Q2 2026 Primaris Real Estate Investment Trust Earnings Call
Speaker #3: Good morning. And welcome to Primaris Right's Q2 2026 results conference call. At this time, all lines have been placed on mute. After the prepared remarks, there will be a question-and-answer session.
Speaker #3: You may ask one question and a follow-up, at which point you may return to the queue. If you would like to ask a question, please press star 1 to raise your hand.
Speaker #3: To withdraw your question, press star 1 again. I will now turn the call over to Claire Mahaney, VP Investor Relations and Sustainability. Please go ahead.
Speaker #4: Thank you, operator. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. 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 Primaris REIT's control, that could cause actual results to differ materially from those that are disclosed in, or implied by, such forward-looking information.
Speaker #4: Additional information about these assumptions, risks, and uncertainties are contained in Primaris Right's filings, with securities regulators. These filings are also available on Primaris Right's website at www.primarisright.com.
Speaker #4: I'll now turn the call over to Alex Avery, Primaris's Chief Executive Officer.
Speaker #5: Good morning. Thanks for joining Primaris Right's Q2 2026 conference call. Joining me today are Pat Sullivan, Rags Davloor, Julian Schoenfeld, Leslie Buist, Morty Bobrowski, Graham Proctor, and Claire Mahaney.
Speaker #5: Halfway through our fifth year post-spin-out, we are having a lot of fun at Primaris. All of the hard work over the past 5 years is manifesting in our financial and operating results.
Speaker #5: It has been a remarkable 5 years of change. With 70% of the portfolio new since 2021. We have moved from the 19th largest capped REIT index member to the 9th, driven by sector-leading FFO per unit growth, significant portfolio growth through net acquisition activity, and, as our FFO and AFFO multiples have expanded to the low end of our peer group.
Speaker #5: We are still in the early innings of the mall recovery story. In June, we announced visibility to approximately $52 million of incremental annual cash NOI from leasing activity expected to commence over the next 3 years.
Speaker #5: Underscoring what we believe is one of the strongest embedded growth profiles in the Canadian REIT sector. Within place occupancy currently sitting at 86.6%, we have approximately $1,000 basis points of occupancy gains ahead of us to get us to stabilized occupancy of 96%.
Speaker #5: The $52 million we have identified comes from three sources: first, signed and committed deals; second, future lease-up at our 10 most productive centers; and third, lease-up of the 10 former HBC spaces that are now 84% leased or in advanced negotiations, at rents four times higher than previous.
Speaker #5: Compared to the midpoint of our 2026 guidance range, this represents more than 13% growth in NOI over the next three years. Taken together, our leasing pipeline and improving portfolio quality initiatives provide a clear and highly visible path to meaningful earnings growth over the coming years.
Speaker #5: With significant embedded NOI growth already identified, a stronger and higher-quality portfolio, and multiple sources of internally generated capital, we believe Primaris is exceptionally well-positioned to create long-term value for unitholders and further strengthen its position as Canada's leading owner of dominant enclosed shopping centres.
Speaker #5: With that, I'll now turn the call over to Pat who will walk you through our operational results for the quarter.
Speaker #6: Thank you, Alex, and good morning, everyone. Year-to-date, tenant demand remains robust, with both the quality and volume of executed deals continuing to improve. CRU leasing performance is outstanding, driven by record leasing volume, strong renewal spreads, and sustained tenant demand.
Speaker #6: Leasing activity across our former HBC locations continues to accelerate, with retailer demand well ahead of our initial expectations. Benefiting from a constrained retail supply environment and the high quality of these real estate assets, we have leased out the former HBC space, including 58% that are under long-term lease agreements.
Speaker #6: Upon commencement, these leases are expected to contribute approximately $19 million of annualized net rent, or $22 million of cash NOI, from a diversified roster of high credit quality tenants.
Speaker #6: We believe the full impact NOI could be higher as this analysis does not account for the benefit to adjoining retail premises, some of which are currently vacant, that will benefit from being next to new tenants generating higher traffic.
Speaker #6: These leases executed to date are at rents nearly four times those previously generated by HBC from the same space. Anticipated cash rent commencement from redeveloped HBC locations will begin in some properties as early as early 2027, with overall yields expected to be approximately 10%.
Speaker #6: Onto our operating results. Same-property NOI performance this quarter was fundamentally very strong, driven by rising base rent resulting from strong leasing volume, as well as rental escalations and high percentage rent driven by rising sales.
Speaker #6: The reported 0.5% increase in same property cash NOI was impacted by $0.4 million in prior year property tax recoveries, as well as $1 million in lower rental revenue due to the disclaimed HBC leases.
Speaker #6: Excluding the 0.4 million dollar contribution from the recovery of property taxes last year, same property's cash NOI would have seen an increase of 1.1%.
Speaker #6: Notably, Q2 2025 was the last quarter of full rents from HBC. We anticipate the same property NOI growth is likely going to jump next quarter, accelerate further in the fourth quarter, and again in the first quarter of 2027.
Speaker #6: We expect it to then remain elevated for the following 10 quarters. Leasing activity was extremely strong during the quarter, with 109 leases renewed across 482,000 square feet.
Speaker #6: CRU leasing spreads were 5.8% and 7.4% for the overall portfolio. Fifty-one new deals, encompassing 213,000 square feet, were completed during the quarter, including 45 new CRU deals for 86,000 square feet.
Speaker #6: New CRU leases completed during the quarter were signed at a weighted average net rent of $52.20 per square foot. For context, average CRU rents in the portfolio have risen to $50.69 per square foot as at Q2 2026, up from $42.02 per square foot at the end of 2022.
Speaker #6: The portfolio's 91.1% committed occupancy compared to 86.6% in-place occupancy represents 450 basis points of embedded occupancy growth already under contract. This committed space provides approximately 15 million dollars of base rent, a strong source of future NOI growth, and demonstrates the momentum of our leasing program.
Speaker #6: Another key occupancy stat for us is CRU occupancy, which refers to the space under 15,000 square feet. CRU in-place occupancy improved 290 basis points to 92.3% from 89.4% a year ago.
Speaker #6: Same property CRU occupancy is even higher at 93.1%, reflecting the lower CRU occupancy in newly acquired centers than our portfolio average, which provides significant income growth in these high-performing centers.
Speaker #6: Occupancy is a key driver of recovery ratio improvement, and CRU occupancy has the greatest impact on this metric. Many of the properties acquired since 2022 had an elevated CRU vacancy, and our leasing efforts reduced this vacancy at malls such as Conestoga, Devonshire, and Oshawa Center have resulted in higher NOI over the past few years.
Speaker #6: With continued strength in new CRU leasing coupled with accelerating leasing progress with HBC replacement tenants, occupancy and recovery ratios will continue to improve at our properties, including newly acquired top-tier centers such as Oshawa and Gallery de la Capital, where recovery ratios remain well below our target levels.
Speaker #6: Sales continued to be strong, with all-store sales volume at $3.5 billion and sales per square foot at $825 for the 12-month period ending May 2026.
Speaker #6: Notable increases were realized at Orchard Park, where sales volume is up 10% to $220 million, and at the Halifax Shopping Centre, where sales volume is up 8% to $300 million.
Speaker #6: As well as Southgate and St. Bruno, which are growing at high single digits. Conestoga Mall, which we called out last quarter, is now producing over 200 million dollars in sales volume, as a result of the significant leasing activity at the property.
Speaker #6: In Q2, we approved a $50 million redevelopment of the food hall at Promenade St. Bruno. At present, the food hall area encompasses approximately 30,000 square feet, and generates substantially no income.
Speaker #6: The project is expected to generate approximately 10% return, and will be completed within 24 months. In closing, strong leasing momentum, accelerating HBC renting, and a strengthening tenant roster positions us for meaningful NOI growth in the years ahead.
Speaker #6: The underlying fundamentals of the portfolio remain exceptionally strong, reinforcing our confidence in long-term value creation for unit holders. With that, I'll turn the call over to Julian to discuss our land optimization strategy dispositions and acquisition outlook.
Speaker #1: Thank you, Pat. And hello, everyone. Alongside this tremendous operating momentum, we are actively executing on our land optimization strategy, which is focused on unlocking value from excess and underutilized land across the portfolio that generates little to no NOI today.
Speaker #1: We have identified a potential pipeline of $275 million to $375 million of excess land, which we intend to monetize over time. This will unlock embedded value and generate an additional source of zero-cost capital to fund future growth within our core portfolio.
Speaker #1: By monetizing these land parcels and redeploying the proceeds into our higher-yielding enclosed shopping center business, we can create meaningful value for unitholders while remaining focused on our core strategy.
Speaker #1: Several sites are already under contract or actively being marketed. Importantly, these opportunities have been evaluated to ensure they can be executed without disrupting mall operations.
Speaker #1: As a reminder, we have no intention of owning, managing, or developing residential properties ourselves. In Q2, we also completed some smaller but strategic shopping center transactions totaling 100 million dollars of dispositions and 68 million dollars of acquisitions, improving the portfolio quality and metrics, as well as simplifying our balance sheet with fewer co-owned properties and less secured debt.
Speaker #1: The dollar amount may appear small, but the impact to our broader portfolio metrics is meaningful. Occupancy at the disposed properties was higher than that of the remaining portfolio, however, the tenant mix was weighted toward short-term and specialty leases, reducing the overall quality and stability of cash flow.
Speaker #1: These transactions contributed to the sales productivity increasing to 825 dollars per square foot, long-term in-place occupancy growth to 83.5%, and weighted average net rent per square foot growth to 32 dollars and 84 cents, resulting in a significant increase in cash flow quality and durability.
Speaker #1: Beyond excess land, we've also identified approximately $200 million of non-core retail pads and other assets, beyond what is currently reflected as assets held for sale, that may be monetized over time.
Speaker #1: Together, these initiatives represent a significant source of low-cost capital to fund future growth and enhance portfolio returns. Turning to acquisitions, the annual cadence of pension fund activity in Canada has driven a meaningful uptick in discussions around acquisitions over the past month.
Speaker #1: We remain optimistic that we could acquire one or two or even three malls this year, though nothing is in advanced stage or has any certainty today.
Speaker #1: As a reminder, our target acquisitions are typically in the $300 million to even more than $600 million range for each mall. With that, I'll turn the call over to Regs.
Speaker #4: Thank you, Julian. And good morning, everyone. Primaris supported FFO per unit of 45.1 cents per diluted unit up 1.3% for the quarter over last year.
Speaker #4: This year-over-year increase was achieved despite the impact of approximately 1.9 million in terminated transaction costs, 0.4 million of lower prior tax recoveries recorded in 2026 over 2025, and 1 million of lost rent from the now-disclaimed HBC leases.
Speaker #4: Excluding the 1.9 million in terminated transaction costs and the 0.4 million impact of prior tax recoveries FFO per unit was up 5.4%. This growth, even after absorbing the loss of 1 million of HBC revenue speaks directly to the strength of our underlying core portfolio and operating business.
Speaker #4: We achieved these impressive per unit results despite non-core asset sales over the last 12 months and the impact of the disclaimed HBC leases. If you're trying to reconcile same property NOI growth to FFO growth, it is important to note that over one-third of our 2026 cash NOI guidance is attributable to the 2025 acquisitions, which is not included in same property NOI, and these have also benefited from strong NOI growth due to robust leasing activity.
Speaker #4: As a result of this dynamic, we have added new disclosure on quarterly same property cash flow growth in Section 9.1 of the MD&A. Consistent with prior years, NOI growth from recent acquisitions has boosted overall NOI growth.
Speaker #4: We also reaffirming our 2026 guidance, most recently updated and disclosed in our press release dated June 29, 2026. Turning to the balance sheet, we remain very comfortable with our financial position.
Speaker #4: At quarter-end, average net debt to adjusted EBITDA was 6 times, liquidity was $655 million, and we continued to have no debt maturities until 2027.
Speaker #4: In March 2027, we have $250 million in unsecured debentures maturing at 4.82%. Today, we could issue 5-year unsecured debentures at approximately 4.25%. We remain disciplined in our approach, well capitalized, and well positioned to continue executing on both internal growth initiatives and selective external opportunities.
Speaker #4: With that, I'll turn the call back to Alex.
Speaker #1: Thank you, Regs. As you can see, our team continues to deliver remarkably strong leasing activity and very solid operating results across the portfolio. Our progress is increasingly being recognized in the capital markets with our weighting in the TSX capped read index rising to over 5% and our trading liquidity now nearly 5 times what it was 2 years ago, as measured by the dollar value of units traded per day.
Speaker #1: We saw strong engagement from the investment community at our recent Oshawa Center property tour. The event provided investors with a firsthand look at one of our dominant centers that we have added through our acquisition program and showcased the significant leasing progress, redevelopment opportunities, and long-term growth potential embedded within the asset.
Speaker #1: Building on that momentum, we look forward to welcoming investors to our upcoming investor day at Promenade Saint Bruno this fall, where we'll be able to provide a deeper look at our strategy, portfolio strengths, value creation opportunities, and the substantial growth runway we see ahead.
Speaker #1: We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.
Speaker #5: Thank you. If you would like to ask a question during this time, simply press star, followed by the number 1, on your telephone keypad.
Speaker #5: If you would like to withdraw your question, press star 1 again. You may ask one question and a follow-up, at which point you may return to the queue.
Speaker #5: We'll pause for just a moment to compile the Q&A roster. Your first question from the line of Lorne Kalmar, with Desjardins. Your line is open.
Speaker #1: Thanks. Good morning, everyone. Julian, you mentioned a bit of an uptick in conversations around acquisition with the pension funds. Just wondering if you could elaborate on exactly what's been driving that.
Speaker #3: I think as we're approaching kind of year-end and folks are looking at their targets or goals for the year, that can tend to be a bit of a driver.
Speaker #3: It's hard to kind of understand everyone's specific or unique motivations in the background, but we are relatively active with them. Nothing that's advanced, but with the cost of capital that we have now and the access to capital that we have, that could potentially be driving it.
Speaker #3: But again, nothing specific to report right now, but we're hopeful that we'll be able to drive at least one this year.
Speaker #1: Okay. And then, I guess, you kind of alluded to it a little bit there, but just with the stock now trading above IFRS NAV, it obviously changes or can change the calculus on the transaction structures.
Speaker #1: Has that been reflected at all, or have conversations changed at all as a result of that?
Speaker #3: I'd say it gives us more tools in the toolbox to use to affect the transaction, and we're not shy about bringing that up. We remain open to using structured acquisition structures, but ultimately, yeah, it gives us more tools in the toolbox, and we're not shy to mention that.
Speaker #1: Okay. Thank you very much.
Speaker #5: Your next question from the line of Mark Rothschild, with Canaccord. Your line is open.
Speaker #3: Thanks, Shannon. Good morning. Alex, you made a comment about the market seemed the capital markets recognizing increasingly the value of primaris units and obviously the unit price has done quite well of late.
Speaker #3: To what extent does this correlate with any moves at all in cap rates in the market or the prices of deals that you're seeing?
Speaker #3: Or is it simply that the unit price was just severely undervalued for some time?
Speaker #4: Thanks, Mark. It's very difficult to ascribe the reasons behind a stock price movement, as you know. I would say a couple of observations, though.
Speaker #4: What we have seen in the direct property market is a significant uptick in the number of parties interested in acquiring closed shopping centers. Most of those parties remain focused on the mid-tier and lower-type properties.
Speaker #4: And generally, ticket size of under 200 million dollars or maybe 150 million dollars so I think that's probably a part of it. But also, the liquidity in our stock was really probably the biggest thing.
Speaker #4: When we talked to some of the trading desks about what is happening with our stock, there's a couple of dynamics that they consistently cite.
Speaker #4: One is very large institutions that were constrained by a lower daily trading volume that we had until earlier this year or late last year.
Speaker #4: And then the second thing is I think there were a number of investors who didn't pay a lot of attention to primaris when it was a smaller index weighting.
Speaker #4: And you can probably skate by without having any exposure. And then it all sort of came together at the same time as the liquidity increased or waiting in the index increased.
Speaker #4: You had First Capital announce their privatization, which I think also created a little bit of a tailwind for retail property broadly. So it was a bunch of different things.
Speaker #4: At least that's how we see it. But it could be something entirely different that we're not aware of.
Speaker #3: Okay. Great. Thanks. And maybe just one more it seems like selling off some residual density of property selling land is something that you're going to be looking to do.
Speaker #3: To what extent is this something we should expect in the near term? Because, obviously, development land is not trading as much now as it might have been a few years ago.
Speaker #4: Yeah, Mark. On the land side, what I would say is you're right. The market has changed in particularly as it relates to residential being PBR and condo.
Speaker #4: It's come down in many markets. But I'll say we're not just focused on that. We're looking at all different asset classes. So seniors' housing has become quite interesting.
Speaker #4: Hospitality as well. We're even having discussions on student housing and self-storage depending on the site. So I wouldn't take the depressed residential in some markets to be a sign that we're not going to be active on it.
Speaker #4: We're looking at highest and best use, for each market separately. And we're active. I'll even say, on the residential side, there are some markets that are still holding up strong and that can still benefit from favorable government incentives.
Speaker #4: As well as favorable financing. So again, we're not in a rush to do something if a particular market or use is challenged. But we are being creative.
Speaker #4: We're talking to parties across kind of the entire landscape. So stay tuned.
Speaker #3: Okay. Great. Thanks so much.
Speaker #5: Your next question from the line of Pammy Beer, with RBC Capital Markets. Your line is open.
Speaker #3: Thanks. Good morning. Just given the progress on the leasing, and I guess your comments on organic growth, how do you think same-property NOI growth shapes up in 2027 versus, say, that standard 3 to 4 percent three-year target that you've guided to?
Speaker #4: Yeah, I mean, it's sort of a little bit of a TBD. What's really going to dictate it is just the cadence and the timing of when these leases all roll in.
Speaker #4: And we are approaching our budgeting process for 2027 and beyond, which we'll be doing over the next 30 days, 45 days. But I think qualitatively, you could say we expect our same property to exceed that 3 to 4 percent range probably for the next three years, consistently.
Speaker #4: And how much it's going to exceed that by, or where it sort of lands—a lot of it could land in one year, or it could be equally spread out.
Speaker #4: It really just depends on when all of the leases take effect. But yeah, I would think it would be 4% plus consistently for a fairly long period of time.
Speaker #3: Got it, that's helpful. And then, just maybe as a follow-up, on the terminated transaction costs that hit G&A, I'm just curious if you can maybe share any color as to maybe why that deal did not go forward, or if it was multiple deals or one.
Speaker #3: I'm just any insight would be perhaps helpful.
Speaker #4: Yeah, sure. So when we were looking at a transaction that was a portfolio disposition and part of the reason the fees were more significant than we would typically see on a property transaction was that it had structure in the same way that when we acquire properties, we give the vendors preferred equity and equity.
Speaker #4: And so think about a very similar transaction, only primaris is the vendor. And we were doing that because we had concerns that we would not have enough capital to fund all of the acquisition opportunities that we encounter.
Speaker #4: And ultimately, we ended up terminating the transaction when two things happened. One was that we had success finding buyers. We had unsolicited interest arrive for McAllister for Marlborough.
Speaker #4: And we've now concluded two of those and closed mall transactions. So it became easier for us to sell properties because as I mentioned earlier, there's a quite a number more people interested in buying the mid-tier mall properties.
Speaker #4: And the second thing is that our stock price moved from the $14s last year up to $19 at the time that we terminated the transaction.
Speaker #4: And as Julian was saying, with our stock price higher, when we engage with prospective vendors, it's an easier conversation. You can imagine that a few years ago, when we were trying to get people to take our stock at $22 when it was trading at $13, it was a bigger discussion point than it is when your stock's within a dollar or two or three of the IFRS fair value.
Speaker #3: Thanks very much.
Speaker #4: Thanks, Bobby.
Speaker #5: Your next question, from the line of Sam Damiani with TD Cowen. Your line is open.
Speaker #3: Thanks. Good morning, everyone. Just on the recovery ratio—it’s not in your guidance officially—but could you give some thoughts as to where that would land in 2026 for the full year, and into 2027?
Speaker #4: Hi, Sam. Yeah, I think HBC is somewhat muddied the water in terms of where we recovery ratio. It is a difficult measure to talk about quarter to quarter just because it's driven by the timing of the spending throughout the year.
Speaker #4: And it's something, really, that I tend to focus on personally at the end of the year, when all our spending is complete for the cycle.
Speaker #4: And we've recovered all the money that we're going to the tenants. It is definitely going to trend upwards simply because of all the CRU leasing we're doing, the number one driver in recovery ratio improvement is occupancy.
Speaker #4: And the CRU occupancy is the primary driver of that. So as a lot of these committed leases kick in, our recovery ratio will improve.
Speaker #4: Some would held back by our tax recovery ratio on the HBC boxes. But I suggest it'll be slightly stronger towards the end of this year and materially stronger at the end of next year.
Speaker #3: Okay. Great. Thanks. Thanks, Bob. That's super helpful. And maybe just a couple smaller sort of modeling questions. I noticed the percentage rent jumped quite a bit this quarter.
Speaker #3: Was there anything unusual in there? Any reason not to sort of look at that as a run rate at least for a second quarter?
Speaker #3: And sort of similar on the specialty leasing revenue, is that a line item that might taper off as some of these long-term leases take effect?
Speaker #4: And so the percentage rent is driven by the timing of the tenants lease year-end. So tenants, it's not always January to December. Sometimes have their lease years ending March, some June, some October.
Speaker #4: And that kind of drives the timing of when their percentage rent gets paid. So it becomes difficult to model in terms of quarter to quarter simply because it's driven by the cycle of the tenants when they're expiring.
Speaker #4: But the percentage rent jump is completely tied to the sales increases. I mean, it's the benefit of having tenants report sales. Is that we're participating in the inflation or the increased sales impact that's driving their sales higher.
Speaker #4: When we go to renew these leases, we'll try to recapture some or all of the percentage rent in a higher face rate on the lease.
Speaker #4: So it is somewhat hard for you guys to model that. But it is directly correlated to sales rising. In terms of specialty leasing, yes, as we lease up space, you will see that number theoretically drop, although we have other initiatives that are driving it higher such as branding and other promotional activities.
Speaker #4: There is a spike right now coming in Q2, Q3 that's driven by large format tenants taking some of the debate boxes that haven't started construction yet, specifically spirit of Halloween.
Speaker #4: Which those opportunities won't be available to them next year.
Speaker #3: Got it. Thank you. That's really helpful. I'll turn it back.
Speaker #5: Your next question from the line of Matt Cornack, with National Bank of Canada Capital Markets. Your line is open.
Speaker #4: Good morning, guys. Just wanted to go into the cadence a bit more of the increase in occupancy. How should we think? Have the easy bay deals already been done and that's in your committed occupancy?
Speaker #4: And then now you're going to kind of expand existing tenants into spaces and that will take more time structurally? I mean, you mentioned 13 quarters of really solid growth.
Speaker #4: We're just trying to understand is it front-end weighted or is it actually kind of tempered by the fact that there are structural limitations? How much you can do in a particular period?
Speaker #4: Matt, yeah, no, there's still a lot of bay leases that they replacement tenants that have not been signed off completely yet. So there's going to be a jump, a continued jump in the committed for the next few quarters to start with.
Speaker #4: And then a lot of the store openings take place over the next, say, 24 months. It all depends on the complexity of the redevelopment and when we start.
Speaker #4: So we've started in Gallery to Capitel, and we're going to do some tenants opening early in 2027. Lime Ridge, the bay, the Walmart, which is not in a bay box.
Speaker #4: It was in a Sears box. Sounds like they're going to open much earlier than we all anticipated. They're going to open in November, it sounds like, versus the original thought of January.
Speaker #4: But it really is just being driven by the timing of the openings, and we expect that timing to be stretched out over the next 24 to 30 months, actually.
Speaker #3: And that's the HBC side of things. If you go back to our Q1 results, you saw the gap between in-place and committed jump out to 350 basis points at the time.
Speaker #3: And substantially all of that was CRU leasing. And with CRU leasing, generally there's less fitting-out time, so sequentially, you're going to see a lot more of the CRU occupancy moving up quarter to quarter for the next few quarters.
Speaker #3: And then the actual rent commencement from a lot of the Bay stuff is more 2027, 2028. It all layers together though. It'll be a pretty consistent ramp for a while, but the different moving parts kind of contribute at different times.
Speaker #4: Makes sense. Maybe switching gears to the acquisition side of things and just you mentioned you've traded quite well. You're at a premium now to your IFRS value.
Speaker #4: How should we think about the structuring of deals going forward? I mean, in the past, it was almost by necessity that you issued some shares as you were doing these deals.
Speaker #4: But is there the potential that now you do an entirely cash deal and issue equity and go about it that way? Or do those structured deals still make sense in the context of the size of these assets?
Speaker #3: Matt, it's kind of an ongoing and dynamic discussion, but the kind of touching on what I was saying earlier on the call, it just gives us more tools in the toolbox and we are open or remain open to using the structure.
Speaker #3: We're also open to using cash. We have our kind of stated leverage goals that we want to remain within, but yeah, again, open to using kind of the former structure that you've seen us use actively and open to also doing cash.
Speaker #3: So just makes us a lot more nimble and powerful in our ability to acquire. And even though our stock price is trading above IFRS NAV, the way that we have structured the deals all the way along was they need to make primarily better company.
Speaker #3: It needs to be a creative to the unit holders and so the math is a little bit different. But the underlying principle is the same and I keep saying this, but we don't attract attach a huge amount of significance to the IFRS NAV as a as a number.
Speaker #3: It is a backward-looking reflection of the transaction market that, right now, has been dominated by the lower-tier malls and smaller transactions. So it is very difficult to get a really good read on what the market value of a lot of assets are when there isn't a lot of transaction activity.
Speaker #3: So we tend to not place as much significance on IFRS as a goalpost than some might think.
Speaker #4: Makes sense. Ours is above yours at this point now, so we'll see where it trends. Good. Take care, guys.
Speaker #3: Thanks, Matt.
Speaker #5: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question from the line of Mario Sharich, with Scotiabank.
Speaker #5: Your line is open.
Speaker #6: Hi, good morning. I just have a small two-parter for Pat, and then maybe a longer-dated question for Alex. Pat, with respect to tenant demand, and specifically thinking about foreign entrants, what trends are you seeing, if any, that may signify a return of foreign entrant demand into the mall space in Canada over the next 12 months?
Speaker #3: Hi, Mario. It's been pretty
Speaker #4: it's been a pretty good uptick in foreign demand, especially from Southeast Asia over the last couple of years. We've seen quite a few retailers led by Uniglow opening a lot of stores in Canada.
Speaker #4: Uniglow has been on a pretty good expansion kick, and we've managed to do a few, and we've got a lot more that we need to do.
Speaker #4: And I think it's going to continue there's some American tenants continuing to look up here and whether that's new entrants or a tenant's generally just footprint.
Speaker #4: I think they're all realizing that space is becoming difficult to find, especially quality space and quality malls. And so, there are a lot of tenants really scrambling to find that space.
Speaker #4: And what we are finding in a number of our malls is that we're starting to look out, say, beyond 12 months into the 24-month range in order to figure out how to accommodate these tenants.
Speaker #4: So demand side is fairly strong and it is actually being driven by a number of foreign entrants.
Speaker #6: Okay. And then, just associated in terms of the demand that we've seen—like retail tenant demand, not just necessarily mall demand, but just retail tenant demand—your peers have in the past communicated kind of this catch-up from a COVID lull in terms of explaining the demand in the face of slowing population growth in the past 12 months, anyways.
Speaker #6: Do you agree with that? And then secondly, where do you think we are in that cycle in terms of retailers just simply catching up in terms of square footage demand post-COVID?
Speaker #4: I think there's a definite desire by tenants to find space to capture the increasing consumer demand—sorry, not tenant, consumer demand. There has been a significant increase in sales in the last number of years, and the inflation impact really wore off, say, two years ago.
Speaker #4: That's what the tenants have told me. And so they're really realizing a big sales jump. And a lot of them are looking to expand their footprint.
Speaker #4: And as you know, there's been no new retail built in a meaningful way. So they're really clamoring for more space in a fine amount of retail space within Canada.
Speaker #4: We are starting to see the bay boxes represent an opportunity for a number of tenants to relocate from existing centers into the bay boxes.
Speaker #4: To get larger, but once that opportunity is gone, there'll be a real lack of additional space in the market to accommodate that. And there won't be any new construction unless rents rise materially.
Speaker #4: It's questionable whether large format tenants are going to be able to afford the rents that are required to build additional retail. So I really do think it's not so much a—well, I guess a catch-up is maybe the right way to describe it—but really they're chasing the fact that their sales are rising, and a lot of them just need bigger footprints.
Speaker #6: Okay, okay. And then just maybe really quickly for Alex, I guess more of a longer-dated question. You’ve talked about Same Store NOI growth should be higher than the 3 to 4 percent range over the next three years, and that’s clear.
Speaker #6: In terms of getting up to a 96% stabilized occupancy over that timeframe, how do you once the portfolio is at stabilization, say, two to three years from now, given your balance sheet leverage, and kind of where you see that portfolio three years out, what do you think the structural earnings power growth of that portfolio may look like?
Speaker #3: Yeah, I mean, we've actually spent a fair bit of time thinking about this over the last four or five years. And what we've concluded is we believe that it's going to be in the 3 to 4 percent range fairly consistently.
Speaker #3: And that is better than inflation. Which is really quite good. But a lot of it is a function of the moat around our properties.
Speaker #3: These properties are very expensive to build, and it's very difficult to create new enclosed shopping center properties within an urban boundary. Finding 40, 50, or 60 acres of land is very difficult.
Speaker #3: And then even if you do, to build a new mall today would be at a minimum $1,000 a square foot. And that would require rents of about $90 a square foot, which is about three times what we are averaging in our portfolio across the large box and the small box of blended basis.
Speaker #3: So, we can see a long runway of rental rate growth without any threat of new supply. So, it's probably a 10-year window where we think we can consistently do 3 or 4 percent after we go through this abnormally high growth rate period.
Speaker #6: Got it. And just for clarification, that 3% to 4% you're referring to—that would be kind of FFO or same-store in a line and presumably would exclude any potential benefit from the sale of residential land?
Speaker #4: Yeah, no, that's just net operating income—same property NOI. That's the 3 to 4 percent. And I think, in our three-year guidance, we had also said 5 to 6 percent on the FFO line.
Speaker #4: And I think that if you can do 3 to 4 percent—same property—you should be able to do 5 to 6 percent FFO growth.
Speaker #4: We have relatively low leverage compared to some of our peers as well. And that so that math is all factored in.
Speaker #6: Okay. Thanks for the color.
Speaker #4: Thanks, Mary.
Speaker #1: There are no further questions at this time. Claire, I turn the call back over to you.
Speaker #2: Thank you, Warren. With no further questions today, we'll close the call. On behalf of the Primaris team, we thank you all for participating and have a great long weekend.
Speaker #1: Thank you. You may now disconnect.
