Good afternoon. Thank you for standing by. Welcome to the First Capital REIT Q4 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press star one on your telephone keypad. I would now like to turn the meeting over to Alison. Please proceed with your presentation.
Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks, and uncertainties is contained in our securities filings, including our MD&A for the year ended December 31st, 2023, and our current AIF, which are available on SEDAR and our website. These forward-looking statements are made as of today's date, and except as required by securities law, we undertake no obligation to publicly update or revise any such statements.
During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this call. I'll now turn the call over to Adam.
Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our year-end conference call. 2023 was a busy and successful year. But before we get into our results, I want to start with some perspective on the strong fundamentals supporting our business. One of the main drivers of these underlying fundamentals has been the significant increase in the customer base of our tenants. Over the last two years alone, Canada's population has grown by 2.1 million people. That's a staggering number for a country of our size, representing a 5.4% increase. First Capital's properties are located in neighborhoods within Canada's largest markets, which are precisely the areas that are attracting the majority of this growth. This population increase creates more demand for everything, particularly the necessity-based goods and services that our tenants sell.
Against that backdrop, there has been almost no new supply of grocery-anchored centers for several years. There are two main barriers to entry for new supply in the neighborhoods our properties are located. The first are physical barriers. Sites are scarce, given the urban nature of our portfolio, and for sites that do exist, high-density residential is typically the highest value use. The second barrier is economic. Replacement costs, mainly from higher construction and soft costs, have increased significantly over the last few years. They are well in excess of current market values for grocery-anchored centers, which makes it highly unlikely there will be any new supply over the foreseeable future. The combination of high population growth and a lack of new supply continues to reduce the square footage per capita of FCR-type retail. In terms of inflation, it too is having an impact.
75% of our top 20 tenants are public companies, so we know that inflation has benefited their top-line sales, and importantly, their profit margins have largely remained intact. This means that store profitability and therefore rent-paying capability have improved. Against that backdrop, our leasing pipeline remains deep, with many of our tenants pursuing an expansion of their physical footprint. This includes all the major grocery stores. For instance, our largest tenant, Loblaws' ambition, is to open 40 new stores across their grocery and pharmacy banners. It also includes restaurants across the spectrum, such as Chick-fil-A, McDonald's, Firehouse Subs, Chipotle, and many others seeking large expansions. Jersey Mike's is another example. They're seeking 300 locations across BC, Ontario, and Alberta. It includes the fitness category, with GoodLife, Planet Fitness, and Anytime Fitness growing their location count. It also includes the pet category across multiple retailers.
For instance, Pet Valu is targeting 40-50 new stores per year. Daycares are expanding as well, so are general merchandise retailers such as Winners and the likes of Dollarama, who, for example, are aiming for 30 new stores per year over the foreseeable future. I could go on. The point is, fundamentals are solid, so we continue to expect strong operating performance, and that came through in our 2023 results. Occupancy improved by 30 basis points since Q3 to 96.2%. Lease renewal spreads also continued to track well. In 2021, they were 8.6%. In 2022, they increased to 9.5%, and in 2023, they jumped to 12.1%, our strongest since 2009.
Our leasing activity led to an average in-place rental rate at year-end of CAD 23.34 per sq ft. This is higher than all of our peers, and it's also a record at FCR, a record we expect to eclipse this year. Throughout 2023, we made important and meaningful progress on our optimization plan. Our investment team had an outstanding year executing this plan. Jordy will provide some color on the transactions we announced yesterday, but in total, we are now at over CAD 630 million of dispositions under the plan at an average yield of less than 3%, and an average premium to pre-mark IFRS carrying value equal to 21%. The new sales we announced yesterday had a much higher premium. This outsized premium was heavily weighted to a development property in which our zoning progress is well advanced.
However, under our valuation policy, the value uplift isn't recognized until a series of conditions are met. One of these conditions is obtaining the formal zoning permissions, which is imminent. Therefore, we believe the buyer valued the property on a fully zoned basis, which drove such a high premium to IFRS NAV. Our collective investment activity continues to demonstrate that we can sell the right assets for FCR at big prices. I know many are focused on how we're tracking against our billion-dollar target, and we are clearly on track. But what's more meaningful than disposition volume is that we're tracking ahead on the objectives of the plan, specifically our targets on growth in FFO per unit and on lower debt to EBITDA. Our disposition activity is largely neutralizing a significant headwind that the entire real estate sector is facing, which is, of course, higher interest rates.
This is having a positive impact on FFO per unit. Now, we had some noise impacting the headline number in Q4, but as Neil will explain, it is just noise with continued strength in the underlying business. Our investment activities are also having a positive impact on our debt to EBITDA, which has decreased by one full turn in the last five quarters and heading lower still. Lower debt to EBITDA is important for our cost of unsecured debt capital, and it's also important to our equity investors and our FFO multiple, specifically. Lastly, we believe that many of the assets we're selling have not been fully valued by traditional REIT investors when they assess FCR. The bottom line is that our investment activities are increasing the value of First Capital. Now, we're pleased with our progress, but we will continue pushing forward and working hard for our investors.
That's a good segue into our upcoming Investor Day, which we've also been very busy preparing for. We're going to cover several important things on February 21st. This is an in-person event, and based on our current registration levels, we're going to have a great turnout. For those who haven't registered, please do so, and we look forward to welcoming you. With that, I will now pass things over to Neil.
Thank you, Adam, and good afternoon to all of our call participants. As is customary, we have posted a quarterly conference call presentation on our website at fcr.ca. In my prepared remarks today, I will make references to that presentation. Overall, we are very pleased with the performance of the business through the final quarter of 2023. Thematically, FCR's operating and financial results were slightly better than our internal projections. Beginning with slide 6 of the presentation, fourth quarter funds from operations were CAD 58 million. This was a CAD 22.5 million decline from CAD 80.5 million in the fourth quarter of 2022. The reported results were CAD 0.27 on a per-unit basis, relative to CAD 0.37 in the fourth quarter of 2022.
As you can see near the bottom of slide 6, there was a large year-over-year decrease in FCR's other gains, losses, and expenses, or OGLE, as we commonly refer to them. In Q4 2022, OGLE was +CAD 12.7 million. In Q4 2023, it was -CAD 9.7 million. In both periods, OGLE was almost entirely comprised of non-cash mark-to-market gains and losses that we are required to recognize each quarter under IFRS. We see these amounts as entirely independent of FCR's operating results. Therefore, Q4 FFO prior to OGLE was CAD 67.7 million. This equated to CAD 0.32 on a per-unit basis, which was an improvement of 1% relative to Q4 2022.
Now, let's take a moment to walk through the components of Q4 FFO. Total net operating income of CAD 109.8 million was CAD 2.3 million lower year-over-year. While not shown on this slide, I do note that Q4 NOI increased slightly from CAD 109.3 million in Q3. Same property NOI, prior to lease termination fees and bad debt recoveries, was CAD 101.1 million, a 3.3%, increase year-over-year. Higher base rents and improved recoveries were the key drivers. Now, working against this core growth rate was the fact that lease termination fees and bad debt recoveries totaled CAD 1 million in the recent period. This was much lower than the outsized CAD 6.2 million amount recognized in the fourth quarter of last year. Moving down to NOI.
On a year-over-year basis, property dispositions accounted for $2.8 million of lost NOI. And finally, other NOI of $6.9 million improved by $2.4 million year-over-year. The increase was mostly related to 2022 and 2023 acquisitions, as well as contributions from developments coming online, including the likes of our Cedarb rae redevelopment, which began generating rental income in the back half of last year. Moving further down the FFO statement, Q4 interest and other income was $6.7 million. This was $900,000 higher year-over-year, due primarily to higher average cash balances as well as higher short-term interest rates. Q4 corporate expenses were $9.1 million. Again, this was $900,000 lower year-over-year and $800,000 lower relative to the third quarter.
While G&A expenses can fluctuate from quarter to quarter, we remain proactive in managing corporate expenses, and most of the trendline growth here relates to low inflationary type increases in salaries and compensation costs. Interest expense was CAD 39.1 million in Q4 2023. This was little changed from CAD 39.3 million in Q3, and CAD 38.8 million in the fourth quarter of 2022. This is noteworthy. Interest rates have increased a lot in the last two years. If we take the fourth quarter in isolation, FCR's weighted average in-place interest rate was approximately 25 basis points higher than it was in the fourth quarter of 2022. So if we hold all other variables constant on CAD 4.2 billion of total debt, this would have otherwise resulted in a CAD 11 million increase in annualized interest expense.
This is a big number, but we have mitigated the impact. FCR's ability to diminish, to diminish the interest rate headwind, which is impacting many, if not all, of our peers, is a direct outcome from the successful execution to date on the optimization plan. The plan is a key differentiator for FCR, and since announcing the optimization plan in September 2022, the REIT's total net debt has increased by more than CAD 350 million. Slide 7 summarizes our full year results. I do not intend to review these in detail, but the bottom row of the slide shows that FFO per unit prior to OGLE was approximately CAD 1.18 in 2023 versus CAD 1.19 in 2022.
Now, both years had a few income and expense items that were non-recurring, including the lease termination fees and bad debt recoveries that I previously cited, but also including some restructuring costs that were included in G&A, some non-recurring other income, as well as costs in both 2022 and 2023 related to unitholder activism. Slide 8 outlines the components of OGLE, and it's provided primarily for reference purposes. To emphasize the key takeaway here, the components of Q4 OGLE are almost entirely unrealized mark-to-market income and expense items. As you can see for the quarter, the gains and losses relate to financings or derivatives that are employed as part of our financing initiatives, where over the fullness of time, the sum total of these unrealized gains and losses will ultimately net to zero. Referencing Slides 9 and 10, FCR's operating performance metrics finished the year with strength.
Adam touched on some of these already, but to elaborate just a bit. Q4 occupancy was 96.2%, up 30 basis points in the quarter, as we had 155,000 sq ft of tenant possessions relative to 103,000 sq ft of closures. Fourth quarter renewal leasing volume of 672,000 sq ft was stronger than Q3's activity and generally consistent with that of Q4 2022. These renewals in the quarter were effected at a strong average increase of 13.5%, bringing the full year renewal leasing spread to 12.1%, on 2.3 million sq ft of volume. And so with these conditions at hand, our December 31, 2023 in-place portfolio net rent per sq ft reached CAD 23.34.
an all-time high and an increase of 1.7%, year-over-year. Slides 11 and 12 provide the distribution payout ratio metrics. These two are mostly for informational purposes, and they show how we view and measure cash generation and sustaining capital expenditure requirements within the business. The key takeaway: for 2023, FCR generated CAD 233 million of adjusted cash flow from operations, relative to CAD 184 million of cash distributions, thus equating to a 79% payout ratio. Advancing to slide 13, the REIT's net asset value per unit at December 31 was CAD 21.95. This is relative to CAD 21.26 at September 30, and CAD 23.48 one year prior.
On this basis, FCR's NAV increased by 3%, or CAD 0.69 per unit in the fourth quarter, while it decreased by CAD 1.53 per unit, or nearly 7%, over the course of 2023. During Q4, we recorded a net fair value increase on investment properties of CAD 168 million. Now, for additional color, there was really three components of the Q4 adjustments. Firstly, a CAD 127 million net fair value increase related to small yield changes. During the fourth quarter, the portfolio weighted average cap rate compressed by approximately 10 basis points to 5.5%. I would describe these valuation adjustments as some fine-tuning.
For added context, you may recall that they followed a sizable round of adjustments in the third quarter, when the REIT's weighted average cap rate increased by 30 basis points, and this had the effect of reducing the portfolio's value by CAD 457 million in that quarter. The second notable component of the Q3 revaluation was CAD 61 million of fair value increases that were specifically related to marking certain property carrying values up to their contracted sale prices. These valuation increases were partly offset by a third factor, which was a net decrease of CAD 20 million related to individual cash flow modeling, including capital expenditures. I'm providing an update on capital deployment, as summarized on Slide 14. During Q4, we invested CAD 50 million into the portfolio.
This included CAD 27 million into future income properties and residential developments, and CAD 26 million into portfolio CapEx and leasing costs. For 2023, in its entirety, development expenditures were CAD 130 million. Slide 15 summarizes key financing activities over the course of 2023. Now, during our third quarter results conference call, we discussed the Series Q senior unsecured debenture maturities and the new 150 million dollar unsecured term loans that are listed here in the Q4 activity. One additional point I will add is that in mid-November, we preemptively addressed 2024's second-largest debt maturity. More specifically, a 200 million dollar unsecured term loan that was due on March 29. In this regard, we extended the loan for approximately five years to a new maturity date of January 2029.
The low 3.17% interest rate remains in place until the end of March, and thereafter, the interest rate increases to a fixed rate of 5.8%, through maturity. Reflecting this extension, our 2024 debt maturities consist primarily of a CAD 300 million senior unsecured debenture due at the end of August, and six property-specific mortgages, having an aggregate balance of CAD 162 million. FCR's debt maturity profile is reflected on slides 16 and 17. So turning to slide 18, I'll make three key points on debt and liquidity. The first, Q4 net debt was CAD 4.1 million. This is a decline of a little more than CAD 50 million during Q4 and more than CAD 100 million year-over-year.
Secondly, FCR's trailing four-quarter EBITDA of CAD 412 million held steady relative to Q3, and in combination with the lower debt, net debt's EBITDA decreased to 9.9x from 10.1x. Thirdly, FCR's liquidity and financial strength remains excellent. At year-end, the REIT had CAD 6 billion of unencumbered assets and nearly CAD 800 million of unrestricted liquidity, comprised of CAD 700 million of revolving credit facilities that were undrawn and CAD 92 million of cash. So to wrap up, we look forward with optimism toward the year ahead. I will note, however, that some of the trends that impacted the latter part of 2023 will continue into 2024, including same property NOI growth. As you're likely aware, FCR's same property NOI is derived on a cash rent basis.
So notwithstanding the recent leasing successes at our One Bloor East property, for the first half of this year, we will have no cash rent on these new leases. So just as the lost NOI on the 40,000 sq ft of space that was formerly occupied by Nordstrom Rack was a drag on NOI growth in the back half of 2023, this will continue for the first half of 2024. To date, the cost of this carry has been approximately 140 basis points per quarter. Therefore, the full effect on annual 2024 same-property NOI growth will be close to 70 basis points. Moreover, amidst a challenged environment, we also have an office lease in Montreal that is rolling off on March first.
The annual gross rent on this space is CAD 3.3 million, and this will present a headwind to 2024 same-property NOI growth. On the disposition front, we've made great progress on our optimization plan, and this year we are targeting more than CAD 400 million of asset sales. Similar to the nearly CAD 500 million of dispositions that were completed under the optimization plan to date to December 31, you should expect 2024's transactions to be a mix of development and density sites and some low-yield income properties. On a blended basis, we expect the lost NOI yield on this year's dispositions to average 3% or less. And we have some good momentum established, as evidenced by the CAD 157 million of transactions that are subject to firm sale agreements, with closings scheduled in the first quarter.
With that, I'll now turn the session to Jordy to provide an investment update.
Thanks, Neil, and good afternoon. Today, I'm going to provide you with a brief update on our investment activities and our progress this quarter in particular. In Q4, we closed on CAD 58.5 million of previously disclosed assets. The assets sold include our Sterling Retail property, located in the Kerrisdale neighborhood in Vancouver. Sterling is a single-tenant, 30,000 sq ft space leased to Save-On-Foods, who operate the store on the ground floor for residential condominiums. Save-On has a long-term fixed-rate lease with little growth. We bought this property in 2018 on their lease commencement date, and our sale price is greater than the price we had paid. We also sold a further 25%, interest in our Yonge and Roselawn mixed-use development project to our partner, Woodbourne. Pursuant to the sale, we retain a 50% interest.
In Q4, we entered into binding agreements to sell an additional CAD 116 million of income-producing and development assets. These assets are being sold at a 40%, premium to our pre-marked IFRS value. As Adam had mentioned, this unusually high premium primarily relates to our Royal Orchard sale, the details of which I will touch on shortly. This brings the total amount of sales under our plan to over CAD 630 million. The run rate yield on these assets is less than 3%, which is consistent with the objectives set out in our plan. Included amongst the income-producing assets for which we have a binding agreement to sell is our Cerca Residential property, located in Richmond, BC. The property was built by FCR in 2013. It consists of 68 residential units and above-grade parking garage.
The in-place tenancies are all subject to rent control, and turnover is exceptionally low, so projected income growth is muted. We will reallocate the capital from the sale to higher growth alternatives. Cerca Residential sits above three retail units that do not form part of the transaction. This retail will be retained and continue to form part of our related Broadmoor Shopping Centre. The purchaser waived its conditions in late December and will close in March 2024. As mentioned in Q4, we entered into a binding agreement to sell our interest in our Royal Orchard property. The property is a development site located at Yonge and Royal Orchard in Thornhill, and the transaction will close later this month. Given the residential growth of the surrounding neighborhood and the pending lease expiration, we saw an opportunity to intensify the property.
In 2021, as part of our entitlement program, we submitted an application for three residential towers and 1.6 million sq ft of density. We expect municipal approvals for this density later in the quarter. In Q4, we also agreed to sell a 42%, interest of our 1071 King Street West residential development project to Woodbourne, an existing strategic partner and a leading operator and developer of residential multifamily apartments. Pursuant to this transaction, FCR will retain a 25%, interest in this quality, purpose-built, residential rental development site located here in Liberty Village. In addition to the proceeds on closing, Woodbourne will reimburse FCR for their proportionate share of costs incurred to date. Last, in Q4, we entered into a binding agreement to sell 71 King, a small, 5-story, 45,000 sq ft medical office building located in Mississauga.
The total sale price reflected its Q3 2023 IFRS values. In Q4, we invested CAD 27 million in our development pro-
... This investment was broad-based and includes our Cedar Brae and our 400 King Street projects in Toronto, and our 200 West Esplanade project in Vancouver. We have continued to advance our entitlement ladder as well. In Q4, we submitted applications for an additional 1.5 million sq ft of incremental density. To date, we've submitted for entitlements on over 17.3 million sq ft of incremental density, representing 73%, of our 24 million sq ft pipeline. In 2023, we've also received approvals for 2.5 million sq ft, bringing our total approved density to more than 10.9 million sq ft. As you'll note, it was a very busy Q4 on the back of a very busy year.
We expect that this pace will continue into 2024, and look forward to updating you with our progress. With that, operator, we can now open it up for questions.
Thank you. Please press star one at this time if you have a question. There will be a pause while participants register for questions. We thank you for your patience. Our first question is from Mario Saric from Scotia Bank. Please go ahead.
Hi, good morning. I'm sorry, good afternoon. I wanted to touch on the leasing environment and kind of broader tenant trends. Specifically, first question would be on the renewal spread this quarter. I know it's not disclosed, but can you give us a sense of what percentage of the 670,000 sq ft of leasing that was done this quarter had contractual rental escalators in it? I'm just trying to get a bit more color in terms of the composition of the lift this quarter.
Yeah. So good afternoon, Mario. I guess the way we describe the renewals that occurred in the fourth quarter is very typical. We had two major fixed flat rate renewals, so we had a Walmart and a, and a grocery store that both had fixed rate options at a flat rent. That was nearly 20%, of the total volume. We also had another grocery store that went to market that saw an 86% rent increase. So kind of those are two opposite ends of the spectrum, but if you take a look at our previous activity, it's actually pretty typical.
Okay. And then, Adam, or maybe for Jordy, like, if you look back over your experience within the retail industry and you think about, you know, the near record international immigration and negligible new supply, Adam, that you pointed out, how would you characterize your view of First Capital's pricing power with CRU tenants today? Like, on a scale of one to ten, let's say, with ten being kind of the strongest that you ever seen?
Well, it's definitely closer to 10 than 1. You know, it's been good. Leasing's been good. We own great properties. The macro trends have been working in our favor. It certainly feels and appears that will persist for, you know, the foreseeable future. Our portfolio is near full, north of 96% occupancy, so it affords us the opportunity to not only generate much higher rents, but we're constantly trying to upgrade the quality of the merchandising mix. As you know, retail is dynamic and changes over long periods of time, so, you know, we do a lot of work, asset by asset, space by space, looking for the best retailers we can bring in under the different uses that we think serves the needs of the community the best.
Ultimately, we're trying to drive the highest sales per square foot in the entire center. From an asset strategy perspective, you know, we're getting more leverage. Where we lose leverage is, you know, tenants that have options, where in some cases there's an opportunity to upgrade, they exercise the option, so we work with the tenant. But generally, you know, the fundamentals have been very strong, and we've been taking advantage of that, and, you know, it's starting to come through in our numbers.
Okay. Then just, you mentioned 96% occupancy. If we pro forma One Bloor, I guess that goes up closer to mid-97%, a bit higher than mid-97%. And you have 8%, of the leases maturing in 2024. So look, in the context of the market today, and, I mean, taking into consideration, I don't know if you're seeing any impact with respect to some of the COVID government tenant programs like CEBA starting to taper off. But taking all that into consideration, what do you think can be achieved occupancy-wise by the end of the year, if you have a target?
Yeah. So keep in mind that 31,000 of the 40,000 sq ft Nordstrom space is reflected in the occupancy numbers. So Neil touched on that. Our same property NOI is reported on a cash rent paying basis. Keep in mind that our occupancy is on a tenant possession basis. So he mentioned the office lease in Montreal. The other data point I'd point you to is in our 25-year history, our all-time high occupancy was 96.9%, in the fourth quarter of 2019. So you know, we view where we are now as near full occupancy. The bandwidth for this business over that 25 years is roughly 95%-97%. We're kind of in the middle of that.
We think there's a good chance we grind our way a little bit higher, but, we would describe our current occupancy as near full.
Just maybe on the CEBA, are you seeing any implications on that so far with your-
No.
Questions or that?
No, there's a couple things we. Yeah, there's a couple things we keep reading about that we see absolutely no evidence in the business whatsoever. One is that what you referenced, we don't think any of our tenants are dependent on that or impacted by that from a rent paying capability perspective. You know, the second is on the restaurant category. You know, there's no shortage of articles around lack of profitability across restaurants. We are seeing the absolute opposite. We have hundreds of restaurants. I'm not sure they've ever been in better shape in our portfolios than they are today. The demand beyond the ones we have is exceptional. And so we would actually describe that category as exceptionally strong today.
But the CEBA loan issue, we see absolutely no evidence in our business whatsoever.
Okay. That's it for me. Thanks for taking the question.
Thank you very much, Mario.
Thank you. Our following question is from Dean Wilkinson from CIBC. Please go ahead.
Thanks, and afternoon, everyone. Just wanted to clarify, Adam, on the CAD 157 million of asset sales that are gonna happen, Q1 of this year, you said that they had not all been reflected in terms of your IFRS valuation. Is that to say that we would expect something in the order of a CAD 60-70 million gain, which will increase the book value there? Or just I'm trying to get a sense of what's already in the numbers.
Yeah, well, we certainly stayed clear of double counting, Dean. So, what to clarify the comments is, the numbers we reported at the end of Q4 and the IFRS value lift, you know, to CAD 21.95, includes marking the asset sales we announced to the sale price. So, that is already baked in. So, the premium to IFRS NAV that we reported is the pre-mark IFRS NAV, so think of it as the Q3 IFRS.
Just the Q3. Okay.
Yeah. Yeah. So the CAD 60 million's fully baked. And so any further contributions to NAV, premiums to NAV that come about from asset sales will be on ones we announce in the future.
Got it. And would those asset sales be all cash, or is there a debt component associated with paying something off there?
They're all cash. There's one property that's got a small outstanding mortgage. We expect the mortgage to be paid out on closing. It's a small. It's a seven-figure dollar value, to give you an idea.
Right.
It's not big. The rest are all subject to cash purchases. There's no, you know, certainly no VTB financing or anything of that nature. That would defeat the objectives we're trying to accomplish, so.
Great. That actually leads into the next question then. So if I take that, plus the cash on hand, you're sitting, call it just around CAD 250 million of cash when these close. You've got the leverage under 10 times now. Would that have you being a little more aggressive on, on the buyback, given the discount to, to your book value? Or, or how are you thinking about the utilization of, of, let's call it a war chest?
Yeah, I'm sure Neil has got some commentary on this, because I know he spends a lot of time thinking about this and planning for this. What I can tell you is, well, we are in the real estate business, so fortunately, we've got some really attractive real estate investment opportunities. So some of the capital is going to be invested in that. But, Neil, do you want to expand on how we're thinking about the specific question?
Yeah. Thanks, Adam. Hi, Dean. Yeah, you know, thinking about this, your, your, your question might actually relate a little bit more to maybe why didn't we buy back stock in the fourth quarter, for instance? And, you know, on the heels of maybe my response at the time in the third quarter conference call, when, you know, we, we commented on how rates were actually rising quite rapidly at the time, and that actually was, a factor that caused us to pull back at the time from, from our buyback activity. And so through the fourth quarter, you know, interest rates were declining, but we, we really we did not buy back any stock. And I would say at, at the time, it really was more so a timing issue.
You know, if you think about our prior comments, and asset sales, I think we've been pretty consistent to say that the default application of funds will be debt repayment-
Yes
... because we view the statements that we've made to bondholders and unit holders as being really commitments. And through the fourth quarter, while interest rates were declining, the fact of the matter was that we, you know, didn't go firm on our asset sales till very, very late in the quarter, and then before you know it, we're through year-end and into our blackout. So look, the bottom line is, it's easy for us to generate NAV accretion, if you will, on buying back units at, you know, at today's price or somewhat higher or somewhat lower. Our focus is to make sure that we generate FFO accretion, on those repurchases as well. And interest rates do have a lot to do with that equation, both interest rates and credit spreads.
You know, you'll see our activity when we report it as we're required to do so. You know, we have to come out of the blackout period, and to your point, we've got lots of confidence in our near-term liquidity.
You're not double counting. Thanks, guys. I'll hand it back.
Thank you very much, Dean.
Thank you. Our following question is from Sam Damiani from TD Cowen. Please go ahead.
Thanks. Good afternoon, everyone. First question, Adam, you mentioned the portfolio optimization plan. I guess success to date is you're tracking ahead on FFO and leverage. Could you be a bit more specific as to how, you know, how that impacts your targets for year-end? And also, how are you thinking about what the REIT will do beyond 2024 on the balance sheet front?
Yeah, and just to clarify, you know, when we came out with the plan a little over a year ago, we said that by the end of 2024, or call it calendar 2024, you know, our objective was FFO that's greater than CAD 1.20. We feel like we're tracking ahead of that. We said that our total debt would be less than CAD 4 billion. We feel like we are tracking ahead of that. And importantly, we said that our debt to EBITDA, you know, would be less than 10 times, which it already is. So, the only thing we'd say on 2024, and Neil may have more to share, but, you know, we do see a benefit of taking our debt to EBITDA lower.
We see it a benefit to unsecured credit and the cost of that, which we plan to continue to utilize. Very importantly, we see a benefit to our FFO multiples. We've spent a lot of time with equity investors over the past 12-18 months. There's a very consistent theme that we've heard. And so, you know, that's a very important factor. So where we were starting, it was a two-year plan. We felt that was a reasonable objective. We're happy to be going through that. That shouldn't be interpreted as we're there and we're done. You know, I said in my opening remarks, we're prepared to take it lower. We're not prepared at this point to expand any further on that, though.
Okay. Appreciate that. And then just on, on 1071 King, now that you've sort of set your JV with, with Woodbourne, and others, is there, is there an intention to start construction on that rental residential project in the near to medium term?
Hi, Sam, it's Stuart. So the answer is yeah. We're actually on site doing our geothermal work as we speak. And the intention is to probably start shoring and excavation, I would say, into the second half of this year.
There's a couple of things that have happened with that property. One is we've obtained a little more density going in for a variance. And as you know, Sam, most multi-use residential rental properties do not pencil out today. Most does not mean all. This is one of the rare ones that actually do. It's why, you know, we were able to bring O Invest in as a capital investor, is why we were able to bring Woodbourne in. The pricing's strong, and that's because the deal actually works. So, that's one where our intention is to go forward.
We've got pretty clear objectives we're laser-focused on with respect to FFO and credit metrics, and so reducing our interest down to 25%, is what we had hoped to do, and we feel like that's the right equity investment percentage to balance the objectives we have in retaining some upside on the development as it goes forward, which we expect to formally commence, you know, in the next few months.
So between 1071 King and Yonge and Roselawn, you know, how would the stabilized yields on cost pencil out on average between these two projects?
Yeah. Strong enough for us to make the decision to go forward. We've never put out our formal target on returns or development yields, but Yonge and Roselawn is the other one that does pencil out. Part of it is, you know, because it's got a meaningful retail component, but it does pencil out. Those are the only two that we're contemplating from a mixed-use residential rental perspective that we feel do. So the numbers work. We think there's, you know, adequate development margin. Yonge and Roselawn's a bigger development, so, you know, we're down to 50%. Our objective is to go down a little bit further, but that project is going to start, regardless of whether we do that or not.
Okay, great. Last one for me is just, and I think I know the answer, but what is your tenant watch list looking like today, given the hindsight of the holiday season and typical restructuring season in the retail sector?
Yeah, we've said before, we don't have that restructuring season. Our tenant base is not discretionary or retail-oriented, so you know, for some of the discretionary uses, you see this kind of January, February filing season. We've never seen that. And so the watch list is thin, and you know, there's like one tenant, one space on it. We mentioned WeWork last quarter. Like, we've got one small location with them. It's not a big deal. The space was designed as retail. The depth of our leasing pipeline is exceptional, so you know, I wouldn't read too much into that. But if you're pressing us for an answer, I'm going to go WeWork in Liberty Village, in a space that doubles as retail. And for what it's worth, they're current on their rent.
Excellent. Thank you. I'll turn it back.
Thank you very much, Sam.
Thank you. Following question is from Matt Kornack, from National Bank Financial. Please go ahead.
... Hey, guys. Just quickly going back to Yonge and Roselawn, is, is the view to own for that property and maybe broadly speaking, 25%, of a mixed-use development, or, or would the ideal be to own the retail component of that development and, and forgo the multifamily component at the end of the day?
Yeah. In these developments, they're pretty complicated, and when you start trying to bifurcate uses with different ownership percentages, it introduces a number of complications. Then you have to get into the allocation of certain costs that are tough to allocate across certain uses. So we like the alignment of joint ownership. And so our intent and plan and expectation for Yonge and Roselawn is that whatever interest we own, whether it's 50 or something slightly lower, it'll be on the entire deal.
Okay. Nope, that's fair enough. And then, back to Mario's earlier commentary and some of your initial comments around, just tenant demand versus supply and, and the cost to build out new retail. It would seem that you're, you're gaining pricing power as landlords in, in this space, but can you give us a sense, as to where you think those leasing spreads could go? And, and obviously, given the fixed rate renewals, there's, there's some complexity to it, but is the trajectory we've seen over the last several years what we should expect, or do you think there's an inflection point where you start to charge more and, and at a quicker pace?
Well, we've seen them accelerate. I tried to touch on that in my opening remarks. So, we've seen them accelerate. Everything that we see would indicate continued, you know, strength in that regard. You know, we put up a really strong quarter. I always say, like, never read too much into these metrics in a single quarter because they can be lumpy. But, you know, I would say, like, Q4 was pretty typical. We had a couple of chunky fixed flat rate options that held the spreads back by 200-300 basis points on a blended basis, but that's not atypical. So, so, look, we'll see. The environment's good. Our the demand is good. We're dealing with really strong tenants. We're seeing tenants become more flexible given the fundamental backdrop we outlined.
So you're seeing tenants that are being more flexible in terms of the size and the configuration of space, given their preferred prototype. So you're seeing a lot of positive things that would indicate that that strength continues. But, you know, we're not in a position to tell you that, you know, we think the lease renewal spreads are going to be 16% instead of 12%. You know, we'll see how it plays out. What we do know is things look good.
Okay. Appreciate that color. With regards to dispositions, obviously, Q1, good, good quarter, and at a pretty low implied cap rate. Can you give a sense as to the quantum and maybe timing, if there's any lumpiness, to dispositions for the balance of the year? Appreciate the context on, on what the yield will be on those.
Yeah. Well, I can assure you it will be lumpy. It has been lumpy, but the important thing from our perspective is not what we do in any given quarter. It's are we tracking well? Are we making progress? And we are, and we expect to continue to make progress. And some of the rezonings coming down the pipeline are really attractive properties that we think are well suited for disposition in this market. The market construct is something we've paid very close attention to, and that's why we've had this success. This is a market where smaller is better. We've our entire CAD 630 million has been a bunch of singles, like, no transaction has involved more than one property. We're fortunate that we got some chunkier ones done earlier.
The remaining assets average, like, CAD 20 million in value. So that, that's actually good. That's a sweet spot for us. It's a lot more work, but, that's certainly something we're not, we're not afraid of or shy from. So we'll, we'll see how it shapes up. It, it will be lumpy. We had a good quarter, you know, maybe next quarter is a little quieter. We don't know, but we, we do have activities. The pipeline is good. We're encouraged. We're confident that we're going to achieve the objectives that we, we told the market we would achieve.
Is anything sacred, or is everything for sale at the right price?
Well, look, we sold a lot of real estate. One thing I'll note is not one single property is a multi-tenant grocery-anchored shopping center. So I'm, I'm hoping that, that tells you something about where we're focused. But no, I mean, look, this is about capital allocation. This is about maximizing the value of the FCR business. This is about monetizing the assets that we feel that, you know, traditional REIT investors, you know, don't fully value. And so in that context, you know, that's what we're focused on, and then that's what we continue to be focused on.
Thanks. And then one quick one for Neil. There was some tax and other recoveries in this quarter outside of bad debt. Should we, should we read any of that as being non-recurring, just from a run rate standpoint, if we use Q4 as the base point? I know there was some lease termination income and bad debt recovery, but is there anything else beyond that in the quarter that we should look at?
Yeah, Matt. So, I'll infer that you're referring to property tax recoveries and adjustments, current and prior year.
Yeah.
I would, at the margin. So there were some adjustments in the fourth quarter. At the margin, maybe they're a little larger than average, if you will. You know, these adjustments, like, they happen all the time, almost every quarter, and they are an ongoing element of the business. You know, it's kind of back to, like, Adam's comments on leasing spreads. Don't read too much into a quarter. They tend to average out over time. And frankly, if there was a slightly bigger adjustment in the fourth quarter of this year than relates to last year, well, it's really income that we should, I guess, in theory, in theory, would have recorded last year. So, but if you're looking at a pure run rate basis, you know, I think your observation is valid.
All right. We'll trim a little bit, but perfect. Thank you. Appreciate that, very detailed color.
Thank you.
Okay. Thank you, Matt.
Our following question is from Pammi Bir from RBC Capital Markets. Please go ahead.
Yeah, just on the disposition program, it's obviously been trending pretty well with rates rising and periods of falling as well. So, you know, maybe where we sit today, have you seen any change in the appetite of or buyer behavior? Are there maybe more buyers surfacing with rates down from, let's say, you know, last year's high? Or is it sort of the same level of activity?
Yeah, I would definitely describe the market as very similar to what it's been over the last several months. We were hopeful, you know, when the 10-year went from 3.50 down to close to 3.00 or 3.10, that, that would start to deepen the pool. It didn't stay there long enough for that to happen, so there's clearly a lag. But, I would say certainly over the last, what do you say, Jordy, 9 months or so, it's been very, very consistent. The types of buyers we've been dealing with have been very similar in profile. Do you agree with that?
Yeah, 100%. I've not, certainly not seen. We have not seen any meaningful change.
Yeah. Yeah. So no improvement, but also no deterioration.
Okay. And then just, it looks like the targeted rezoning square footage figure over the next few years, I think it's dropped to 6 million sq ft from the initial, if I recall, 11 million sq ft. So was that, you know, was that just from some, you know, successful entitlements received, maybe some effective dispositions, or is it really just an updated view on the timing?
No, you hit the nail on the head. The two main drivers of the change were we've agreed to sell a bunch of density, and we've received zoning on some of it, so it's come off last.
Okay, so it's not, it's not necessarily timing related?
No.
Okay. All right. And then just lastly, I think, you know, on One Bloor, last quarter, I think you were a bit, you know, reluctant to provide the, the rent lift on the new leases, versus what Nordstrom was paying. You know, I think there was obviously still, still some space in discussions with, some prospective tenants. Now that it's done, any color you can share on what that lift look like or what the incremental NOI impact, would be?
Yeah, Jordy can provide a little color, but not the full color. And the reason we're going to remain a little limited on our commentary for another quarter is that, as you probably know, Nordstrom's made a settlement offer to landlords that we're still in the midst of working through. So, I feel like we'll be able to provide a little more detail once we're totally through that. Jordy, anything else?
I, I wouldn't say a lot more, except, you know, maybe at a high level, just saying that, the aggregate rent will certainly be, I'll say, meaningfully more than what Nordstrom was paying. And those, leases will have, also a higher growth profile.
Yeah, if you take the Q4 run rate. So this will capture more than just the Nordstrom space, which is why we can speak to it. But if you take the Q4 run rate to full annualized occupancy, excluding the positive impact that we expect from parking, so just the actual leasable area, that number, Jordy?
Somewhere between CAD 8 million and CAD 9 million.
Yeah. So that'll give you a little bit of color on, you know, what the impact of One Bloor will be on the annualized numbers from Q4 through to annualized full occupancy, which we're the better part of a year out from.
Got it. Thanks very much. I'll turn it back.
Thank you, Pammi.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting over to Adam Paul for closing remarks. Please go ahead.
Okay. Okay, thank you, operator, and thank you everyone for once again taking the time to participate in our conference call. We hope to see you all at our Investor Day on February twenty-first. Thank you very much. Have a good day.
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