Q4 2023 RioCan Real Estate Investment Trust Earnings Call
And 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 intentions and similar statements concerning anticipated future events results.
Stances 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 <unk> 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 were comparable metrics determined in accordance with IRS as indicators of reopens.
Foreman 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 investors may do the same additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward looking statements together with details on our use of non-GAAP financial measures can be found in the financial statements for the period.
Ended December 31, 2023, and management's discussion and analysis related there too as applicable together with Rio <unk>. Most recent annual information forms that are all available on our website at www Dot SEDAR plus dossier I will now turn the call over to our president and CEO Jonathan <unk>.
Thanks, so much Jennifer and thanks to everyone Thats joined <unk> Senior management team today first I wanted to start with the recognition that <unk> recently celebrated its 30 <unk> anniversary.
I had the pleasure of marking the occasion by ringing the opening bell at the PSX with our chairman and founder of Sunshine, along with Rio Kim Senior team, it's actually not really a bell its more like pushing a button, but it was very cool.
Yes.
Being Canada's longest standing isn't just a status symbol our 13th anniversary provided the opportunity to reflect on how we've curated an irreplaceable portfolio of high quality properties and leverage every opportunity to strengthen our assets foster strategic growth and create value for our unit holders.
So as we do today from a position of strength with the perspective of knowledge afforded by a long history and a clear vision for the business.
<unk> 2023 operating results again reflect the excellence with which we are executing our strategy.
We showcased historic operational strength enhanced efficiency and achieved our financial objectives.
In light of this we're pleased to announce that <unk> board of Trustees has approved an increase in the annualized distribution to $1 11 per unit.
This is the third consecutive annual increase as we provide sustainable distribution growth to our valued unitholders, while maintaining our payout ratio targets.
I'll take a moment now to share some notable 2023 operational achievements.
Rio can superior property fundamentals, coupled with extensive demand for our space led to outstanding leasing spreads and record occupancy.
The consistent delivery of new and diversified NOI from our development projects further contributed to our strong operational performance.
Commercial same property NOI growth for the year was four 8%, which exceeded our 3% annual target and providing the foundation to deliver <unk> per unit of $1 77, a three.
Three 5% increase over 2022.
Leasing velocity remained the dominant theme is <unk> high quality necessity based retail portfolio propelled results.
New and renewal leasing spreads of 14, 7% and nine 8% resulted in a robust blended leasing spread of 10, 7%.
New leasing in 2023 generated an average net rent per square foot of $27 75.
Well above the portfolio average of $21 50 per square foot.
This expanding spread indicates a significant growth opportunity as an increasing number of contractual fixed rate renewals burn off.
Retail committed occupancy reached an all time high of 98, 4%.
Now 98, 4% retail occupancy positions us exceptionally well when.
When weaker tenants vacate these short term transitions, while creating nominal downtime presents opportunities to backfill with more productive leases.
That will happen with tenants, such as rooms, and spaces and bad boy, who cease business operations in the first quarter of 2024.
We've already leased most of these spaces or have garnered solid interest from strong and stable retailers that will enhance our shopping centers and with rents on average more than 20% higher than the incumbent retailers. These.
These types of failures are not atypical in the year's first quarter. This year there may be some additional turbulence from the less than 3% of our portfolio comprised of what we characterize as transitional tenants. As these are the types of business is more susceptible to macroeconomic volatility.
We view these as healthy transition necessary for long term portfolio health and outsized growth.
It's off its opportunity that represents evolution.
Any vacancy that arises allows us to accommodate the significant space requirements of high growth tenants such as <unk>. So these shoppers drug Mart dollar Emma and T. J X along with numerous quick service restaurants that are seeking to enter the Canadian market and these are just to name a few categories.
The robust demand for our space, coupled with our team's deep experience will continue to create positive tension in lease negotiations when there is a vacancy.
Our ability to capitalize on these opportunities safeguards, our occupancy levels and enhances our portfolio's overall productivity and profitability.
Our income is further supplemented by our Rio can living residential rental portfolio, which generated $21 5 million of net operating income in 2023, an increase of nearly 58% over 2022.
With close to 3000 residential units in operation, we are well on our way to achieving our goal of between $50 million to $60 million and residential rental NOI by 2026.
Our growth in 2023 was further punctuated by delivering nearly 600000 square feet of development projects, which are expected to generate more than $27 million of stabilized NOI.
These deliveries included the well, we're 96% of the commercial spaces leased and 91% is in tenant possession.
There is no more excellent reflection of REO, Ken's bulbous than the vision and scale of the well.
November marked a significant milestone for the project as we celebrated the launch of the retail component with the community ribbon cutting ceremony.
Steady stream of tenant openings will continue throughout the first half of 2024 offering diverse experiences innovative and service oriented tenants and inspired food offerings.
Throughout 2023, we continue to demonstrate the strength of our portfolio both in terms of asset mix and locations.
We also showcased our operational agility by pivoting in key areas.
This included increasing our focus on debt reduction to help offset the impacts of an abrupt and sustained high interest rate environment.
Entering 2024 in the context of today's high end persistently uncertain interest rates. It was important for us to consider our 2020 for guidance and the longer term targets, we discussed at our 2022 Investor day.
With the compounding influence of interest rates on <unk>. We believe the prudent approach is to focus our <unk> outlook on our 2024 guidance rather than the longer term targets. We set two years ago under a very different interest rate environment.
What is particularly important for me to emphasize that numerous operational elements factor into our <unk> outcomes for which we remain on track in fact, we've not just met but in many instances exceeded the operational and balance sheet targets that we established back in 2022.
We have seen the benefits of our sustained strong performance in a more normalized interest rate environment.
Our cumulative <unk> results for 2022, and 2023 within our five year target range of 5% to 7%.
That said for 2024, we expect <unk> to be in the range of between $1 79, and $1 82.
This is strong two 3% growth in the face of a material increase in interest expense due to the higher for longer interest rate environment, we find ourselves in.
To drive continued <unk> growth and helped offset the continued impact of higher interest rates. We're focused on two critical areas debt reduction and operational performance we.
We have a clear improvement path forward for both.
Strengthening our balance sheet and reducing debt allows us to lower the cost of capital moving forward.
Have a well defined roadmap to do so starting with utilizing repatriated proceeds from the dispositions of inventory properties.
Over the next two and a half years, we anticipate approximately $800 million and inventory proceeds most of which are earmarked for debt repayment.
These arent speculative inventory sales they are contractually bound condominium closings.
In 2023, we reduced our net debt to EBITDA by 23 basis points ending the year at 928 times.
We expect to reduce our net debt to EBITDA ratio to nine times by the end of this year, we plan to drive this ratio down further as additional proceeds are realized.
We are also exercising prudence by reducing our construction spending this year relative to what was planned in 2022.
This is a proactive measure.
By temporarily scaling down construction spending we allocate capital to highly productive and accretive uses such as debt repayment, providing third party mortgages and where appropriate opportunistic acquisitions.
Operational performance is the second pivotal factor in mitigating the impact of interest rates quarter after quarter, starting from our February 2022, Investor Day, Rio Kansas team and portfolio of consistently delivered exceptional operating results.
<unk> portfolio is that its greatest desirability and defensiveness. This results from our commitment to maintaining a resilient and sought after asset base or.
Our strategic focus on major markets has resulted in our portfolio concentrated within densely populated areas within a five kilometer radius of our assets. The average population is now 260000 people with a high average household income of around $140000.
This profile aligns perfectly with the requirements of strong and stable retail tenants.
Operating environment remained strong marked by a supply shortage of available retail space combined with intense retailer demand for high quality locations precisely the confound within <unk> portfolio.
And while we maintain a steadfast focus on our operations balance sheet and progressing our development pipeline. We've also been recognized for our ongoing commitment to sustainability ethical governance and of course people and culture.
Rio can continues to take steps to mitigate the impact of climate change and has set an overall target to reach net zero greenhouse gas emissions across the value chain by 2050.
We are pleased to confirm that our targets were approved by the science based targets initiative. This year, a significant validation of our commitment.
In addition, im proud to report that we maintained our first rank amongst our Canadian peers, and the 2023 <unk> real estate assessment.
Before I turn the call over to my colleague Dennis I'll reiterate that retail real estate dynamics are in our favor and are producing meaningful long term demand drivers for our products.
We've taken meaningful steps to make our business viable in any backdrop.
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.
We have the foundation for a return to outsized growth the quality of our assets fuels long term growth and mitigates downside risks.
Rio Canada's operating a best in class retail portfolio in the most desirable markets in this great country.
We remain committed to prudent financial management, and we have an exceptional team.
Accordingly, we are delivering our third consecutive distribution increase which signifies our confidence in <unk> long term prospects. The increase also acknowledges our unitholders ongoing support and loyalty.
We believe returning value to our investors through a higher distribution demonstrates our dedication to creating long term unit holder value.
And with that I'm pleased to turn the call over to Dennis.
Thank you Jonathan and good morning to everyone on the call.
<unk> results for 2023 tell a story of operating strength and progress and development deliveries.
<unk> of $1 77 per unit represents growth of three 5% over the prior year.
Combined with 2022 growth of six 9% compound annual growth rate over the last few years was five 2%.
Our confidence in our growth prospects, along with our payout ratio ratio, which is the lowest of our peers and our disciplined approach to capital management.
<unk> and our decision to increase our distribution to unitholders by two 8% to an annual amount of $1 11 per unit.
This is the third consecutive year of distribution increases and we're set up to continue a sustainable and reliable distribution increases for the foreseeable future.
2023, <unk> growth was driven by strong fundamentals across our business.
Same property NOI growth from our commercial portfolio of four 8% or three 6%.
Excluding the impact of provision reversals drove nice growth.
This was fueled by record occupancy and a very strong leasing environment.
Development deliveries led to five set of growth and contributed materially to our portfolio quality with remarkable assets added in the country's best markets.
Our residential assets added three sets of growth as the supply demand dynamics for purpose built rental remained incredibly favorable for that asset class.
On a same property basis NOI growth for our <unk>.
Stabilized residential properties was 13, 8% in 2023.
This metric was achieved with no capex required as our residential rental portfolio is comprised entirely of Newbuild properties.
Prior period, and CIB activity led to <unk> growth in 2023, and all other items added a combined one cent per unit.
Offsetting the above growth drivers were 10 as a result of reduced NOI related to assets sold I'll address addressed this momentarily when discussing capital recycling initiatives.
And we had five.
The reduction due to higher interest expense net of hedges reduced debt requirement future retained operating cash flow and debt repayments from asset sales and higher interest income.
Looking ahead to 2024, we have provided <unk> guidance in the range of $1 79 to $1 82 per unit.
Growth will be driven by 3% same property NOI growth from our commercial property and incremental NOI as our development deliveries and residential portfolios will continue to ramp up.
Key assumptions include the following.
G&A expense, excluding ERP implementation cost is expected to be flat due to past restructuring and disciplined cost management.
Our weighted average interest rate on new financing activity was assumed at 564%.
And we have a <unk> impact related to 2023.
Is it 23 in early 2024 dispositions net of acquisitions and as I mentioned earlier I will address this further in my comments the capital recycling.
In addition to <unk> guidance for 2024, we provided the following.
We expect to maintain our industry low target payout ratio of 55% to 65% of <unk>. This ensures that we can fund their distributions in maintenance Capex from operating cash flows while retaining approximately $150 million of cash flow per year for reinvestment in our balance sheet and business.
We expect to spend $250 million to $300 million on mixed use development, mostly related relating to construction of already underway projects as well as the advancement of our extensive pipeline.
We do not intend to start any new mixed use construction in 2024.
We expect to spend $50 million to $60 million on retail construction.
These are infill opportunities such as strips and pads at our existing from existing sites.
While the cost of construction of new retail remains high with repeat replacement cost well above fair value. We have had tenant interest in some of our well located sites at rents that support construction.
These type of opportunities are an attractive use of capital and we will remain disciplined to ensure our return requirements are met.
Finally, we have good visibility for net debt to EBITDA and expect to achieve our 95 target in 2024 and will be well inside our target range of eight to nine times in 2025.
Now moving to other aspects of our results.
Capital recycling has long been one of <unk> core competencies as we continuously improve our portfolio quality and surface greater opportunity for future growth and generate enhanced risk adjusted returns.
This has been a theme over the last number of years as proceeds from the sale of lower quality higher risk assets were redeployed into premium assets through development and acquisitions, while also improving our balance sheet.
The result is a portfolio that has major market focus with an excellent demographic profile two.
<unk> 2023, with a continuation of this program.
We disposed of $295 million of assets, including an enclosed mall in Winnipeg, and three cinema anchor centers.
These are centers that we consider non core and non strategic from an asset class geography tenant mix and growth perspective.
Sales proceeds were partially recycler recycled industry strategic asset acquisitions in major markets Act.
Acquisition cost was 263 million, which included assumed debt of $120 million and a deferred of density payment of $41 million, resulting in a net investment of $102 million.
Assets acquired include a managing interest in a grocery anchored center with development outside in Toronto, Newbuild residential buildings in Calgary, and Montreal, and a few small land assembly opportunities.
The acquired that was key to making the <unk>.
Acquisition economics work as the weighted average contractual interest rate of two six was $2, 6% to 8% significantly below market at a weighted average term to maturity of five three years.
We allocated $9 million to our loans receivable program was $84 million of new loans, written offset by $75 million of loan repaid.
We maintain a disciplined lending policy, where we are lending to retail and residential assets in major markets leveraging our in house underwriting capabilities to gain comfort over the security provided.
We are also partnering with an institution that specializes in this type of lending to provide expertise in administration.
The weighted average interest rate on new loans written was 11, 1%.
The remaining uninvested proceeds of $177 million was used to reduce corporate debt.
Given that we have been selling lower quality and therefore higher cap rate assets over the last few years and reinvesting that money into development that are still in progress and higher quality assets with lower cap rate. There is a short term impact on <unk>.
I mentioned that impacted the analysis of 2023 result in 2024 forecast.
Pulling the pieces together the impact of dispositions over the last two years, partially offset by acquisition and CIB and interest savings from reduced debt balances as <unk> on our 2024 <unk> per unit.
Said another way our 2024 <unk> per unit will be <unk> <unk> higher if we had not sold these assets and recycle capital as described.
Real estate is a long term business and so we make capital allocation decisions using 10 year model.
Looking specifically at the capital recycling over the last couple of years due to the differential in growth rates expected, we expect <unk> neutrality by 2020, and accretion thereafter, which drives NAV accretion over time.
We believe that the improvement to our portfolio quality enhances the health of the business and <unk> future growth potential and reduces risk by constructing a portfolio that can weather all economic environments.
The impact of this significant quality improvement over the last number of years should appear in our valuation metrics, which brings me to the next area of focus.
During 2023, we recognized $450 million of fair value losses on investment profit properties, driven by judgmental increases in capitalization rates and light at the higher interest rate environment, partially offset by gains related to higher stabilized income, reflecting the strong operating and leasing environment.
On a cumulative basis, we have had about $1 billion of write downs over the last few years, which we view as reasonably conservative.
Over the course of 2023, our weighted average cap rate increased from 533% to 544, 1%, which also requires further novel.
Cap rates cap rates were increased by 14 basis points driven by higher interest rate environment. This was partially offset by six basis points due to improvement in portfolio mix with higher cap rate asset sold at a lower cap rate assets investigating.
Over the last two years, we see the same trends cap rate increased by 31 basis points cumulatively, partially offset by 19 basis points due to the improvement in portfolio mix.
This demonstrates how our higher quality portfolio, which we achieved through active capital recycling has translated into our IPO valuation metrics.
Finally, turning to our balance sheet metrics and financing activities. We finished 2023 with a net debt to EBITDA of $9 two eight times down from $9 five one times at the end of 2022.
Liquidity stood at $2 billion.
Apprised of Undrawn corporate lines of credit construction lines and cash.
This was higher than prior quarters due to timing of asset sales acquisitions and debt repayment.
And in the coming quarter, we expect liquidity to be more in line with recent norms.
Our weighted average term to maturity was 297 years as that our year end. However, this was also impacted by timing as a significant amount of that has already been refinanced so far in 2020 for extending the weighted average term to three five years.
In terms of financing activity reopened it continues to have access to various forms of capital.
Since we reported Q3 2000 <unk> results through to today, we have a range of $608 million of permanent financing at a weighted average interest rate of five 4%, including debentures commercial mortgages and <unk> mortgages.
Overall, we expect to see continued improvement in our credit metrics over the course of 24% and 25% driven by items that are largely in our control.
As we reflect on 2023 and look forward to 2024, we are confident in the strength of our business.
<unk> has an irreplaceable portfolio of top quality assets and the best markets in Canada with the team in place to operate and optimize this portfolio, we have the opportunity and capability to drive increasing value over the long term.
With that I will pass the call to the operator for questions.
Thank you.
Please press star followed by the number one if you'd like to ask a question Joey devices, Amit miniature attention.
Did you change your mind. Your question has already been on J D can be Julia question. My question is followed by the number.
Our first question today comes from Dean Wilkinson.
Your line is open. Please go ahead.
Thank you good morning, everybody.
Good morning, John maybe start starting with.
The new construction and the decision to sort of be shovels down there.
Is that decision going forward as simple as interest rates coming down is it interest rates.
Stabilizing where we are or is there a lot of other sort of stuff going into the gumbo on that.
Well thanks Deane these are.
Complicated projects and there's a lot that goes into the decision interest rates and construction costs are significant elements to it.
But theres also predictability and the timing of the construction process, which we're working with municipalities as best we can to get a little more clarity on that and then there's also just decisions around how else to allocate proceeds or funds at this point in time and so it's also a byproduct of whether or not there's other opportunities.
That may have a little less risk in a little better of an outcome for us that all weigh into the decision, but the short term decision to be shovels down again, it doesn't reflect on our advancement of development sites, meaning getting more entitlements, meaning dealing with tenant encumbrances, meaning dealing with environmental issues things like that but in terms of like starting <unk>.
Construction being interest rates and clarity on those definitely factors into it but it's not the only factor.
Andrew any other.
Additional thoughts on that no I think I think everything you said is bang on Germany, Julian issue to it as where in the case of some of the multi multi residential sites where rents go right up.
Due to the side of equation in terms of the return.
And that all being said Deane.
We're very much focused on growing that.
Apartment unit Count, we think it's a great mix with our our retail portfolio and we will certainly get back to it as soon as there is a little more clarity as it becomes more clear to us that it is the most efficient and effective way to utilize capital.
Okay that makes sense.
Second question is one that we probably don't spend almost any time on with you guys.
10% of the portfolio, which is office.
The year over year increase in rents seem exceptionally strong and as close to 14%.
Base rent or is there like a net effective what kind of drove that because it looks to me like youre actually going to put up some very decent same property NOI metrics in 2024 out of office and that might be sort of counter conventional narrative.
Well.
It is a reflection that we have a high quality office portfolio that is certainly unique in each one of the areas where it exists. So I think a lot of that growth is driven by the well where we've seen very good progress on the on the overall lease up of the office space there.
Otherwise we are seeing some.
Obviously, an asset class that is going through some struggles we have a fairly I'd say insulated group of office product, particularly if you look at the GTA, where we have young Shepherd and Yonge Eglinton, which again are I think stand out because of the part of mixed use communities and that provides an amenity for the office tenants are they quite like in there.
Both transit oriented so even though occupancy in those buildings as I would say at a fairly low point relative to historic numbers, we do see some uptick there because there's infrastructure that's being completed here at Yonge Eglinton and other young Shepherd is being recognized for the strength of that mixed use facility. So I think it's listen it's not it's.
It's not going to be our biggest growth driver, but it's certainly something where we've seen a lot of diminishment.
Diminishment in occupancy over the last little while and whenever those diminishment in occupancy had always means that there is some upside potential and that's what we're seeing right now.
Right.
Suggest perhaps that those assets could be salable or do you want to hold them in the portfolio given sort of ancillary benefits to the other two components.
Look every everything in our portfolio deem is always available.
I mean these are all assets that if they benefit our balance sheet and benefit the outcome for our unit holders.
Would sell anything if it came down to it but I think the circumstances would have to be very appropriate and remembering too that these are components are very vital mixed use.
Mixed use facilities that are that are a big part of those of those communities.
It makes it more it makes it a tougher decision for us because I think it does serve as a vital component to the residential that we have in these locations as well as of course the retail. So they are an ecosystem and when you strip out one of the lens of that ecosystem that makes it less of a compelling overall project. So we really do view it as a.
A vital component of our good operating mixed use facility at the end. The one thing I would add is just from a capital flows perspective in private markets. There's just not a lot of capital chasing these assets at the moment, it's not not probably a great time and because our balance sheet metrics.
Or will be achieved through organic means we're under no pressure to sell anything going forward. So we have the ability to be patient and wait for the right REIT market. If we ever were to sell assets such as these.
Alright, good position to be in.
That said I'll hand, it back for others. Thanks, guys.
<unk>.
Our next question today comes from John Campbell.
Your line is open.
Good morning, and thank you to Dean curve, so willingly handing it back so we could all bar one chance.
Just first Jonathan you mentioned rooms in spaces there've been.
Some chatter they've been having issues, but could you maybe give a little bit more color on the situation there.
Yes, im going to start and aren't going to hand, it over to Oliver Harrison Who's.
Ben are drawn balance on its been closer to this but.
So room spaces was a tenant that we didnt really seek out they were inherited as part of the bed Bath and beyond.
Bankruptcy <unk> filing that they went through last year, and so rooms in spaces with a tenant that acquired those bed bath and beyond leases in that process.
Didn't put any capital into those deals, but they did open up in.
In earnest in the middle of last year and as we throughout the course of the year, we're able to.
To get those spaces back, which ultimately is a benefit to us Lorne because.
There is as I mentioned in my in my address a significant.
Outside from the rents there keeping in mind that these are historic bed Bath and beyond leases. So we we are going to see that tendency to part and we are going to see five of them and we're going to see five new tenants take their place who are more suitable and capable of paying really high rents John or all or anything.
Yes, Hey, Laura I would just add that we had the benefit of when we went through the <unk> process with bed Bath <unk> beyond there were a number of suitors, who are stepping up to bid for those locations. They were ultimately unsuccessful in rooms in spaces.
One the auction, but we didn't stop talking to the potential tenants who wanted the space. So it's made it very easy for us to backfill them quite frankly with much stronger better uses including actually a couple of grocery operators for locations. So we're very pleased with the results was a bit of a delay to get to where we're going to get.
But ultimately as always we're going to end up with stronger tenants and as Jonathan said higher rents.
And just a quick follow up on that one the grocery operators would it be sort of the usual suspects in terms of back filling a discount retailers et cetera.
Yes.
Okay and are you guys expecting much of an NOI impact from.
From I guess the downtime in between tenancies.
Marginal.
Any downtime youre going to see a few months.
Integrated.
But it's something that we provision for its something that we always take into consideration. When we're budgeting for are doing our business plan for the year. So it's really around the edges, Lauren and will have no no material impact, but there will be a little bit of rockiness over the course of the first and second quarter, just because of this evolution Mr. Double down on that we accounted for that.
He is in our guidance range.
We knew about all these things that are coming.
Previously so.
So thats a counterpart and we had $9 6 million provision.
Provisions on our balance sheet at the end of the year. So we have been accounted for.
A number of these risks within that provisioning process.
Okay.
Then maybe just switching over to the capital recycling front.
And it looks like you guys did a pretty good job on the disposition side you ended up doing a couple of strategic acquisitions, but I was wondering if there was consideration about focusing more on deploying the proceeds towards debt reduction.
Prior to the.
Condo closings and if you guys have a disposition target for 2024.
Okay.
It was as Denis had mentioned, we don't I mean, we're having we're making significant strides in the.
A statistic of net debt to EBITDA.
Without doing anything as always we will we don't have a prescribed target for dispositions, but if opportunistic situations arise Lorne, where we can really sell sell something that does not have a significant amount of growth, but has a low cap rate attached to it we will execute on that type of transaction and I would say the promise.
And use of those proceeds would be for debt repayment and that is going to be the fundamental and main focus of our capital allocation process going forward.
It's something that again when it arises we will absolutely take advantage of it we have a lot of density in our portfolio and I think right now we're in a bit of a <unk>.
Trough when it comes to land values and density values in even in cities is greatest Toronto, and Vancouver, but that being said given the obvious need for more housing I think that market will bounce back and at that point, we will avail ourselves of opportunities.
The reason we created all of this density was to have some optionality, where we can either just leave the income producing properties as they are we can partner up with potential purchasers like we've done where we've set up in our limited partnership and developers.
Construction and development manager or we could build it ourselves or we could simply sell it outright and we will assess each one of those options as the market improves.
Okay, so as things hopefully stabilize.
Selling density is definitely an option for you guys.
For sure it would be I think it's like we put it in so much sweat equity to create that density and if we can optimize the outcome by selling it off.
<unk>.
Wholesale manner or even keeping part of it I think it really does do well for our unit holders. So it's something we will definitely take advantage of we didn't put all of that effort and for nothing.
Fair enough. Okay. Thank you very much I'll turn it back.
Thanks Lauren.
Thank you. Our next question comes from Mark Rothschild Canaccord. Your line is open.
Thanks, and good morning, guys.
Maybe just with regards to retail leasing.
There is some mixed data as far as how the economy is going and definitely the outlook is that it should be slowing what are you seeing any signs of.
Moderating demand or something that would lead to maybe a drop and the pace of leasing spreads you comments.
Positive.
They are positive and I think the reason they are so positive is because I think we're in a very good dynamic.
We really have a lot of retailers looking for a very limited number of square feet and so thats available. So we're still seeing wherever we have available space, which is fairly rare a significant lineup of number of different types of tenants, both the stalwarts that our Canadian retailers as well as some new entrants.
Since the market and.
It's actually a very good environment and I don't see it dissipating, maybe slightly but I really don't see this environment slipping for us just given the conversations that our leasing team is having so many different tendencies.
Happy to turn it over to all of our Harrison just to give you his perspective on all of the growth categories out there or any other color.
Sure.
I mean, it really is.
A very unique moment in time as Jonathan said supply demand dynamics are.
Very favorable at the moment.
All of the retail categories that we're looking to grow within within our portfolio and I think thats. It.
The function of immigration is a function of where our properties.
Focusing on the quality of the assets.
That we own and the quality of our management team.
It is responsible for that so I mean in terms of whether it's grocery pharmacies value retailers personal services like we are seeing.
Significant demand in all of those categories.
And.
They are very pleased with.
With the operating environment evolves.
And I would add to that but I think another reason is because we have really focused on customer centers, making a better experience for these tenants and it is starting to resonate where if a tenant has a choice to go to.
One of our sites or a competitive side because of some of the initiatives that we've undertaken were pleased to hear that they sometimes prefer to deal with Rio can which is a really gratifying thing.
So based on all of these comments Youre, making and what you said about 2020 for having some volatility of rockiness or predict that produce.
It's fair to assume that 2025 should have significantly stronger ethical per unit growth.
Yeah.
I think we do look at.
Various scenarios, but I would say continued continued strength on the NOI.
NOI growth side.
We definitely feel quite.
Strong about.
<unk> itself is the.
I think we all know right now is highly dependent on interest rate assumptions.
I think thats, how that flows down but I think.
One of the things that we've focused on is that.
Looking at our.
Our longer term targets around operating metrics NOI growth development deliveries et cetera, those all remain very robust.
Perfect. Okay. Thanks, so much.
Thanks Mark.
Our next question comes from Mike <unk> of BMI.
Your line is open.
Thank you operator.
Just maybe circling back to the guidance first of all.
To confirm the 3% same property NOI guidance would that be on the adjusted basis that you provide I E. Excluding.
The credit loss provisions or any potential credit loss provisions in prior period adjustments Sidoti Yes, we don't have any budget for a credit loss provisions and.
And the number.
Right and then I guess the year over year would be apples to apples like ex those items.
Versus sex correct.
We are coming out right.
This year, we've normalized for that that's correct.
Awesome. Thanks for the clarification. There. So then just within the <unk>.
<unk> 79 to $1 82 range.
Im just kind of thinking about other lumpy items.
Mostly your development and management fees tend to be lumpy and.
The condo gains is it possible to sort of give us a range of what the contribution from those two buckets.
Yes, I think in terms of the fees, we would expect them to be relatively actually flat year on year.
Most of the fees are driven by.
Property management fees and development fees, which are vis anywhere or you've got a bit of lumpiness can be <unk>.
Nancy fees, where we get paid a fee for.
Running the financing process for our partners and that just depends on what refinancings, we have coming up in a given quarter, but on an annual basis, we would expect those to be in line year on year.
And in terms of condo condo sales.
The number that we talked about before in terms of.
Condo closings in the range of $20 million to $25 million.
20 to 25 for this year.
Okay.
Got it.
Just on the increasing focus on deleveraging I guess, the $800 million, that's always been part of your plan in terms of getting the.
The condo sale proceeds back so is the deleveraging of the increased focus really a function of just scaling back on the development spend in the interim or is there another lever that you might potentially volta to accelerate that going forward.
Yes, I would say it's predominantly that.
We are.
Just to add those proceeds coming back we're always in the plan.
Of course as those.
Condos closed the construction loans come out of the credit metrics and the profits go to go against corporate debt. So that as that is a big factor in.
In the near term based on the environment, rather than redeploying those capitals back into construction, so that capital back into construction. If this goes on the balance sheet.
And then on the other side of it obviously, there's political cycle.
Which we plan on driving driving additional EBITDA through a number of initiatives ancillary revenue, but also reducing expense in G&A and.
I think those things will contribute to the improved balance sheet metrics.
Actually a really important point that 2024 story.
It is really about EBITDA ramp up we've got these developments, we delivered $600 million of developments.
During 2023, the ramp up of those those assets.
<unk> NOI because you were those assets will drive the EBITDA, which will drive the credit metric. That's the big story for 'twenty 'twenty four 'twenty five as you mentioned is delevering through the condos.
That's a great reminder, thanks, Pat and I guess, just last one for me intrigued.
Intrigued to see what you guys bought another.
Stabilized purpose built apartments in Calgary this time.
Perhaps if you could just give us a little bit more color on that transaction.
And.
I suppose it's opportunistic or is this something that we should see more of sort of in the coming year, just given the environment.
Yes, we forecast Mike we forecasted.
Getting some of our objective of $50 million to $60 million of residential NOI through acquisition and so as much as we are focused on.
The existing in the ground developments that will be delivered over the course of the next two years, which will make up most of that NOI. We have stated that where we see great opportunity and good buildings that fit within the REO Cam living profile, we will avail ourselves of those opportunities in this case. It was one that did particularly.
<unk> well positioned and we saw a lot of growth prospects for <unk>. In addition, it had some debt that was very favorable for us. So we assume so.
And a great partner well established really good managers. So we took into consideration all of those things. So if you want to characterize that as opportunistic because all of those.
Criteria were in place then I guess that is the right characterization, we will take advantage of opportunistic acquisitions, but I can tell you. This as well right now based on everything that we have in our development pipeline that's in the ground.
And everything that we've already purchased including a couple of.
Options, we have on assets that will be completed in the next couple of years, we will reach that goal without any more significant acquisition.
Got it that's great. Okay. Thanks, Thanks, so much I'll turn it back.
Thanks, Mike.
Yeah.
Our next question comes from Amit <unk> of RBC.
Please go ahead.
Thanks, Good morning, I, just wanted to come back to the guidance again, specifically that <unk> to 3% same property NOI.
Are some of the occupancy and renewal spread assumptions that were underpinning that.
That forecast.
Occupancy generally given where we're at is relatively relative.
Relatively flat so it is driven predominantly by.
Renewal spreads.
Just kind of contractual rent increases that we have going forward keeping in mind that 2024.
NOI driven by renewal spreads is really based on renewals that were done in 2023 is obviously a lag effect on that so we feel pretty locked in in terms of the rental growth that underpins those assumptions and there's also some ancillary revenue elements that contribute and John any other okay.
Yes.
Jonathan spoke about our transitional tenant list, that's under 3% of our total revenue Pommie.
And people are always asking us about watch lists.
Where theres risk I would say when we look at them and it's really more we look at this opportunity.
A lot of these tenants are paying their either gross payers their points payors and quite frankly, they're not as strong tenants we want in our portfolio. So we do have an opportunity our portfolio is basically full at this point in time at 94% occupancy we do have the opportunity to now start working way at this space to really kind of soup.
Besides growth and when you look at the new rent spreads that we're getting the spreads we're getting on new leasing.
<unk>.
In 2023, there were 30% higher than our average rent per square foot. There is a serious mark to market that we can realize particularly on spaces like this and an anchor premises as they roll off so to us that's where the real opportunity is to really push growth.
Got it no that's helpful.
And then just on the.
Yes on the Toronto that grocery anchored acquisition that you did.
Post Q4, what can you share just in terms of the partner partnering yours and your partners intention there and I guess the long term plans for that site.
Sure Pardon me so.
Very well located grocery anchored center, that's been managed by by the vendor and I would say as good as they are the Rio can be a little more we have a depth of relationships with tenants that they might not have benefited from an ability to drive down costs, which they might be given our scale and so.
I think first and foremost there is operational upside there from just leasing and operational efficiencies that I think will create short term growth and then long term over time, it's a very well positioned asset. So it's the combined intention.
<unk> of the partnership and again long term too.
Extract density out of it and either sell that density or utilize it for our own multi rose portfolio, but again, that's not the immediate focus the immediate focus is just getting this well positioned grocery anchored major market asset into our hands. So we can manage it exceptionally well and create value for both our unit holders as well as our.
Partners a.
Couple of things I, just wanted to make sure. We're clear we do earn fees, so where property manager will get property management fees, and we will get development management fees that diagnosis and financing fees. So these will supplement our income going forward.
We did note in our disclosure there is a an accrued density payment that we happen to crew it now based on.
The requirements of the accounting rules that is payable upon zoning. So it's that $40 million amount is not cash payable until a number of years in the future. So we're creating the option of earning the speeds through time, we get the zoning and then at that point with with our partner.
We're at full optionality to either build it ourselves.
Or sell it or do something else with the property. So that's where we'll get the value creation creation there.
The actual acquisition prices market cap rate for a.
Retail center.
David comes much later.
Okay, Yes that was my.
A follow up question just in terms of the <unk>.
Stripped out the residential density payment, what sort of cap rate range.
Not sure if it's fully stabilized yet in terms of the commentary with respect to leasing.
Is that fair.
And I would say, it's a stabilized asset, but I think there will be opportunities with renewals coming up and some of the smaller vacancies that they're reviewing strike more value, but no I'd definitely characterize it as a stabilized asset.
Is that market cap rate based on in place income upside comes from.
Secondly, the fees that were earned from.
Top of the NOI as well as as Jonathan mentioned NOI growth from improved leasing I'll provide upside over and above that.
Yes.
Okay and last one for me just coming back to that Calgary.
Acquisition D residential.
Certainly the price per door or.
Cap rate range in that in that asset.
We don't disclose price per door or cap rate range, but in keeping with our.
Our overall residential for us value.
We don't I don't think we disclose asset by asset cap rate cap rate room, yes, amie I could add it in front of Calgary market. It has a market cap rate and then we've got the added benefit of having really as we've seen before below market debt already on it.
Quite a bit of term left in it.
Okay. Thanks, very much I'll turn it back.
Thanks Bonnie.
Okay.
The next question comes from Matt <unk>.
National Bank financial.
Your line is open.
Hi, guys just a quick capital allocation allocation question most of my other questions have been answered but.
Just going back to Rio can living in growing it to a certain scale I know you've said that creates optionality for what to do with that portfolio.
One you could kind of give us some sense of.
Whether you've thought about that optionality a bit more.
And then two just broader capital allocation. If you do in fact believe that we are in a higher for longer interest rate environment does that change kind of the approach to density.
How to realize that value.
So on the first point.
<unk>.
I'll start with the second point, yes. It does change it I mean, our focus with interest rates being where they are as always pay down debt as aggressively as we can and I think while that was always one of our focuses are kind of become our principal focus.
So that that I would say is a change and then.
The first question.
<unk>.
Okay.
Olympic So.
We are still our thought is that $50 million to $60 million is an optimal range of NOI that does.
It was always based on the principle that that level of NOI should get us recognition within the existing structure, meaning our multiple should benefit from it but if it doesn't or if theres nothing if there are better options at that time that are giving that might give us a better outcome or more recognition from a.
From a multiple perspective, then we will follow that path.
We are always thinking about those options, Matt and we have a number of different scenarios that we've played out.
On timing on structure and on various other elements.
So.
We're not we're not bound to follow that sort of that number but I think it is still it still makes sense from an objective for us.
A scale that observing in the market that seem to get recognition.
We've seen other.
<unk> IPO at that sort of NOI level. So that just kind of gave us an indication of what that might be but we're constantly thinking about it Jonathan.
And I would say even going beyond thinking about it.
Nvidia is set up as a standalone entity within our structure all the financings ring fence.
It is.
Effectively ready to go at the right time.
The right opportunity, but I think that's critical in terms of capital allocation as whether other point, we mentioned that we run a process, where we look at 10 year models et cetera to make decisions.
The given the cost of that debt repayment goes up the less and anything else that we do is using current market.
Cap rates, so even though thinking about some of the capital we mentioned around retail infill we have to achieve rents that will cover.
Sure.
The cost of construction, but also provide at.
Return over and above the cost of debt.
Current cost of debt, so we account for that throughout our processes.
In terms of capital allocation.
Okay, no that makes sense and just maybe one quick follow up because you said you've thought about it.
Is it important.
And when you spin out Rio Ken living or do something with it but it's still a captive partner that can acquire future tenants.
Density residential.
On existing retail sites.
That would definitely be an option and probably an ideal position.
If thats something that makes sense for a potential partners down the road or in a market. So we will evaluate that it's certainly a structure that we've thought about and.
We think that that would be an incredible opportunity for already one to invest in what would be.
The only large scale new built.
Residential portfolio in the country with an embedded growth pipeline from development.
Sure.
Fair enough thanks, guys.
And our final question comes from Doug <unk>.
Biyani of Gd Cowen Your line is open.
Yeah.
Thank you and good morning, everyone.
Most of my questions. Obviously, you have been asked at this point, but I guess just following on the last discussion I guess.
You maintain the goal of $60 million of residential NOI in.
Just just three years from now so you're going to get there from a little more acquisitions than maybe you thought given given the slowing of development.
Starts.
Is that correct.
Yes, no I wouldn't say that's accurate that number was set.
Based on the existing developments that are already in the ground I mean, even if we started something this year it wouldn't even be ready by that time period. So it is actually that was we always had a view that we were going to get to that number largely by our own construction activities, but supplemented with opportunistic acquisitions and beta.
What we've already acquired and what we have rights to acquire and our existing construction that is underway, we will achieve that objective. So it's.
It's actually sort of on rails at this point.
Okay. That's crystal clear final question, Jonathan you did mentioned.
There's sort of less than 3% of the tenant base that is.
Transitory or whatever you want to call. It you mentioned that sector is a little more vulnerable to macro headwinds did you mentioned that because you think theres going to be some some some temporary vacancies in the coming months.
So what types of categories are you seeing that weakness.
Well I'll reframe that hope there is some vacancies in that regard transitional tenants in our view are the ones that we've inherited are ones that just are no longer relevant.
In our portfolio and oftentimes are paying rents that are below market quite simply it's framed by the fact that the majority of brands in our portfolio are below market right. Now so any opportunity we have to take that space back and replace them with better users with higher paying rents, we actually covet that outcome. It's at 98, 4%.
You can see we need that outcome.
Don't that outcome in terms of the categories, though it's across the board I mean, a lot of them are small businesses either franchisees that.
That arent running a great operation.
Small restaurants or smaller independent gyms.
Some of them are just.
Smaller jewelry stores, just very independent users and then some of them would be small small change, but two or three operational outlets.
We just don't think are a tremendous businesses, but in terms of broader brush categories. John do you have any insight on that.
I think you spoke to them all Jonathan to the extent there are maybe some small independent restaurants struggling.
They're more susceptible to both the higher cost and lower supply.
Available labor there are national restaurant brands, both on the sit down and on the <unk> side, we're really 100 for more space. So again as Jonathan said, it's a matter of now.
Kind of pruning through those tenants and putting in stronger operators and growing revenues.
To reiterate our portfolio is in such exceptional shape right now relative to any part of our history and that's just particularly some of the dispositions that we've done which might've been <unk> dilutive, but they provide these growth opportunities because by definition any space available by Rio can right now as I said, it's under market, it's major market location.
It's got exceptional demographics, so anytime we have the opportunity to take back that space as long as it's not like a massive amount of space coming back of any given time circa target 2015.
Sure.
Quite honestly happy for the opportunity.
That's great color. Thanks, so much.
No problem Sam.
Okay.
Okay.
Yes.
Yes.
Okay.
I think we're passing it back to the operator.
Okay.
Thank you. This concludes today's call. Thank you for joining you may now disconnect.
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Yes.
Yes.
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