Q2 2023 RioCan Real Estate Investment Trust Earnings Call
Good day, ladies and gentlemen, and welcome to the real kind of real estate investment Trust second quarter 2023 conference call and webcast. As a reminder, this conference call is being recorded I would now like to turn the conference call over to MS. Jennifer suite.
Senior Vice President General Counsel.
E S G and corporate Secretary Mr. Yates you may begin.
Thank you and good morning, everyone I'm, Jennifer <unk> Senior Vice President General Counsel, ESG and corporate Secretary of Rio can.
We begin I'm required to read the following cautionary statement in talking about our financial and operating performance and then responding to your questions. We may make forward looking statements, including statements concerning <unk> objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs plans estimates intentions.
And similar statements concerning anticipated future events results circumstances performance or expectations that are not historical fact these statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward looking statements in discussing our financial and <unk>.
Operating performance and in responding to your questions. We will also be referencing certain financial measures that are not generally accepted accounting principle measures GAAP under ifr at these measures do not have any standardized definition prescribed by <unk> and are therefore unlikely to be comparable to similar measures presented by other reporting issuers non-GAAP measures should not be.
<unk> as alternatives to net earnings are comparable metric determined in accordance with IRS as indicators of Rio <unk> performance liquidity cash flows and profitability.
<unk> management uses these measures to aid in assessing the trust underlying core performance and provides these additional measures. So that investors may do the same additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward looking statements together with details on our use of non-GAAP financial measures can be found in the financial statements for the <unk>.
<unk> ended June 32023, and management's discussion and analysis related thereto as applicable together with Rio <unk>. Most recent annual information form that are all available on our website and at Www Dot SEDAR Dot Com I will now turn the call over to our president and CEO , Jonathan Kevin. Thanks, So much Jennifer and thanks to everyone Thats joined railcar.
<unk> senior management team today.
The <unk> team and portfolio of again performed exceptionally well.
We continue to strategically and responsibly manage every facet of our business over which we have control such that we're able to grow and at the same time navigate macro level volatility.
With each successive quarter since our February 2022, Investor day, our operating results reflect the precision with which we execute on our strategy in light of this I reiterate our commitment to the 2023 guidance <unk> per unit in the range of $1 77 to $1 80.
This commitment is a reflection of the retail environment and the capabilities of our team.
Our quality portfolio continues to maintain high occupancy and drive strong leasing activity and leasing spreads.
Our active development program generated new income through project completions are key financial indicators were equally strong with same property NOI exceeding our target range. This provides the foundation for reliable year over year growth in <unk> per unit.
The foundation of <unk> portfolio is resilient retail and our tenant base is tailored to offer consumers a compelling mix of convenience and necessity based goods.
Quality of REO, Kansas tenant base continues to improve in lockstep with improvements in our portfolios demographic profile.
Our assets are in densely populated areas with high average household incomes of $140000 and an average population of 260000 people within a five kilometer radius.
This demographic profile provides an increasingly compelling opportunity for our retail tenants.
Rio <unk> portfolio has never been more desirable or more defensive.
As Pierre NOI for the quarter grew by five 2%.
<unk> per unit was <unk> 44.
Healthy new and renewal leasing spreads of 11, 3% and eight 2% created a strong blended leasing spread of 9%.
The result of the new leasing in the quarter highlighted the expanding mark to market between historical and current lease rates.
Average rent per square foot of these new deals was $26 90, <unk> well above the average net rent for the portfolio of $21 34.
And we believe this mark to market will provide a significant upside in the future as an increasing number of contractual fixed rate renewals will burn off.
Retail committed occupancy remained steady at 98%, including the backfill of two units previously occupied by bed Bath and beyond.
Our strong occupancy levels retention rates and leasing spreads are driven by intense demand for REO, Kent quality retail space.
Candidates Titan zoning regulations, and the vast gap between replacement cost and market value make building new retail very unlikely proposition.
Canada is the fastest growing country in the <unk> seven and there is a natural gravitation to transit oriented major market locations to live and subsequently shop.
These are the very same markets in which retail space is supply constrained.
These factors converge to drive demand and create positive tension in lease negotiations for well located bricks and mortar spaces.
All indicators are that the type of space <unk> offers will continue to be in short supply and more importantly in high demand.
Moving now to our development program Rio cans organic growth is complemented by intelligent diversification largely driven by this program, which in our view as a significant competitive advantage.
Our approach to self funding development is also a key differentiator, we self fund projects through retained earnings project financing and capital recycling.
Our development pipeline focuses primarily on mixed use opportunities with emphasis on residential complemented with great retail.
It is concentrated in the greater Toronto area and the majority is located on a transit route.
This pipeline provides a regular cadence of development deliveries that bolsters <unk> growth by generating new income.
Advancing our pipeline through expertise and hard work create significant future value.
With many development opportunities embedded within our existing portfolio, we prioritized our efforts on five projects, which you will see described in our disclosure materials as the focus five.
Now the focus five sites or large scale transit oriented mixed use developments in the greater Toronto area that we're advancing through the zoning and site plan approval process.
These sites have the potential to deliver $20 2 million square feet and 23126 residential units.
We've got the in house expertise to extract the maximum value from these sites now.
Now the projects will be built in phases, or let me say it differently. They are modular they provide the flexibility to stagger. The construction commencement of the project phases at different sites and response to various market factors.
There is scale provides us optionality to create value through development partnerships <unk> sales and outright property sales driving growth for many years.
On Rio can Scarborough centre in the gold miles one of Rio can focus five sites and is located on one of the Premier development corridors in Canada during.
During the second quarter zoning was achieved for 2 million square feet over the first two phases of the site.
This is yet another example of US getting project shovel ready and in doing so creating value the requires human capital and expertise, but little of the financial capital needed through the physical construction process.
Active construction on our next wave of developments will commence in a manner that maximizes long term value, but only when conditions are appropriate.
Projects currently underway and slated for completion by 2026 are expected to provide approximately $43 million in stabilized NOI.
Our development program is considerable that said I know, there's always specific interest in the well which is our flagship in mixed use development in Toronto. So let me provide a few highlights TNF.
Approximately 80% of the retail component is leased and an additional 7% is in advanced negotiations with.
We're proud of and we're very excited about the ongoing progress of this incredible development and we expect the majority of the retail tenants to be open by November of this year.
Pre leasing at $4 50, the well, which is the 592 unit rental residential tower developed by Rio can with our partner Woodburn is progressing nicely.
Since $4 50, the wells launch in March of this year over 100 leases have already been signed the first residence were welcome to their new homes yesterday.
There are currently 12 purpose built residential rental buildings operating in the Rio can living portfolio and when fully stabilized. These developments have high growth potential and have contributed approximately $9 4 million of NOI. So far this year.
We've also accelerated our capital recycling program through the sale of condos, the six condominium and townhouse projects. We have under construction are 86% pre sold achieving 96% of pro forma revenue.
These projects will generate $860 million in revenue or $179 million in profits over the next three years, which we will undoubtedly puts a great use and they're earmarked for very effective uses including the repayment of debt.
Moving now to our balance sheet, we continue to maintain a solid liquidity position and a conservative and very productive payout ratio.
At the same time, we stagger the maturities of long term debt and limit the use of floating rate debt to minimize exposure to interest rate fluctuations as well as proactively employing various financial tactics.
Examples include preemptively refinancing debentures in 2021 before interest rate hikes.
Tactically pivoting to more cost effective secured debt in some instances and effectively hedging risk with bond forwards, our combined capital market maneuvers and generated interest expense savings of approximately $160 million or roughly $30 million per year over the average five five year term of the <unk>.
Our debt issues. These measures are all part of our commitment to responsible growth, which Dennis will speak about in a moment.
So before I wrap up I want to reiterate my conviction in Rio cans ability to deliver long term value.
Like our portfolio. This team continues to demonstrate resiliency and productivity.
Your management team will continue to operate with excellence and find strategies to mitigate the impact of heightened interest rates.
Our consistency foundation strength of vision and demonstrated commitment to responsible growth will continue to serve our unit holders well the.
The same time positioning this trust for continued stability.
With that I'll turn the call over to Dennis to take you through our balance sheet and provide insight into how it continues to support our quality and growth.
Thank you Jonathan and good morning to everyone on the call are.
Our second quarter results continued the trend of strong operating performance and development deliveries, which generated same property NOI and <unk> per unit growth.
<unk> per unit of <unk> 44 in the quarter, an 88 year to date represents increases of two 3% and three 5% respectively.
Strong same property NOI growth of five 2% contributed <unk> <unk> to <unk> per unit growth for the quarter.
Development deliveries and a ramp up in our residential business business contributed an additional <unk> <unk> per unit.
We continue to take steps to mitigate the interest rate impacts through hedging optimizing our financing mix and issuing loan receivables at floating rate.
Net of these mitigating steps higher interest costs had an impact of <unk> on <unk> per unit.
In addition to the major drivers that I just mentioned there are a few items in the quarter that I would like to highlight to provide additional color first due to timing we had no inventory gains in the quarter, but expect inventory gains to ramp up in the second half of the year.
Our residential.
Rental business continues to grow second quarter <unk> from this business was $5 1 million an increase of 51% from last year.
We continue to see strong lease up of our new buildings.
And on a same property basis, our 9% average increase in occupied rent per square foot.
Third we recognized an income $4 million relating.
Relating to the reversal of legacy pandemic related provisions as a result of our team's hard work with tenants to resolve outstanding balances.
Excluding this year to date same property NOI growth was three 2% on track with our target for the year.
We have $10 million of provision remaining.
While we do not expect to collect on all of it our team will continue to work through this over the balance of the year.
Finally disposition activities over the last 12 months net of the benefit of NCI activity had a negative impact of one per unit on the quarter.
This is because we sold some higher cap rate noncore assets to further improve portfolio quality and redeployed a portion of that capital into very high quality development.
There is a lag between the lost income from the assets sold and the ramp up of the development income.
We believe it is well worth enduring this short term drag on <unk> for the long term benefits to our quality and growth.
We reported NAV per unit of $26.
In the quarter up a modest 27 per unit from the beginning of the year.
The increase in NAV per unit was driven by retained income and our equity as our payout ratio of 59, 7% the lowest among our peers enables us to reinvest in our business, adding to equity value.
This was partially offset by a year to date fair value losses of $28 million. There are a number of moving pieces here. So we need to unpack. This further.
We recorded fair value losses for IPP assets, driven by cap rate adjustments, resulting in a negative impact of $56 5 million.
Partially offset by fair value increases due to strong operating performance of $13 million.
<unk> drove an increase in value of $15 $5 million due to the advancements in our development pipeline in particular, the successful zoning at our Rio can Scarborough centre in Toronto skull to Mylan.
Our balance sheet reflects development land at $27 per buildable square foot, which we view as conservative relative to land values in the market.
Our portfolio cap rate at the end of the quarter was 533% with an increase increased weighted average cap rate assumption of four basis points offset by changes in portfolio composition.
Our cap rate movement in the quarter is consistent with an ongoing trend where cap rate assumptions have been increased but are offset by the impact of portfolio composition through redeploying capital from the sale of high cap rate noncore assets into higher quality, and hence lower cap rate acquisitions and developments.
For example in 2022, we increased our cap rate assumptions by 17 basis points, while changes in portfolio composition offset this by 13 basis points.
Looking back further we have recognized $672 million of write downs from the beginning of the pandemic to nap as a reminder, we did not reverse much of our pandemic right downturn. During 2021 in early 2022 and continued to add to those write downs over the last 12 months.
I'll have to say that we have taken a conservative approach to valuations over the last few years.
With that said, we continue to monitor cap rates in the markets, where we own property.
Like many data points. These days, we are faced with contradictory information for.
For example, we have recently seen reports from brokers showing increase in cap rates in the quarter power.
However, they're also remains a shortage of transactional data points in the market.
While there is a scarcity of comparable debt comparable transaction to provide clarity on values. There is also a scarcity and strong assets in major markets that are for sale.
This where patient sellers are matched with buyers who are taking a long term view solid values can be achieved for example, we went firm on a contract to sell our non grocery anchored center in a greater Vancouver summer at a $4, 99% cap rate significantly below the cap rates shown in industry.
<unk>.
In summary, our valuations are another reflection on what we see in our business more broadly.
Values and cap rates have been negatively impacted by external market factors, whereas the factors that we control such as income growth and reinvestment advancing our development pipeline and improving asset quality to portfolio composition are driving improvements in these metrics.
Turning now to our financing initiatives and balance sheet metrics, our financing activities in the quarter demonstrates <unk> continued access to various forms of debt capital during.
During the quarter, we issued $300 million of $6 three year senior unsecured debentures with an all in rate of 528% inclusive of the benefit of bond forward hedges we.
We extended our corporate credit facilities with a consortium of banks by one year to a five year term on existing terms and conditions.
And subsequent to quarter end, we closed a 10 year CMA agency mortgage at Australia property for $15 million at our share at a rate of four 9% a spread of 95 basis points over the government of Canada bond rate.
In this volatile interest rate environment, we have utilized hedging to mitigate risk.
Over the last 12 months, we have settled a $1 billion if bond forward contracts for a total realized gains of $57 $3 million.
Most of the gains will be amortizing the <unk> over a weighted average term of six three years.
We have also fixed the majority of our debt at.
At the end of the quarter only six 6% of our debt was floating.
This includes draws on our corporate revolver, which can fluctuate excluding.
Excluding our revolver, our floating rate debt exposure is three 6%.
Our net debt to EBITDA was essentially flat at $4 nine.
<unk> 949 times.
We expect this to be in the low <unk> by the end of the year and expect to achieve our target of less than nine times during 2024 as EBITDA from our development projects continues to add to our earnings.
Overall, we continue to see strong operating performance driving results. Our team remains focused on what we control and continues to operate with excellence.
Our long term outlook remains positive as the macro fundamentals of short supply and growing demand provide a tailwind for our business.
With that I will turn the call over for questions.
Thanks, Keith if you'd like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd wish to withdraw your question Mr. Stockpiling by two and as a reminder, if youre using a speakerphone. Please pick up your handset.
Question <unk>.
<unk> last question comes from the line of Lauren Kumar.
Jonathan Your line is now open. Please go ahead.
Thank you and good morning, everybody.
Good morning, Loren, maybe just good morning, maybe just a quick one what are you guys. If you had to put a pin in and estimate that the mark to market on the retail portfolio would be.
Well I mean, I think we put out statistics and I just cited them in my delivery of that.
On average rents for this quarter, we're at about $26 90, and on average our rents across the portfolio are in the mid 20 ones I think thats, a general indicator of where we think market rents are today and what our actual rents are so.
You can use that as a general indicator of course, we are hamstrung by certain fixed renewals. So not all of our renewals get to or not all of our leases get to go to market, but of course, where they where they can we think this is a great market in order to extract that kind of growth and that kind of mark to market.
And our and our transactions.
Okay.
And maybe a question for Dennis you were talking a little bit.
Release of the pandemic provisions what are you sort of expect the cadence of the remaining $10 million or whatever it may be to be over the next couple of quarters.
It's really hard to say Lorne.
It's one of those situations, where our property management team needs to grind out.
Tenant by tenant through the outstanding balances so.
It's an opportunity, it's even hard to say what proportion.
We will collect.
Don't really want to give a specific guidance what I will say is over the balance of the year.
Our team is working through the rest of rest of the tenant tenant.
Tenant issues.
But the other thing I would say is we.
We don't need to rely on on this collection to.
Make our make our numbers.
Fair enough.
And then one last quick one I might've missed it but what was the fair value gain you guys were able to recognize on the rezoning golden mile.
We had $16 million $15 5 million.
There.
And just in terms of how we do that I think it's actually important point, we consider a number of factors not just zoning.
When we.
<unk> got to work our way through valuation that's why we have the values a bit lower so we look at zoning and that the big staffing recognize value there, but then we'll also look at any tenant encumbrances.
Site plan approvals environmental et cetera. So there is there is more value.
Valley to comp and specifically on that side as John Valentine I think we just recognized an increase in value on the first two of four phases.
Okay. Thank you very much for the color I'll turn it back.
Thanks, Laura.
Thank you. Our next question comes from firms Damiani TD Cowen. Your line is now open. Please go ahead.
Thank you and good morning, everyone.
First question is just on the capital deployment with.
Development getting a little tougher to pencil out acquisitions also a little bit tougher to pencil out.
How should we think about incremental capital deployment decisions going forward.
I guess.
Really just for the next year or two between acquiring rental residential perhaps and kicking off.
Construction projects.
So we have been fairly clear about the amount of committed capital to our development pipeline and this year, we will complete a number of developments and continue on a number of I should say construction projects to.
To the tune of somewhere around $400 million and then going into next year I mean, some of the we set out in our five year plan that we're going to spend somewhere between four and $450 million a year, but of course.
We govern things on a case by case basis, and you are quite right to say that in this environment things don't necessarily pencils, so that number.
Theres, a fair amount of discretion in how much we spend next year and I think any new construction starts that we had pegged for the year are going to be under a significant amount of scrutiny.
Because of interest rates and because of other construction costs. It is a very difficult proposition in this kind of environment. So it's unlikely if conditions remain the same it's unlikely that we will be aggressively allocating capital towards new construction starts with respect to acquisitions, it's really only a proposition for US one we're just if we're.
Just squaring off an existing assembly, which we've already disclosed this quarter that we have done a little bit of that or if we see something that we feel we can we can add a tremendous amount of value to.
Or and or it has existing debt attached to it such that the IRR is.
<unk> in which case, we will take advantage of those opportunities outside of that and we're also looking at certain.
We see it as a very strong market to be a lender and if there are opportunities, where we can invest money and financing propositions, where we like the underlying assets plus we can get some reits out of the borrower, meaning we have some sort of right of first refusal right at first opportunity or in the best cases, an option to acquire at the end of the loan that's certainly <unk>.
Our unit holders well and we think it's a very good and safe way to to position our capital, but I think the primary focus is to continue to improve our balance sheet. So really what we're doing with incremental capital most significantly is paying down debt as aggressively as we can and we very much intend on sticking to our goal of getting <unk>.
Between eight to nine times net debt to EBITDA in the medium term. So that's I mean, a very.
A fairly broad answer to your question, but that gives you hopefully a good good enough color and I'll just add one number Sam so.
I think we May have mentioned this in prior quarters. The committed development spend for next year is about $250 million to complete what we already have in the ground.
That though.
So as Jonathan said anything over and above that would be discretionary and we can determine whether or not it's appropriate to start to add to that and I'll add sorry, one other thing Sam will pass the baton back and forth between Dennis.
Other thing I want to make the distinction between development and construction and what we are not slowing down is the achievement of zoning and the tackling of some of the hurdles that Dennis had alluded to and the last question, which is getting rights over certain tenants getting environmental situations dealt with because we.
We still feel that that call. It sweat equity in the human capital plus I would say a very small amount of economic capital that goes into creating.
Shovel ready sites creates a tremendous amount of value. So that is something that we will continue to allocate both human and economic capital towards but its fairly incremental and I would say.
Use the word de Minimis in the scheme of things relative to our balance sheet. So that is something we will continue to allocate capital towards.
That's great and then just a couple of kind of related questions. I guess, you mentioned the priority of reducing leverage in the investor deck.
Nine five times debt to EBITDA includes one eight times.
Two two properties under development basically so how should we think about that as these.
Existing active projects burn off over the next two to three years.
I don't think youre, suggesting that your debt to EBITDA is going to fall by one eight times.
Where would the REIT sort of stabilize out if no new projects were started.
Well I think if we didn't if we if we stopped development altogether, which is not unlikely proposition, but that is that would take us down somewhere closer to eight.
Even even below a couple of years, but I think what we are looking to do is just get between eight and nine times, which gives us a healthy balance of all of these types of growth vehicles and as we're seeing now Sam what developments are providing us with as a supplement to our existing <unk> growth and I think it will in the future as these development.
Projects, which have burdened our balance sheet undoubtedly but as they as they are delivered youre going to see a fairly significant amount of <unk> in our balance sheet. So so I think for us to protect our future growth prospects development is still very much a component of our of our business.
But I think as I've said before we're not going to be aggressive on development starts unless there is a healthy return in doing so.
Yes. Thank you last one for me is just the <unk>.
Right.
At <unk>, our net debt to EBITDA, excluding developments today with the most avid.
So that's what you see at our IPP business sale.
If we just stopped developing altogether, which as Jonathan has done in the card.
Her time or probably three years, we would be into the low <unk> and the good news is Sam that we're getting about $860 million back from our various properties.
<unk> buy condos and things like that that we're going to use to strengthen that balance sheet and net debt to EBITDA number over the next couple of years and will allow us to stay in that eight to nine range. Even if we do continue to development.
As a key point going forward.
That's very helpful. Last last one from me is just on the dispositions any any thoughts on the current market for disposing of of density monetizing some of that zoned land.
The REIT has so much of on balance sheet today.
Well I think right now the market is very opaque when it comes to land, we're seeing the odd sale, but it's certainly not as vibrant as it was a year ago. So.
Our current business plan for the short term has no reliance on the sale of air rights.
But I think that we all believe in the strength of the various markets in Canada, particularly the GTA market and I do think that over time as the need for more housing becomes more and more acute we're going to see enhanced value and enhanced demand for that land and for those are right, but right now Sam it's a very distorted market and I don't think there.
Is there any sound bites that would say that we should be relying on it and it should be transacting on it.
In the short term so I don't know Andrew do you have anything else any other color that I'm not no I agree with that John I think the one thing I'd add is that.
Discrete amount of transactions you are seeing are highly structured.
The result of a lot of BTB lake structures and those purchases.
Because prospective purchasers can't afford to take on that cost now based on trying to deliver an IRR return.
So theres a lot of nuance in every deal we see even though there's not a lot of them.
All very helpful. Thank you all.
Thanks Pam.
Thanks Keith.
Our next question comes from the line of Hanmi Bank.
RBC capital markets. Your line is now open. Please go ahead.
Thanks, Good morning, maybe just starting with the lease.
Just maybe starting with the leasing side of things do you think about the next year or so.
Are there any tenants or segments that maybe youre, a little bit more concerned about or maybe on the flip side as well, where you're seeing some of the strongest momentum.
Yeah.
Sure. So I'll start on the flip side, which is the positive we're seeing momentum from really.
Vast majority of our categories I mean, we focus on tenants that are strong and stable, which means that they have relevant uses and also good balance sheets, and we're really seeing growth in the vast majority of the categories that make up that.
That larger category grocery pharma.
<unk> stores liquor stores, and then we're seeing a significant push for health and well being doctors physiotherapists things of that nature, even bank branches Dare I say are actually seeking out the appropriate locations and we're seeing some growth in that business.
I think where there is any weakness or softness.
<unk> to prognosticate going forward I think what's happened to small businesses based on this high interest rate environment is that some of them will suffer and close so I don't think theres any one category of small business, but I have to think that if you're a smaller restaurant that is not significantly capitalized or a smaller jim or some.
Franchises are various outfits.
Your balance sheet is going to be squeezed, if you've taken on debt and I think we will see some fallout from those but again I think because we have done a good job of limiting our exposure to those and really only bringing and ones that we think are very relevant and very useful for the communities in which we serve I don't think youre going to see a significant amount of fallout and the even better news is the <unk>.
We do see any fallout, we've been able to re lease at typically a higher rates. So we're not in a position where we have significant red flags up across our portfolio.
But oliver any other thoughts on tenancy your categories Youre concerned about in categories. You feel I think itself, primarily tenants businesses revolve around surface discretionary costs.
They will probably feel a little bit of pain.
If the economy.
Worsen, but beyond that there's no no immediate concerns in the portfolio.
The only thing I will say is we're keeping an eye on what's going on with Lowe's, because obviously they are consolidating with rona and im sure theyre going to reshuffle their store count based on that that.
That merging of the two banners, we do have some lows in our in our portfolio most of which have lengthy terms in them and are well positioned but that is one that of course, we have to keep an eye on.
Alright.
Maybe coming back to the disposition.
Commentary.
It seems to have picked up after the quarter.
You'll probably be constitute.
Some of these deals close.
The additional properties in the pipeline can you just comment on those.
Are these sort of consistent with everything you've done so far and then I guess it sounds like it's fair to say that buybacks are not necessarily part of the equation in terms of redeploying some of those proceeds just given your comments around paying down debt.
Yes, I mean as I watch our share price today, I can't help but be very tempted to do share buybacks, but I do agree I mean, we have prioritized we've made it quite clear that we're prioritizing and improvement in our balance sheet. So that is something we will focus on and.
With respect to the types of dispositions I mean, I think we've.
Illustrated a pretty good balance between taking advantage of some quantitative.
This disconnect between private and public markets and when we see an incredible opportunity to raise capital efficiently in the private market. We will do that as we've demonstrated with a property that is now firm in Surrey.
But mostly any dispositions that we do going forward will be qualitative just we have some low growth assets, even after our significant portfolio improvement over the last few years, we still do have some low growth assets that we will look to dispose of if the conditions are right, but the great news for US is that we really don't rely on any disposition.
Going forward with our payout ratio, where it is and our I think our controlled spending we don't need the capital right now and so we're not going to be for sellers. We don't have to be we won't be in this market as I said before is a little bit opaque. So we're really not you're probably not going to see any heightened activity around dispositions.
Beyond what we have in the pipeline right now.
And Paul just to comment on and CIB and obviously, we did quite a lot of it over the last last.
Year or so.
In this interest rate environment, when you sort of run the math on it.
The marginal benefit of doing and CIB versus just paying down our lines. It's.
It's not as wide as it used to be now you get all dependent on the share price and various things but.
The incremental benefit of.
CIB versus just paying down debt.
It frankly is just not as widely used to be and it is.
Also important to pay down debt and get that debt to EBITDA, where it needs to go as well so.
Yes.
On a margin basis, it seems like capital is.
Paying down debt unless we have some other.
<unk> compelling different opportunities.
Thanks for that Dennis and then just maybe lastly on the I think you mentioned $180 million condo profits coming in over the next few years just wanted to confirm based on the disclosure in your in your materials.
Well almost hit by the end.
2025 years, some of that possibly bleeding into 2026, I know, it's a while out.
Okay.
We pay close attention to it.
As you know construction schedules are never.
We are never reliable so right now our best guess is the vast majority of them will have for 2025, but there is always going to be slippage in the delivery of some of those condo units and so there might be some bleeding into 2026.
Those are in Venice, and yes, I think Thats right I think we will actually expect seven of it in 2000, and so I think at <unk>.
<unk> project will be over 25, and then into 'twenty six.
Even though <unk> been our disclosure, we say completed in.
2500 that amount or pardon me, but I think thats, why we say that move and timing of one tenant to take possession. So there's some of that ends up in 'twenty six at our five year plan.
Alright, and then all of this is included in your typical sort of 5% to 6% annualized rental growth targets.
Right.
<unk> growth our <unk> targets include condo gains yes.
Yes, Okay, alright, thanks, very much I will I'll turn it back thank you.
Thanks.
Thank you.
Question comes from the line of Tao only.
National Bank.
Your line is now open. Please go ahead.
Hey, good morning, everybody good morning, Carl.
Hey, how are you.
Not too bad.
Dennis.
Sitting on quite a bit of cash at quarter end were you holding that for anything in particular.
Yes, it was actually it got.
Peyton our lines to.
A few days after quarter end. It was just the timing issue of when our debenture close and when we were able to settle in the lines.
Okay.
And then just on the ERP project, how much more.
Sort of.
Expense do you expect to incur and what's the return you're expecting to see out of that project.
I would say it.
It's about we're about halfway.
The project so we'll see another now.
Other chunk of expense going during the year.
In terms of the return.
While we do expect to see some efficiencies, which virtually a good thing at the end of the day. This is a project that we needed to do because our old system was.
Going out it going obsolete. So it's one of those things that every 10 12 years I think in our case 14 years.
You just have to replace it and get another 10 to 12 years out of it. So that's what we're doing but it's not.
I want to sort of frame it.
A little more.
Positively then like it being a recovery in our replacement in an old colleague I didn't give it something there will be a significant improvement to our existing system I think it will allow us to do things quicker and more efficiently and more effectively and so I can't put a dollar value on exactly what the benefits will be tell but look I think the.
System are designing.
He is going to certainly make this organization far more effective and efficient in the way we report and the way, we just again process numbers and so many other things, but it's hard to peg a number to it but it is going to have a significant difference on Rio can emmis output.
Okay. So we should expect maybe another like $8 million to $10 million.
Of expense from the over the balance of the year, So I'm going to say I'm going to see more like six to eight.
And hopefully our it teams listening to that.
But.
Okay.
Just to pivot back to the development markets here I was wondering if Andrew.
Sure.
I think in the past <unk> talked about.
Construction costs.
Sort of breaking or coming under control being one of the real things that would sort of change your mind about whether your advanced more more projects or not.
You just talk a little bit about the construct of what you are seeing in construction costs with respect to raw materials versus labor how that has.
Has sort of been progressing over the quarters to come out of the pandemic.
Thanks, now I guess, what I can tell you is we're actively keeping our fingers on the pulse of the construction cost situation I would say what we've seen in probably the last two quarters is a bit of softening on what we call. The front end trades of the traits that start projects early so.
The people that are digging the hole that are doing the shoring that are forming the coffee.
And some of the raw materials associated with that in terms of concrete and rebar those costs are leveling off and in some cases coming down in very small increments that coming down and that's a reflection of.
Less projects going in the ground in some of the big markets now the middle trades, so the mechanical electrical trades.
And the finishing trades, we have not seen any softness yet significant softness there is two reasons for that one those trades are still hard at work, finishing projects and to a lot of those trades work in more than one asset class.
So we've taken a mechanical electrical trade they can work on institutional buildings. They can work on infrastructure projects. They can work on a number of things.
Their costs are also indexed to materials costs. So some of those materials to supply chain on the mechanical electrical side has been getting better but costs have not come down because they've still got plenty of demand and the other factor is labor in those markets has been negotiated two or three years ago labor agreements and that start coming down. So we're seeing softness on the front end trades.
Not seeing softness through the middle and tail end trade, we're keeping an eye on it and hope it happens I think theres a couple of factors construction costs can level off or come down and as most a lot of our mixed use projects are resident rent rental residential projects.
<unk> residential rents are increasing so not enough to break the back of a format and make us potentially to go but those are the indexes were watching rental rate increases in construction costs leveling off or decreasing.
And when you guys are building out a pro forma and a new project, what's your sort of because I mean.
I would say probably more likely than not it's in Toronto like what are what are the rents rent growth assumptions youre working with.
We are fairly conservative in that regard we always happen.
Usually model out somewhere between three to maybe four and in some rare cases, 5%, but usually.
We sort of anchored around that 3% per annum, which has been obviously.
Clift in the market over the last little while but we do tenure models.
I think it's logical to stay in that 3% range, although with the inflationary environment. We are in probably up that a little bit in our models going forward if anything when we do that for the first site two years of the model and may refer to the three years thereafter, but I think to add to Andrew's point, what has changed in the models. If you take two years ago rents.
Put it in the front end and escalate III you just move the whole curve up because you've got todays resin that escalate from there. So there is there is an improvement in the model as Andrew said not quite all the way to where we need to be but.
We continue to monitor and.
And the good news is that because we are now.
<unk> on certain starts it has given us the ability to go back to various municipalities and enhance our our zoning and also tried to change the use where we have some insistence on office use changing that to residential so we arent taking this time to be very productive and the value that we're creating and I think Andy.
And the development team have done a tremendous job in assessing where we have the biggest opportunities and then going back to various municipalities to extract more value out of those.
And I guess, just lastly on the development side.
You sort of talked a little bit about the economics of commercial development right now.
We've seen some of your peers.
One of the thing about the retail retail is they all kind of play at all of the asset classes.
Some of your peers have sort of said you know what rather is not for US right now we're going to focus on.
More commercial stuff is there like a tipping point or how are you thinking about whether to put a dollar at resi or a dollar at the retail.
Right now.
I think for US we have to assess the individual sites that we have and in some cases, even though the short term economic output from redevelopment one site might be better if we did it strictly is commercial.
Some of the sites are just so prominent in well located that for the long term it would be sort of wasteful to utilize those that land holding to do something thats low rise or that covers 25% of the lot. We would rather wait until the conditions are right and utilize the lot for something more productive like mixed use.
So it really is on a case by case basis, but right now.
It's hard to sort of say well like what IRR. It takes for us to well sorry, we do have hurdles that we've established internally, but as I said only certain sites would be logical to focus only on retail most of them really do suit themselves more towards transit oriented mixed use project and I think that is.
The long term what will create the most value for our unit holders I think tally.
Construction costs on the retail side are elevated as well.
We've talked about this before is $600 a foot in the GTA to build out.
New open air retail space compared to asset values around.
<unk> hundred 50.
And to make the math work on that you need to be getting.
Hi, <unk> Lo <unk> rents per square foot.
To do that and while we can get that in some small shop space and we will we have been and we will green light.
90000 square foot strip here in a pad, there et cetera, where we'd be able to get to extract that kind of rent.
The market Hasnt quite caught up to the reality of that.
What it cost to build and so.
Yes, it's going to be few and far between to make the math work even on the retail side, which then should dovetail into more.
More and more pressure on upward pressure on the rest.
And the existing space what.
What I would add to identify that we're actively working on.
Retail development.
<unk> scale to run those performance, it's much easier because youre pre leasing you know what the rent growth is the.
The construction period is shorter.
Type of contract you do a shorter it's a lot more predictable, but it's at a much lower scale, but we retain that expertise and we do it.
As it comes forward in the return presented itself as an opportunity. So we've got excess density on various retail sites that we execute down.
Just not as big from a spending standpoint.
As prominent as some of the stuff you've seen us do in the past, but it's table Stakes and we still do it.
Yes.
Okay. That's great. Thanks very helpful. Thank you.
Thanks, Tom.
Thank you. Our next question comes from the line of Jennifer.
BMO capital markets. Your line is now open. Please go ahead.
Thank you good morning, everyone.
Good morning, Jamie.
I'm doing great. Thank you I wanted to ask about the same property NOI guidance for the second half, it's running above what youre expecting above your target of 3% year to date and I know, there's some provisions from Covid that came back into that but when you look at the second half are you expecting the organic growth to run sort of in that three.
3% range or it might take a dip sort of even out at 3% I'm. Just wondering if you are just being a bit more conservative on the organic growth target Gen sticking closer to your long term, 3% not really moving it too much around on a short term basis.
I think on the.
I would say excluding provision basis, we would be at around the 3% and then the provision that we've brought in.
Let's call that a bit of a bonus.
Yeah, John I mean, so youre sticking.
Okay.
Okay, great. So we're sticking to that.
Organic 3% for this year, then so fairly steady with what you've seen in the first half of the year.
Yes, exactly yes, I think it was $3 two in the first half.
We should be in that area.
Okay great.
Think about your <unk> per unit growth targets.
Going back to February of 2022 can you remind me what interest rate environment, you're baking into that just because so much has changed it looks like you've got some other levers that you can tell.
Do you think maybe I'm getting ahead of ourselves, but do you think.
Your your target can absorb the current interest rate environment.
Well, we haven't changed our target we're monitoring them in the context of all of these market dynamics. Obviously, there has been a serious shift in the macroeconomic environment, particularly driven by higher interest rates since early 2022.
We're going to focus as you suggest on what's under our control and we're going to grow our revenue side of the business as much as we can to counteract what were clearly.
Higher interest rates than we are quite frankly anyone would have anticipated.
And we're going to provide updates as like a sort of as they as they come with respect to.
Our long term targets in the face of this ever changing.
Heightened the straight environment.
Yes, I think the scenario that we ran add as a reminder, was we did have we had assumed ethylene rates, we had assumed designating rates to about four 5% over a few years as opposed to what they did in like six months. So there is no doubt that that puts pressure.
And.
And as you did point out and this is what we are assessing as we go through our business plan. We've got other levers that will help offset that in the operating performance has also outperformed our plan but.
With that.
Yep.
If we're in a higher for longer interest rate environment.
There seems like even over the last few months is a growing consensus where we saw most economists calling for rates declining late this year early next.
Just seeing more more views implying higher for longer.
That is going to be a challenge for us.
Real estate owners, they got and.
And so we have to evaluate that as we go forward. So we don't want to sugarcoat it.
But we also.
As we always do are looking at all of the revenue side opportunity as well.
Yes.
Okay, Great that's helpful.
I can step back sort of on the revenue growth front as you're negotiating new leases today I know traditionally for retail it's been sort of a fixed French Jeff.
Low inflation environment.
Has there been a shift in how you have these discussions like are you able to negotiate rent steps that will give you more protection.
Or rather on a greater ability to leverage.
Both from inflation or is it still very much the traditional sort of one to one 5% rent steps that you see.
No I think these paradigm shifts these paradigms shift.
Along with the with the market dynamics and right now the pendulum is firmly in favor of the retail landlord and as such we have more leverage to introduce concepts that are inflationary pressure.
Protection.
So we are very much driving for annual bumps as opposed to bumps every five years, we are trying to get clauses that have a set increase year over year, but.
The greater of that and CPI I mean look with mixed results, depending on the tenant and depending on the situation, but three years ago, we would've had no chance to even introduce that concept, but because of the shifting dynamic and the lack of quality supply we're seeing much more favorable conditions, and we're seeing tenants understand and accept that.
These conditions are necessary going forward. So the negotiations have certainly been a little more nuanced than they would have been a couple of years ago and we have we have been seeing a lot more.
We have a lot more success in getting those those types of terms Oliver who is much closer to some I am missing anything the only thing I'll add is that we are pushing very hard on removing fixed option.
For new lease deals, which gives us the option to convert rents to market when.
Fire, which we have had a significant amount of success over the last.
And doing.
So that's it.
Thanks.
Okay are you seeing success in this regard more so tilted toward some of the larger tenants or some of the smaller tenants or is it sort of.
Next case by case basis.
The mix case by case basis, it really depends on the strength of the individual property.
How much competition there is and.
Various other market dynamics.
Notably it is with the larger tenants because historically, we've always had the ability to.
Influence smaller tenant deals as the anchor tenant deals where it was table stakes that if youre doing a deal with an anchor tenant youre, giving them fixed options. The reality is now we're doing anchor tenant deals where the options are at market and they understand that that's the reality of this moment in time.
So we're doing our best to take advantage of.
That situation.
Okay. That's great. Thank you I'll turn it back.
Thanks Jenny.
Thank you.
I am showing no further questions at this time I would now like to turn the conference back to you.
President and CEO Jonathan Caitlin.
Well. Thank you very much for joining us today, and we look forward to speaking to everyone again next quarter.
Right.
Okay.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.
[music].
Okay.