiring new lands at market or even yesterday's market or today's market.
We own it. We're operating shopping centers on them and that was always the intention here.
we're not under pressure to proceed and we're not, we don't need to do anything. We'll do it if it's safe to proceed with all those variables that you mentioned in mind. Okay. We're not gonna develop for the sake of development as we said, we're gonna develop whatever it is.
14 billion dollars with development. You know, just blithely proceed. We'll do it, but we'll do it carefully and thoughtfully, and we'll get there. Just respecting, you know, Mother Nature.
Great. And then what about on the balance sheet side, if, and I mean it's a big if, the spreads between unsecured and unsecured persist, would you be willing to tap into your unencumbered pool to get some financing at slightly better costs over the short time period or is it you're still more committed to maintaining a larger unencumbered pool and leaning on the unsecured market?
Yeah, I think Jenny, it's Peter, good morning. I think the latter is the case. Our strong preference is to continue with the strategy that we've employed now for several years, which is continuing to unencumber.
those properties as mortgages mature. And it's not necessarily only a financial decision, right? It provides the property, many of which, most of which are now subject to
rezoning and intensification initiatives, it allows tremendous flexibility and convenience when choosing to take sections of that property offline for development. So to have...
an abundance of those properties unencumbered I think will assist our development program.
certainly both in the short and in the longer term. Having said that, there is a bit of a disparity, as you mentioned, between bond rates and mortgage rates.
However, I think it's fair to say that we're very fortunate to have the support of the Canadian banking community behind us because there are other forms, at least for us today, of unsecured financing that we're pursuing and those other forms of financing are quite competitive with any secured mortgage type financing alternative that you can think about. So at least for now, we're very fortunate to have the support of the Canadian banking community behind us.
Given where spreads are in the bond market, I think we've said publicly that for now, you know, we're not assertively looking at the bond market and we're pursuing other courses, but those other courses aren't secured courses, they're other unsecured courses through the Canadian banking community. Does that help? Okay. Yes, that's very helpful. Thank you. And then turning to the Pickerel land acquisition, I didn't see the numbers tied together, I think in the MDNA, but it...
than the ones that a lot of other players talk about probably on the left end.
Yeah, I mean, we, it's owned by the guy was owned by the government. So, you know,
We love the area. We think it flew a little bit under the radar when we identified it a year ago.
And yeah, so we have a user which you need to have to be able to buy this particular piece of land.
So we were fortunate enough to have that and be able to buy this land. So the reason for the price is to do with I guess the government wanting to create activity, jobs and whatnot and taxes and open up this area. So it's called Seaton. I mean everybody's heard about that area, maybe no one knows where it is. It's basically flickering on the 407. So yeah, it's an emerging...
Industrial Business Park right on the highway there. Kubota is already there. There's some others under construction and then there's us. We have other lands for industrial.
we will
be talking about those in future quarters. I'm sure where we were, you know, we're up to other potential industrial developments on some of our other properties, but this one of course is the first one and we actually acquired it, you know specifically for this purpose. Can you expand on the need to have a user? Is that tied to the government or is it just that you are a user to the table? Yeah, you're not allowed to buy the land unless there's an actual operator or tenant.
You can't buy the land and speculate on it. They didn't want the land to go crazy in terms of what they wanted.
They wanted businesses.
there on opening day, you know, as a criteria, it's a condition of acquiring the land. So yeah, a user can buy it.
or a landlord or developer can buy it if they have it.
So yeah, it's owned by IO.
Investment Ontario and it's really you know it's all serviced it's you know really well you know kind of manicured industrial land ready to go basically you know just in the 905 so it's really cool well the rest of the city is going crazy in terms of pricing and this was reasonable.
and I think very strategic actually.
So is it a matter of just bringing a user because I mean 38 acres is quite a bit so is it just you know you know is it opportunity to find other users to ultimately fill up that space and you start with one or I mean
No, we're allowed to spec space. Yeah, you have to have a user to be able to buy the land. We were able to negotiate what we were able to negotiate. I don't think we would have been able to negotiate 138 acres, but we were able to, as part of the negotiation, we didn't want to go there just to build on 10 acres. It wasn't something that would, you know,
maybe be something we would do but through the negotiation the government saw that it would fulfill their I guess their vision of creating you know assessment there and jobs by getting us started with with a user that we had and allowing us to expand from there so yeah we have surplus lands but it's all within the parameters of the of IOS vision area okay so this is a user that third party to you and the government
Yes, oh yeah, absolutely. It's a third party. Is there a tenant?
And
And you know we are sort of anticipating that they will want to, you know need to expand over time and hence some of the extra land. And there is other interest. We have other interest from third parties, but we haven't buttoned it down yet. But the deal that we have with the third party had to be done before we were allowed to acquire the land. Okay, okay. Now if I look forward, is this like a one-off opportunity that you guys had, or does the government have?
more land that is sort of saleable to the market, assuming that the market for development is there to you or to any other developers.
I can hear everybody hanging up the phone calling IO right now. Yeah you should drive out there I mean it's you'll get it as soon as you drive you go yeah of course why would people not want to you know look at this so.
But yeah, I mean we aren't really in a position to buy more land because we had negotiated, you know you gotta look at it from the point of view of that we have a user that's not insignificant. We want them to be able to expand and we want to be able to do more to buy, you know to develop out there. But there's also physical reasons why it made sense to buy that 38 acres exactly. So that's how we landed on it. But there's lots more land. They have, I don't know actually how many more acres of land they have. I mean it's not infinite, but it's on both sides of the.
and service grade and manicure you know the several hundred acres of land and build the intersections before having deals but of course you know it is the government and they wanted to make this happen so you can go out there and see it it's it's you know inevitably going to be a you know vibrant industrial area of Toronto
Okay, sounds good. That 38 acres you own is a contiguous piece, correct?
Sort of. I mean, if you mean legally, technically, I mean it's on either side of a road, but I mean they're beside each other and for all intents and purposes from the development and marketing point of view, they're basically beside each other.
Okay, great. Thank you very much. I'll turn it back.
Thank you very much. I will turn it back.
All right, next question comes from Dean Wilkinson from CIBC World Markets. Please go ahead.
Thanks. Morning, everyone.
Um.
Mitch, just on another way of coming at the development side of things, we all talk about the rising interest rate environment, but when you look at the 10-year bond yield, it's not far off where it was in 2018.
in that developments tend to be long-time lead items, have the economics really changed from when you were looking at development back when we all thought COVID was just a tasty beverage? And has anything really changed?
I mean, first of all, the majority of our...
efforts and energies and really where the money is made is actually in the land use.
Master planning approval. So I mean first for us, if you were here in our office and lived in our world, you would see and understand that actually, I mean the approval getting that right.
is what, you know, majority of our brain, you know, neurons are.
applied to. When it comes time to pull the trigger we look at obviously we look at the world every day and we sort of intuitively feel whether or not it's safe to go or no go but when you you know when you really look at it you know a multi res deal today is it that different than it would have been in 2018 in terms of returns? No probably not because because rents actually have kind of firmed up and costs are sort of coming down and yeah rates have
background, short-term rates.
Borrowing rates have gone up, but if you looked at it all today with a takeout financing, I mean...
I mean, probably isn't really much different.
You could probably make the needle move more by replacing materials or figuring out a way not to build that extra level of underground parking than what's going on in terms of background interest rates.
Great. Peter, on that exposure to the variable rate, correct me if I'm wrong here, the majority of that is in inactive developments so I believe most of that just gets capitalized so that rate move really doesn't have an impact on FFO for you, right?
Yeah, it's quite muted. You're absolutely right Dean. Okay, great. Last question was just on the premium outlets, the increase in rent there. Are there percent rents associated with those properties?
Yes, absolutely Dean, there are all leases.
as well as the face ramp that has annual steps.
Alright, so you would have seen an uptick in the percent Rand, I'm assuming, with everything reopening.
Absolutely, and we're actually seeing sales for many retailers that are actually exceeding the 2019 levels, which would have been the high watermark.
Yeah, I think my daughter was part of that, so... I think I saw that on one of the lists. I'll pass the thanks along to her. That's it for me, thanks guys.
Bye Dean.
Alright, and the last question we have comes from Tal Wouli from National Bank Financial. Please go ahead. Are you currently a blind person or may you be a candidate for a Mitchell-
Hey, good morning everybody.
Morning, Cal.
Miss you had made a reference to condo sales. I just wanted to go back to that for a second.
to condo sales I just I just wanted to go back to that for a second if you're
Looking at sort of recent releases, I think obviously you know you've still been successful at selling through. Are you getting any sense of like a shift in pricing or you know the demand level that's out there?
Strangely we haven't had any real pushback on pricing. I mean the sales that we are
We are doing right now are not Being reduced by any changes in our in our pricing pricing being you know pre You know a little bit of turbulence. I mean over the last few months mmm, so art walk You
was sold out just before the world changed a bit.
And that was at around 1200 a foot, you know, up here in Vaughan where we are right now.
you know up here in Vaughan where we are right now.
And then right after that we went out with Park Place.
which is a much bigger development than Artwalk. Our timing on that was right when everything started to...
and an art walk and that's when we, our timing on that was right when everything started to.
slow down. And yet, we're taking the long-term approach. We're chipping away and we've sold half the units we've released.
at the same basic price.
Just obviously, you know, it's been two months.
versus art walk, I mean art work sold out in like three weeks.
So pricing hasn't changed really, the rate has changed, but our relationship is, I mean we're in this for the long haul. And I'll tell you there is a bit of a silver lining too because our relationship with the brokerage community who are part of that program is, this is an opportunity, everybody's, it's much more of an opportunity to develop these relationships during these slightly slower times. Obviously, as has been mentioned in our last couple ofariogies...
And they get that we're not mercenary developers, that we're in it for the long term and building communities, and I mean that, with all the quality of life stuff around them. And this period of time has enabled us to tell them that story, and they really, if you read their, if you go onto websites of brokers who've been to our developments, particularly VMC, you'll see their comments.
talk about our master plans. So we've used this time well and we continue to sell much slower but at the same price.
And when you make reference to the Burrage Community are you talking about brokers who are buying themselves and looking to do assignments at close?
Yeah, I mean like, like, you know, a lot of the condos are sold, you know, like if you're a real estate, residential real estate agent who specializes in the sale of, of condos, you know, you may have two or three or four or five, you know, clients that regularly buy condos. hundred four
and rent them out. It's quite a, I mean it is one of the, you know, one of the forces at work in the sale of condos in Toronto and in Vancouver. So that's, for the most part, done through brokers. So you got to have a relationship, well you really want to have a relationship with.
with that community. And of course up in our developments we see a higher percentage of user buyers.
but a lot of condos are sold to investors who rent them out.
And what would be the split? What would be your estimation of the split? I mean I would say honestly downtown I mean you know historically being you know up until the slowdown I would say that it's bloody you know I'd be I'd be you know if it was 80% I'd be surprised if you were 20% end users in the majority of condos sold downtown Toronto I would be surprised.
But you know in VMC you know maybe this split would be you know I don't know 65, 65, 70 percent depending on the moment in time. You know brokers selling to investors.
and renting them to the to the renting market, you know, versus 85, you know, 80 to 90% downtown probably.
Okay, really depends on what part.
Sorry, any concerns then just with like you know if you have brokers buying multiple units like ability to close or anything like that I appreciate it has no no it's not the brokers not buying them it's not the brokers buying them it's their clients.
But still we always have concern about, well, if we enter into a contract with them, we're still worried about it, because
you know, their deposits initially are not that big.
So the way it works is, I mean, you know, you get an initial deposit which is refundable to them for 10 days and then if they don't rescind, then the deposit is firm.
then there's milestones for further deposits. But until you get those further deposits, I mean you're not in the clear. So you know with parking.
With Park Place, I mean, I wouldn't say, even Art Walk, I wouldn't say, you know, we're totally in the clear, like we're gonna...
We're going to stress test all of our deposits and buyers at Artwalk.
and obviously Park Place, but it's the structure that's...
behind every condo that's been built in this city and that's a lot including our own.
But it's not the brokers, it's their clients.
Right, so you know you have you're a broker you have you know three or four investors that you know that have you know whatever sort of you know wealth and they want to be in the rental market it's a good market to be in you know you bring present to them different pre-sale you know pre-construction they call it opportunities to invest in you know
And your investment is not huge up front, you know, it's a deposit. And so you're betting on, you know, you're betting on that location and the value of, or the return in the future is three years from now.
That's the game that's going on and has been going on for a long time and continues to go on but it's always been the game and The good thing for us is that you know quite frankly I mean you know we see a condo as a rental I mean if if we ever proceed with a condo we're perfectly prepared to take it as a rental Just so you know I mean you know so is our backup plan
But that's not what you'd normally
have going on with a private developer, you know?
they want out and you know and they don't have those contingencies but anyway just a little insight into the offstage stuff which is the condo development business.
And I guess just a bigger picture about, you know.
the development program.
The decision to go no-go on a project, is it really like...
function of the individual specifics of a project or when you look at the plan in totality
Like, is there, would there be a certain key sort of macro variables that like you would sit there and say like, okay, if we kind of get to this point on interest rates or this point, you know, in terms of where the economy's at, like we would really start to slow down. I'm not, I'm not trying to suggest that's what should be done here. I'm just trying to get a sense of how you think about that.
No, it's a great question. But it's always, I guess, we do these calls and we answer questions and the things that get taken away are sometimes maybe overly simplified.
Like in the best market, in the lowest interest rate market, in the most prosperity and wealth flying around, we still are extremely cautious about proceeding with a high rise development. And we look at it as everyone's gonna, what happens if everyone defaults? And that's the worst case scenario, just so you know. Don't close.
So, I mean, when things get a little bit like this, of course, even more so, we're not on automatic pilot. But just like, I mean, use all the examples you want out there, I mean...
The right thing that's you know the thing that's going to happen in Pickering is it's going to be the master plan that you can see on our website.
The question is, you know, how we're going to get there. And so it's going to happen. It's the right thing for that particular infill location with thewise officer...
with the transportation infrastructure, with the changes going on in Pickering and what's going on in the city, et cetera, et cetera, macro, it's going to happen. The question is how do you get to that completed master plan safely.
structure with the changes going on in Pickering and what's going on in the city etc etc macro it's going to happen the question is how do you get to that completed master plan safely I mean you know
Canary Wharf, I mean you guys are probably too young on the phone, but you know, that's a classic example of Blowing it like, you know because you go on, you know
you know, automatic pilot, you know, you have a vision and you get kind of seduced by your vision and you just go. But, you know, obviously it's an amazing property and a great vision, but you can still blow it if you don't execute properly. So we're not just gonna go, we use macroeconomics, you know, long term, it's gonna be great, no, we're not gonna, we're not going to get seduced by that. It's going to be, you know, any one project.
not being a success is a huge failure here. And it's just not, we don't need to go. And we are not going to go just because, you know, big picture, this is gonna be a great master plan or we can't wait to see it come out of the ground. It's just not gonna happen. So it's gonna be based on, you know, getting there. Proper deposits, you know, and there are steps along the way. You don't go from, okay, we're going, and then you're gone and you're on to the next thing. You.
You may start doing your undergrounds and monitor and know what your exit plan is while you're digging. So there's no automatic pilot.
Okay that's helpful. Peter just a couple of housekeeping questions. The miscellaneous revenues line, that's I'm assuming is parking and percentage rent mostly? Yeah you're absolutely right Tal. Okay and then on the balance sheet side I know one of the things you know you'd sort of after the land purchase in Vaughan you were interested in making sure you
retain your current credit rating, where do you think you need to get that ratio by the time you come up for review and when is the review with BBRF?
I think the review, I mean, DBRS is going to review things when they think it's appropriate, but typically what happens, Tal, is
our credit comes up for review in December of each year.
The most recent discussions with DBRS, there's been nothing that's been intimated or suggested by DBRS that would change that, so we would expect that sometime in the late fall we'll commence discussions with them and no doubt they'll have questions leading up to their report we expect in December .
With respect to your first question on where does that debt to EBITDA metric have to be?
Again, I think I would refer you back to DVRS's report from December of last year, Tal.
And I'm going from memory, but I seem to recall them suggesting that we would have to find a way to guide it down.
below 9.5, 9.5 times. And so as you would expect, and I think we've talked about this before, we're, you know, doing and making roads and inroads to try to find ways and means to get there. From a timing perspective, it's almost impossible to predict with any precision when and if we'll get there, but certainly we're doing everything we can to...
ensure that we're first of all aware of the expectation by DBRS. We've said that we do respect our credit rating and we spent a long time getting to the point where we're at now and so we wouldn't think it would be appropriate to let it go frivolously. And so we're making and taking every step we can to try to ensure that at some point we find ways of getting that EBITDA level down to a level that's...
appropriate and acceptable to DBRS to maintain credit reading as is. Okay, that's it for me. Thanks very much gentlemen.
Thanks, Tal.
And that was the last question we had in the queue.
Okay. Oh, there's the last question. Oh, sorry. All right. Well.
Okay.
Thank you all for taking the time to participate in our second quarter call. Please reach out to any of us for further questions.
Stay safe and...
Have a good rest of the day. Thank you.
Ladies and gentlemen, this concludes the SmartCentres REIT Q2 2022 conference call. Thank you for your participation and have a nice day.
Thank you. Thanks. Bye.
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