All participants, please stand by. Your conference is ready to begin. Ladies and gentlemen, thank you for standing by. Welcome to the First Capital Real Estate Investment Trust Q4 2019 and year-end 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.SDFGH/*-
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. Summary of these underlying assumptions, risks, and uncertainties is contained in our various securities filings, including our MD&A for the year ended December 31st, 2019, and our current AIF, both of which are available on SEDAR and on 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. 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 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. 2019 was a pivotal year for First Capital. To be successful, change has to be built on a solid foundation. FCR's evolution into an urban platform is not a recent phenomenon. It's evolved over the past decade-plus. Today, as we celebrate our 20-year anniversary and start this new decade, our foundation is very solid. In 2019, we took several bold steps to unearth the true potential value of FCR. We launched our Super Urban Strategy and a new brand identity that depicts the importance of community at the center of our real estate portfolio and solidifies our purpose to create thriving urban neighborhoods.
We also addressed the Gazit overhang by facilitating an initial CAD 1.2 billion reduction of their ownership interest, including FCR acquiring CAD 742 million at a price well below our NAV. Gazit's ownership now stands at 4.4%, resulting in FCR being a widely held company for the first time. After a lot of work by our tax, accounting, and legal teams, we successfully completed our previously announced conversion to a real estate investment trust near year-end. Our focus on improving the people and culture side of our business came through loud and clear on our high engagement survey scores and led to FCR being named the top employer in Greater Toronto by The Globe and Mail for the first time. We were honored to be Canada's only public real estate company to receive this distinction in 2019.
Our longstanding commitment as a leader in ESG garnered several accolades for our team, including receiving our third consecutive AAA ESG rating from MSCI. This is the highest rating possible. Perhaps most importantly were the advances we made executing our super urban strategy and, in turn, enhancing the quality of our real estate portfolio. The composition of our portfolio underwent a significant shift in 2019 through CAD 1.4 billion of investment activity and over 9 million sq ft of zoning submissions, of which 6.5 million sq ft were in Toronto. This CAD 1.4 billion of investment activity included CAD 835 million of dispositions in our leased urban neighborhoods. We also had a very busy fourth quarter in which over half of our total dispositions closed, with the majority of the proceeds used to reduce debt following the temporary spike from our share buyback.
By selling our entire portfolios in markets like Quebec City, Trois-Rivières, and Red Deer, we have almost no exposure to secondary markets and, in turn, have increased our exposure to our most super urban positions, most notably those in Toronto. We continue to develop strong partnerships with FCR as the managing partner in portfolios that are urban but not super urban. Roughly 20% of our properties, or 10% by value, fall into this partnership category now, and growing. For example, Ottawa is a market we want to continue to participate in, but it lacks some of the super urban attributes that we look for. We now own a 50% interest in virtually all of our properties in Ottawa.
It allows us to benefit from their future upside, enhance our returns through fee income, and grow together with our partners using less capital. We'll consider this for other markets and properties that we believe have further upside, but that lack super urban attributes we're targeting. Throughout 2019, we also invested over CAD 550 million of capital into super urban neighborhoods with roughly 85% of them in Toronto. Neighborhoods like Liberty Village, Yonge and Eglinton, and Yorkville, where we expanded our position and acquired a key development site adjacent to Yorkville Village and The Hazelton Hotel. All three of these Yorkville properties will benefit from being under FCR's common ownership. We're already seeing the impact of our recent investment activity on our key super urban metrics.
Our average population density within 5km of our properties improved by 16%, from 250,000 people at the beginning of the year to 290,000 people to date. We're confident that we will achieve our objective of 300,000 people sometime during 2020, which is ahead of schedule. Transit connectivity is also an important part of our real estate strategy. Over 99% of our portfolio is now within a five-minute walk of public transit. I'll now make some comments on our density pipeline, which we believe is the most mispriced element of our company in the capital markets, so surfacing its value is a very important objective for our team. We took meaningful steps in 2019 to progress this objective. First off, the pipeline grew. This is important because it's an indication of the relative upside inherent in our business through densification. It also protects the downside.
We started the year with an existing portfolio of 23.9 million sq ft of leasable area. We also had an identified incremental density pipeline of 22.5 million sq ft, representing 94% of our existing portfolio at the time. These numbers are all at FCR's ownership share. Owing to dispositions, our existing portfolio actually shrunk to 20.9 million sq ft by the end of the year. Our density pipeline grew. It grew to 25 million sq ft, now representing 120% of our built portfolio. Growing the pipeline is one thing. Surfacing its value is another. An important initial step towards this is through the entitlement process. Heading into 2019, we had approximately three and a half million sq ft of our pipeline zoned. In 2019, we submitted new zoning entitlements for an additional 9 million sq ft of density.
As you'll hear from Kay, we have significantly enhanced our disclosure related to our density pipeline. The zoning submissions made in 2019 are detailed by property in this disclosure, as well as our current IFRS value for the group. By applying even the most conservative assumptions, it is clear that there is material value to be realized, including for the portion we have conservatively included in our IFRS NAV. While 2019 was no doubt our biggest year ever for zoning submissions, we are planning an additional four million sq ft more in 2020, taking our two-year total to roughly 13 million sq ft. Our MD&A now provides insight into the individual properties that comprise our 25-million-square-foot density pipeline. It also highlights that certain properties haven't been included in our pipeline yet.
Properties such as Pemberton Plaza in North Vancouver, or the 42 acres we own under Meadowvale Town Centre in Mississauga, among many others. Our vision and plans haven't evolved to the point of inclusion yet. This is a future growth opportunity. Looking forward to 2020, we are very focused on unearthing the true value of FCR. As we pursue our super urban strategy, we come face to face with the paradox of a successful real estate strategy in the arena of the public markets. Quarterly metrics versus midterm and long-term value creation. We're well aware that selling our higher-yielding properties to reduce debt pressures FFO initially. We're also well-focused on the future value creation that our super urban strategy represents in the midterm.
We will strive to balance metrics like FFO over the short term as we surface the unrealized value in our 25 million square foot density pipeline, all of which is located in the strongest urban growth markets of Canada and have visible runway for continued and material NAV growth. Our management team is up to this challenge. We intend to deliver on our promise to delever, and until we do so, future investments will be aimed at enhancing properties which are core to our strategy. We'll continue our efforts to obtain additional entitlements, and we are ramping up our efforts to secure partnerships with partners who share our vision of creating thriving urban neighborhoods. The world is witnessing many new challenges, and the call for increased attention to ESG matters is increasing rapidly.
Our super urban strategy meshes perfectly with increasing demands from stakeholders related to ESG. Creating a thriving urban neighborhood requires a different vision than managing traditional grocery-anchored shopping centers. One which is extremely well-aligned with our approach to sustainability and will enable us to make even more progress in this area. Transit-oriented locations, parks, and public realm within our mixed-use developments, minimizing shadow impact, and pedestrian-friendly projects are as important as our quest for LEED and BOMA BEST certifications. FCR is proud to have always taken a leadership position in sustainable practices, both for new and existing properties, and we're determined to maintain our leadership position. I want to conclude by acknowledging the incredible efforts of the FCR team in 2019. It was a tremendous year, and it's amazing to see how they have rallied behind our super urban strategy, our new REIT structure, and our new brand.
Most importantly, our team has never been stronger, and I know they're up to the challenge of executing our new vision. I'll now pass things over to Kay, who will speak to our fourth quarter and annual results in more detail. Kay?
Thank you, Adam. Good afternoon, everyone. Thank you for joining us on our call today. As Adam mentioned, it was a transformational and very busy year at FCR. We are quite pleased with all of the progress we made towards achieving our strategic objectives and the strong operating metrics we posted for the year. I would like to highlight some of the key strategic milestones and then take you through the results in more detail. Early in 2019, we introduced our super urban strategy and the metrics we use to measure our progress in advancing this strategy. These metrics include the average population density within a 5km radius of our properties, the proximity of our properties to transit, our portfolio's walkability score, growth in our average rental rate, increasing our density pipeline, and achieving our disposition targets. We made very good progress across all of these objectives in 2019.
As Adam mentioned, our average population density reached 290,000 and is well on track to achieve our target of 300,000. Over 99% of our properties are now located within a five-minute walk to public transit, up from our Q3 level of 90%. This improvement was primarily due to the Q4 dispositions of CAD 468 million of properties that were inconsistent with our super urban strategy. Our portfolio's walkability score is 78, which is considered very walkable and where most errands can be accomplished on foot. Our average rental rate grew a record 5% in 2019, well above our five-year historical average growth rate of 2.4%. During the year, our density pipeline grew by 2.5 million sq ft to 25 million sq ft. Currently, 7.1 million sq ft or 28.4% of this density, up from 12.9% last year, is included in our NAV.
0.6 million sq ft is included as part of our active developments, and the remaining 6.5 million sq ft is valued at CAD 506 million or CAD 78 per sq ft. This is an increase of CAD 349 million over the prior year, due primarily to acquisitions of property with meaningful incremental density potential, as well as entitlements received during the year. We include in this CAD 506 million any vacant land parcels or properties we purchased for development, including properties like Christie Cookie, 1071 King Street West, 400 King Street West, Yonge and Roselawn, and 140 Yorkville. We also include land parcels adjacent to existing IPP centers, such as those at Place Portobello and Place Viau. Zoned density that is not encumbered by a lease, such as phase I of Humbertown and Place Panama, are also included.
Place Panama would be the largest property in terms of density that is included here, as it is zoned for 2 million sq ft. Notwithstanding that these properties are currently included in our NAV, this does not mean that there is less upside here than in the rest of our pipeline. For example, our Christie Cookie asset, which is not yet zoned for our intended use, is included here at cost with an incremental density of only 300,000 sq ft, which is based on the current in-place zoning versus the 3.5 million sq ft we submitted for. Both of these numbers are at our 50% ownership interest in this asset. In April of 2019, we became a widely held company. This was accomplished via our repurchase of 36 million common shares from Gazit, combined with the closing of the secondary offering by Gazit for an additional 22 million shares.
Upon closing of these transactions, Gazit's ownership in FCR declined from 33.3% to 9.9%, and since that time, Gazit has sold a portion of its remaining interest in FCR, reducing its current ownership to 4.4%. Following the share repurchase, we've been focused on reducing our leverage back to similar levels as at year-end 2018 through our disposition program. In 2019, we completed CAD 835 million in dispositions and made good progress towards our de-leveraging objective. One of our key strategic objectives for 2019 was converting from a corporation into a real estate investment trust, or a REIT. On December 30th, we successfully completed the conversion and began trading on the TSX under the symbol FCR.UN. As a result of the conversion, we expect to be included in the S&P/TSX Capped REIT Index in March of this year.
As part of our year-end reporting, we enhanced the disclosures around our density pipeline in our MD&A by including a breakdown of the density by urban market. We have also shown the individual list of properties where we have already submitted entitlement applications or plan to submit in 2020. These properties make up roughly 16 million of the 25 million sq ft of incremental density within our portfolio. We have disclosed our active developments as we always do, as well as a list of the additional properties that largely account for the remaining incremental density within our portfolio. As discussed previously, based on current market conditions, we expect to recognize meaningful increases to our IFRS values once approvals for these submissions are received.
We have also highlighted properties with meaningful incremental density that are not at the stage where we would include them in our pipeline, but are likely to be included at some point in the future. That summarizes the significant progress we made during 2019 in advancing our super urban strategy. Turning to the financial results. On slide six of our conference call deck, which is available on our website in the Investors section under Earnings and Reporting, we outline factors driving the year-over-year change in FFO. For 2019, we achieved FFO growth of 2% or CAD 0.02 on a per unit basis. Excluding the costs related to our REIT conversion, FFO per diluted unit increased 3.3% over the prior year.
Moving to slide seven, our same property NOI increased by 3% for the fourth quarter and 3.3% for the year, driven by rent escalations, higher occupancy levels, and higher lease surrender fees. On slide eight, we show our lease renewal activity. For the fourth consecutive quarter, we achieved double-digit increases on our lease renewal rates when comparing the rental rate in the last year of the expiring term to the first year of the renewal term. For the seventh consecutive quarter, when comparing the rental rate in the last year of the expiring term to the average rental rate in the renewal term. Our total portfolio lease renewal lift for 2019 was a very solid 10.7% on 2.5 million sq ft of renewals using the first year of the renewal term, and at 12.4% when using the average rental rate in the renewal term. Moving to slide nine.
Our average net rental rate grew a record 5% over the prior year to CAD 21.25 per square foot. This growth was primarily due to renewal lifts, rent escalations, development completions, and dispositions of our leased urban properties. Our development completions for 2019 included 201,000 sq ft of new commercial GLA and 247 residential units. The completions were primarily in our mixed-use King High Line project, located in Liberty Village in Toronto. On slide 10, our total portfolio occupancy rate increased by 20 basis points over the prior year to 96.9%. Slide 11 highlights our 2019 development spend. The vast majority of this investment, totaling CAD 166 million, was in super urban neighborhoods. Slide 12 shows the factors impacting FFO and the year-over-year changes. Slide 13 touches on our other gains, losses, and expenses, which are included in FFO.
For the fourth quarter, we recognized CAD 3.1 million of other expenses, primarily due to REIT conversion costs of CAD 3 million. For 2019, we recognized CAD 2.4 million in net other expenses, primarily due to REIT conversion costs and transaction costs related to the Gazit secondary offering, being partially offset by a CAD 4 million gain on a PropTech investment and the additional proceeds we received from Target. Slide 14 summarizes our ACFO metric. During 2019, we generated CAD 252 million in adjusted cash flow from operations. Slide 15 summarizes our 2019 financing activities. To fund the share repurchase transaction, we put in place CAD 850 million of unsecured bank term loans in the first half of 2019 and repaid CAD 100 million of these loans in the fourth quarter with proceeds from our disposition activities.
Additionally, in July, we completed the issuance of CAD 200 million of 7.5-year unsecured debentures with an interest rate of 3.5% and used the proceeds to repay other debt, including CAD 150 million of maturing debentures with a much higher interest rate of 5.6%. Slide 16 summarizes the size of our operating credit facilities and our unencumbered asset pool, as well as our key financial ratios. At year-end, CAD 7 billion or 69% of our assets were unencumbered. We had approximately CAD 800 million of availability under our revolving credit facility. As previously stated, we have a goal to return our leverage metrics to similar levels as at year-end 2018, within two years of the share repurchase transaction. We made good progress in the quarter with debt to assets declining quarter-over-quarter from 48.9% to 46.7%, and debt to EBITDA declining from 10.8 times to 10.0 times.
Our path to achieve our targets will show a steady decline in our debt to asset ratio. This will not be the case for debt to EBITDA, given EBITDA is calculated on a trailing 12-month basis and debt is at a point in time. We expect an uptick in this metric in the first half of 2020, but that it will remain below Q3 2019 levels, followed by a decline in the second half of the year to below Q4 2019 levels. Slide 17 shows our term debt ladder. Over the course of 2019, our weighted average interest rate declined from 4.2% to 4%. Looking forward to 2020, we expect same-property NOI growth to be in the range of 2% to 3%. We expect our 2020 lease renewal lift to be in the range of 8%-1 0%.
We plan to invest between CAD 150 million-CAD 200 million in development, we expect our development completions to be a similar amount at CAD 150 million-CAD 200 million. We expect to take a small amount of space offline for development, approximately 40,000 sq ft of GLA, primarily in phase II of our Wilderton project, as construction continues. At the start of our disposition program, we stated we were targeting approximately CAD 1.5 billion in dispositions. During 2019, we completed CAD 835 million of dispositions. Based on the strategic acquisitions we made in Q3 2019, together with the success we've had thus far with our disposition program, the fact that the remaining assets should garner even more interest, we expect to exceed our CAD 1.5 billion target.
As a result of the progress we made in 2019 against our disposition program and related deleveraging targets, our portfolio today has higher quality assets with increased density and stronger growth profiles and less downside risk, making it more desirable and more attractive than ever before. All of this is very positive, but in the short term, there is an impact to FFO, and as such, we do expect FFO to decline in 2020. Notwithstanding this, we do expect continued growth in NAV during the year and growth in FFO to resume in 2021. Overall, we are very pleased with the progress we made in 2019. It was a truly remarkable year for FCR, and I would like to congratulate and thank our entire team for their outstanding efforts and accomplishments during the year.
We are very proud of all the milestones that our team achieved and look forward to executing on our strategy and objectives in the year ahead. At this time, we would be happy to answer any questions you have. Operator, can you please open the call for questions?
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on the telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Mark Rothschild. Please go ahead.
Thanks. Good afternoon, everyone. In regard to your same property NOI, to what extent was that 3% impacted from asset sales that may have been a slower growth asset? Looking forward, do you expect leasing spreads to accelerate and be stronger in 2020 following the large number of asset sales?
Hi, Mark. Thanks for your questions. In 2019, there was very little impact on same-property NOI from asset sales. Our view longer term is that the assets we're investing in have a better growth profile than the assets we're selling, although the assets we're selling do have a growth profile, just not as strong or compelling based on what we see over the longer term. As you know, year to year, sometimes things happen, and you can't read too much into trends one year to the next. 2019 was an example of that. There was actually very little impact on same-property NOI based on assets moving buckets as a result of dispositions. Sorry, just so I'm clear on your second question, would you mind repeating it?
Yeah. In regards to leasing spreads that have been around the low double-digit range, would you expect that to be stronger in 2020 following the asset sales that you completed last year?
Again, it's hard to say in any one year, Kay provided, I guess, soft guidance on kind of 8%-10% expected for 2020. I can tell you the way our leasing group budgets, we've consistently exceeded what they have budgeted in terms of lease renewal lifts. We'll see if that's the case in 2020. I would say, we've seen an acceleration in the lifts on renewals over the past year, our expectation is that we continue to hang in at around that range.
Okay, great. Thanks. My only other question, in regards to the entitlements and the different tables on MD&A and the CAD 9 million that you submitted this past year, can you maybe quantify somewhat on what would the value be in the market to the extent one of these assets would trade now maybe on a billable per foot on the residential side? How would that change pre- and post-entitlement?
Look, we've got a pretty wide range when you look at the properties that are included in that list. We have some density in South Surrey that's kind of at the low end of the range, and that would be mid double-digit values today. We've got density at the opposite end of the range that's in the neighborhood of CAD 300 a billable foot for that type of density. I'm talking residential density. The commercial's typically higher. The residential density is the lion's share of it. The reason we put this disclosure in, is again, to support our objective of trying to surface some of this unrecognized value that we see in the pipeline. We think that for stakeholders, they can take a look at this list.
They can go into the actual submissions, which is public information. They can form a view based on work that if they're prepared to do or the knowledge of the market, they can form a view on the rough value of each of these properties and the density and how much density is expected and then compare that to the IFRS NAV. Our goal was to provide disclosure that can get people into a ballpark with an educated set of assumptions. We obviously have our view. We've got to be careful given these are zoning submissions, not completions. In some circumstances, we're in sensitive discussions with stakeholders like the city and community. We're reluctant to talk more about that at this stage, but we think we've provided the information that allows investors to get into the ballpark.
Okay. Thanks a lot.
Okay. Thank you, Mark.
Thank you. The following question is from Dean Wilkinson. Please go ahead.
Thanks. Afternoon, everyone.
Hi.
Adam, maybe just a follow-up on Mark's question. On the 6.5 million density that's currently valued at CAD 506, that's CAD 78 per square foot. Do you have a range of sort of the low and the high on where those density figures are? You've seen some numbers sort of core GTA, where you might be pushing as high as CAD 200 per square foot for some of these, and just trying to get a sense of the range of that in looking at the 9 million that's sort of in the harbor.
GTA, you could say 200. Toronto proper, which is where the majority of this is located. In many of these neighborhoods, it's well north of that.
It's very tough to put a specific value on it. Again, we've tried to lay it out. The one thing that I think is very important to flag is that because it's included in our IFRS NAV, does not mean that we've taken a market value for the density and applied it by the expected density. In fact, the majority of it is carried at our cost.
Right.
If we buy a piece of land, Christie Cookie is a great example. It's sitting in our IFRS NAV, but it's sitting at our IFRS NAV at our cost. The density that's been included in the NAV is the in-place zone density, which is about 300,000 sq ft at FCR share. I want to make it very clear that while it's included in our IFRS NAV, that should not be directly linked to the expected zone value. In fact, there are some properties that are included in our IFRS NAV that on successful zoning, we think will have more of an increase in value than some of the properties that aren't even included in the NAV. I think it's an important distinction.
Our policy on how we value this density and when it gets included in the pipeline, when it gets included in IFRS NAV, I would say, given the options, is more on the conservative side.
Until we have a lot of clarity around the zoning that will be achieved, I would say there's a pretty big gap between what it's carried at on our balance sheet, if it's carried at all, and then what that value is.
Then in terms of the process of that markup, as soon as you've got sort of the entitlement and the approval in hand, do you then go back and look at, okay, now we'll put a value per square foot on those buildable approved footages?
Yeah
In reference to the market? Okay. That's how you look at it.
Yeah. That's what we do. In some cases, like in the case of 400 King Street, we reached a settlement with city council, and so, in our view, we've now removed the rezoning risk. That did trigger a write-up that the formal rezoning will take place sometime in the next couple of months, Jodi?
In March. Okay.
Okay.
Technically, it's not rezoned, but from a practical perspective, we have a settlement with the city on what the zoning will be, that was good enough for us to have our appraiser factor that into the valuation, that triggered a write-up.
Got it. Can you remind us when you get those approvals and you get that write-up in place, is there an increased component of carry vis-a-vis a tax assessment or anything to that effect, or it's just a valuation exercise?
Yeah. It's just a valuation exercise. It depends on the municipality. Some will charge your taxes on the highest and best use, whether you've pursued a path of rezoning to that use or not. It depends on the municipality, but typically, there is not a correlation between carrying cost tax assessment versus when we include it in our IFRS NAV or when we write things up based on rezoning progress.
Got it. In terms of how you're looking at the debt metrics, have you incorporated any of this forward view of that zoning, or would that tend to be accretive to your debt measures, at least on a book value basis as they come in?
Yeah. Fortunately, the majority of this density is in Toronto. Unfortunately, there's a bit of a backlog in the city getting the zoning done. Our expectation is that the rezoning for the majority of this density will be achieved past the initial milestone date that we set, which was two years from last April. We have not baked that in. If we fast-forward past that time period, our expectation is that some of this density will get developed by us, some of it we'll sell a partial interest to a strategic partner and co-develop, and some of it I would expect we will sell outright. Obviously, the sale of outright air rights is very positive.
Yeah
debt metrics with little to no earnings accretion. That bodes very well for starting to look at 2021, 2022, 2023, but we haven't factored it into what we've been talking to the market about in terms of our shorter-term debt metric objectives.
Okay, great. Just sort of a final small housekeeping for me. Looking at the Montreal assets, looks like the counter to maybe the rest of your markets. The average rents in place there went down a tick from last year. Was there a big lease renewal or something that happened in there, or was that sale of assets that would've driven that difference?
No. We didn't have rents go down in Montreal. We sold assets, but the assets we sold had a lower average rent than what we hung on to.
It looks like you-
Maybe we take this offline, Dean, and you can-
Yeah
show us what you're looking at, and we'll help walk through it.
Yeah. It's a disclosure on page eight.
Okay
Second line item. Okay. That'd be great.
Okay. We'll take a look at it right after this and get back to you.
Sounds good. I will hand it back. Thanks, everyone.
Thank you very much.
Thank you. The following question is from Johann Rodrigues. Please go ahead.
Hi. Sorry, just a couple clarifications. The CAD 506 million, or rather, the 6.5 million sq ft, that's made up of all of the pre-2019 entitlements and some portion of the 2019 or?
Hi, Johann. It's Kay. In terms of what I said in my script, I'll just kind of go back to that. Any vacant land parcel or property that we purchased for redevelopment is included in that CAD 506 million. That's certainly a portion of it. I referenced some assets like Christie Cookie, 1071 King Street West, Yonge and Roselawn, 140 Yorkville. That's one component. Excess land parcels adjacent to IPP centers, that's another component because we've got to value those land parcels at something. They're valued separately than the IPP centers. I mentioned Place Portobello, Place Viau as both having examples of that. Then the third one would be the zone density. I mentioned phase one of Humbertown and Place Panama. Both of those are unencumbered by leases, so they would be included in this number.
Okay. On the pre-2019 entitlement applications, you've got eight properties there. Only the first two, Panama and Humbertown, are included in that figure, and then the remaining six are not?
The majority would be included there because they are zoned as referenced in the table above. Not all of these are zoned, something like Appleby Village is one of the properties that's not zoned. It would not be included at this stage.
Okay. That's helpful. Then I just wanted to make sure I heard you guys correctly. In terms of the CAD 1.5 billion you mentioned at the end that you expected to exceed that total, was that because you expect better pricing on the sales, or you plan on selling additional properties?
Both. Part of it is when we set the CAD 1.5 billion target, that was strictly related to getting our leverage back to where it was with little expected in the way of acquisitions, then a couple of very strategic ones materialized in Q3, which you would've seen. Part of it is an uptick from that. Part of it is our conviction in the ability to continue to execute because, if you say we're half done the first half in terms of assets, depth of the market for buyers, pricing, et cetera. The first half, we expect it to be tougher than the second half, just given the quality of the assets and the way the environment is and where there's capital and demand for the types of different properties in the various markets.
It's a combination of the acquisitions we did, which kind of required that to go up a bit, slightly better pricing expected. That's the main reason.
Okay. The soft guidance of 2%-3% same property NOI, is that stable same property NOI or does that include developments?
Yeah. As you know, if there's development of any consequence, it's not included in same property at all. That other bucket that you're referring to is the one we look at. In some cases we end up demolishing space. We see development trigger a reduction in the leasable area. If there's any development of any consequence, the property's not in same property period in any bucket. We look at total same property. That's the reference it's been made to.
Okay. I'll turn it back.
Okay. Thanks, Johann.
Thank you. The following question is from Sam Damiani. Please go ahead.
Thank you. Good afternoon, everybody. Everyone. Just on the FFO guidance, aside from being down a little bit year-over-year in 2020, can you be a little more specific on the quantity? Talking CAD 0.01-CAD 0.02, CAD 0.03-CAD 0.04?
Well, look, I'm sure Kay wants to jump in on this one. Before she does, we sold CAD 835 million of real estate this year. The majority, not all, but the majority is IPP. I would describe this as the bottom of our portfolio. I hate using that word because most of this real estate's actually good real estate. The average cap rate was about 6%. Okay. If you just run the simple math on the spread between the 6% and the cost of debt, you can get into a certain level of dilution pretty quickly. I think that's an important starting point. Kay.
Yeah, I'm happy to jump in. Within the MD&A, we've made disclosure on the NOI loss from dispositions and the NOI from acquisitions. We show you development completions. We show you development yield. We've given you soft guidance on same property NOI growth. You know there's an impact from the weighted average unit change given the share repurchase transaction. I think if you triangulate on that data, you can come very close to coming up with a good estimate for FFO next year.
That's why they pay us the big bucks.
Yeah. Very big bucks.
Yeah. Well, that's another matter. I guess when we look at dispositions, CAD 800 million last year, that's a pretty wholesome pace. Do you see continuing that level in 2020 or perhaps transacting a little more slowly in the near term?
At this stage, we're still early in the year, but I would say that based on what we see now, we think it's likely we come in in the same type of neighborhood. The assets are a little better that we're looking to divest of. There's going to be more partial interests than there were last year, which actually makes it easier for us. We actually have a number of institutional investors that are much more keen to buy partial interests with us as their partner than 100% interest. The environment in general, there appears to be more capital looking for investment in the type of real estate that we'd be looking to divest than there was last year at this time. Based on what we see now, it's likely to be a similarly active year in 2020.
Which works well for us because there's a clear relationship between the level of dispositions we do and the de-leveraging. We're confident that, especially based on the assets we sell, the dilution to earnings from selling these properties, given the growth profile of the business on what remains, we think we should get adequate multiple expansion to offset that.
Okay. That's helpful. The added disclosure this quarter is very helpful. Thank you for that. Just to finish off on the CAD 506 million, back to that. The handful of properties that you mentioned, most of which were in Toronto, and the only one it seems that actually has or effectively has its zoning in place is 400 King Street West. Is it fair to say that-
That one we expect will have its full zoning in March. Appleby Village does not have the zoning yet. We expect that relatively soon. The rest do. Panama zoning is in place, Humbertown's in place, Wilderton is in place. Long Street actually is not in place. The last two, Rutherford and 200 West Esplanade, are in place.
Okay, I was actually referring to, I think it was Kay mentioned a handful of properties in that bucket, being Christie Cookie, 1071 King, 400 King, Yonge and Roselawn, 140 Yorkville.
Okay. Yeah, this is the group of properties that we submitted for in 2019.
Sorry.
Yes, Sam.
Those are in the 500 section. Isn't that right?
That's correct. Some of those are recent acquisitions. You take 140 Yorkville-
Yes
It would be included at the cost we acquired it at.
Right. What square footage would you have for that asset?
Christie?
No, for 140 Yorkville.
Well, 140 Yorkville, it actually technically is zoned. We're looking for a rezoning to change things. What we would've adopted is the zoning that's in place.
The CAD 78 a foot does seem on the low side for most of the properties that you mentioned.
Yeah, it is. This is why we wanted to put the disclosure out because just because we say it's in our IFRS NAV doesn't mean there's not a lot of value to be realized on rezoning. Obviously, 140 Yorkville is in our NAV at a higher number than CAD 78 a foot.
Yeah.
When you look at the group, and that's why it was important for us to put this out, and you use reasonable assumptions, it's clear that there's a lot of value to be realized on a rezoning. We're not telling you the CAD 78 a foot is the current market value. We're trying to give you a data point that people can make assumptions on and basically get into a ballpark on what is expected in terms of value creation on the full successful zoning of these properties.
Okay. Just finally, then I'll turn it back, is on the list of 2019 applications, which are the first one or two larger properties where you expect to receive approval?
Hi, Sam. It's Jodi. Good afternoon.
Hey, Jodi.
So hi. We submitted for 13 applications in 2019. The ones that are, I'd say, more advanced than the others, 1071 King is pretty well advanced. We expect to see that complete itself very soon. Following that, I'd say Yonge and Roselawn, it would be the next one that should happen. Over in Montreal, Plaza Major Faye will come later on as well. I'm sort of giving you a general idea of what we expect to happen. 1071 King and Yonge and Roselawn being, I'd say, the very next wave that will come through. Following that, we have things like Semiahmoo, Royal Orchard, 801 York Mills in Toronto that'll come following. I'd say further down the list, Christie Cookie is a big process, as you know. We submitted official plan application last year.
2020 will be the Christie Cookie zoning submission. We have a big process for there. That's a bit further down the line. The rest of them are over the next 12 months, we should see some of these early ones come through.
That's great. Thank you very much.
Thank you, Sam.
Thank you. The following question is from Pammi Bir. Please go ahead.
Thanks. Good afternoon. I think most of my questions were answered. Just maybe one to clarify on the, I guess, recognition of value for zoning. Just to clarify, once it's zoned or successfully rezoned, you would then recognize value. Do they also need to be unencumbered by leases? Because I do recall there was some commentary, and I think you made a reference to that in the past.
Absolutely. There's a couple of catalysts and triggers for a variety of milestones that range from being included in the pipeline to begin with. I could tell you, the pipeline after combining all the properties is much bigger than 25 million sq ft. Until we have, in our view, a credible, visible plan that can be executed, it doesn't get included. Once it gets rezoned, rezoning is great; there's other things that impact the value, and lease encumbrance is one. To the extent there is an encumbrance, whether it's from leasing or otherwise, absolutely that will play into the overall valuation for IFRS purposes.
Just on the 2019 applications that were filed, I guess on the almost nine million sq ft, any rough sense of what, I guess, the weighted average lease term left on these properties is?
Most of them are pretty clean. Dufferin Corners is probably one of the more encumbered ones. Staples, Lougheed were seven years max of term. Could be as low as two. Côte-Saint-Luc has some encumbrances. I think the rest are pretty clean.
It looks like then, with the exception of those two or three properties, to your comment earlier, that it could take maybe a couple of years for this to get through the process, maybe three. Fair to say that, maybe in 2020, there's perhaps not as much value recognized this year, but as it gets through, it could be lumpy. In other words, I guess 2021 and 2022 could be bigger years for actual recognition of value.
I think as time goes on over the next few years, given we have entitlements in 2019 that's getting added to in 2020, that'll get added to in 2021. I'd say it's safe to say as time goes on, the value creation from this program is going to accelerate.
Got it.
Sorry, Pammi. The other thing that's worth noting that's tied to your question is, properties being encumbered is not a new thing for us. We can go back to a lot of things we've developed over the last number of years, and they were encumbered, but we find ways to unencumber them. We have good relationships with a lot of the national tenants that encumber some of these properties. The value creation is such that we have some chips to work with to help facilitate it getting unencumbered. It's not that it's encumbered and there's nothing we can do about it.
Right.
For retailers that are there, and tenants that are there's ways that we can deal with it in a way that's a win-win for both sides. In a lot of cases, we can offer a tenant a new format, whether it's bigger, smaller, different location, better loading, better access, exposure, a change in lease terms, all sorts of things, all sorts of tools we have to help facilitate that. If we have included it in an entitlement application, you should definitely assume we have a vision to get at that density in a reasonable period of time, including where it's encumbered.
Got it. Just one last one. As we are generally in a typically weaker period of Q1 for closures, your report hasn't generally seen much of that. Can you maybe just comment on what you're seeing in the broader retail market in terms of, I guess, seasonal closures through Q1 so far?
Yeah, I'll have Karm with us as well. He's kind of on the front line of that. I'll pass it over to him. I'll caveat it by saying our business is a very specific sub-sector of retail, and we're far less exposed to retailers that sell discretionary goods and services and retailers that are more trouble. If you look at a lot of the bankruptcies that have happened over the last two or three years, there's been almost no impact in the FCR portfolio. If you look at when our tenants, where we do have defaults, it's been pretty steady for many years now. Not a lot of seasonality to it. I'll turn it over to Carmine to explain to you from his perspective what he's been seeing on the ground.
Hi, Pammi.
Hey, Carmine.
Tenant closures.
Yeah.
Hi. Tenant closures have been relatively consistent for us over the past three years. What we've seen in the marketplace is pretty much normal churn, and we always view this as an opportunity in many cases to replace tired tenants with better offerings. Not surprising, some of the more active closure categories we are seeing are some of our most active new categories, such as full-service restaurants, health and beauty, QSR, and medical offices. Many of these are owner or franchise operated. Many are retiring. Many haven't invested in their businesses or haven't innovated, and they're being replaced by, quite frankly, just better operators. We're not seeing anything yet that causes us any concern.
Yeah, a lot of times we like the use, we still believe in the use, and we replace the operator with the same use and with success. It's very tough on our business. There's not a lot of seasonality. When you look at the sales patterns, obviously, the end of the year is a little higher than other parts, but not nearly to the same magnitude of fashion-type retail and more discretionary-type retail.
Yep. No, understood. Just trying to get a pulse on what you're seeing from the ground in the broader market, but that was very helpful. Thanks very much.
Okay. Well, I'm surprised it was very helpful, but I'm glad you found it that way, Pammi.
Thank you. The following question is from Jenny Ma. Please go ahead.
Thanks. Good afternoon.
Hi, Jenny.
Just want to clarify a point about dispositions and the leverage. You say that you anticipate the leverage to go down to year-end 2018 levels. Is that assumption based on the 15% of asset sales, or is it based on the additional sales that you talked about earlier in the call?
Well, firstly, we're going to get back to where we were on debt-to-assets before debt to EBITDA, because of just the way our investment activities have evolved. I would say it's in between. It's also going to depend on where our investment spend comes in in 2020. It's a little bit fluid, and I don't think the goalposts are super wide on the dispositions. I don't know if that's helpful or not, Jenny, but we don't have an exact debt metric matrix on CAD 1.5 billion versus some of the other assumptions we've made, do we?
I would assume that for your purpose, Jenny, that our target, as I said, is above the CAD 1.5 billion. You should be assuming a number above that for your debt metric calculations.
Okay. Yeah. There's a lot of moving parts, obviously. Would it be reasonable to assume a range? A year ago you sort of started at that 10%-15% mark. Would 15%-20% be a reasonable range for total dispositions after this program is all said and done?
I think it's in that range. I doubt we'll get to the top end of your range.
Okay.
I would add, Jenny, that dispositions have always been a part of our business. Even when the disposition program concludes, I wouldn't say that you should expect no dispositions going forward after that.
Okay. Then I want to talk a little bit about pricing. It looks like, based on your disclosure, that it came in at about 5.6% on the 2019 stuff. If we just look at the much smaller held for sale bucket, it looks like the implied cap on that is closer to 6.5%. I'm just wondering if you could talk about what you expect in the fulsome disposition program if 6.5% is sort of indicative of that second half or if that's very specific to the held for sale bucket.
Yeah, it's specific to the held for sale bucket. I think what you're taking to get to the 5.6 is the NOI that we've disclosed on dispositions divided by the CAD 835 million. The CAD 835 million includes a little bit of error rates. On our math, the cap rate's close to 6%, not 5.6, so 6%. For the IPP dispositions we made, it's in that range, just under 6%.
Okay, that's helpful.
I'd say at this stage, look, in our internal models we're using 6%. I'll be disappointed if it's not slightly lower than 6%, but we're using 6%.
Okay, great. You did mention that you expect some more JVs with some institutional partners. Just wondering if you can comment on for some of the exits in the smaller markets, what kind of buyer profile you're seeing for these assets. For example, in Red Deer or Trois-Rivières, who's coming to the table in those markets?
Trois-Rivières was a private local investor. Red Deer is a private REIT. If you look at the broader program, it's been small public REITs, small and medium-sized pension funds, private equity capital, large family offices that have a focus on specific geographic regions, life insurance companies.
Yeah, local players.
Yeah.
Okay.
It's been pretty broad-based and that's where we continue to see demand. The uptick we've seen is a little deeper in what I would describe as more of the institutional bucket. Where institutions that were quite adverse to investing additional capital in retail have now kind of analyzed the various buckets of retail and found grocery anchored retail as a compelling place to be. That was not the case a year ago.
Okay. That's great to hear. My last question is can you provide an update on the leasing of the residential component of King High Line?
Yes, we can.
Hi, Jenny, it's Jodi.
Hi, Jodi.
Happy to answer that question. As of now, this week we're at 263 out of 506 units and so we're very pleased with this. We're well on track but more importantly, we're actually getting the leasing rates that we're looking for, which is north of CAD 4 a foot. It's going according to plan.
Yeah. Really, CAPREIT, our operating partner on the resi component started leasing that mid-year 2019. We've had a lot of dialogue with them. There's a clear relationship between leasing velocity and rent. They have a very strong conviction that we have the right balance right now. We could certainly lease it up quicker, and we're very well aligned given the deal structure, so we defer to them on this. They feel we have a very good balance between leasing velocity and the rental rates that we're achieving.
Just one more quick question. Remind me that if this one doesn't get rent control because of the timing of completion, is that the case?
No, we're not subject to rent control because the legislation changed, and it changed at the perfect time for us, so we're out of that.
Perfect. Thank you very much.
Thank you, Jenny.
Thank you.
Thank you. The following question is from Tal Woolley. Please go ahead.
Hi, good afternoon.
Hi, Tal.
Adam, I'm wondering to go back to Jenny and Johann's questions just about dispositions. You're sort of talking about maybe upsizing the program a little bit over the longer term. I'm just wondering if we go out even further, when you're talking to the board, when you're talking amongst your management team, what is the right mix of grocery anchored retail versus mixed use for the future? What do you guys see that mix ultimately being?
We talk about the mix of not by asset class but by quality of real estate and investment in super urban neighborhoods. That's where the focus is. We look at some retail and we say, "This is phenomenal retail. We have a lot of conviction that a lot of money can be made on it without densification, just in its current form over the next 5, 10, 20 years." Then we look at other retail and we say, "Well, we don't have the same level of conviction." We look at some of the office space we own, same thing. Some of the residential space, same thing. It's really about the quality of the real estate. We don't have targets on mixed use, resi, retail. We want phenomenal real estate. Every year that goes by, we want the bar on average portfolio quality to continue to rise.
It's not a question of like, if someone came in and bid for 20% of your retail at a 5% premium to NAV, you'd be a taker of that right away. Like that's not your view at all.
Sorry, can you repeat that, Tal?
I was just going to say, if we could take that sort of transaction cost and the timing and everything out of it, and if someone came in with a really solid bid for a significant chunk of your existing retail portfolio, that's not necessarily a bid you would take today.
No, it depends on the real estate.
Okay. On the CAD 506 million in density value in the NAV, what's the current loan-to-value outstanding against those properties that are included in that?
Probably close to zero.
Yeah, I would have to take a look at it, Tal. I don't know that number off the top of my head, but the majority of our assets are unencumbered. High level, I would say you can assume a small amount.
Yeah, where we have encumbered properties, generally they're properties that are chunky in size and where we don't anticipate making a lot of changes to them over the next 10 years. It's unlikely that we have debt on any of these properties.
Okay. I guess just my last question. We saw a fairly significant trade of an urban-focused portfolio of retail assets in the U.S., with Pub , getting bought this week. Do you have any thoughts, feelings about how that, when you look at that was a set of very highly productive retail assets with good locations that could be redeveloped. Obviously, I've been talking with some investors, some parallels were drawn between yourself and there. Looking at that transaction, how did you feel about how it shook out in terms of valuation?
Yeah, look, the market's very different there, and that's a different retail asset class than what we own. We didn't draw a lot of similarities or a lot of strong takeaways to our business or the environment in Canada.
Okay, perfect. Thanks very much, guys.
Thank you very much.
Thank you. Once again, please press star one at this time if you have a question. The following question is from Michael Markidis. Please go ahead.
Hi. Thanks for taking my question. Maybe just two parts here. First, looking at the entitlements that you have outstanding in your existing pipeline that is actually active and in production, what could we expect to get added over the next 12 months or so, would be the first part. Second part, just given the way that is expected to evolve, how should we be thinking about your development investment in 2021 and 2022 versus the CAD 150 million-CAD 200 million that you expect this year? Thanks.
Okay. I'll answer the second question and then, Jodi, if you don't mind taking the first one. Look, right now, the first step in this process of unearthing some of this unrecognized value for us is through the rezoning process. That's going to take the better part of two years. Once we realize that uplift from securing entitlements, then we're going to have various options. Most of these are income-producing properties. We can do nothing for a period of time and continue to grow the cash flow from the existing tenants, and these are generally neighborhoods that are getting better and better over time. We can do that. We can initiate developing the density on our own. We can sell a partial interest to strategic partners.
In some cases, we can outright sell the density where there isn't as strong of a strategic fit for First Capital. We're likely to do all of those. The mix of the various buckets is going to have to be determined as we get closer, and we'll make decisions for each property and the overall program. We're going to look at a bunch of factors, besides the strategic fit of the properties and the amount of development profit to be realized by taking it through the full development process. Our overall capacity, both human resource-wise but also capital and balance sheet-wise. If you look at how much has changed over the last two years, you can understand why we'd be reluctant to commit to what the magnitude will look like in two or three years from now.
What we know is it's a great road that leads to great things. Where we go from there, we'll have lots of options, but it'd be premature for us to start indicating at this stage what concrete steps we'll take, how much our development spend will change by, if any, at that time. It's just a little too early.
Okay. Just in terms of any of the pre-2019s that you think might get put into production in the next 12 months or so, or is that still too early to say at this point?
No, I think we can give you some color around at least some of those.
Hi, Mike, it's Jodi. In terms of the pre-2019, the eight that are on the list. Other than, as we mentioned, 400 King Street West, which got settled with City of Toronto Council last July, and it's
Sorry, Jodi. Correct us if we're wrong, Mike, but I think your question is what of these will actually go into production in terms of construction. Correct. Was that your question?
It was. Thank you.
Okay. Very good. Okay. On the pre-2019 list, is that what we're looking at? Or just generally?
Well, just generally. Sure.
Generally. Okay. There's some that we have partnerships already established, those are going to go into production very soon. First phase of Humbertown, that's a pre-2019 that's been zoned for a while. Our partner is Tridel, we expect that to be in UD next year in 2021, in the first quarter, the early part of next year. 400 King would move into production as well. That's getting zoned. Wilderton phase II will also be 2021. As soon as phase I is complete, phase II gets to start. We have a partner as well for Wilderton phase II. Long Street already has some base zoning, but we partnered with a local developer, and we're going to increase our zoning. We're going to try and get some more density, and I would expect that'll be in production in the next couple of years.
Rutherford Marketplace, that's 50 townhomes where we partnered with Greenpark. Those have done very well with pre-sales, those homes are going to start construction as soon as we're out of winter. We'll close on those probably in the first quarter of next year. 200 West Esplanade, also, we expect to be with a local partner there in North Vancouver, Cressey, we'll be in UD on that one at the end of this year, probably Q4. Following that, the 2019 submissions, obviously, those have to go through the zoning process. As I mentioned earlier, things like Yonge and Roselawn and 1071 King are well advanced. 1071 King, we have a partner already, as soon as we go to get our entitlements, it's a vacant piece of land. That will be in production, I would say, in 2021.
The list will continue from there. I would expect that we have a sizable amount that will start in 2021, and there will be probably two that will start later this year. We also expect Panama phase I could start at the end of this year or early next year. Not a mixed-use development, Leaside, adjacent to our Leaside Shopping Centre, retail expansion of the Shopping Centre is already in UD, and that will be complete in the next year, in 2021.
That was very helpful. Thank you.
Okay, great. Thank you.
Thank you. The following question is from Sam Damiani. Please go ahead.
Thanks. Just to follow up on some leasing, either for Karm or I'm not sure if Jord's in the room, but how is the lease-up of Brewery District and also One Bloor East?
Okay. They're both in the room. I think you're going to get to hear from both of them on this one.
Hi, Sam. It's Jordan. With respect to One Bloor, I would say the lease-up , as you know, has been slower than we would've liked. I would say to you, in light of the performance of Nordstrom, McEwan, and the opening of Chick-fil-A, which has received a lot of attention. By virtue of that, we are starting to get a tremendous amount of inbound calls. I would suggest to you, we are confident about the prospects going forward. It's a great piece of real estate, as you know. It's one that we have strong conviction about, and we know at the end of the day, it's going to be worth more than we paid for it.
I hear there's a Tokyo Smoke opening up at One Bloor. Is that a firm deal? I think they're advertising.
That is a firm deal. Yeah, they are in possession, in fact, paying rent.
What unit are they taking?
They're taking the Bloor Street frontage or a portion of the Bloor Street frontage at grade.
Grade. Okay.
Yeah. We don't have much left there now, and like Jordie said, we're in negotiations actually, with a couple of groups for the balance, but there's not much left at this point. Okay, Brewery District.
All right. Brewery District. Hi, Sam. As a reminder, this project is a 300,000 sq ft mixed-use project, retail and office. As you would typically expect, early on, we experienced very strong leasing velocity. We finalized significant deals with Loblaw, Shoppers Drug Mart, MAC, GoodLife, Winners, TD Bank. Deal velocity has slowed, the center's continuing to draw interest. In the second half of the year, we actually finalized about 35,000 sq ft of deals consisting of some office tenants, a medical use, fast food, and a 23,000 sq ft second-floor retail box, which was the toughest space to lease because it could not be demised. We're also in active negotiations with an additional restaurant and another large retail format group. Things are good.
Yeah. Brewery, to Carm's point, it took a little longer than we expected to get through the final space. Credit to him and his team that they did a lot of legwork and really broke the back on the balances towards the second half of the year. We would've thought it would happen earlier, but a lot of progress towards the end of last year.
That's great. Good update. Thank you very much.
Thank you, Sam.
Thank you. There are no further questions registered at this time. I'll now turn the meeting back over to Adam Paul.
Okay, thank you very much, operator. Thank you everyone for your time this afternoon, your continued interest in First Capital. Clearly, it continues to be a very busy time. We look forward to updating you on our progress in the near future. Thank you very much. Have a great afternoon.
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