Q4 2024 Primaris Real Estate Investment Trust Earnings Call
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Okay.
Yeah.
Good morning, and welcome to your primary suites Fourthquarter 'twenty 'twenty four results conference call at this time all lines have been placed on mute.
Speaker Change: After the prepared remarks, there will be a question and answer session. You May ask one question and one follow up at which point you may return to the queue I will now hand over the call to Claire Mahaney, Vice President Investor Relations and ESG. Please.
Please go ahead.
Thank you operator.
Speaker Change: During this call management of Prime Maris REIT may make statements containing forward looking information within the meaning of applicable securities legislation.
Speaker Change: Forward looking information is based on a number of assumptions and is subject to a number of risks and uncertainties. Many of which are beyond primary streets control that could cause actual results to differ materially from those that are disclosed in or implied by such forward looking information.
Speaker Change: Additional information about these assumptions risks and uncertainties are contained in primary <unk> filings with securities regulators. These filings are also available on our website at <unk> Dot com.
Speaker Change: Now I'll turn the call over to Alex Avery Primerica's, Chief Executive Officer.
Alex Avery: Good morning.
Thanks for joining primarily Reits fourth quarter 2024 conference call.
Speaker Change: Joining me today are Pat Sullivan, President and CEO O Regs, Doublure CFO less abuse, SVP finance, Marty Bobrowski, SVP General Counsel Grant Procter SVP of asset management, and Claire Mahaney VP IR at ESG.
Speaker Change: We are very pleased with our 2024 results, particularly our strong growth in same property NOI and <unk> per unit.
Speaker Change: In 2024 <unk> per unit was up six 5% committed occupancy is approaching 96% and importantly, we saw continued and material improvement in our recovery ratios.
Speaker Change: Rising recovery ratios were a key driver in our 2024 financial performance and there is considerable further room to drive tax recoveries into the low to mid 90 percentage range and cam recoveries into the high nineties percentages.
Speaker Change: This should continue to be a key driver for NOI and <unk> over the next few years.
Speaker Change: In addition to our strong financial and operating results, we have been very active leveraging our disciplined capital allocation model recycling capital from dispositions into acquisitions of leading and closed shopping centers in growing Canadian markets.
Speaker Change: On January 20, <unk>, we announced the $585 million acquisition of offshore center in Ottawa, Ontario, and a 50% interest in Southgate Center in Edmonton, Alberta.
Speaker Change: We are increasing our relevance with retailers and building on <unk> profile as an attractive buyer of large high quality assets.
Speaker Change: Consistent with prior acquisitions. These additions to our portfolio are designed to deliver higher internal growth driving NAV per unit growth <unk> per unit growth and ultimately distribution per unit growth.
Speaker Change: Since December 31, 2021, <unk> acquired $2 4 billion.
Speaker Change: Leading in closed shopping centers from five of Canada's 10 largest pension plans.
Speaker Change: With the vendors, taking back equity and exchangeable preferred equity investments in the REIT.
Speaker Change: With the transactions announced last month, we have improved the overall quality of our enclosed shopping center portfolio driving the portfolio's annual same store sales productivity from $684 per square foot and as at September 32024 to $749 per square.
Speaker Change: On our Q4 pro forma basis.
Speaker Change: These properties enhance the <unk> value proposition with retailers and offer a significant income growth opportunity consistent with the growth. We see ahead for our existing assets.
Speaker Change: We continue to be very active in discussions on several acquisitions and dispositions, we have capacity for well more than $1 5 billion of acquisitions and require no financing conditions in our deals.
Speaker Change: This profile as a well capitalized incredible counterparty is a real differentiator and what is currently a challenging transaction market for many.
Speaker Change: I'll now turn over the call to Pat to discuss operating and leasing results followed by regs, who will discuss our financial results.
Speaker Change: Thank you, Alex our leading enclosed shopping center portfolio performed very well in 2024 with NOI growth coming from strong rental revenue growth rising occupancy and falling non recoverable expenses over the last four months, primarily has acquired approximately $910 million a dominant closed shopping centers.
Speaker Change: And our team is doing an excellent job integrating those assets into a national full service platform.
As the largest owner and manager of enclosed shopping centers in Canada measured by mall count primarily very quickly moving towards our ambition of becoming the first call for retailers looking to grow and expand their footprint in Canada.
Speaker Change: Okay Center in Edmonton, Alberta is a leading superregional enclosed shopping centers and as the eight most productive mall in Canada, producing approximately $1375 per square foot and over $300 million in total <unk> sales.
Speaker Change: It is located in the southern portion of that in the affluent neighborhood of normal claims with exceptional extensibility and visibility among major traffic corridors, drawing shoppers from across the greater Edmonton area and beyond.
Speaker Change: The center is an 846000 square foot mall located on 39 acres of land for an approximate 66% site coverage.
Speaker Change: The property is in great shape and in 2000 $20 million to $93 million was invested into the 260000 square foot redevelopment of the former Sears space.
Speaker Change: Creating an additional CRE <unk> and atrium.
Speaker Change: With in place occupancy of 91% there is opportunity for lease up in future rental revenue growth.
Speaker Change: Offshore center is a leading regional shopping center in the high growth market of Bosch for Ontario, located 40 minutes east of Toronto.
Speaker Change: The center is a $1 2 million square foot mall inclusive of approximately 100000 square feet of office and is located on 79 acres of land for an approximate 47% site coverage.
Speaker Change: Producing $758 per square foot same store sales productivity and total CRE <unk> sales volume of $242 million.
Speaker Change: In 2016, there was a $230 million three.
375000 square foot redevelopment completed which included the addition of 260000 square feet of <unk> space, a food court expansion and upgrades throughout the entire center.
Speaker Change: In place occupancy is 91, 9%.
Speaker Change: Consistent with the acquisition strategy, we have been communicating these acquisitions offer very strong NOI growth over the next few years as operating and financial performance Normalizes and is primarily full service management platform integrates and operates the properties.
Speaker Change: Opportunities to increase operating income at both properties includes the conversion of tenants on preferred rent deal to standard net leases.
Lease up of approximately 56000 square feet at <unk> Center, and 98000 square feet at Ottawa Centre, a temporarily tentative or vacant space to strong tenants at market rents.
Speaker Change: On to operating results.
Speaker Change: Our same property cash NOI was up nine 1% for the quarter and four 5% for the year, primarily driven by increased occupancy higher rents and very strong recoveries.
Speaker Change: Recovery ratio for the year came in almost 4% higher versus 2023 consistent with the guidance. We provided at the Investor day in September of last year for.
Speaker Change: For context every 1% increase in Cam and tax will recover equates to approximately $2 million annually. This number directly impacts the bottom line.
Speaker Change: Despite recent volatility in the markets and negative headlines the underlying fundamentals of the shopping centers continues to be supported.
Speaker Change: Both by low retail supply strong tenant sales population growth and continuing tenant demand for quality space as well as our national full service platform and team.
Speaker Change: Portfolio in place occupancy was 94, 5% up two 1% from Q4 last year.
Speaker Change: Committed occupancy was 95, 6% versus 94, 2% in the same quarter last year.
Speaker Change: We are approaching historical occupancy levels and our target of 96% in place occupancy and we expect to achieve this target over the next 24 months, given our strong pipeline of leasing activity.
Speaker Change: These higher occupancy rates, we will be in a better position to drive rents further upward to proactively replace underperforming tenants.
Speaker Change: Leasing activity remained strong during the quarter with 87 leases renewed at spreads of five 3% and for the full year leasing spreads were four 8%.
Speaker Change: In addition, we completed 31, new deals encompassing 94000 square feet during the quarter and over the year. The team completed 121, new transactions encompassing 464000 square feet, which is approximately 100000 square feet more of the new leasing completed during the same period in 2023.
Speaker Change: Not captured by our leasing renewal spreads is the conversion of leases with preferred rental terms such as percentage Brendon Leo a base rent back to net leases.
Speaker Change: The implication being that there are additional rental gains beyond those captured by the traditional net to net leasing spreads analysis.
Speaker Change: And our leasing spreads understate the growth we are experiencing at quarter end approximately seven 7% of our tenant base was on preferred rental structures compared to 11% at year end.
15% at the beginning of 2023.
Speaker Change: Figure will continue to decline during the balance of the year, which is having a significant positive impact on our NOI for 2025 and beyond.
Speaker Change: Also of note, we successfully reduced our percentage rent and lieutenants to 3%, which we consider to be a stabilized number at this point.
Speaker Change: We've made tremendous progress reducing this number over the last few years.
Speaker Change: Before I move on to tenant sales a few comments on coal market as we highlighted in our disclosures Komarek filed for creditor protection in January.
Speaker Change: <unk> had 36 stores operating under the banners a bootlegger Cleo in ricky's within the primary portfolio.
Speaker Change: Co Mark would be the 19th and 20th largest tenant measured by annualized minimum rate and gross rent respectively.
Speaker Change: The majority of <unk> leases are gross rent only leases. Therefore, our growth rate is a better reflection of the recent quarter to co. Marc as it includes recoverable operating costs, such as common area maintenance and taxes.
Speaker Change: We've intentionally maintained comex weighted average lease term at one year to enable flexibility and releasing that komarek space as.
Speaker Change: As we highlighted during our Investor day on September 24th primarily implemented risk mitigation strategy for higher risk tenants since the pandemic primarily has been actively working to market. The komarek space and already has plans to replace most of the stores upon expiry of the co mark leases a potential buyer of the merged for 13 of our co Mark locations.
Speaker Change: And we are in active discussions with new tenants for approximately 15 locations equating.
Equating to approximately 50000 square feet.
Speaker Change: Same property same store sales productivity has grown to $705 per square foot.
Speaker Change: As at the end of Q4.
Speaker Change: Pro forma for the transactions announced last month sales productivity rises to $749 per square foot.
Speaker Change: For the past 24 months tenant sales have rebounded significantly from the pandemic are lows with many retailers operating in our properties now reporting their highest 12 month rolling sales figure at the property since opening.
Speaker Change: A particular note the months of August which is the back to school shopping period November specifically Black Friday and December were strong sales months.
Speaker Change: Sales productivity and growth should be viewed over the long term not necessarily on a quarterly basis, given the ongoing re merchandising efforts and seasonality of the shopping center business.
Speaker Change: Overall reported sales productivity figures continue to show growth. Our primary focus remains on driving occupancy and NOI higher not undertaking actions simply to drive the reported mall productivity figure higher over.
Speaker Change: Over the long run we anticipate sales growth of our properties will occur due to strong fundamentals in the shopping center industry due to a 30 year low and per capita in closed mall square footage in Canada, coupled with population growth.
Speaker Change: Include our business is performing very well and we are positioned to capture continued growth with intermodal and with that I'll turn the call over to <unk> to discuss our financial results.
Speaker Change: Thank you Pat and good morning, everyone.
Speaker Change: Strategically we continue to focus on our differentiated financial model represented by low leverage low payout ratio.
Speaker Change: Significant free cash flow, which we believe is a major strategic advantage for primary suite.
Speaker Change: Our operating and financial results for the quarter and year remained very strong.
Speaker Change: We have seen very strong NOI growth from our portfolio specifically the acquisition properties.
Speaker Change: Many operating metrics continue to improve.
Speaker Change: Business is reaching critical mass as can be seen in our G&A as a percentage of rental revenue, which has begun to stabilize.
Speaker Change: For the quarter <unk> per unit was <unk> 46 cents as compared to 40 for the same quarter last year.
Speaker Change: Spike higher interest rate costs and increased unit count as a result of high quality accretive acquisitions completed over the last 12 months and the strong same property growth <unk> was up 14, 5%.
Speaker Change: For the year <unk> per diluted unit was $1 69 up six 5% over 2023.
Speaker Change: Our average net debt to adjusted EBITDA was five eight times.
Speaker Change: In a range of four to six times.
Speaker Change: As a reminder, this range forms part of our executive compensation structure was the top end of the range of six times.
Speaker Change: In November 2024 primary secured a $70 million mortgage kind of contractual interest rate.
Speaker Change: Six 2% on <unk> and <unk>.
Speaker Change: Ladies Ontario, a suburb of Ottawa.
Speaker Change: This property is held in the 50% ownership arrangement.
Speaker Change: Considering the pre funding of as soon as being debentures maturing next month on a pro forma basis, primarily weighted average interest rate and attempt to maturity of total debt and $5, three 7% and $4 35 years, respectively.
Speaker Change: With unencumbered assets of $3 $2.285 billion available on our operating line on the pre funding of our March 2025 debt maturity, we have no unfunded debt maturity until 2020 channels.
Speaker Change: We have eliminated refinancing risk in the medium term.
Speaker Change: Access to significant liquidity.
Speaker Change: Yeah.
Speaker Change: During the quarter, we closed on the sale of Edinburgh marketplace in Guelph, Ontario, So $71 5 million and <unk> announced the sale of Sherwood Park Mall and professional center for $107 million Molson line.
Speaker Change: Yes fair value.
Speaker Change: These dispositions in addition to a 240 million in assets held for sale pool aligned to our strategy to focus on.
Speaker Change: Owning a growing high quality portfolio, leading enclosed shopping centers in Canada.
Speaker Change: These dispositions improve our overall portfolio quality and growth profile and again demonstrated primary stability to transact and provide proceeds available to fund further acquisitions.
Speaker Change: <unk> has been in the market repurchasing units since March nine 2022 under the LCR.
Speaker Change: As at year end, we have purchased for cancellation $9 8 million units and in average unit.
Speaker Change: Average value per unit of approximately $13 88.
Speaker Change: Or the approximate 35, 6% disc trial of $21 55.
Speaker Change: This program is very accretive.
Speaker Change: To unit holders.
Speaker Change: The team is continuing to progress on the ESG initiatives.
Speaker Change: We reached a number of important milestones in 2024, which we disclosed in our second annual ESG report, which was released in December.
Speaker Change: These milestones include the integration of ESG into the employee performance review process.
Speaker Change: Since our tenant engagement program and the incorporation of Green lease language into our standard lease for.
Speaker Change: We announced our inaugural ESG targets, which include a 25% reduction.
Speaker Change: Greenhouse gas submissions for 2035 and stability and growth.
Speaker Change: Scores of tenant satisfaction and employee engagement Green building certifications and aggressively score.
Speaker Change: Year over year, our emissions are down 5% a testament to our very engaged an experienced property management teams, who are continuously looking for ways to optimize our properties.
Speaker Change: In 2025, we will focus on developing a decarbonization plan aligned to achieve our greenhouse gas emissions reduction target.
Speaker Change: The C SBS and Fs, one and Thats two standards and the Tcs the framework.
Speaker Change: Given our strong results to date and confidence in the strength of our business.
Speaker Change: Providing 2025 guidance.
Speaker Change: We anticipate same property cash NOI growth to be in the range of 3% to 4% unless asphalt per unit diluted to be within the range of $1 70 to $1 75.
Speaker Change: Guidance includes the impact of the January 31, 2025 acquisitions, and approximately 300 million of dispositions throughout the year.
Speaker Change: No additional further acquisitions or incorporated into the guidance.
Speaker Change: Further details of our 2025 guidance can be found in section four of the DNA title current business environment and outlook.
Speaker Change: Overall, we are pleased with our results for 2024 and are optimistic of the outlook in 2025 and beyond.
Speaker Change: Maintaining a conservative financial model and generating free cash flow after distributions inaugurated in capital.
Alex Avery: Our focus, which we will not deviate from and with that I will turn the call back to Alex.
Alex Avery: Thank you Rex 2024 was a very strong year for primarily in 2025 is off to a great start.
Speaker Change: Our portfolio is performing well with significant further runway as rising occupancy and recovery ratios drive NOI and <unk> growth.
Speaker Change: Properties, we have added to the portfolio over the past few years are enhancing our internal growth profile and increasing our relevance with retailers.
Speaker Change: We expect to see more capital recycling materialize in 2025, providing more capital for further acquisitions.
Speaker Change: Terming out our debt ladder over the last few years constrained <unk> per unit growth, but we have rounded that corner with a weighted average interest rate of five 3% and now see refinancing opportunities at lower interest rates in the near future.
We expect to see material growth in NAV and cash flow per unit in 2025, and 2026, driven by internal growth reinvestment of excess free cash flow and stable valuation metrics.
Speaker Change: Underpinning our 2025 financial guidance is our expectation for more of what we saw in 2024 strong internal growth highly impactful capital recycling a significant improvement in the trading volume of our units and growth across all of our key metrics in conclusion, we are very pleased with how our businesses perform.
Speaker Change: <unk> and are excited about what lies ahead.
Speaker Change: Now be pleased to answer any questions from the call participants operator, please open the line for questions.
Speaker Change: Thank you if you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad. If you would like to visit draw. Your question. Please press star followed by the number two you may ask one question and a follow up and at which point you may return to the queue for phosphate just a moment.
Speaker Change: The Q&A roster.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Your first question comes from the line of Lauren got it.
Speaker Change: Lorne Kalmar from <unk>. Your line is open. Please go ahead.
Lorne Kalmar: Thanks, Good morning, and congrats on a solid finish to 2024.
Speaker Change: Just quickly on the specialty leasing revenue in the quarter I think is about just over $8 billion up pretty significantly.
Speaker Change: Certainly versus the average of the first three I was just wondering should we expect that to revert back to the $4 million range in <unk>, if we exclude.
Speaker Change: The Southgate in Oshawa Center acquisitions.
Pat: Yes capital Hey, Lauren it's Pat that capital was in Q4 and that was that was one of the drivers for the John So thats going to continue.
Pat: SL revenue does drop in Q1 of course because of the seasonality, but certainly capital. It's got an elevated amount of vacancy that helped drive that number higher that will change next year as we lease up space.
Pat: Okay.
Pat: And then maybe just on the guidance can you give us an idea of what it contemplates in terms of recovery ratios for 2025.
Pat: Yes.
Pat: My guess would be say, 3% to 4%.
Pat: The increase from the increases here.
Speaker Change: Okay. So you don't have the <unk>.
Pat: Number.
Pat: With that said, we've modeled that obviously asset by asset so I don't have the overall number available.
Pat: We certainly see improvements in the recovery ratios.
Pat: Okay. So I guess fairly consistent once you guys disclosed since your Investor day for 2025.
Pat: Yes, yes.
Pat: Okay, great and just for context.
Pat: Over the course of 2024, we made about 400 basis points of improvement and we think there's another.
Pat: Maybe 13% to 17% improvement.
Pat: Improvement in that ratio so.
Pat: We have been feeling the strong tailwind, but there is certainly quite a bit more to come.
Pat: A little bit difficult to pinpoint because.
Pat: It's not just any individual lease it's out of the leases work together and.
Pat: The cadence of lease commencement occupancy as well as lease conversions.
Pat: Yes.
Pat: Part of the noise, we're going to have going forward and we will tell you. We looked at segregating more same property information is with bolt on acquisitions.
Pat: The sizable obviously some of these numbers start to move around a bit.
Pat: We will give.
Pat: I'll give you that.
Pat: Clarity.
Pat: There's also get blended in ryzen.
Pat: On a same property basis that can be improving.
Pat: But overall the ratio may not look like it's going up so.
Pat: We'll have to give you that.
Pat: That line of sight.
Speaker Change: Your next question is from the line of Mark Rothschild from Canaccord. Your line is open. Please go ahead.
Mark Rothschild: Thanks, Good morning, guys.
Mark Rothschild: Maybe with regard to unit buyback.
Mark Rothschild: Have been active in funding.
Mark Rothschild: Large transaction, which obviously used capital maybe.
Mark Rothschild: But you can't buy back stock, but considering.
Mark Rothschild: Considering how much capital you are retaining where the unit prices.
Mark Rothschild: Just curious how serious are you thinking about using that this year.
Mark Rothschild: Cash flow and how much of it does depend on the acquisition pipeline.
Speaker Change: It's a good question Mark we are we did spend a bunch of time talking about that yesterday with our board.
Mark Rothschild: I would say directionally.
Speaker Change: More is probably.
Mark Rothschild: The way that we're headed.
Mark Rothschild: And you know on the surface you might think that.
Mark Rothschild: We're contemplating a lot of acquisitions it might be.
Mark Rothschild: More advantageous to.
Mark Rothschild: Dial it back.
Mark Rothschild: But in fact, the return profile of buying back our stock at these levels is just so superior to anything else, we can do with our capital but.
Mark Rothschild: Once we talk fully through the analysis, it's really.
Mark Rothschild: It really is our best use of capital so.
Mark Rothschild: With the disposition activity that we've already announced plus what we can see in the pipeline.
Mark Rothschild: We have quite a bit of liquidity and as were doing that.
Mark Rothschild: We're.
Mark Rothschild: We're buying back units at a dramatic discount to the price at which we're selling properties.
Mark Rothschild: The acquisitions that we're buying are.
Mark Rothschild: Partially funded through equity, but also.
Mark Rothschild: Really great additions to the portfolio so.
Mark Rothschild: It kind of it kind of all pulls together with expect more acquisitions more dispositions and more buyback.
Okay great.
Mark Rothschild: Mark just a way to look at it.
Mark Rothschild: And we.
Mark Rothschild: When we looked at our disposal program.
Mark Rothschild: Yes.
Mark Rothschild: It is not calibrated solely to fund acquisitions, we do look at it that way.
Mark Rothschild: So when we sell we do sort of.
Allocate a portion of those proceeds to continue the share buyback program because it is so attractive and then we also look at selling the acquisition side of the house. So the desktop program is geared solely to fund acquisitions.
Speaker Change: Okay, great. Thanks, and maybe just one more on the occupancy.
Mark Rothschild: We still see improvement.
Speaker Change: Late in the year.
Speaker Change: But things have changed at your Investor Day, when you gave that.
Speaker Change: I'm pretty optimistic outlook for the next couple of years.
Speaker Change: Improvements in occupancy.
Speaker Change: Would you want to temper that somewhat or do you still think you can reach that level or potentially even exceed it.
Speaker Change: Everything you see today.
Mark Rothschild: Hi, Mark.
Mark Rothschild: We're still optimistic we're going to get there and optimistic we can actually exceed it on a same property basis.
Mark Rothschild: The malls, we just bought specifically offshore has an elevated amount of vacancy which is a great opportunity for us and we'll be tackling that but certainly on a same property basis were.
Mark Rothschild: Very much optimistic we're going to meet or exceed the number.
Speaker Change: Your next question comes from the line of Brad Sturges from Raymond James. Please go ahead.
Brad Sturges: Hey, good morning.
Brad Sturges: I appreciate the disclosure and comments around Kumar can kind of understand that.
Brad Sturges: The contribution on the revenue side, a little bit lower just want to understand the mechanics. It sounds like for 13 stores, there would be limited or no disruption on rent and then.
Brad Sturges: What would be your expectations I guess for transitional Ricky for the rest of the year the source.
Brad Sturges:
Brad Sturges: I would suggest so if things have changed a little bit in the last 24 hours to Theres actually.
Brad Sturges: About 16 stores that have been purchased and we're just working through the terms on those but we're keeping them relatively short term in the financial numbers or are slightly less but not materially.
Brad Sturges: Three stores it looks like Youre going to be bought by a different different division of these same private equity company that owns the.
Brad Sturges: The change to warehouse, one is going to pick up <unk>.
Brad Sturges: And then we have we have.
Brad Sturges: Good traction on releasing about 50000 square feet of.
Brad Sturges: The other space.
Brad Sturges: So we.
We are.
Brad Sturges: We're in a pretty good position to kind of manage this the comex situation, which to be honest with you. We expect it to do so anyways in our budget because almost all of them are expiring in June of 2025, and we have made provisions for replacing the majority of them already.
Brad Sturges: Makes sense.
Brad Sturges: And just.
Brad Sturges: In terms of.
Brad Sturges: Retailers are towns anything else on the watch list at this point.
Brad Sturges: Nothing of note.
Brad Sturges: Tenants that we've kind of monitoring their sales, whether it's certainly not keeping up with other tenants growth profile.
Brad Sturges: Some that we were watching a little more closely we're not so concerned about anymore is there as their sales have rebounded.
Brad Sturges: There's two or three tenants that I would say on our watch list that have bounced back.
Brad Sturges: There is another change that was on our watch list that actually got purchased so its always a transition, but theres certainly nothing of note on there.
Brad Sturges: Sir.
Speaker Change: Your next question comes from the line of Mario <unk> of Scotia Bank. Please go ahead.
Brad Sturges: Okay.
Mario: Hi, good morning, maybe.
Mario: Maybe a first question just more of a high level question.
Mario: The portfolio. Meanwhile, tenant sales are stable despite.
Mario: Having ramped up materially post COVID-19.
Mario: It sounds like your watch list is pretty low declining a little bit relative to.
Mario: Three or four months ago, the occupancy upside you are pretty confident.
Mario: So I appreciate all that and also appreciate in the past you've talked about how when there is economic turbulence. It takes a while to show up in the performance it's not overnight.
Mario: Market seems very focused on U S tariffs decelerating population growth negatively impacting the GDP growth.
Mario: I'm just curious like when you look back over your career like have you seen such a dichotomy in terms of actual on the ground performance.
Mario: And uncertain macro environment sort of uncertain macro sentiment and how do you think about optimizing the portfolio in that regard.
Mario: Sadly youre, making you feel all that I can go back a long way here.
Mario: Hi.
Speaker Change: Yes, it's certainly I've seen the ups and downs in the retail business over periods, where malls were considered forecast trophy assets in the listed them very well 2008, specifically.
With more of an American events in our Canadian event came through it very well.
Speaker Change: It was the subsequent year say 2011, and 12, where there was a lot more turbulence in terms of.
Speaker Change: Sure.
Seth: This is Seth.
Speaker Change: Sure.
Speaker Change: Uh huh.
Speaker Change: And in 2015 and that certainly had an impact on that suggest to you that the primary driver.
Speaker Change: Retail in general is the lack of available space and tenants demand for opening stores is still significant.
Speaker Change: And Thats that actually is a dynamic that hasn't existed in my career. There is always a lot of retail space. There is always a lot of construction going on for retail use.
Don't have it right now and so tenants theyre actively looking for store locations and they just can't find real estate and construction costs are almost thinking it prohibitive to build.
Speaker Change: Anything from strip malls.
Speaker Change: All expansions.
Speaker Change: It's Tom So that's putting thats why youre seeing the rental rates rise.
Speaker Change: As you are and all the retail asset classes just lie.
Speaker Change: <unk> space.
Speaker Change: And.
Speaker Change: What is your sense in terms of.
Speaker Change: Magnitude of higher event required not necessarily for enclosed malls, but just generally speaking for potentially competitive space for you.
Speaker Change: What is the quantum in terms of the higher rent required in order to justify.
Speaker Change: More meaningful uptick in retail construction.
Speaker Change: It's a significant number.
Speaker Change: Acquiring a large parcel of land in and then servicing it.
Speaker Change: That building is very significant coupled with.
Speaker Change: Tenants tenants like.
Speaker Change: Properties that are tried tested and true like they understand them.
Speaker Change: When you build something new for them. There is an uncertainty of where their sales are going to be.
Speaker Change: And so your ability to generate the rents you need to justify the construction.
Speaker Change: Our top when you take a big risk and I think you can look to a couple of developments where that happened.
Speaker Change: The landlords ended up taking big gambles in and doing very aggressive deals theme.
Speaker Change: The new property in Quebec and even.
Speaker Change: Even the Triple five development in New Jersey.
Speaker Change: They had to do very aggressive deals to fill the buildings.
Speaker Change: That's a high risk.
Speaker Change: Proposition that a lot of people take.
Speaker Change: I guess one other question is you got to ask yourself is what's the yield people are prepared to that.
Speaker Change: And has that changed.
Speaker Change: Secondly in the past few years that people with.
Speaker Change: In some cases going forward on a five year old had months, where people are going to do that anymore.
Speaker Change: Since you've sort of work that math I mean, the ERP.
Speaker Change: 70 <unk>.
Speaker Change: Well just to build just to build that out parcel right now or any kind of new pad, you really need rents in the $50 $60.
Speaker Change: Makes sense.
Speaker Change: Let alone let alone in the closed mall, which you would need to almost.
Speaker Change: Probably double the rents we're generating to justify building.
Yes, the replacement cost of the building is probably $800 a square foot. The land component is about 200, so you're about $1000 a square foot to replace an enclosed shopping center.
Speaker Change: And to the point, I mean, 75% or $80 net is.
Speaker Change: <unk> is probably what is required there if you just look at existing property cap rates.
Speaker Change: You would want to have.
Speaker Change: Certainly $70 net and.
Speaker Change: And then when you look at our overall average in place rent its in the $24 $25 range.
Speaker Change: Which implies rents have to go up three times from where we are today.
Your next question is from the line of semi IC and CIBC. Please go ahead.
Speaker Change: Thanks, Good morning.
Speaker Change: The guidance that you put out and you're expecting the occupancy go up 800 basis points does that reflect that the E. Commerce space will be leased up were addressed within the year or is there any downtime factored in that guidance.
Speaker Change: Yeah.
Speaker Change: No I.
Speaker Change: I don't think it impacts our forecast as I've mentioned earlier, we had already anticipated a lot of these stores turning over in 2025.
Speaker Change: And the bankruptcy really didn't change that the fact that somebody is coming along to buy the stores and.
Speaker Change: And in some cases prepared the banner is just going to enable us to generate revenue for longer than we would've anticipated.
Speaker Change: As we manage through the replacement of the source.
Yes.
Speaker Change: Okay.
Speaker Change: And I think hallmark once a significant component of the non styled leases or trying to whittle down is the rest of that bucket of leases diversified our adult also concentrated amongst a handful of tenants.
Speaker Change: Yes. It is.
Speaker Change: It is there is a concentration towards a certain certain brands in that bucket.
Speaker Change: And that will go away or reduce further as we as.
Speaker Change: As we remerchandise komarik represents about 2% of that number.
Speaker Change: When I say seven 7% will go down to like five and change.
Speaker Change: With co Mark no longer being in that on that list.
Speaker Change: Your next question comes from the line of Sam Damiani from TD Securities. Please go ahead.
Sam Damiani: Thank you and good morning, everyone.
Sam Damiani: First question just on occupancy and how you see that evolving over the next year or two with the mix. It's a little more skewed to short term in the fourth quarter in part as you mentioned.
Sam Damiani: The gallery was a contributor there, but but how do you see that sort of ending 2025.
Sam Damiani: Versus where it is today.
Sam Damiani: The mix between Sam.
Speaker Change: Our leasing team our leasing team is doing a fantastic job of leasing up spacing.
Speaker Change: We did a lot of new deals in 2024.
Speaker Change: And we did a lot in 2023 and I expect that cadence to continue through 2025.
Speaker Change: And we're going to continue to convert a lot of these temporary tenants to permanent elevated capital is a great. Great example in May we closed on it in in October we've got a lot of leasing momentum on the space, there and I fully expect us to make a significant dent in the amount of space that's available there Devon Shire.
Speaker Change: But we knocked down the series, we've taken about 40000 square feet, plus or minus of temporary tenant or vacant space put two large format stores and there'll be opened later this year. So.
Speaker Change: There's a lot of activity, that's going on and I really am very optimistic that we will meet or exceed our targets.
Speaker Change: Okay, that's great and last question I guess, just sort of back to the results.
Speaker Change: Touch on a little bit earlier.
Speaker Change: Yes, I guess, both with the specialty leasing, but also the percentage rent ticked up notably in the quarter.
Speaker Change: Was there was that is that a sustainable level of I guess sales driven percentage rent was there something unusual that happened there.
Speaker Change: GST breakup a factor or.
Speaker Change: Anything else that would cause us to look at that percentage rent.
Speaker Change: And maybe a discount that a bit for going forward.
Speaker Change: So percentage rent is purely a function of people that are exceeding their breakpoint in sales for a lot of tenants have exceeded their breakpoint you get that you've got a lot of tenants. There are breakpoints are skewed towards the end of the year and thats when they break.
Speaker Change: You may see that number come down in the future, but it is a direct correlation between us resetting the base rent and Theyre breakpoint, increasing as a result so.
Speaker Change: There's a lot of tenants, whose sales have risen significantly over the last number of years that are now breaking out there.
Speaker Change: The breakpoint exceeding the breakpoint.
Speaker Change: And as those renewal of those renewals are executed on a go forward basis.
Speaker Change: The percentage rent will drop but the increase in rent will offset that number.
Speaker Change: Again, if you would like to ask a question. Please press star and then the number one on your telephone keypad. Your next question comes from the line of Stanley Berger of RBC capital markets. Please go ahead.
Stanley Berger: Thanks, Good morning.
Stanley Berger: In terms of the the same property NOI growth guidance, how much of that is being driven by the conversion of percentage rent.
Stanley Berger: Leases I don't know if you have that figure either on a proportion of that 3% to 4% or just a dollar value basis.
Stanley Berger: I think it's been significant for the past couple of years simply because there was no that's been our main theater into our recovery ratio increases.
Stanley Berger: I think going forward, it's not a significant driver simply because we are approaching more stabilized normal normal level, what really is driving our numbers going forward has been leasing up space, that's increasing occupancy.
Stanley Berger: That benefit both our retail rental growth and it also directly benefits our recovery ratios as we fill up space and get recoveries in that rental Dennis.
Stanley Berger: It goes straight to the NOI line. So that's really the primary driver.
Okay. So.
Stanley Berger: The conversions would be arguably are we talking like less than a third of that 3% to 4% guidance or even less than that.
Stanley Berger: I would say less than that.
Stanley Berger: B.
Stanley Berger: 300 million of dispositions.
Speaker Change: And I guess, excluding Sherwood Park, what kind of traction are you seeing.
Speaker Change: On those assets and any update on the potential timing of <unk>.
Speaker Change: When we may see some of those deals actually I'm happy to.
Speaker Change: We're seeing very good traction on our dispositions.
Speaker Change: We're in active discussions right now and I would expect that we will have some news coming out.
Speaker Change: The next couple of quarters.
Speaker Change: The deal has taken a while to pull together thats part of.
Speaker Change: The challenge everything takes longer these days.
Speaker Change: Separately, where we've noticed a change in tone and we do believe that we have.
Speaker Change: The $300 million would be 200 on top of.
Speaker Change: Sherwood.
Speaker Change: Yes.
Speaker Change: As I mentioned durable and hopefully we can move up the timeline earlier in the year.
Speaker Change: Some do better than necessarily but we'll be cautious in the guidance.
Speaker Change: Your next question comes from the line of Mario Sorry of Scotiabank. Please go ahead.
Speaker Change: Hi, sorry, one quick follow up just a clarification a path forward towards Uber.
Speaker Change: Remember you 20 years ago, when I asked the question maybe myself in addition to yourself or.
Speaker Change: Youre not alone but.
Speaker Change: The clarification just on the comment the percentage of rent leases.
Speaker Change: We're now stabilize at the level of 3%.
Speaker Change: Not pertaining to the percentage of sale lease arrangements percentage of entered into common also hold for other unconventional lease structures that you've been looking to restructure into net rent deals.
Speaker Change: Yeah.
Speaker Change: It's more related to the percentage rent and lieutenant leases, we still have a number of leases that are gross rent or a combination thereof, and those ones are likely to come down more but the percentage rent Lou only.
Speaker Change: That's more or less stabilized number at this point in our view.
Speaker Change: Okay. Thank you.
Speaker Change: There are no further questions at this time glare I turn the call back over to you.
Speaker Change: Thank you operator with no further questions. We will close today's call on behalf of the finance team. We thank you all for participating and look forward to speaking with you again soon have a great long weekend. Thank you.
Speaker Change: Thank you you may now disconnect.
Speaker Change: [music].