Operator: Good morning, and welcome to Primaris REIT third quarter 2026 results. At this time, all lines have been placed on mute. After the prepared remarks, there will be a question and answer session. 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. To withdraw your question, press star 1 again. I will now turn the call over to Claire Mahaney, Vice President, Investor Relations and Sustainability. Please go ahead.
Claire Mahaney: 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. Additional information about these assumptions, risks, and uncertainties are contained in Primaris REIT's filings with securities regulators. These filings are also available on our website at www.primarisreit.com. I will now turn the call over to Alex Avery, Primaris' Chief Executive Officer.
Alex Avery: Good morning. Thanks for joining Primaris REIT's Q3 2026 conference call. Joining me today are Pat Sullivan, Julian Schonfeldt, Rags Davloor, Leslie Buist, Mordy Bobrowsky, Graham Procter, and Claire Mahaney. Q3 2026 was an exceptionally busy and productive quarter for Primaris. Our team remained focused on executing our strategic priorities, delivering strong leasing momentum, acquisitions, and dispositions. There is more of all of those things ahead, and we are all working hard to deliver on the opportunities in front of us. We are also having a lot of fun in the process. In September, we hosted a Halifax Shopping Centre property tour showcasing a great example of the kind of properties Primaris owns. Investors saw firsthand the dominance of the shopping centre within the region, the strength of the Halifax market, and the effectiveness of Primaris' operating platform.
Alex Avery: In September, we also successfully raised CAD 230 million through a bought deal equity offering, demonstrating strong investor confidence in Primaris' strategy, portfolio quality, and growth outlook. The offering provided the funding to complete the acquisition of Upper Canada Mall, which we closed on 15 October, while also strengthening our balance sheet. We are thrilled to welcome the Upper Canada Mall team to Primaris. Earlier this month at our Investor Day at Promenades St-Bruno in Montreal, we introduced new three-year targets and outlined a clear roadmap for delivering sustainable growth across our business. We highlighted three phases of value creation over the next few years, including lease-up opportunities across the portfolio, tenancy optimization to improve merchandising mix and drive rental rate growth, and operational efficiencies that support continued margin expansion and cash flow growth.
Alex Avery: Our intent was to demonstrate how our operating platform and focused strategy execution position us to deliver on our targets and to continue to create meaningful value. We hope attendees left the event with a clear understanding of the significant embedded growth opportunities within our portfolio and confidence in our ability to realize that potential. With our financial and operating results released last night, we announced a 5.7% distribution increase. This increase reflects the strong growth in our cash flows and our confidence in the long-term earnings growth embedded within the business. This is part of our goal of providing annual distribution increases, supported by our differentiated financial model that supports sustained growth in earnings and cash flow.
Alex Avery: Notably, at the midpoint of our 2027 FFO guidance range, the new and higher distribution level equates to a 47.5% FFO payout ratio, being the midpoint of our 45% to 50% FFO payout ratio target. As our fifth consecutive year of distribution increases, we aspire to be included in the Canadian Dividend Aristocrats Index, adding another pool of capital and investors to the audience for our equity. With substantial NOI growth potential, a strong and high-quality portfolio, and multiple sources of internally generated capital, we believe Primaris is well-positioned to deliver significant and sustainable growth in FFO per unit, NAV per unit, and distributions per unit while further strengthening our position as Canada's leading owner of dominant enclosed shopping centers. With that, I'll turn the call over to Pat to walk you through our operational results for the quarter. Pat?
Pat Sullivan: Thank you, Alex, and good morning, everyone. Subsequent to quarter end, we completed the acquisition of Upper Canada Mall, a premier market-leading shopping center in the GTA that further strengthens the quality and growth profile of our portfolio. Upper Canada Mall is a 990,000 square foot shopping center situated on 76 acres in the Greater Toronto Area with strong sales productivity of CAD 888 per square foot and annual CRU sales volume of approximately CAD 271 million, more than CAD 100 million above our portfolio average sales volume per mall. At 70% in-place occupancy, the property offers meaningful upside through the lease-up of existing vacant space and the future monetization of excess land, providing multiple avenues for value creation and growth. Upper Canada features an attractive and highly productive tenant roster, including Apple, Aritzia, Browns, Lululemon, Zara, Uniqlo, Winners, and other leading national and international retailers.
Pat Sullivan: We are very pleased to welcome the Upper Canada Mall team to Primaris, adding another high caliber group of professionals to our organization. Their local expertise and experience will be critical as we integrate the property and execute on significant opportunities ahead. Tenant demand remains robust with both quality and volume of executed leasing deals continuing to improve. CRU leasing performance is outstanding, driven by record leasing volumes, strong renewal spreads, and sustained tenant demand. Leasing activity across our former HBC locations is also strong, with retailer demand well ahead of our initial expectations. Benefiting from a constrained retail supply environment and the high quality of the former HBC locations, we have leased or are in advanced negotiations on 84% of the former HBC space that we intend to reposition, including 69% that are under long-term lease agreements.
Pat Sullivan: Rents are coming in higher than originally anticipated, with leases expected to contribute approximately CAD 19.4 million of annualized net rent, or CAD 23 million of cash NOI from a diversified roster of high credit quality tenants. We believe the full impact NOI could be higher, as this analysis does not account for the benefit to adjoining retail premise, some of which are currently vacant, that will benefit from being next to new tenants generating higher traffic. The rent generated from leases executed to date are at levels nearly four times higher than previously generated by HBC from the same space. Anticipated cash rent commencement from the redeveloped HBC locations will begin in some properties as soon as early 2027, with overall yields expected to be approximately 10%. On to our operating results.
Pat Sullivan: Same property cash NOI growth this quarter was 3.1% as compared to Q3 2025, driven by rising base rents, strong leasing volume, rental escalations, and higher percentage rent resulting from increasing sales. We anticipate same property NOI growth will accelerate in 2027 and 2028 and expect it to then remain elevated for the following six quarters. Leasing activity was extremely strong during the quarter, with 104 leases renewed across 356,000 square feet. CRU leasing spreads were very strong at 14.4% and 12.7% for the overall portfolio. 37 new deals encompassing 151,000 square feet were completed during the quarter, including 33 new CRU deals for 78,000 square feet. The new CRU leasing continues to be very strong, with more than 133 new deals being completed year to date, encompassing 260,000 square feet, with both deal count and square footage leased being the highest figures reported in the past 10 years.
Pat Sullivan: We expect the cadence of new CRU leasing to continue, and we will post a significant increase in new anchor and major lease transactions over the next few quarters as we finalize leases to backfill the vacant HBC boxes. Curating a merchandise mix that drives traffic to the shopping center is a focus of our team. As we continue to add larger and more productive shopping centers to our portfolio, we are expanding our relationships with key retailers in our portfolio, both new and existing. During the third quarter, we completed new transactions with four exterior mall facing restaurants, including Cactus Club at Oshawa Centre. Year to date, we have finalized transactions with Browns Shoes at Orchard Park, expansions with SoftMoc at Kildonan Place and Oshawa Centre, new Lululemon stores at Stone Road Mall and Peter Pond, as well as introducing Purdys into our malls in the Maritime Provinces.
Pat Sullivan: The portfolio of 90.9% committed occupancy compared to 87.7% in place occupancy represents 320 basis points of embedded occupancy growth already under contract. This committed space provides approximately CAD 6.5 million of base rent, a strong source of future NOI growth, and demonstrates the momentum of our leasing program. Another key occupancy stat for us is CRU occupancy, which refers to space under 15,000 square feet. CRU in place occupancy improved 70 basis points to 92.1% from 91.4% a year ago. Same property CRU occupancy is higher at 93.1%, reflecting the lower CRU occupancy in the newly acquired centers than our portfolio average, which provides for significant income growth in these high performing centers. Occupancy is a key driver of recovery ratio improvement, and CRU occupancy has the greatest impact on this metric.
Pat Sullivan: Many of the properties acquired since 2022 had elevated CRU vacancy and our leasing efforts to reduce this vacancy at malls such as Conestoga, Devonshire, and Oshawa Centre have resulted in higher NOI over the past few years. 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 Galeries de la Capitale, where recovery ratios remain well below our target levels. Sales continued to be strong with all store sales volume at CAD 3.5 billion and sales per square foot at CAD 826 for the 12-month period ending August 2026.
Pat Sullivan: Notable increases were realized at the Halifax Shopping Centre, where sales volume is up 9% to CAD 311 million and up 7% and 8% at Orchard Park and Conestoga at CAD 219 million and over CAD 200 million respectively. In Q2, we approved a CAD 50 million redevelopment of the food hall at Promenades St-Bruno. At present, the food hall area and adjoining area encompasses approximately 30,000 square feet and generates substantially no income. Construction has already commenced with the project expected to generate an approximate 10% return and completed within 24 months.
Pat Sullivan: In closing, strong leasing momentum, accelerating HBC re-tenanting, and a strengthening tenant roster positions us for meaningful NOI growth in the years ahead. The underlying fundamentals of the portfolio remain exceptionally strong, reinforcing our confidence in long-term value creation for unitholders. With that, I'll turn the call over to Julian to discuss acquisitions, dispositions, and our land optimization strategy. Julian?
Julian Schonfeldt: Thank you, Pat, and hello, everyone. Turning first to acquisitions, as we've mentioned earlier, we are thrilled to add Upper Canada Mall to our portfolio. Interest in enclosed shopping centers is growing, and Upper Canada was the subject of a broadly marketed process. Our reputation as a well-capitalized, reliable buyer with a proven operating platform continues to position Primaris as the preferred counterparty for vendors. There are several acquisition discussions currently underway, which we continue to diligently pursue. While it remains possible that we could acquire one or two additional malls this year, given the limited time remaining in 2026, further acquisitions are more likely to occur beyond 2026. As a reminder, our target acquisitions are generally worth several hundred million dollars each.
Julian Schonfeldt: Turning to dispositions, this month, we announced the sale of our 50% interests in both Cataraqui Centre and Grant Park Shopping Centre for approximately CAD 42 million and CAD 44 million respectively. Cataraqui Centre is a smaller, partially owned property that is no longer aligned with our long-term portfolio strategy. Having invested capital in repositioning the property following the departures of Sears and Target, we made the decision to sell rather than deploy additional capital towards the next phase of redevelopment in a property that we've deemed non-core. Grant Park Shopping Centre is a fully leased, partially owned shopping center in Winnipeg with a relatively low amount of CRU sales and low sales productivity. Primaris deemed Grant Park to be non-core and launched a brokered sales process over the summer.
Julian Schonfeldt: The process generated very strong interest from a broad group of bidders, resulting in attractive pricing and providing further evidence of growing investor demand for well-managed shopping centers. As a part of the transaction, we were also able to forward sell two conceptual outparcels subject to Primaris entering into leases, construction being completed, and rent payments commencing. On a pro forma basis, including both dispositions and the acquisition of Upper Canada Mall, same-store sales would increase from CAD 826 per square foot as reported in Q3 to CAD 839 per square foot. Finally, we continue to actively execute on our land optimization strategy, focused on unlocking value from excess underutilized land across the portfolio. We currently have four sites under contract or LOI in Kelowna, Calgary, Winnipeg, and Chicoutimi, representing approximately 15 acres and CAD 26 million of gross proceeds, or CAD 19 million at Primaris' share.
Julian Schonfeldt: In addition to enhancing traffic at our malls and demonstrating the value of our underlying land, these transactions represent a zero-cost source of free capital that can be reinvested into our approximately 8% implied capitalization rate business. With that, I will turn the call over to Rags.
Rags Davloor: Thank you, Julian, and good morning, everyone. At our recent Investor Day, we announced new three-year performance targets and outlined the incentives that will support their achievement. It is important to note that the growth metrics represent average annual targets over the three-year period. Same-property cash NOI for the first nine months of 2026 has been essentially flat. However, growth has begun to build as we lap the impact of the former HBC and begin to see the cash inflows from redeveloping this space with Q3 same-property NOI over 3%. Capital spending is expected to be front-end loaded over the next three years, with the associated NOI growth expected to build over time, accelerating through 2027, 2028, and beyond as the space is turned over to tenants and rental income commences. Last night, we also provided 2027 guidance.
Rags Davloor: We expect same-property cash NOI growth to be within the range of 3% to 5%, redevelop and CapEx within the range of CAD 160 million to CAD 180 million, and FFO per unit to be within the range of CAD 1.93 to CAD 1.99. For the quarter, Primaris supported FFO per unit of CAD 0.468 per diluted unit, up 5.6% for the quarter over last year, driven by growth in NOI. These impressive per unit results were driven by growing rents and leasing activity, despite the impact of the disclaimed HBC leases and the temporary impact of the 22 September equity issue. In the third quarter of 2025, there was CAD 1 million of revenue contribution from the disclaimed HBC leases. During the quarter, we adjusted the fair value of the Dufferin land in Toronto to CAD 66 million. Toronto land remains highly illiquid, making valuation an imprecise exercise.
Rags Davloor: Although the Toronto land market continues to face near-term headwinds, other markets across Canada remain relatively active, supported by healthier transaction levels and liquidity.
Rags Davloor: Turning to the debt metric, we remain very comfortable with our financial position. At quarter end, average net debt to adjusted EBITDA was 5.7 times. Liquidity was CAD 873 million. We continue to have no debt maturities until 2027. We remain disciplined in our approach, well capitalized, and are well positioned to continue executing on both internal growth initiatives and selective external opportunities. With that, I will turn it back to Alex. Alex?
Alex Avery: Thank you, Rags. As you can see, our team continues to deliver remarkably strong leasing activity and very solid operating results across the portfolio. With Q3 same property NOI growth above 3%, we have entered a period of strong internal growth that we expect to accelerate and persist for more than three years. Our progress is increasingly being recognized in the capital markets with our weighting in the TSX Capped REIT Index rising to over 5.5%, and our trading liquidity now nearly five times what it was two years ago, as measured by the dollar value of units traded per day. Over the past 100 days, Primaris' free float has increased by nearly CAD 450 million, with three significant block trades and the bought deal treasury offering supporting further growth in the REIT's trading liquidity.
Alex Avery: As part of our ongoing commitment to transparency and investor engagement, today we are conducting our annual board unit holder engagement, where our board engages directly with investors in the absence of management. These discussions provide valuable insights to our board on investor priorities and expectations. We view board unit holder engagement as an important component of our governance framework and appreciate the constructive dialogue and feedback the board receives from the investment community. As I stated in my opening remarks, Q3 has been exceptionally busy and exciting. We are grateful for the support, confidence, and trust our unit holders have placed in us and remain committed to executing our well-defined strategy, capitalizing on the significant opportunities ahead, and delivering long-term value to our fellow unit holders. We would now be pleased to answer any questions from the call participants. Operator, please open the line for questions.
Operator: 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. 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. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sam Damiani with TD Securities. Your line is now open. Please go ahead.
Sam Damiani: Thank you. Good morning, everyone. For the 2027 guidance, I believe the occupancy there is 88% to 90%. Is that a year-end target or average for the year? I guess if it is a year-end target, I am just wondering what could cause in-place occupancy to essentially, at the low end, be flat from where it is today, or at the high end, up just 2 percentage points over the next five quarters?
Alex Avery: Pat, do you want to take that one?
Pat Sullivan: Sure. Hi, Sam. In terms of occupancy, right now we are in a bit of a, as we have said, a transition period. A lot of our occupancy gains are going to be driven by HBC. The timing of those deals, in terms of when they open, we are substantially complete a lot of our leasing efforts for these stores, and it just really comes down to construction schedules. In some cases, that is impacted by the length it takes to get permits in place. In other cases, if we are subdividing a space, it just takes a little longer to get that space prepared. That is really the main driver of where the occupancy is going to end up in the short to medium term.
Sam Damiani: Thank you. Is that 88% to 90%, including just a small percentage of the HBC space being occupied on an in-place basis at the end of 2027, I guess?
Pat Sullivan: Yes. There will be some of the HBC that is occupied and open by the end of 2027, but a lot of it is not going to take possession and open until 2028.
Sam Damiani: Okay. Thank you. My second question is just on the acquisitions. Julian, I found your comment a little bit interesting. You said one or two acquisitions additional beyond Upper Canada Mall are still possible in 2026. Just wondering what sort of probability you would assign to one or both of those occurring this year.
Julian Schonfeldt: Yeah. Look, we are having a lot of discussions with multiple parties. We are working hard at it, but as I caveated in my remarks, just given where we are at in the year, I would say it is a lower probability that they happen this year and more likely to be a beyond 2026 story. It is still possible, and we take a lot of pride in our ability to operate quickly and execute very quickly, but more likely to be beyond 2026.
Sam Damiani: Thank you. I will turn it back.
Alex Avery: Thanks, Sam.
Operator: Your next question comes from the line of Lorne Kalmar with Desjardins. Your line is now open. Please go ahead.
Lorne Kalmar: Thanks. Good morning. Maybe just going back to the discussion around the turnover of the HBC spaces. What does 2027 FFO guidance contemplate in terms of straight line rent from the former HBC locations?
Rags Davloor: Yeah, I don't think we have it broken down. We've given the overall guidance on straight line rent, so we'd have to dig through that number and get back to you.
Alex Avery: There's an awful lot of leasing going on. Qualitatively, I would say there's a substantial amount of the free rent period for CRU leasing that's going to commence at various points in time through 2027 and into 2028. Then there's also a couple of larger spaces where we're either already receiving straight line rent from, for instance, like a Walmart at Place d'Orléans, and have further ones like that. But I would say like the cash rent, there's going to be some in 2027, and it's going to accelerate in 2028. Then during 2028, it's going to really start to convert into cash and then continue to grow in 2029 as well.
Lorne Kalmar: Okay. Then maybe-
Rags Davloor: I just don't have a detail here.
Lorne Kalmar: Okay.
Rags Davloor: Just saying we don't have the details.
Lorne Kalmar: Thanks, Rags. Then maybe just sticking to the outlook on the development spend, how much of the CAD 175 million to CAD 225 million related to HBC is included in the 2027 budget or outlook?
Rags Davloor: About half.
Lorne Kalmar: About half. Okay. All right. Thank you very much.
Rags Davloor: Then you get the CRU and other stuff.
Alex Avery: Yeah, we have got a big chunk of money that we are spending at St-Bruno that is not related to HBC. We have got some expenditure still coming through at Kildonan. So it is probably half and half.
Operator: Your next question comes from the line of Mark Rothschild with Canaccord Genuity. Your line is now open. Please go ahead.
Mark Rothschild: Thanks, and good morning. Maybe just focusing on the improved or the stronger leasing spreads. To what extent is a pace like this assumed in the guidance for 2027? I guess connected to that, do you think this level is sustainable?
Pat Sullivan: Hi, Mark. We had an exceptional quarter for leasing spreads that was clearly above what we posted in the past. I think we are going to stick to our guidance of mid to high single digits for leasing spreads. The renewal spreads are always going to be a subset of who is expiring in the quarter, and there is going to be quarters when we have tenants expiring that we are still trying to keep for occupancy, where the spreads are not going to be as big. So we have not factored spreads like this into our forecast going forward. I think what we have really built into our forecast is that we have integrated 2% to 3% annual increases into our leases in general going forward. So there is going to be an expectation that there is organic growth just through the annual spreads built into the leases.
Mark Rothschild: Are you saying that there was some abnormally strong leasing this quarter that really should not be expected in 2027?
Pat Sullivan: I really feel more comfortable saying mid to high single digits. I think this quarter was driven by some exceptionally strong renewal spreads on specific tenants. That may be the case in the future. When you renew as many tenants as we do on a regular basis, it really just comes down to the subset of who is expiring. I fully expect we are going to see increases on expiry. I am just not sure it is going to consistently be double digits.
Alex Avery: As you know, Mark, the big driver of our earnings growth is really leasing up space over the next couple of years. We do expect 2 years from now, 3 years from now, for those leasing spreads to grow once our portfolio reaches sort of a stabilized 96% occupancy rate. There is a lot of talk about leasing spreads, and certainly there is a very robust landlord's leasing market. But we do not really spend a ton of time focused on the quarter-to-quarter leasing spreads because they really do not move the needle that much beyond to say that economically, we are in a very landlord-friendly leasing market.
Mark Rothschild: Okay, great. Thanks so much.
Operator: Your next question comes from the line of Mario Saric with Scotiabank. Your line is now open. Please go ahead.
Mario Saric: Thank you, and good morning. Maybe for Pat, can you talk about trends that you are seeing in tenant sales by tenant category? Which ones seem to be above the 2.5% that you highlighted in Q3? Which ones are below?
Pat Sullivan: Sure. August and September, there are two periods during the year where tenant sales on a monthly basis are skewed, and that is basically March, April, and August, September, and that is really driven by Easter in the spring, and it is driven by back to school this year. We saw a bit of a soft August, but we saw September rebound considerably, and that was delayed Labour Day and the back to school was delayed. Overall, the net effect of the two quarters or two months, August, September, we saw a good upswing in sales. Where I had seen some softness in August in fashion, we saw a significant rebound in fashion in September to the point where when you look at two months combined, the fashion was very strong. We also saw that trend generally across the portfolio, whether that be footwear, electronics, such forth.
Pat Sullivan: The one category I suggest that is kind of leveling off at this point is health and beauty. They have been on a significant strong run for the past five years, driven by Sears closure and then the Bay closure, and those sales migrating to tenants such as Sephora, MAC, and so forth. They have leveled off to an extent, so we are not seeing the significant increases from those tenancies, but their sales have risen a lot since the end of COVID, to the point where I think a lot of them are looking for larger locations because they simply cannot drive higher sales out of the stores they have now.
Mario Saric: Sure. Okay. My second question, just maybe for Rags. Where are you finding, or where are you seeing secured/unsecured spreads for 5 to 7-year money today?
Rags Davloor: The 5-year money today is around 120. It's gapped out about 10 to 15 basis points in the last 2 weeks. 7-year, I think it's probably closer to 150. It's been very volatile. The underlying is obviously backed up a fair bit. The spreads, they were really tight there. They actually came in about 3, 4 months ago, and then they just started widening. Today, 5-year money would be 4 and three quarters, would be the coupon.
Mario Saric: Sorry, are you referring to unsecured?
Rags Davloor: Unsecured. Yeah.
Mario Saric: Okay.
Rags Davloor: We're not in the market for secured. We just don't play in that area. Our preference is unsecured.
Mario Saric: Okay. Thanks, Mario.
Alex Avery: Thanks, Mario.
Operator: Your next question comes from the line of Tom Callaghan with BMO Capital Markets. Your line is now open. Please go ahead.
Tom Callaghan: Thanks. Morning, everyone. Maybe just a first question on the 2027 guide there and the operating CapEx. Leasing capital, the CAD 40 to CAD 42 million is up a bit year-over-year. Obviously, expect that to be related to HBC and Upper Canada. Can you just give a sense of how you expect that figure to trend into 2028 as you get some of this big chunk you are leasing out of the way?
Pat Sullivan: Hi, Tom. I would expect it to start to head downwards. A lot of this is related to the lease-up of CRU space and the anchor space. Some of it is pertaining to the redevelopment we have at St-Bruno, where there is a lot of moving tenants, and the finalization of the Kildonan redevelopment. I think once we are substantially through those major projects and have leased up a lot more of the CRU, that our leasing CapEx will fall, and probably quite substantially, to be honest with you.
Tom Callaghan: Is 2026 kind of like a better run rate, kind of once you are through this, to think about, like that CAD 25 to CAD 30 million-ish number?
Pat Sullivan: Yeah, that is a good base.
Tom Callaghan: Okay. Just a second quick one. Apologies if I missed this. Just in terms of the Toys Us boxes, can you just give an update on where you sit with the backfill on all those ones?
Pat Sullivan: Yeah. We have tenants and negotiated deals for all the boxes. It is just a matter of the possession dates. Dufferin Mall, for instance, we have the space. We have already announced Old Navy taking one portion. We have a lease signed for the remainder, so that lease is executed. We have leases at various stages of finalization for every other box. We expect all of them will take possession at various points during 2027, with some paying rent in 2027 as well.
Tom Callaghan: Okay. That is great. Thanks. I will pass back.
Pat Sullivan: Thanks, Tom.
Operator: Your next question comes from the line of Pammi Bir with RBC Capital Markets. Your line is now open. Please go ahead.
Pammi Bir: Thanks. Good morning. I realize it might still be early, but as you think about the tenants that might be maybe just hanging on through holiday season here, any on the watch list at this stage that you think may not make it through Q1 or maybe the early part of next year?
Pat Sullivan: Yeah. Nobody that will be of surprise to us. I think we have a really small watch list. We have negligible accounts receivable. We are in really good shape from a receivables point of view. But there are some tenants that we have been holding on to that we would not have otherwise. We are doing it just for occupancy purposes.
Pat Sullivan: We more or less look at them as short-term tenancies only because none of them have long-term leases. Nobody has indicated they are going to file yet, but I expect there might be one or two tenants that may file in the early part of December, maybe even early January, but none of them will be a surprise to us, and none of them pay us a significant amount of rent. Like I said, we are really looking at them as short-term tenants just filling space until we can get our occupancy higher.
Pammi Bir: Okay. That is helpful. Then just maybe one more. Just in terms of the commentary around acquisitions that you are looking at, just given where rates have moved to, have you adjusted perhaps your thinking on pricing? Or any color you can share in terms of how the cap rates are relative to maybe the recent transaction that you just completed of Upper Canada Mall. Sorry.
Julian Schonfeldt: Yeah. Thanks, Tom Callaghan. One of the benefits from our point of view is there is a big cap rate spread, a lot of growth in the space. Our leverage is lower. Candidly, while it does have an impact on our underwriting for sure, it is, I will say, much less pronounced than for other asset classes. So, I would say, yeah, it will be one of the lesser impacted ones, but of course, it factors into our models. I will say as a side note, Pammi, it is a bit counterintuitive, and of course, interest rates kind of impact all real estate somewhat negatively. But there is a bit of a counterintuitive play here in that I think for a lot of the other asset classes, the impact, where leverage is higher and rates were lower and the financing spreads were lower, is quite a bit more significant.
Julian Schonfeldt: In an odd way, we are actually seeing, because the impact is so much stronger in other asset classes, the interest in the mall space from real estate investors is actually, for some folks, increasing because they are having trouble making the math work for other asset classes that are more heavily impacted. So, I think that was proven out a little bit with the Grant Park process that we ran in the summer, and even with our performance in the capital markets, in spite of kind of the interest rate environment.
Pammi Bir: That is helpful. Thanks, Julian. I will pass it back.
Operator: Your next question comes from the line of Tal Woolley with CIBC Capital Markets. Your line is now open. Please go ahead.
Tal Woolley: Hey, good morning, everybody. Just wondering on the dispositions, if you can give us some estimate of the NOI yield attributable to those two properties.
Julian Schonfeldt: Yeah, sure. Thanks, Tal. I will start with Cataraqui Centre. That was a disposition that was initiated, we will say, in the first quarter of the year, so before the market had heated up. That one is a low 9 cap. On Grant Park, this one was one that we launched in the summer, and it was as the market was heating up, and it was a very strong process. We had 13 bids. It went through a couple of rounds. We had a very strong purchaser come in, and that one was on the base mall, a mid 7 cap, which I think is notable because it being a non-core property that is trading inside of where our implied cap rate is. That was, we think, a very strong signal of where the market is moving or has moved and is moving.
Julian Schonfeldt: Again, that was a mid 7 cap rate, and there is also a commitment to purchase future out parcels that are not built or leased yet, and that was at a, call it a low 6 cap rate. Again, good evidence that the market is heating up.
Tal Woolley: Okay, that is helpful. As we move into Q4, obviously the portfolio continues to evolve. Just wondering if there is any things we should be thinking about in terms of comparison items. I am thinking specifically for Q4, things like percentage rents, stuff like that.
Alex Avery: One thing that was. I was just going to highlight the accelerated capital recovery that we had last year, which was about CAD 4 million in Q4. There was also another CAD 4 million of prior year tax recoveries last year. The same property NOI growth as we have noted, and I think I mentioned it in our opening remarks, that we are expecting it to accelerate over the next several quarters. Q4 might be an exception to that. On a headline basis, it will probably still be low single digits, if you do not adjust for that prior year. If you adjust for that prior year, it will be a higher number. But we did have a particularly strong Q4 last year because of those non-recurring items.
Tal Woolley: Anything just with respect to percentage rent, with some of the new assets? I do not know if there is any material differences that we should be aware of.
Pat Sullivan: Hey, Tal. I do not think there is any material difference. The percentage rent continues to be a strong source of revenue for us, both in the percentage rent in lieu and the percentage rent. The new assets we bought, including St-Bruno, are performing very well. Sales are rising, actually, and they are very strong, and we are getting much more percentage rent out of some of the new acquisitions than we anticipated. I think Q4 will reflect that.
Tal Woolley: Okay. Just looking into, I think you have come out of ICSC, and you are seeing healthy demand for the HBC boxes, just maybe in the core CRU space. When you are going through these conferences and stuff like that, are you seeing more interest from either US or international retailers wanting to get into the Canadian market, or is it more in line with typically what you see?
Pat Sullivan: It was very strong from the US retailers. The trend in the past few years at ICSC has been there is a bit of a tail off in the attendance in Toronto from the US retailers. That was bucked this year. There were a lot of Americans up here. I think there are a lot of US retailers looking to expand their footprint, whether that be Victoria's Secret or Bath & Body Works, American Eagle, with their expansion of their Aerie banner. There is a lot of US retailer interest. The Southeast Asian tenants such as Uniqlo from Japan, they are continuing to look for a lot more space. Canadian retailers on top of it, we are seeing a lot of those Canadian retailers look to expand as well.
Pat Sullivan: We had a lot of discussions at ICSC about not just new deals, but about expansion of existing stores, which is generally the case when you see strong sales. They feel like they are maximizing the sales they can realize from their existing footprint, and they are going to be looking to grow their footprint. Going forward, you might see some pressure on our productivity number per square foot, but the main driver is all store sales volume. As they are looking to get their sales higher, we are going to accommodate them with bigger stores. Aritzia is a great example of that. We are working on a number of expansions with them as well. It is all across the board.
Operator: Your next question comes from the line of Matt Kornack with National Bank of Canada Capital Markets. Your line is now open. Please go ahead.
Matt Kornack: Good morning, guys. Maybe a broader generic one for me around the acquisition targets going forward. You have kind of circled the GTA, you have bought in the outskirts of Montreal, but are there any holes in terms of geographic exposure or otherwise in terms of what you would like to acquire from here on out? Maybe just the receptivity from a disposition standpoint of some of the larger pension guys that own these assets.
Julian Schonfeldt: Yeah. I'd say, Matt, obviously it's not a grocery store and we don't get to kind of go and pick what we want. But we do have a national balanced portfolio. There's some areas where we might be a little bit hungrier than others, but we look at all opportunities in front of us that fit within our strategic criteria. Again, I said this earlier, but we're encouraged because we're having a number of discussions with a number of different parties from coast to coast on different assets. I don't want to guide you towards where the next one might be insofar as, again, there's so many different discussions going on. Again, a big part of that's outside of our control. But yeah, that's what I'd say there.
Julian Schonfeldt: In terms of the dispositions, I don't want to kind of pick on specific properties, but again, you know what our strategic criteria are with respect to acquisitions and how we view core. One of the interesting new sources of dispositions, I'll speak to one that we're out in the market with now that's being broadly marketed, is the outparcels at Promenades St-Bruno. These are some of the retail that's outside of the ring road, open air. There's nothing wrong with it. It's good retail, but the pricing is meaningfully tighter than where our business trades at, and there's exceptional demand for it. We'll likely be calling for bids in November and think that'll go strong.
Julian Schonfeldt: But this is something that we have in various pockets of our portfolio where we bought malls, and it came with, we'll call it non-core retail on the outskirts that we paid kind of a blended mall cap rate for, but can then sell separately at cap rates that are meaningfully tighter. That's a really low cost source of capital for us that we're eager to tackle, particularly at this point in the cycle.
Matt Kornack: Okay, thanks. Switching gears and getting very granular, I don't know if you'll have an answer for this, but property management fees, is this quarter a good run rate? I know it's been a little bit lumpy, but how should we think about that going forward? I don't know if there's any incremental being added with recent acquisition activity as well.
Pat Sullivan: Well, we do
Matt Kornack: In income, not expense.
Pat Sullivan: Yeah. On the income side, we have sold some joint venture properties, so that number has been declining. With the Cataraqui and Grant Park, it is likely to decline a little bit further.
Operator: Your next question comes from the line of Brad Sturges with Raymond James. Your line is now open. Please go ahead.
Brad Sturges: Hey, good morning. Just on the lease surrender income, it has been trending a bit higher this year. Obviously, it is kind of a lumpy item, but I wonder if you have any line of sight of what that could look like over the next few quarters.
Pat Sullivan: Hi, Brad. I think there were some larger ones we transacted with this year. I do not think it is a good run rate going forward. I think these things kind of come inconsistently over years. Some years are higher than others, and I think this year you can regard as being elevated compared to what you can expect in the future.
Brad Sturges: Would the year prior, like 2025, be more of a normalized year, or how should we think about what is more normal?
Pat Sullivan: Yeah. I think you could look at 2025 as a more normalized year. There is always going to be some, but this year had quite a bit higher than normal.
Brad Sturges: Okay. Appreciate it. Thank you.
Operator: Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad. Your next question comes from the line of Sam Damiani with TD Securities. Your line is now open. Please go ahead. Sam? As a reminder, please unmute locally when asking a question. Sam Damiani, your line is now open. Please go ahead.
Sam Damiani: Thank you. I did now hit the unmute button. Question is on the recovery ratio. It did increase about 200 basis points year over year, despite in-place occupancy being down. Just wondering if that surprised you and if there was anything unusual in the recovery ratio this quarter and your expectations over the next couple of years.
Pat Sullivan: Hi, Sam. No, I think we expect the recovery ratio to continue to climb. The tax ratio for sure is going to get much stronger as we backfill the HBCs as the tax revenue comes in from those major tenants. On the CAM side, once the contribution kicks in from the HBC, that will help as well. But really the main driver is the CRU occupancy. As I look to our leasing and how much leasing we have actually done and how much is committed, it is definitely pointing towards a material increase in our recovery ratios in the next few quarters and years ahead.
Sam Damiani: Thank you. That's helpful.
Alex Avery: Sam, I think one of the things that is important to note on this is that the recovery ratio and the occupancy may not move in lockstep on a quarter-to-quarter basis. We report a number of different occupancies. There's the committed occupancy, the in-place, and then the long-term occupancy. And those numbers do jump around. As we're backfilling a lot of these HBCs, some of the adjacent spaces have been leased, but leased to shorter term, lower rent, lower sometimes gross lease type tenants. As we're getting these new dynamic retailers that are going to drive a lot of traffic, we've actually found ourselves moving out some of these less traffic-driving retailers. So that's part of what has gone on in the quarter-to-quarter occupancy number. But you can see the long-term number moving up, and that is the critical one.
Alex Avery: I would say the correlation with recovery is more correlated to the long term than it is to the in-place occupancy on a quarter-to-quarter basis. But I think if you look at it over two, three, four quarters, you're going to see a really strong correlation and a really strong trend of improving recoveries, improving occupancy. It's just the making of the sausage does create a little noise quarter to quarter.
Sam Damiani: That's super helpful. Thank you. I guess just on your outlook for the next, whatever, two, three years. You got the 96% occupancy, but do you maintain that sort of mid-90s combined recovery ratio as a medium-term target as well?
Pat Sullivan: Yes, Sam. Yeah. As our occupancy grows,
Alex Avery: From the
Pat Sullivan: Sorry. Go ahead, Alex.
Alex Avery: I was just going to say, from the Investor Day, we were talking about the different phases of growth for the lease up, then the second phase being sort of refining the tenant mix and the merchandising mix. That is going to be part and parcel of that phase of things, going back and finding the retailers where we have leases in place that aren't optimizing for recovery ratio. So we're going to be tightening the screws on that to really push it. As you know, the CAM recovery can actually exceed 100%, and the property tax can be in the low to mid-90s. So I think we can probably match our recovery ratio pretty closely with our occupancy rate.
Sam Damiani: That is wonderful.
Alex Avery: At least I am saying that. Pat might have a different view.
Pat Sullivan: No, that is consistent. Really, it is driven by CRU occupancy, and we are making substantial progress in leasing up space, and as that continues, the recovery ratio will rise. I very much see us getting to our target.
Sam Damiani: Thank you both.
Pat Sullivan: Thanks, Sam.
Operator: There are no further questions at this time. Claire, I turn the call back over to you.
Claire Mahaney: Thank you, Derek. With no further questions, we will close today's call. On behalf of the Primaris team, we thank you all for participating, and have a safe and Happy Halloween. Thank you.
Operator: Thank you. You may now disconnect.
