Q3 2023 RioCan Real Estate Investment Trust Earnings Call
Remind you this conference call is being recorded.
I'd now like to turn the conference over to MS. Jennifer <unk> Senior Vice President General Counsel, ESG and corporate Secretary Ms. <unk> you may begin.
Thank you and good morning, everyone I'm, Jennifer Steve <unk> Senior Vice President General Counsel, ESG and corporate Secretary of REO, Ken before we begin I'm required to read the following cautionary statement in talking about our financial and operating performance and in responding to your questions. We may make forward looking statements, including statements concerning <unk>.
Objective its strategies to achieve those objectives as well as statements with respect to management's beliefs plans estimates and 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 and discussing our financial and operating performance and in responding to your questions. We will also be referencing certain financial measures that are not generally accepted accounting principle measures GAAP under ifr at these measures do not have any standardized definition prescribed by EIOPA.
And are therefore unlikely to be comparable to similar measures presented by other reporting issuers.
non-GAAP measures should not be considered as alternatives to net earnings are comparable metric determined in accordance with IRS as indicators of <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.
Formation on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward looking statements together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended September 32023, and management's discussion and analysis related there too 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 Gatlin. Thanks, So much Jennifer and thanks to everyone that has joined Rio Kent Senior management team today.
So we look at Q3 operating results again reflect the exports with which we are executing our strategy.
However, because I noticed on the top of mind for many of you I'm going to start today by addressing our guidance.
I expect due to interest rates Rio Kim will end the year at the lower end of our 2023 guidance range of between $1 77, and $1 80.
Our long range targets will need to be revisited if higher for longer interest rates persist and we're going to provide an update on this in the first quarter of 2024.
I'll now turn to our Q3 operating results and then I'm going to touch on the macro economic environment.
I'll highlight how Rio can continue to use to strategically and responsibly manage every facet of our business over which we have control.
Consistent with each successive quarter since our February 2022, Investor day, Rio Kents team and portfolio performed exceptionally well.
This performance reflects the quality of our locations and the cycle and the cycle tested experienced Rio Ken's team.
Once again, Rio can superior property fundamentals and the extensive demand for our space drove standup leasing spreads and record occupancy.
Our development deliveries also continued to generate a steady stream of new and diversified NOI.
Our key financial indicators for the quarter were strong with same property NOI growth of three 7% exceeding our target and providing the foundation for <unk> per unit growth.
<unk> per unit for the quarter was <unk> 45.
Leasing velocity remained the dominant theme is <unk> high quality necessity based retail portfolio propelled results.
Retail committed occupancy reached an all time high of 98, 3%.
New and renewal leasing spreads of 21% and 11, 2% respectively resulted in a blended leasing spread of 12, 9%.
The average rent per square foot for new deals was $27, two <unk> well above the average and that rent for the portfolio of $21 39.
And we believe this expanding mark to market spread indicates a significant growth opportunity as an increasing number of contractual fixed rate renewals start to burn off.
You've heard me speak about candidates type zoning regulations, and the vast gap between replacement cost and market values, which makes building new retail a very unlikely proposition.
You've also heard me referenced the pace of Canada's population growth and the natural gravitation to transit oriented major market locations to live and to shop.
These are the same markets in which retail space is supply constrained and also the same markets in which <unk> portfolio is concentrated.
In addition, our retail tenants are displaying health and strength, particularly in this inflationary environment.
These factors converge and that drive demand and create positive tension in lease negotiations for our brick and mortar space.
All indicators are that the type of space III, Ken offers will continue to be in short supply and high demand.
But our operating results are rooted in fact was far more deep seated some favorable supply demand dynamics.
Rio <unk> current strength and stability are a function of years of unwavering discipline and responsibly managing every aspect of our business over which we have control.
This focus has resulted in a portfolio and team designed to thrive and promising economic conditions and to deliver strength and stability in downturns.
This means we face the current conditions with confidence and here's why.
Rio <unk> portfolio has never been more desirable or more defensive.
Our major market focus has resulted in portfolio and our portfolio is concentrated in densely populated areas within a five kilometer radius of our assets. The average population of 260000 people with a high average household income of $140000.
Demographic profile provides a compelling opportunity for our retail tenants the quality of Rio <unk> tenant base has improved in lockstep with.
The improvements in our property portfolio is demographic profile.
Bind with our commitment to resilient retail the result of the tenant base tailored to offer a mix of convenience and necessity based goods.
We've also invested in our centers to make them, even more attractive to tenants and to our customers.
The steps we've taken over the last decade, and the effective execution of our strategic plan is set up Rio can to weather the current environment.
However, we're not a team known for simply weathering.
Our team that wins and we understand the winning in these conditions requires hypervigilant discipline in capital allocation specifically.
Specifically, reducing costs associated with traditional expenditures such as G&A construction and acquisitions.
Rio can hires for grid and we reward resilience, we encourage creative problem solving courageous leadership and continuous innovation, we're well equipped to take the logical and prudent steps required to offset some of the impact of interest rates and to fortify our future.
We are increasingly leveraging our national scale to reduce operating costs. We're also driving costs down through system improvements that generate efficiency and allow us to streamline expenses. This includes a 2020 for implementation of a new <unk> based ERP system.
Regarding development, we're adding value by moving projects through the entitlement process, but we're taking a conservative stance and activating capital intensive construction at.
At the same time, we continue to focus on strengthening our balance sheet Dennis.
Dennis will expand on the levers through which we'll do this but for now I'll emphasize that the 2605 condominium and townhouse units. We currently have under construction are expected to generate combined sales revenue of over $800 million between now and 2026. These proceeds are earmarked for effect.
<unk> uses including the repayment of debt.
Lastly, in addition to the cost control and responsible balance sheet measures I just referenced we will continue to take advantage of every revenue driving opportunity presented by the current operating environment.
I'll take a few moments to talk about the well.
Due to this for two reasons.
This project is emblematic of everything I just spoke about.
<unk> ability to effectively manage every aspect of our business over which we have control while at the same time investing in our future growth.
This project demonstrates our resilience ability to execute commitment to intelligent diversification customer centrism responsible growth and our ever present balance of boldness and prudence.
There is no more excellent reflection of REO Ken's boldness in the vision and scale of this project.
Our prudence is reflected in countless ways, but perhaps none as much as the patients and responsibility, we and our partners at Allied demonstrated as we leased this project while in the throes of a global pandemic.
We remain steadfast in our commitment to populate this incredible development with the right mix of innovative experiential and service oriented <unk> oriented retailers and inspired foodservice offerings. The Toronto has been waiting for.
Approximately 96% of the total commercial space that the world is leased with about 89% and tenant possession.
The retail component is 91% leased with another 2% in late stage negotiations.
On this subject I am pleased to announce that Lulu Lemon and Sephora have recently signed leases and will join the wells impressive tenant roster.
There has also been exceptional demand at $4 50, the well the 592 unit rental residential tower developed by Rio came with our partner would born.
Beyond the well offering obvious proof points of all the REO candidates capable of I have a second reason for wanting to focus on this project right now.
<unk> and our partner Allied properties are on the precipice of introducing the King was community the GTA and the world to one of the most ambitious mixed use developments in Canadian history.
Every measure this is an outstanding architectural achievement and the accolades receiving a fortified our belief that this is precisely the right product for Toronto.
Momentum continues to build for our mid November ribbon ribbon cutting ceremony, and Youll continue to see a cascade of relevant businesses open at the well in the coming months. The majority of retailers are expected to be open by the end of 2023.
On behalf of the incredible team of REO candidates and honored to deliver this development. We are confident our vision passion and expertise will be reflected and always the well is experienced in the weeks months and years to come.
Before I turn the call over to Dennis I'm going to reiterate the <unk> long term thesis remains very much intact.
Retail real estate dynamics are in our favor and are producing meaningful demand drivers for our product.
The fundamental quality of our assets fuels long term growth and mitigates downside risks.
Who knows if interest rates will move up down or stabilize.
What I do know is that at times like these REO candidates fortunate to be operating the best in class retail portfolio in the major markets of this great country.
<unk> is well positioned regardless of the scenario, we've taken significant steps to make our business viable in any backdrop. We're now in a moment, where these steps are being tested and I'm proud to say, we're standing up to that test if interest rates stay higher for longer that may temper our growth in the short term, but real estate is a long term investment.
Our consistency vision and demonstrated commitment to responsible growth will continue to serve our unit holders well and at the same time position. The trust for continued stability with that I'm happy to turn the call over to Dennis.
Thank you Jonathan and good morning, everyone.
<unk> for the quarter was <unk> 45, compared to <unk> 44 in the same quarter last year.
The key components of this increase were <unk> from our three 7% commercial same property NOI growth on.
On a year to date basis same property NOI growth was four 3%.
This included the benefit of reversing pandemic related provisions as our team continues to work through legacy balances with tenants.
Excluding the provision year to date same property NOI growth was three 3% and remains on track to achieve our full year target of 3%.
Same property NOI has benefited from a number of factors, including a notable improvement of 70 basis points and in place occupancy as tenants signed in prior quarters have moved in.
Other contributors were <unk> from development deliveries, including the rental office and the ramp up of residential rental assets, such as our Lula and rhythm properties in Ottawa.
These were partially offset by <unk> <unk> due to higher interest rates in the current year as compared to the prior year.
<unk> due to assets sold in the prior year net of the accretive impact of our prior year unit buybacks.
We have recycled capital from asset sold into higher quality investments and developments as well as use the proceeds to pay down debt we.
We believe that this short term dilution and <unk> is well worth it for the long term benefits quality value improvement medium to long term <unk> growth and balance sheet strength.
Net income for the quarter was a loss of $73 $5 million, which was driven by a fair value loss of $199 $5 million.
Excluding this unrealized loss our business delivered strong operating income.
The fair value loss was driven by a 10 basis point increase in our weighted average capitalization rate assumptions, partially offset by a three basis point decrease due to change in portfolio mix as we sold lower quality assets and redeploy that capital into higher growth assets.
A continuation of a trend that we've seen over the last number of years.
The fair value losses from the change in cap rate assumptions were partially offset by $46 3 million of fair value gains driven by higher income at our properties again, a continuation of a trend over the last number of quarters, where the operating results that are in our control are adding to the value of our portfolio.
Development deliveries continued to aid portfolio quality and income growth.
In the quarter, we delivered 151000 square feet and remain on track to deliver over 600000 square feet of new product. This year that will contribute approximately $25 million of NOI upon stabilization, which will ramp up over the coming year.
The majority of deliveries in the quarter related to retail and residential components of the well we're leasing is very strong.
With respect to development spend we expect to be towards the lower end of our guidance range of $400 million to $450 million for the current year and anticipate this amount will be substantially lower in 2024.
While we do not plan to start construction on new projects in the near term, we will continue to create value through the development process by advancing our pipeline through zoning to shovel ready status.
To that end, we recently received zoning for the 83 <unk> Street project in Toronto prestigious Yorkville neighborhood.
Dislocation, where we this is a location where we combine our existing retail assets with a partner who own neighboring assets to create a land parcel of the scale required to redevelop.
The plan for this site is an 80 storey premium condominium tower that will include a commercial podium of approximately 18000 square feet.
In addition to our large scale development, which tend to get them get most of the attention. We are also we also have more immediate infill opportunities at our retail centers for example in the quarter, we delivered a 16000 square foot retail strip out our Winfield farms retail center that includes service <unk>.
<unk> as a tenant we are currently constructing two additional strips that include tenants such as Petsmart and CIBC.
Winfield farms is a prime example of a high demand GTA location that Rio can develop from a greenfield site.
Today. It comprises approximately 175000 square feet of open air grocery anchored retail three condo towers, including two currently under construction and 400 fixed townhomes at.
Our communities such as this creates significant demand and the rents that motivate Rio can't build this space.
We are seeing these types of opportunities and a number of existing locations with approximately 160000 <unk> thousand square feet of retail properties under development expected to be delivered between now and the end of 2024.
While individually these projects are relatively small we see these as up.
As good opportunities to deploy capital.
We will of course remain disciplined and ensure we achieve the rents that support the construction costs.
In spite of the challenging retail transaction market. Our team has continued to source opportunities to recycle capital in ways that continuously improve our portfolio quality.
This requires discipline as well as the ability to source special situations.
So far this year, we have closed $140 2 million of asset dispositions.
This included an enclosed center in Winnipeg, and a cinema anchor center in Gatineau, Quebec that were completed in the last month.
We also have a firm disposition for us cinema and home home improvement anchored center in BC at a capitalization of $4, 99%, which is expected to close in December and is expected to bring $155 million of capital.
The capital from closed and firm dispositions totaled $295 2 million at a cap rate of 692%, which is similar to our incremental cost of debt on our corporate credit facilities.
These dispositions.
It will be <unk> neutral, while being credit positive.
Year to date, we have acquired $110 million of assets, including a residential asset in Montreal and certain land Assembly assets.
These acquisitions included the assumption of $45 million of debt at a weighted average contractual interest rate of 267% with eight years of remaining term.
Taken together the equity for these acquisitions was $65 million, leaving the remaining proceeds from asset sales for debt reduction.
As you can see our capital recycling strategy continues to improve our portfolio quality growth potential and balance sheet, while the attributes of the in place debt within the acquisitions ensures that our economic return targets can be achieved.
Okay.
Yes.
Our balance sheet continues to be a top priority our net debt to EBITDA at the end of the quarter was nine five times compared to 951 times at the beginning of the year. We expect this to decrease further by.
By the end of the year as we closed the afirma aforementioned dispositions.
Net debt to EBITDA is expected to continue to improve in 2024 as the EBITDA from our development deliveries ramps up and the spend on these developments decreases most notably at the well where the spend rate will reduce significantly after the first quarter of 2024.
We manage risks in this environment by having a maturity ladder that is well staggered at having fixed interest rates for over 92% of our debt.
Our strong liquidity position is very important, particularly within an uninsured uncertain economic environment.
We have $1 6 billion of available available liquidity predominantly in the form of Undrawn operating credit lines and construction lines with the committed lines spread across a number of banks.
Our liquidity is sufficient to cover over a year's worth of obligations inclusive of debt maturities and construction capital.
Debt capital remains available for top tier borrowers like Rio Canada, we completed a $300 million of unsecured debentures in the third quarter. These were three year debentures with a call feature that allows us to repay the debentures at par and without penalty after one year.
In light of the uncertain rate environment going forward, we paid a small premium for this flexibility.
We believe that bolstering liquidity, while maintaining optionality for a small portion of our debt stack as appropriate.
We are currently in the process of finalizing agreements for certain commercial mortgages and the CRH mortgage that we expect to close by the end of the year.
In this time of turbulence, we will continue to be judicious with our unit holders capital balance.
Balancing short term tactics and long term strategy.
Our portfolio continues to produce strong operating results as the fundamentals of top quality retail real estate in Canada are among the best we've ever seen.
We remain focused on what is under our control, while continuing continuing to strengthen our portfolio and position <unk> for accelerated growth as the market stabilizes.
With that I will hand over the call to the operator for questions.
If you'd like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove a question. Please press star followed by two again to ask a question press Star one as a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question, we will pause briefly as questions are registered.
The first question is from the line of Dean Wilkinson with CIBC. Your line is now open.
Thank you and good morning.
It's probably going to be the first of quite a few questions.
Good morning, guys. This is probably going to be the first of a few questions on the guidance John.
Obviously interest rate environment is ridiculously volatile and what's happened over the past couple of days is put kind of.
The five and the 10 year in Canada back to where you were in August.
Pulling that guidance, we're pushing it out to 2024 is that.
When we look back to the August figure, where are you guys contemplating sort of a lower rate environment or if we were to stay around here do you think that the numbers that you had previously mentioned would likely hold award.
Is it just too early to say on that.
I think it is like we're all getting whiplash from the interest rate fluctuations.
What I will say is that we're we're going to wait until Q1 and provides more appropriate updated guidance at that point and it's yes.
And we will have I think a little more color in where the sort of the medium term.
Just rates.
It will be at that time, so we will definitely look to provide more color.
Yes, I think dean Okay, sorry about that.
That.
In a higher for longer rate environment. It does make.
It does make the longer term guidance of challenge and I think that the challenge right now as you know we've seen a 50 basis point move over the last month.
75 basis point in the month before that.
And the 10 year and.
The range of.
Estimates for the end of 2024 from various bank economists is about 100 basis points wide. So it's really hard to pin down any kind of guidance at the moment, but we are in our budget cycle now working through that.
We'll provide that update in February as Jonathan mentioned.
That's fair enough I mean, it's incredibly credibly volatile I guess dovetailing into that when youre pens down or perhaps shovels down on new construction.
Would you have to see.
You kind of have you sort of flipping the switch on that is it higher development yields or is it just a lower cost of variable rate debt that you have to finance that with.
I think it is a combination of both of those factors and a few others.
As with everything it's a capital allocation decision. So it's not just how good the returns are.
Not in the construction space, but it's also what the returns are on other potential uses of capital, including paying down debt, which in this environment is very accretive and other things like potential acquisitions doing mezz financing things like that so it would be a combination of elements that would lead us back into <unk>.
<unk> of construction, but we have all the tools to do it and one thing that we're always cognizant of is <unk>.
Being able to jump the moment, we we see that the conditions are right and that it is the right capital allocation decision.
Okay that makes sense and the last one for me I may dovetails into just your target leverage metrics more specifically.
Terming out that debt. So how do you guys think about taking that three in a quarter.
Year term out to five just given what we've just been talking about interest rates.
That would be a drag or could that be a target that might be maybe pushed out a little farther just given what the interest rate expense looks like if you were to go longer right now.
Yes, I think it is something that probably is going to get pushed out a little farther from our target of getting there by 2026 simply because of the tactics that we've done over the last.
The last 18 months or so.
We had some I would say gaps in our latter in the shorter term.
We thought.
We were comfortable with the amount of debt in those in those given years and so we use that kind of part of the latter to do some of our more unsecured debentures to keep advancing that mix and where we've seen advantages from a pricing perspective on CME agency mortgages and commercial mortgages that today are probably.
80 to 100 basis points inside of the debenture pricing.
That's where we've got long so we've sort of barbell intuit as opposed to what.
What we.
Doing in sort of late 'twenty, one which is just all kind of seven to 10. So thats definitely got it probably takes a little bit longer to get there, but I think as Jonathan.
Pointed out earlier we.
We're deploying some tactics right now until we can see a bit of stability.
And then the.
Longer term strategy hasn't changed.
Perfect. That's it for me I'll hand, it back thanks, guys.
Thanks, Steve.
Thank you for your question.
The next question is from the line of Lauren Count more with <unk>.
Your line is now open.
Thanks, Good morning, everyone.
Maybe just sort of going back to the discussion around pulling back on development.
Guys, obviously are continuing to move things through the zoning process you have.
A very robust pipeline has there been any thoughts of doing any density sale. The consequence, assuming you would get pretty low yields on that you could then recycled back into into debt reduction.
So just to clarify we're pulling back on construction not development, which means that we continue to move the needle forward on getting properties entitled getting them free of tenants' obligations and things of that nature. So that they are shovel ready. So it's construction that we're pulling back on it and I would say that.
We are.
We are always looking at ways to raise efficient and effective capital and we've done. So we've demonstrated this over the course of the last few years I think we've been very active in the disposition market whether is income producing assets or development density and that Hasnt changed I would say that that market is.
Lower now than it would've been a year ago, Lauren and we are in the I would say in the very fortunate position given the amount of money, we have coming in from condo sales. So inventory sale over the next couple of years, our balance sheet is going in the right direction, we have enough to fund whatever construction, we do have in the ground through district retained.
Earnings and.
On site specific financings. So we really don't have a tremendous amount of pressure to need to raise capital. So if there is an opportunity in todays market, where we can extract a lot of value for that density sure. We'll jump on it because that's what we do we are entrepreneurial and we will always do do things, where we feel there is an effective way.
<unk> raised capital, but given where the current market is which I would say while interest rates are fluctuating the way they are there's a bit of.
There's a bit of a slowdown I would say in the land market. So I don't think we would we would be active in trying to sell that today, but I think that like everything changes quickly and we will of course be ready as we always are to extract the most value out of our assets as possible, whether that's developing them ourselves selling a partial interest to partners.
And then getting fees from it or just selling it outright.
Okay. Thanks.
Things could change by Monday, who knows.
On the on the condos.
On the condos I mean, I think we've spoken about this before and I know they are well located in good markets, but with everything that's been going on I think it's.
Worthwhile asking has there been any sort of change in terms of people pulling out of pulling.
Pulling out of the condo deals and issues of closings or are you guys still pretty confident in being able to achieve.
<unk> set out.
We're confident for a couple of reasons one.
The sales that we did were a number of years ago. A lot of these condos are now in late stages of development, meaning that the sales were done in the teens and that means that even though market values have have dissipated a little bit the values in which people have bought into these are still I would say above water.
Currently we always were very careful to get sizable deposits a meaningful deposits and I think people are low to walk away from generally 20% deposits and third people are generally also not inclined to walk away from the contractual obligations because it puts you in a.
In a situation of legal liability.
But that being said we are in unique times, where people can afford what they can afford and if they can't afford to to close on these units, which again I think is a very remote circumstance Rio cans in a fortunate position, where we have Rio Cam living and if these units happened to come back to us if any of any parts of these units come back to us we're well.
<unk> suited to deal with them and to extract value from them, but because of the three conditions I spoke about at the outset of answering this question Lauren I do really think that that is a remote circumstance and yes. We are so confident in the in the ability to get that revenue in.
Okay.
Just lastly for me you guys.
New record high in occupancy.
Was 21% on new leases.
Hi, do you guys think you can push spreads before you can't anymore.
Okay.
Well look I think that we're in a really good environment now and I can't reiterate this enough, Florida. There is no supply of new retail in major markets. We've got we and a few others have what I would say is really a goldmine of income producing asset and look tenants.
In certain circumstances tenants are doing very well in this inflationary environment. They are protecting their margins and therefore, there is the ability to pay the rents that are that are necessary for our properties. There is always going to be that affordability quotient, but we keep on getting new and I would say thriving businesses come.
Going into Canada, and that has created an upward push for our space and like I said given that there's no new space coming on stream, we feel pretty good about the continuous prospects of raising the revenue coming out of our income producing properties. I would also say that there are there's a lot of ingenuity Rio can and I'm very proud of the team for <unk>.
Continuously coming up with ancillary revenue methodologies that continues to also add to that bottom line. So between the two of those things I think we've got a pretty steady growth profile I wont be up total like I'm always an optimist.
I don't think like 2021% new leasing spreads or are here forever, but we are certainly in an environment where.
I think that we're going to see certainly the.
The target we set out in our 2022 Investor day of high single digit leasing spreads I really think that that is an enduring target and that we can achieve that I don't know Oliver if you have any further commentary on the market. These days.
Alright.
<unk> said it all.
Okay.
Thanks, Jonathan I appreciate it.
No problem take care.
Thank you for your question.
Next question is from the line of Sam Damiani with TD Cowen. Your line is now open.
Yes.
Thanks, very much and maybe I'll try and get all of our to answer your question here.
But what are you guys seeing in terms of those watch list tenants or do you have any known tenant departures that you think youre going to happen of any consequence in the next.
Few months or a couple of quarters.
I'll start and then John or Oliver can fill in any gaps I leave him, Hey, Pam I hope youre doing well.
Sure.
So we're actually.
In really good shape, we've worked very hard to get our tenant base.
The categories of strong and stable tenants up to a very high level and there are 87.
<unk> percent I mean, not that means that the number of tenants on our watch list is.
Actually similar to what it was last quarter, which is pretty small.
Some small independent tenants that have called us about some rents that theyre, having trouble paying but we're working with them on and the hope is that we will be able to write those but typically if they are not capable of maintaining their businesses. The good news is that we've got a lot of backfill prospects for them, but really there is not a significant amount.
Of softness right now.
A couple of categories should the economy.
Continued to see challenges, there's always going to be categories that will.
We will have issues and that kind of environment, but right now we're seeing general strength across our portfolio, John or Oliver If you have anything that I would add hey, Sam I would just add there are a couple of categories.
The on.
Sit down restaurants, particularly more than modest offer independent operators.
You read reports in the news about their ability to operate at a profit.
Which.
I think the most recent reported but 35% of restaurant operators.
On the independent basis are operating at a profit so.
That is something we keep an eye on our restaurants are predominantly national players, where we feel good about the covenants.
I would add more boutique Gms, we're hearing great things out of the good life nearly finishes we are keeping an eye on the smaller smaller operators and furniture as well as discretionary income becomes a little more challenged with what's going on in the economy people are spending less on their homes and on renovations. So we're.
Are keeping an eye again, we have very few on the independent side the covenants of our national players are strong.
Always an area of concern.
And we do that Thats specific to your question, we do have some larger vacancies coming up in the portfolio over the next few quarters Fortunately.
At the moment, we have demand that exceeds the availability of what is coming back and to use an example of.
The entire space, we got back in autumn law earlier, this year, which was 140000 square foot purpose built building.
Which we leased the day after Canadian tire less so.
We're always going to get the space back.
It's the nature of the business, but we are in the best position, we've ever been to drive brand and improved quality of tenant and.
And one of those spaces become available to us.
Yes, I was thinking of the Canadian tire space or former Canadian Aerospace when you mentioned boutique Jim's John I'm, just wondering youre still obviously comfortable with the attendant that's going into that space.
Oh absolutely.
Quality of service they provide.
Had the pleasure of being at their Liberty village location about a month ago. I also note that they've done a new location that you on a more we're very happy that continent, and we're very happy with the.
Produce.
Great.
Next question from me is just on the condo side with the sale of the interest in 11 why we.
Would it be just tell us a little bit of what the.
Rationale was for doing that.
Stage.
Yeah, Hi, Sam I think.
One of the things that comes with that with condo sales.
Is.
If they can get a bit lumpy and we have a lot of a lot of sales lining up in.
2025.
So both in terms of kind of getting a steadier income stream, but also managing any kind of <unk>.
Tax disclosures etcetera, we thought it was prudent to.
We do a transaction to pull some of that forward.
It takes it takes them.
Yes.
Proportion of construction loan off our credit metrics as well.
So all in all we thought it was a good mechanism to.
To effectively securitize, those future gains in and bring them forward into the current year and we have an enthusiastic counterparty who was.
Much inclined to do it right.
Yes, it certainly looked like you didn't give up any profit by doing so.
So it looks like it anyway.
And then on the distribution increase obviously nice nice 6% bump this past year with all the uncertainty and I guess pending.
Pending guidance in February.
Does the <unk>.
<unk> thought about an increase next year.
Is it any less than it would have been.
A year ago.
Because the decision our board makes for the recommendation does come from management and the one thing we always monitor is our payout ratio and at times. Like this you are quite right Sam it's more meaningful than ever to have retained earnings because retained earnings or really the cheapest form of capital you can get but that being said we are going to be we.
We think we will be well within our comfort level on our payout ratio and if we are we always.
We would like to we.
We would like to continue that upward momentum of <unk>.
Consistent distribution increases so provided we can afford to do so it is something that we will.
Continued to.
To advocate for but again it will like everything it's so volatile today, so we'll revisit that decision.
At the end of this year when we have a little more clarity on how 2024 is going to look.
Thank you and I'll turn it back.
Thanks Sam.
Thank you for your question.
Next question is from the line of Matt <unk> with National Bank Financial Your line is now open.
I guess I'll keep it brief because I'm new to the recovering the story, but just with regards to Rio can living.
The federal and some provincial governments have been.
Very active in putting a policy that would encourage the building of new rental product notwithstanding challenging capital markets does that change your kind of longer term view on on how much you would potentially do in adding incentives very necessary new apartment rental supply to the market.
Yes, so first of all Matt welcome back to Rio can get the have you second of all I think the initiatives at the federal and provincial governments are taking our incredible steps and they are certainly something that will impact our long term ability of delivering very good purpose built multi res buildings.
That is still very much part of our long term strategy. It's something that we are currently benefiting from what the delivery of some of those developments and I think it's something that this country is sorely needs because I think we are in a bit of a housing crisis. So it is definitely something that we will be focusing on in the in the initiatives that the governments have taken will help with our prospect.
Right now as I said, it's just not an extremely prudent time to allocate a tremendous amount of capital, but that to me is a short term view and I think it will improve.
Because of some of these initiatives the government is taking over the next little while Andrew do you have any further commentary on that the only thing I'd add Jonathan I agree with everything you said, obviously as that.
The.
Changes in HST at federal and in some cases, a provincial level definitely help the return on these projects.
A number of other factors continue to have to happen.
Access to <unk>.
More affordable financing these projects would be.
Very helpful to make these things work.
Improving timelines for approvals in improving the amount of density we can achieve all things that the industry has talked about before all things that require several levels of government to work together to solve the housing crisis and all things that will improve our ability to deliver these projects and the benefits of return to our shareholders.
Great. Okay. So it's fair to say that.
We shouldn't expect anything in the immediate term, but also youre going to continue along the lines.
Getting approvals for these sites.
We're getting ready for when it makes sense from a capital allocation standpoint to invest in this platform and keep in mind too Matt that we're in the process of delivering a lot of units and we still have a lot of units that are currently in the ground. So it's not like we've abandoned multi res we are still very much active in growing our portfolio. So it's just like I said.
A slight pause in construction starts until there's a little more clarity on the expense side of the equation and as Andrew said, but there is a lot of uncertainty now when you start a project of what the approval process will be and what kind of.
What kind of timeline that you're undertaking so I think it's always good to get a little more clarity in that regard.
And I think your existing portfolio showcases it but.
I would assume for the stuff that you are delivering.
Rents have exceeded our expectation.
And a number of different markets.
They'd be coming ahead of pro forma.
And then when you started those projects.
I think thats, a byproduct of the fact that our that our multi res units are brand new they are highly amount as high as they are part of Rio can.
Properties, meaning they've got great retail at greater right around it and so we are seeing.
Very good rental market, but thats also a byproduct of the fact that there is limited supply. So yes, we are doing very well on the revenue side, but it's on the backs of a lot of hard work and I think well setup infrastructure in Rio can limit.
Awesome, Thanks, and looking forward to covering the name in more detail going forward.
Thanks, Matt we're looking forward to having him.
Thank you for your question.
I am showing no further questions at this time to turn the conference back to President and CEO Jonathan <unk>.
Okay, well, thanks, everyone for joining our call today, and we will look forward to seeing and hearing from you all soon all the best.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.