Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT Q1 2020 Results 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 conference 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 statements. A summary of these underlying assumptions, risks, and uncertainties is contained in our various securities filings, including our Q1 MD&A, our MD&A for the year ended December 31st, 2019, and our current AIF, which are available on SEDAR and on our website. 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 company's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call. I'll now turn the call over to Adam.
Okay. Thank you very much, Alison. Good afternoon, everyone, thank you for joining us today. After I speak, Kay will take us through the quarter, there are other members of our management team joining us as well for the Q&A section. Q1 really does seem like a distant memory. The world has changed so much since then. My comments today will focus on the state of our business in light of the environment brought about by COVID-19 and the related government-imposed shutdowns. I'll frame the discussion by starting with the current shutdown phase, followed by the reopening phase, conclude with some thoughts we have as we look into the future beyond COVID-19 as it relates to FCR.
To begin with the current phase, I'd like to start by acknowledging the efforts of the First Capital team, who have done a remarkable job in responding to the pandemic as a result of their focus, agility, and dedication. When this first hit, one of the first to act was our IT team. Within 48 hours, they had 100% of our staff up and running with the tools needed to work safely, effectively, and remotely. Our property operations staff have been exceptionally busy as well, ensuring the safety and security of our tenants and properties. FCR's frontline workers are our property operations team. These dedicated employees continue to be front and center at our properties to ensure they are safe, secure, and that maintenance standards are met in order for our essential tenants to continue serving their respective communities who are relying on them more than ever.
Communication with tenants has been a big priority. This is not business as usual. The focus on direct communication has been increased. Everything from dealing with tenant requests, helping them navigate available government programs, and sharing links and information on COVID-19 best practices, among other information. Our accounting, valuations, and finance teams didn't miss a beat and completed Q1 results and reporting while working together, but apart. Our leasing and legal teams continue to work with operations and with many tenants directly. In addition to our small business support program, this team has also been negotiating and completing lease renewals and even a handful of new lease transactions. Our brand and culture team has been providing employee support and implemented a communications hub for information on the coronavirus, as well as a resource center for webinars on topics such as leading teams remotely and enhancing mental wellness.
Our development and construction teams are doing their very best to move our active projects along while keeping the site safe, whether they're open or closed. Furthermore, this team is preparing for the full reopening of our sites and projects while still working directly with city officials on high-priority files the city has kept working on remotely, such as the rezoning of our Christie Cookie site. In terms of our portfolio, its foundation is necessity-based, which has provided us with some cushion. Through the lockdown, there has obviously been bifurcation between retail that is designated essential versus non-essential. FCR has been, and remains focused on providing communities with essential services through our properties, including grocery, pharmacy, liquor stores, restaurants for curbside takeout or delivery, certain medical uses, among others. This, combined with our urban locations, should serve us well as we slowly commence reopening.
Our portfolio today can be summarized as follows. Approximately 1,700 tenants, representing 54% of total rent, are fully open. Approximately 330 tenants, representing 7% of total rent, are partially open. Roughly 2,300 tenants representing 39% of total rent are closed. Although, we still consider these tenants an important part of our tenant mix going forward. In terms of April rent, we collected 74% of the total gross rent payable before adjusting the rent roll for rent deferrals that have been agreed to, such as those under our small business support program. At this stage, we believe that a significant portion of the uncollected April rent will ultimately be collected. Aside from small business tenants subject to deferral arrangements, tenants that have not paid generally fall into one of two categories. The first are large companies who we believe have the means to pay rent.
Aside from whether or not they are operating, their covenant strength and access to liquidity are important factors to us in assessing their ability to pay. We will take an aggressive approach to collect the rent owed from these tenants. The second are tenants who we believe do not have the means to pay full rent. Many of these are our small business tenants who are among the most vulnerable. To help them, we launched FCR's small business support program in March that provided immediate relief through up to CAD 30 million in the form of rent deferrals. Thus far, approximately 1,400 qualifying tenants with a total monthly rent obligation of CAD 9.3 million have applied. We launched this program to provide immediate relief. Since then, government has announced additional support. One such program is the Canada Emergency Commercial Rent Assistance Program, or CECRA for short.
While well-intentioned, important details need to be finalized and understood before we definitively understand the impact to FCR. At this stage, we believe that roughly 25% of our tenants may qualify for the CECRA program, including substantially all of our tenants who qualify for FCR's small business support program. CECRA may prove to be a better option than FCR small business program, both for FCR and the tenant. We'll await further details on CECRA to make that determination. On to May. It does take a bit of time to get an accurate picture on monthly rent given the timing of when tenants pay or are obligated to pay, timelines for checks to clear, timelines for electronic fund transfers to clear, and so on.
Based on the three business days incurred to date to start the month, May rent collection is shaping up to be very similar to April. We'll wait for funds to clear before making that final determination. Speaking of May, I'll move into the reopening phase with preliminary plans already in place in certain provinces. The only thing we know for certain is that the reopening phasing and timeline will vary by province. Our team will be supporting our tenants with health and safety requirements, customer or physical distancing control, PPEs where applicable, designated curbside pickup areas, and more. We have a wonderful tenant base. We can't predict how different retailers will adapt to a graduated reopening, but some tenants may not survive, causing vacancies. We'll endeavor to work with our tenants to ensure their success.
Failing which, we're very confident in the quality of our locations and our ability to re-lease space. Looking beyond the immediate future. Our team's focus is now turning to how best to harvest the learnings from this global tragedy and to develop a plan to enhance our current property attributes and business in general. We're more convinced than ever that our super urban strategy of creating thriving urban neighborhoods positions FCR well for the future. We know that essential service tenants have fared better in close proximity to higher or more dense populations. We know that food service locations, while impacted by the loss of seating and in-dining availability, were able to shift a larger portion of their businesses to take out and food delivery, again, because of their proximity to higher and more dense populations.
More than ever, we also know the value proposition of our real estate being centrally located in the heart of the last mile, a major factor in the future value of real estate. The walkability of our properties should also result in better performance coming out of this. From a financial perspective, our objective to lower our debt through dispositions remains. We recognize the property transaction market is largely paused, as was the case during the initial phase of every previous crisis. We have had great success over the last year or so, selling over CAD 900 million of our leased urban properties. Fortunately, we were ahead of our disposition plan coming into this. We will not be inclined to dispose of high-quality properties at undervalued pricing, and accordingly, we expect our dispositions program to pause for the time being.
Capital allocation, always a very strong focus, will be of paramount importance. It's too early to talk of any specifics in this regard, as the lockdowns remain in place and the reopening timeframe lacks clarity. We are not coming off our objective to reduce debt in the short to medium term. Before I conclude, I would like to again reiterate FCR's deepest sympathy to those who have been victimized by this pandemic. I would also like to express thanks and gratitude to the many frontline workers who are the true heroes of this pandemic. As a means to support FCR's independent food tenants through this, and to express our appreciation to frontline staff, FCR is proud to be providing thousands of healthy and delicious meals to frontline workers in several cities in which we operate. I will end where I began, with the FCR team.
Through video calls, phone calls, town halls, and emails, we have kept connected as a team, and we've accomplished an awful lot. I am tremendously proud of how the FCR team has lived our values and worked as one team with one purpose through this. I will now turn things over to Kay. Kay?
Thank you, Adam. Good afternoon, everyone, thank you for joining us on our call today. As Adam mentioned, due to the worldwide pandemic, we are operating in a very different environment today. Never has it been any clearer how important our properties are to the communities in which we operate. Many of our tenants are providing everyday essentials in the midst of a global pandemic, the daily essentials we've always assumed that we would have ready access to and literally cannot live without. We would like to recognize and thank all of our team members and our tenants for how quickly they have transitioned to the new requirements for social distancing and operating our properties, which has allowed the residents of our communities to safely acquire the products and services they need.
I want to touch on our balance sheet and liquidity position leading into the pandemic prior to discussing our results for the quarter. In 2019, we completed CAD 835 million of dispositions, which put us ahead of our internal targets. Early in Q1, we closed on another CAD 81 million of dispositions and had another disposition go firm with closing expected in Q2. Given the significant amount of dispositions completed over the past 15 months, combined with our investment activities, our asset quality has never been higher, and we were in a positive cash position with CAD 800 million of undrawn operating credit facilities heading into the pandemic. We had approximately CAD 7 billion or 70% of our assets unencumbered, including the vast majority of our very best assets.
Additionally, our near-term maturities were very manageable, with about 6% of our debt coming due in 2020 and another 7% in 2021, which is well below the 10% target we set for our annual maturities. Overall, a very solid position. I would like to briefly touch on our results for Q1, which for the most part were unimpacted by the pandemic, with the exception of CAD 119 million non-cash adjustment to the fair value of our properties as described in our MD&A. We've posted our conference call deck on our website, which presents the quarterly results in detail. I will briefly summarize the results rather than taking you through the deck to allow more time for Q&A. As we expected, our Q1 FFO declined versus the prior year, given the success of our disposition program over the past 15 months with CAD 916 million of completed dispositions.
A year-over-year reduction in our outstanding loan receivables. The loans that were repaid, primarily in Q3 of last year, generated very attractive returns for us and supported our deleveraging objectives. As we previously indicated, this has and will result in lower interest and other income in 2020. We also had higher other losses in the year, which included CAD 1.4 million of selling costs related to our Humbertown condo project, which has reached pre-sales of 50% and is slated to begin construction in 2021. CAD 900,000 of non-recurring REIT conversion costs as we closed out this project. Same-property NOI growth was negative as expected due to an unusually large lease termination fee we received in the first quarter of last year from a tenant which we have since backfilled. Our occupancy declined 50 basis points from Q4.
The majority of this decline was intentional, as we are making room for new tenants taking occupancy throughout the remainder of the year. For the eighth consecutive quarter, we achieved double-digit increases on our lease renewal rate with an overall lift of 18% in the quarter. This is a testament to the quality of our assets. We continued to advance our super urban strategy in Q1 by further enhancing our portfolio quality through the disposition of properties inconsistent with our strategy, while at the same time investing capital in our targeted high-growth urban neighborhoods. As a result, the average population density surrounding our properties increased to 293,000 at quarter end, which is very close to our 300,000 target and up 42% from January of 2017. Additionally, our average rental rate grew by 5.5% over the prior year, record growth and well above our five-year historical average growth rate of 3.2%.
During the quarter, Gazit sold its remaining interest in FCR, which further increased our public float. Looking forward, our liquidity position as of May 5th remains strong and includes approximately CAD 680 million of cash and undrawn credit facilities. Our debt maturities for the remainder of 2020 total just CAD 80 million, with CAD 310 million maturing in 2021, and our unencumbered asset pool exceeds CAD 7 billion and 70% of our assets. To further enhance our liquidity, we are implementing a CAD 75 million cost reduction program, which includes both proactive and naturally occurring reductions in spending over the remaining quarters of the year. This program includes a reduction in property operating costs and in general and administrative expenses totaling approximately CAD 15 million, as well as a reduction in development spend and elective maintenance CapEx of approximately CAD 60 million.
We will also be taking advantage of the government support programs that are available to us, including the ability to defer certain payments like HST and realty tax. We'll continue to evaluate the potential merits of the CECRA program Adam touched on earlier, as well as any other programs announced by the government as details become available. While it is too early to predict the full impact of the pandemic, we are actively monitoring and evaluating all aspects of our business as the impact of this crisis continues to unfold. During this time of uncertainty, we continue to be guided by our values and our corporate responsibility and sustainability program. I am proud of our employees who now more than ever demonstrate day after day our core values of collaboration, innovation, excellence, accountability, and passion.
I'm confident that the superior quality of our portfolio and our tenants, the vast majority of whom offer everyday essentials, will differentiate us in the months and years to come. At this time, we would be pleased to answer any questions you have. Melanie, could you please open the call for questions?
Certainly. Once again, please press star one at this time if you have a question. The first question is from Mark Rothschild. Please go ahead.
Thanks, and good afternoon. Adam, maybe in regards to your comment about reducing leverage, you also said that you probably will not be selling assets in the near term. Outside of the cost reductions, can you maybe just talk a little bit about how you plan on reducing leverage in the near term?
Yeah. Thanks, Mark. It's a very good question. It's a topic that we're spending a lot of time on as a management group and a board. I think I would first come back to capital allocation in general. Despite the intense short-term focus that the pandemic is forcing on all companies, including ours, our approach, meaning management and the board, the approach we're taking extends beyond the short term. A lot of the discussion at the board level is geared to the best long-term interests of the company. It's being discussed within that framework. Certainly our board's been, and will continue to meet more frequently than normal to consider all courses of action. Nothing's off the table for consideration, I can tell you.
I think it's an obligation of the board to make sure nothing is off the table, and capital allocation decisions are being discussed and will continue to be discussed at every meeting. Whether there are decisions to change certain courses or not, will be discussed each month and/or as we meet on the most relevant information we have and the future visibility that's available at the time, and that's continuing to unfold. This is a very fluid situation, so I can't point to one specific lever today that I can tell you over the next few months we're going to execute on because there's so much volatility in the world and in our business. We're looking at all of the potential options, and we will think through all of the potential options.
We will act accordingly, where we have a firm belief that it is in the best interest of the company. Certainly dispositions is our preference. We've said right now that's on pause. We don't know how long that will be on pause for and a bunch of other factors and how they'll unfold over the short to medium term, we're going to look at all of them.
Okay, thanks. You also said that you expect to get most of the rent from the tenants, the retailers that haven't paid yet, in general. Clearly, some are likely to need some help and not able to pay much rent. To what extent are you willing to accept vacancy and just not allow the tenants to get by? Are you willing to work with them and understand that they might be able to operate their business and pay rent once we come through this, but in the near term, they will need additional help than just the deferral?
Yeah. It's a very complicated scenario, or I should say it's a very time-consuming endeavor because we don't believe that a cookie-cutter approach is the right approach to this. Unfortunately, I say unfortunately from a time perspective, we have to really analyze each situation individually. We created a small business program that actually provides for a lot of efficiency, and you could make the case for some of the tenants that are qualifying for this, like a doctor, let's say. Well, we know that a lot of medical practitioners, like doctors in our portfolio, can probably find a means to pay their rent and get through this differently than certain small businesses that may be in a different scenario. We have not segregated those. So we've said, look, with the dentist or the doctor, we said, we're going to give it to you.
We're not scrutinizing it differently than other small business tenants. Kind of the worst-case scenario is we have a higher probability of collecting the full rent from that type of tenant. It is a case-by-case basis. We look at the space that they occupy. We look at their business heading into this. We look at their history with First Capital, their payment history, their sales history, the strength of their business. Then we make a call. Unfortunately, there are some tenants that perhaps were weak heading into this, and it won't make sense for us to do extraordinary things, to keep them alive. The space is really good, and we'll say, "Look, there's not much more we can do here," and we will look for an alternate tenant if required.
We're very comfortable with our ability to secure another tenant, given the quality of the space and, generally at more rent, and, of course, you've got downtime and other things. Then others, we may say, look, this has been a long-term great tenant. The business has been a great business. They didn't plan for a pandemic where their revenues went from a certain level to near zero. They really do need some help, and we will work with those tenants, to get them the help and to get them back to where they were, if we believe in them, and there's a demonstrated track record. It's a bit of a long-winded answer, but it's really being done on a case-by-case basis, and there's a lot of factors that we consider in making the decision, including compassion as part of it.
I can tell you, the way tenants are approaching this with us does have an influence over the type and depth of help that we're prepared to provide, including large tenants that are being very transparent and respectful and reasonable on the situation. We're going to get to a meeting of the minds between us and them much more quickly than some others who have taken a, I'll call it, a more opportunistic approach.
Okay, great. Thank you.
Thank you, Mark.
Thank you. The following question is from Sam Damiani. Please go ahead.
Thanks. Good afternoon, everyone. First off, maybe just on the fair value losses that you booked in the quarter. Seems like a pretty substantial number at CAD 129 million, relative to the quarterly revenue run rate for the REIT, especially when you think about the pretty high collection rate that the REIT has enjoyed for April. I wonder if you could just give a little more color as to how you arrived at that fair value loss.
Sure. Hi, Sam. It's Kay. We adjusted the value of certain assets that had a lower percentage of essential tenants by adjusting the growth in market rents and vacancy rents in the near-term years in our 10-year DCF model. We didn't make any adjustments to cap rates, as you noted, when reviewing materials. We really felt there was a lack of objective evidence as at the reporting to date to conclude on an overall change in cap rates. However, we did feel there was evidence of change in cash flows. We had announced our small business support program prior to the end of March, which is why we made a look at all of our DCF models and selectively made those adjustments. It's obviously a very fluid environment, as Adam said, we'll be reassessing cap rates at Q2 based on the information that's available at the time.
Overall, that was the approach that we took, is to look specifically at near-term assumptions in our DCF models for certain assets within the portfolio.
Okay. I was thinking the impact of the rent deferrals was the primary driver, but it sounds like there's obviously a lot more thought put into than that. It looked like Calgary occupancy declined almost two percentage points quarter-over-quarter. Was there anything in particular driving that? It looked like a good chunk of the fair value loss was actually within that market as well.
I'll start that, and then I'll turn it over to Carm. Just to dovetail on the back of Kay's comments, I can tell you that our auditors-Comments to our audit committee was that the gold standard was demonstrated in terms of our approach to IFRS valuations in the quarter. They were very happy that we did a dive into things at the property level versus taking macro assumptions. That's why you may have seen a larger decline than perhaps one would expect, but it was a result of a pretty deep dive of work. In terms of the decline in Calgary, I'll let Carm speak to the details, but there was a tenant who we have re-let their space and terminate early. Carm, the details if you have them, please.
Sure. Hi, Sam. It's Carm.
Hi, Carm.
We had a tenant in one of our properties, an anchor tenant, that we had decided to negotiate a buyout with them because we had another national tenant, a TJX banner, that wanted the space. We ended up backfilling it, and now we're in the progress of getting the space ready for that tenant. We purposely made that 40,000 square feet become available and ended up doing a deal with at significantly higher market rents.
It was Home Outfitters, right, Carm? That's the tenant that went out.
Yes.
Yeah.
Oh, okay. Yeah, sure. Maybe just one last one if I could. I noticed today the Ontario government is allowing more stores to open up over the next few days, including basically any store with an outside entrance and for curbside sales. What % of your tenants that are today closed would then be allowed to open in Ontario as a result of this change? I'm thinking it would be the vast majority, but I'm just curious what the answer is.
Yeah, we're trying to understand the full details, which has been a routine thing when some of the government announcements come out because look, this is not a knock against them, it's just we want to make sure we get the details right. If it's based on the stores that have an exterior access, it's well over 90% of our tenants, by revenue and tenant count, fall into that category.
That's helpful. I'll turn it back. Thank you.
Thank you, Sam.
Thank you. The following question is from Johann Rodrigues. Please go ahead. Your line is now open.
Hey, everyone. Adam, just kind of going back to Mark's question. Just on the two buckets you'd mentioned about those that had the means to pay and those that don't. I can appreciate it's a challenging exercise, as you mentioned, but what actual metrics do you use to determine whether a company kind of has the means to pay or not?
Market cap is one if they're a public company. Access to liquidity is another. Demonstrating their true current financial position through sales and things like that is another. Look, we're asking in some cases for non-public information, but we're being asked to amend a contract, we want to make sure that we have adequate information to make the right decision to do that. Look, obviously, we're dealing with a lot of tenants who their sales, in April, would render them not being able to pay rent. We could say the same thing on certain properties we own that we can't afford to pay certain things there. The expectation is that we pay them, we pay our loans when they come due and when they're scheduled to be paid, and we enter into contracts with strong covenants, and that's part of the decision-making process.
We want to make sure that it's not just about, we've had a really bad month that no one planned for. That doesn't necessarily mean you can't pay your rent for the month. It's a typical financial analysis that one would look to and the metrics and access to liquidity, things like that. Private equity, you look at what type of distributions or capitals come out of the company recently. If there's a major amount, if there's a major sponsor, we encourage that tenant to use their sponsors and owners balance sheet to finance their rent, not ours. These are some of the things that you obviously think about.
Okay. Thanks. Then of the 26 that haven't paid April rent, what % of that would fall under the government small business program that was announced last week?
The CECRA program?
Yeah, the CECRA.
Johann, you may have more info. I think it's roughly half because we believe a quarter of our total tenants would qualify, and we think roughly 15% of our tenant base is small business that qualifies for our small business. Those would all qualify for it, and then there'd be another 10% of our tenants that we believe would qualify for it. Does that answer your question, Johann?
Roughly half of the group that haven’t paid, you think would fall under this program then. Presumably the other half would be ones that would maybe fall under a larger retail program that is rumored to be being developed right now.
Yeah, that's correct.
Okay. That's helpful. Lastly, I know you said it was similar, but as of May 5th, what was the rent paid versus April 5th?
Identical.
Identical? Okay. Thanks. I'll turn it back.
Thank you. The following question is from Jenny Ma. Please go ahead. Your line is now open.
Thanks. Good afternoon. Just one more question on the rent collection. It looks like that the April number, you guys revised up a little bit. I mean, it's not that much, but I'm just wondering, is that just a matter of accounting for it, or was there some sort of change on the part of a few tenants who decided to pay their April rent?
Yeah. It's not accounting. The numbers are apples to apples. Whenever we announced that it was mid-April, we said it was 70%. Since then, by the end of the month, 4% of the rent payable that was not paid was paid. That took us to 74.
Is there anything behind that, or was that just some tenants getting around to paying, or was it in response to?
Jenny?
Yeah?
Sorry, it's Geordie. Just to finish your thought.
Hey, Geordie.
How are you doing?
Good. Thanks.
Good. A lot of it is really a result of tenants paying by virtue of the fact that we issued first a demand letter, then default notices. Certain tenants responded, I guess, in fear of losing their unique, and I would say, urban and high-footfall locations, and paid the rent, albeit later than they typically do. It is more often than not in response to discussions with us and, or a response to having received a default notice.
Okay.
Just to expand on that, Jenny. Our approach, in early April, was one that applied a high degree of patience. When some of the large tenants did not pay rent, or in general, it doesn't necessarily have to be large. When some of the tenants who were viewed to be able to afford to pay rent, which mainly the large ones did not, we did not default them out of the gate. Okay. We tried to work with them for a while. Some of them, we felt that it was inappropriate for them to pay no rent at all. We moved to default. Okay.
Because we got a lot of letters, like many others, and in some cases, it was a paragraph, some cases it was four pages, but they all said the same thing, "We're not paying rent." When we drilled into that, the landlord actually has a lot of rights when the tenant is in default. We started to take a harder line towards the latter part of April. I think it's one of the reasons why May is shaping up to look similar, and not worse at this stage. There's no tenants, unless reopenings commence, which it looks like some will, and we're hopeful that continues, but at this point, that hasn't really happened. No one's doing more sales generally in May than they did in April if they were closed.
Now it's a function where the landlord's rights are starting to be exercised. To be locked out of some of the locations that we have in our portfolio would be a very significant problem for a lot of tenants, because in many cases, they're amongst their most productive stores. That's part of the background and gives you a little bit of color. We were very patient at first. We were trying to figure out who was in dire straits and perhaps who was being more opportunistic and trying to take advantage. Where we're convinced that tenants or retailers are more in the take advantage camp, then, like I said in my opening remarks, we've become more aggressive with them.
Great. I really appreciate all the color around rent collections and also about May. Moving on to the same-property number. I see that there's a little bit of footnote referencing the residential contribution to same-property NOI, and I'm not sure if I can find it in the MD&A. Was the residential piece, and I know it's small, was that negative impact on same property? I noticed that the operating costs went up. I'm wondering if that's coming from that and perhaps the hotel. I know it's a very small piece as well. Maybe some color on that would be useful.
Hi, Jenny. It's Kay. King High Line Residential is our largest residential project, but it's just gone online, so it wouldn't be part of our same-property NOI at this time. We did have higher operating costs in same-property NOI. It does relate to our properties in development. As a number of those have transitioned into IPP, we have tenants who may not be paying cash rent yet. We're capitalizing the less of the operating cost as a result of that. King High Line Residential, a good portion of that's no longer in UD. We are seeing those operating costs come through as well. I would say those are the factors that are increasing the operating costs year-over-year that you're seeing in NOI.
Okay. Is it fair to say that all the op costs are being captured now with the rent contribution on the top line coming in in the next few quarters?
Rent collection as we continue lease-up of the residential and as tenants start paying cash rent in some of those development properties, you'll see the NOI flow in.
Okay. My last question is more like an operations question in the context of COVID. When you've done leasing, you talked about the property that you're doing out for TJX, but if the presumed opening date or transfer date is sort of in the middle of this, how does that happen in terms of lease payments? Are they paying anyway, and then they just have to work with the conditions we have now, or are there other terms that you can work around to sort of delay handovers or openings or rent payment? Just trying to understand how that works in this environment.
No, I'll try and give you an answer. It's not business as usual, but the business is not closed. For a lot of reasons, it's terrible what's happened in the world. Can you imagine if this happened 10 or 15 years ago before things like Uber Eats and the technology that we have? That's flowed through with the properties . Most businesses are focused on the here and now, the new leasing is definitely slowed down. I don't want you to misunderstand what we said. Fortunately, it hasn't stopped yet, and in fact, Carm has had a number of inbound inquiries from tenants that are hoping some of our space shakes loose, and they've expressed a strong interest, including some of the hardest hit industries or sectors within our tenant base. That's an encouraging sign.
Look, it's through the use of technology. We're respecting social distancing. We're not forcing our leasing staff out to the property. You can use lock boxes. You can use virtual things. You can use FaceTime technology, and that's what we've implemented where appropriate, and I would assume for the foreseeable future, we're going to continue to leverage that as part of our overall leasing marketing program. In terms of tenants that are slated to take occupancy, we've been fortunate by and large that our construction group has done a remarkable job of keeping those timelines for landlord work generally on track. We haven't had to exercise a force majeure clause or anything like that to delay occupancy. Our approach is if we meet our timeline for tenant turnover, we've fulfilled our obligation. Our expectation from the tenants is that they fulfill theirs.
Can the tenants come to you and say, "Look, we don't want to open this month. Can we push it out by a couple of months?" Or do they still have to just fulfill the terms of the lease?
No. A lease is a binding legal contract, the lease will outline how all of these things are dealt with. It's not infrequent for a lease to say your rent commencement starts at the earlier of an outside date or the day you open. We don't lack compassion. We understand the environment we're in. If a tenant comes to us and they've got a legitimate issue with opening that they want to bump out by a month or two, they can't even open now. It depends on the tenant. If it's a really well-capitalized tenant, then our expectation is that we go by the lease. If it's a small business tenant who's really stretched on investing in this new store, and it's going to put a lot of pressure on them, then we're probably going to work with them.
Okay, great. That's very helpful. Thank you.
Thank you, Jenny.
Thank you. The following question is from Pammi Bir. Please go ahead. Your line is now open.
Thanks. Hi, everyone. Can you maybe just comment on any updated conversations that you may have had with the ratings agencies and your thoughts on staying on side with respect to their requirements?
Hi, Pammi, it's Kay. We're in regular discussions with the rating agencies. We have provided both of our agencies with current updates given the evolving environment, and we'll continue to do so. Those discussions are ongoing. As Adam said, we are still looking to deleverage over the medium term, and we'll look to restart our disposition program as soon as the market stabilizes.
Has there been any, I guess, indication of potentially perhaps relaxing some of the timelines or even the goalposts that they had currently or previously indicated?
Hold on, Kay. I'm not sure that's an appropriate question for us to answer, Pammi. We have a lot of discussion. Kay, if you feel differently, go ahead. I would imagine that's not an appropriate question for us to answer.
Yeah. I think they've made some comments publicly about the entire real estate industry and how they plan to rate it through the cycle. I would refer you to their public comments on record for that.
Okay. Just with respect to some of the reconversion costs that carried over into Q1 and some of the other condo selling costs, first off, on the reconversion costs, are those done at this stage, or will there be some additional amounts going forward?
We've concluded the project, so I would not expect additional reconversion costs going forward.
Okay. Just on the condo sales, I guess at Humbertown, would those carry on, I guess, if the sales process continues? I am not sure where you are, whether that is still happening or if the sales center is still open.
Yeah. As I mentioned in my comments, pre-sales are continuing. We are over 50% at this time. I'll hand it over to Jodi to give a little more color on the project.
Hi, Pammi. Good afternoon. Thanks, Paige. Yeah. The selling does continue. The sales center on site did close, and Tridel, who's our partner, consolidated a number of their sales centers into one, just to respect the physical distancing measures and to keep everyone safe. The project, from a selling perspective, is going to continue. We do expect to start next year in 2021. I think it's important to note that the purchasers for Humbertown are local. They're not investor-driven. The neighborhood, of course, remains one of the most desirable in the city.
Thanks very much. I will turn it back to you.
Thank you. The following question is from Tal Woolley. Please go ahead. Your line is now open.
Hi. Good afternoon. Adam, you had mentioned earlier, just the process of receiving communication from the tenants. You're getting letters, some short, some long. In those letters, are the tenants just saying, "Yeah, we're not paying you," or are they trying to use lease clauses to justify not paying?
Yeah, I should qualify. Not all of our tenants had the respect to send us a letter. Although they weren't that enjoyable letters to read. Some of them just didn't pay rent and didn't send us a letter. No, to your point, the leases are pretty clear. We have not had tenants try to challenge the requirement to pay rent. It was more of, "Yeah, we know we have a contract, but we're not going to pay rent anyways.
Okay. Just bigger picture. I think we're all sort of struggling with how to think about how the sequencing of the reopening of the economy might go. Do you guys have a base case to try and marshal your resources in a coherent way? Do you think, by July, we expect to have all of our shopping centers open? We think there could be a second wave of this coming in the fall, winter. Have you sort of gotten to that level, or how are you trying to think about the sequencing of all this going forward?
Yeah, we have. The reality is we don't know. We've run all these scenarios, and then we've looked at the impact of each of them. The medical experts don't know. Government doesn't know. We're not going to sit here and pretend that we know. We're planning for a variety of scenarios, and some are a lot more challenging than others. I don't really know what to tell you beyond that. Notwithstanding the majority of this call has been spent on items I'm actually surprised we're spending time on, like Q1 and things like that, instead of the general outlook for real estate and our strategy and the impact on strategy and consumer behavior, et cetera. Nevertheless, we're here to answer the questions, not create them.
We're spending a lot of time on it, and we don't know, and that's one of the things that makes us most uncomfortable because we are used to running the business with a lot more clarity and more information than we have now. The last two or three weeks, cautiously encouraging in terms of things. We are running a lot of scenarios, and some of them are significantly better than others, but we have no idea which one will unfold. We're trying to prepare for all of them.
Okay. Obviously, new leasing in the short run could be difficult. I'm just wondering if you guys, I think, have shown some willingness in the past. I think about a year ago, you were talking about kind of restructuring how you put growth into the lease in terms of the renewal rates and how you would grow rents over the term of a lease. How are you thinking about managing that through this period as you try and write new leases? Do you think you might have to get a little innovative here to try and be able to sign new deals?
Absolutely, especially coming out of this. We will get to a state of normalization and stabilization in terms of our business. We're not there today, and so it'll be a race to get there. Two of our big advantages is our people plus platform. Exceptionally importantly, our real estate. Our real estate is not a commodity, and we believe we have a great portfolio, and so we will use it to the best of our abilities. It will require creativity. We're spending a lot of time internally right now on that. One of the big things in our view of this is that the bifurcation that's been happening in retail for several years now is going to dramatically accelerate.
Weak properties and weak retailers will likely not survive or survive in their current form, and strong properties and strong retailers will find new opportunities to advance their business and become even stronger. We think that's a good thing, and we think that we're well-positioned to provide the real estate component of some of these retailers' strategies. It'll be a bumpy road, but we've got great real estate, and we've got great people, and we'll have to see. If we get into an environment where, potentially on a specific space, the environment's really tilted in the tenant's favor, then we'll push for a shorter term. We'll do things like that. There are other things that we're working on from an innovation and creativity perspective that we won't get into now, just from a competitive perspective.
Absolutely, it's going to require creativity, hard work, great real estate, great people. If you have that, you're going to come out of this much stronger, and if you don't, you'll get weaker.
Okay. Kay, I know sometimes you guys will have options to buy properties where you're maybe a joint venture or something like that. Do you have any of those situations in 2020 that we should be aware of just for capital spending purposes?
Yeah. In terms of acquisitions for the remainder of the year, I think there's one or two potential acquisitions that could come into the numbers later this year. We'll continue to evaluate and, as Adam said, look very careful at any capital allocation decisions we make.
Okay.
To give you order of magnitude, Kay, correct me if I'm wrong, but the aggregate number of those two potential items are less than CAD 20 million in aggregate.
That's correct.
We're talking pretty small properties.
Okay. Just lastly, on the fixed income side, the quantitative easing program proposed by the government, I think is using sort of the BBB rating as a threshold for plunder purposes. I know you guys are split-rated. Do you know if you qualify under that program?
Unfortunately, Tal, we have not received those details as of yet. I think that remains a question out there. They've just said triple B, so what does it mean?
Yeah.
We do not have the clarity at this time.
Okay, perfect. Thanks very much.
Thank you, Tal.
Thank you. The following question is from Ken Weaver. Please go ahead, your line is now open.
Hi, my name's Ken Weaver, as she said. I'm from Alberta. I'm a retail investor. Just got a very general question. With the double whammy in Alberta with the COVID and the oil situation, what percentage of your financial business is in Alberta? Second part of the question is, when you mention 64% open, 7% partial, and a 39% closure, do you have the numbers for Alberta for those percentages?
Thank you very much, Mr. Weaver. The percentages in composition of our portfolio, in many categories, including closure, is similar across our portfolio, including in Alberta. We're really in two places in Alberta. We're in Calgary and Edmonton. In terms of the first part of your question, in terms of the concentration in those markets, we're about 20% of our total portfolio is in Edmonton and Calgary.
Okay. Great. I appreciate that very much. You've answered my question. Thank you.
Thank you very much.
Thank you. The following question is from Dean Wilkinson. Please go ahead. Your line is now open.
Thank you. Afternoon, everyone.
Hi, Dean.
Adam, I couldn't agree more with you on the issue of the myopic focus on there's been a 2% increase in rent collection over the past 24 hours, yadda yadda yadda. When you look forward on a bigger picture and real estate's a 10-year DCF, so let's ignore the next six months. What do you think the biggest change is that comes out of what we've seen here, either for better or worse?
Well, that's exactly what we're working on trying to figure out. There's no question in my mind that some company strategies, their long-term strategies, will be impacted by this. We don't yet think ours is one of them, but we do think around the periphery, there are definitely things that will impact it. If you look at the underpinnings of our super urban strategy, it's about the high-density neighborhoods that are located in areas that have tremendous amenities and close proximity to employment centers and entertainment destinations and education and culture and transit and healthcare and so on. Certainly at this stage, we certainly believe that those fundamentals remain in place over the long term. It's also about jobs, because people are going to go where the jobs are. At this stage, we certainly don't see large sectors moving out of cities.
I had my mother tell me last night that everyone likes working at home, so offices are going to be in trouble. I said, "Whoever told you that doesn't work in an office." Because everyone I know that works in an office is fed up with working at home and wants to get back to the office.
Until people tried. Yeah.
Yeah. Young people are a big part of the employment market, and the big growth drivers in the job market has been in the tech sector, which has attracted a lot of the young people. It's not lost on us that they are also the group that's least frazzled by everything that's going on in the world. It could be in part that there's a certain degree of invincibility that you have when you're younger that wanes as you get older. The hard evidence is such that young people are dramatically less affected by the virus if they get it, than old people. All of these are factors. We will continue to study this carefully as things evolve.
We are looking for ways to tweak things in our business to make it better that we believe will be advantageous versus try to protect something that we thought was not subject to change. This is a massive event, and there will be things that change in the world permanently. We're not at a stage where we're prepared to tell you with a high degree of conviction that we've figured those out. We haven't yet, but we're certainly paying close attention to try and do that.
Yes, we all are. Well, I appreciate the insight. That's it for me. That's maybe the end of the call.
Thank you very much, Dean.
Thank you. The following question is from Sam Damiani. Please go ahead. Your line is now open.
Thanks. I was just wondering if any of your leasing discussions recently or if you're thinking this might be an increasing trend. If some tenants looking for larger stores because of the need for keeping customers with a little more physical distance, is that something that you think is going to be a trend? Have you seen any evidence of it so far?
I'll let Carm chime in as well. As far as I know, we have not seen that. We think that there's two phases that are important. There's the phase between reopening and let's say, when there's a vaccine, and then there's the period beyond that. We think that behavior, certainly at the earlier part of the reopening phase, will result in less density in certain uses like fitness centers and restaurants and things like that. We haven't yet got to the point where tenants are saying, "Well, I used to be in a format of X thousand square feet, and now because of this, we're going to increase it to Y thousand square feet." Carm, if you have anything to add, please go ahead.
No, I think, Adam, you captured what's happening. I've not received any interest from tenants who want more space because of this.
If I might just follow on. What about the restaurants? That is a sizable component of your portfolio. How do you see those businesses reopening successfully and generating, I guess, sufficient sales to pay the rents that they have agreed to?
It's interesting because we have some tenants that have several locations with us and just in their business. The composition of the sales profiles unfolded very differently. It's only reinforced our suburban strategy. What they told us, a lot of them, is that in the urban centers, a lot of their sales are down single digits now, which is, I think, phenomenal given how they're operating. When they get into the suburbs or secondary locations, it's way into the double digits in terms of the sales decline. Look, I do think there's some pent-up demand in the food sector in general. I think a lot of people have been eating at home a lot. I think that was nice for a short period of time. I think a lot of people are beyond that now.
I think it's one of the reasons we have seen a spike in our own restaurant sales over the last three weeks or so. I think coming out of this, the great restaurants that are desirable and people want to eat at, assuming they feel safe in however they consume the food, whether it's on-site or not, as long as they feel safe, I do think that they will come back, but they're going to come back on a gradual basis, and it will take some time till we get to the same volume. I don't see on the initial opening, the same number of seats in the restaurant that they had before. The good thing is a lot of them, this has really accelerated the integration of takeout and utilizing the food delivery services to complement their sales profile.
A lot of them, obviously, as you know, were not doing it at all, and in some cases, not doing it to the same level that they're doing now. I think long-term, that should bode well for the sector. Obviously, it's a really challenging time for restaurants.
Great. Thank you very much.
Thank you, Sam.
Thank you. There are no further questions registered at this time. I'll turn the meeting back over to Mr. Paul.
Okay. Thank you very much. Thank you everyone for joining us today during this definitely unusual time. We look forward to updating you on FCR's business over the coming months. In the meantime, I would like to thank you again. Stay safe and be well, everyone. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation. This conference is no longer being recorded. Please note that this conference call has ended. Please disconnect your line at this time. Thank you.