All participants, your conference is now ready to begin. Ladies and gentlemen, thank you for standing by. Welcome to the First Capital Realty announces year-end and Q4 2018 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 this 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. Good afternoon, everyone. In discussing our financial and operating performance, in responding to your questions during today's conference call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks, and uncertainties is contained in our various securities filings, including our MD&A for the year ending December 31st, 2018, and our current AIF, which are available on SEDAR and on our website. These forward-looking statements are made as of today's date, 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.
Thank you very much, Alison. Good afternoon, everyone. Thank you for joining us today. I'll start out by summarizing what was a very good year for First Capital, then I'll comment on our strategy moving forward. 2018 extended a multi-year period of very strong property and company-level financial results. We advanced many areas of our business and are a stronger, better-positioned company today than when we started the year. In 2018, we invested over CAD 390 million in properties through both acquisitions and development. We also completed CAD 250 million of dispositions, so a CAD 640 million swing in the composition of our portfolio before factoring in CAD 290 million of urban development projects that we completed and transferred to IPP. This had a meaningful, positive impact on our demographic profile.
The average five-kilometer population density of these urban property investments is over 500,000 people, with the FCR properties we disposed of having less than 150,000 people. The rest of the First Capital portfolio also continued to perform very well through 2018, with same property NOI growing above our five-year average at 3.1%, record occupancy of 96.7%, and the average lease lift on lease renewals equal to a healthy 8.4% on year-one renewal rates or 10.9% on the average rent during the renewal term. This all led to FFO per share growth of 4.4%, or 4.9% excluding REIT conversion costs. We achieved this FFO growth with lower leverage than when we started the year. All in all, a very productive year. On to our strategy. The key to our long-term success has always been our ability to evolve our strategy to capitalize on new opportunities in changing market conditions.
Our executive team and our board of directors have worked to evolve our business strategy to optimize our portfolio of assets and accelerate the value we deliver to our investors, our tenants, the communities in which we operate, and our people. Long before I joined FCR, Dori and his team recognized the potential of urban markets, taking positions in assets like King Liberty, the former Hazelton Lanes, and Mount Royal Village, among many others. We focused on urban real estate for many years, with a particular focus on retail. That served us exceptionally well and has allowed us to build a portfolio that is one of our biggest competitive advantages today. The evolution of our real estate strategy will ensure that remains the case well into the future.
That evolution includes looking beyond asset class to create urban neighborhoods where the integration of retail with other uses create not just spaces, but places. That's what we call a super urban approach. Canada's major urban markets are where we'll continue to concentrate, our investment capital will be targeted to a narrow geographic boundary in the past. I don't only mean cities. I mean neighborhoods within those cities. We were urban-focused in the past. Our focus is now super urban. That means our operating, development, and investment platforms will be focused on fewer, larger, more diverse properties. Our strategy will now concentrate more on development and the neighborhood than asset class, allowing us to diversify investment and development opportunities to optimize value potential.
Through experience, we have learned that the neighborhood fundamentals contributing to our industry-leading retail NOI and value growth have also led to similar success of other synergistic asset classes. We know firsthand that scale in Canada's highest growth neighborhoods provides the most compelling opportunity to create value and increase cash flow over time. We'll leverage our competitive advantages to create value by developing more of our own synergistic mixed-use communities. We'll focus our platform on larger positions in the country's most compelling neighborhoods, many of which we already have meaningful scale to build on. To summarize, our evolved real estate strategy is to increase our investment in high-quality, super urban mixed-use properties, focused on large positions in targeted, high-growth neighborhoods. We've established specific objectives and corresponding metrics to guide our decision-making and measure our progress. Our first objective is to increase the average population density surrounding our properties.
We are currently the North American leader amongst our peers by a wide margin. Currently, our average population density is 250,000 people within 5 km. To give you some context, this number was 27%, or 70,000 people lower in 2015. Currently, our closest North American peer on this metric is Federal Realty, whose population density is 160,000 people. Our goal is to increase ours to more than 300,000 within the next 24 months. Our second objective is to surface unrecognized value in our incremental density pipeline. We're also focused on expanding it so that it exceeds our current leasable area of 24 million sq ft. We continue to make progress on this, which is an indication of the relative upside inherent in our business. As we continue to invest, divest, and execute, this metric will keep improving.
One of the most mispriced elements of our stock is the value of this incremental density pipeline. Substantially, all of it is situated in Canada's largest urban growth markets in the form of covered land investments. Highest and best use is a common term in our industry. Many of our properties in their current form are productive but low-density income-producing properties that are not realizing their maximum value potential. This provides significant downside protection with great upside potential. Examples of these properties include our neighborhood developments in Toronto, such as our property assemblies at Avenue Road and Lawrence, Leslie and York Mills, Humbertown, our 42-acre Meadowvale Town Centre in Mississauga, as well as most of our properties in Liberty Village. In the Vancouver area, Semiahmoo and Scott 72, and numerous properties in Montreal, among other cities.
Only 13% of our 22.5 million sq ft pipeline is included in our IFRS NAV. While I acknowledge and know the excluded remaining density is subject to various assumptions, its value is certainly greater than zero, as currently reflected in our NAV. We know it's substantial. We intend to surface the unrecognized value embedded in our very significant and growing incremental density pipeline through a robust but thoroughly well-planned development process. Our third objective in support of our evolved strategy is to take advantage of disposition opportunities. We are planning to be more active on the disposition side. Our goal is to sell 100% interest in properties that are deemed to be inconsistent with our evolved real estate strategy. An example of this is the sale of West Oaks Shopping Centre in Abbotsford, B.C.
Notwithstanding it's a very good property, its 5 km population density is 110,000 people, well below our 250,000 average. As well, it did not contribute to our incremental density pipeline. We own the property in a 50/50 partnership with Bentall, and we jointly sold it in December for CAD 91 million, representing CAD 345 per sq ft, and a mid 5% cap rate. Our proactive high grading of the portfolio over the last 10 years has included regular, ongoing dispositions every year. The assets in this category have population densities that are above what most people have, making them a good fit for many investors. We'll also be more active selling 50% non-managing interest to institutional partners in certain stable but growing properties. This strategy will allow us to expand our position in certain markets without investing additional capital. It will also provide capital for our investment strategy.
A good example of this is the 50/50 partnership we have with Desjardins in a couple of portfolios, including three properties in the greater Montreal area. To recap our evolved real estate strategy, we will increase our investment in portfolio weighting in high-quality, super urban mixed-use properties, focused on large positions in targeted high-growth neighborhoods. To recap, we'll focus on, number one, increasing our average population density. Two, surfacing value in and expanding our incremental density pipeline. Three, making new investments that align with our strategy with capital from strategic dispositions that in some cases, will also improve our market positions. You'll notice that I've referred to the fact that our strategy of focusing on urban markets started well before I arrived at FCR. In fact, we were one of, if not the first company to adopt this approach in Canada.
Yesterday's announcement is a signal that we are narrowing the boundaries of what defines urban to us, doubling down on the fantastic portfolio that we have built over many years. However, we believe real estate is a long-term proposition, our plan will be carried out with an opportunistic approach and as a marathon, not a sprint. While the pace of our dispositions will be higher, our properties are generally market leaders in their respective trade areas. There is no urgency to dispose of from a quality perspective. It's more about capital allocation and opportunities. In terms of capital funding, we intend to finance our real estate activities over this foreseeable future with existing internal equity. To be clear, we are not planning to raise new equity capital to fund our real estate investments.
Instead, the execution of our strategy will be financed through strategic dispositions as I outlined, and to a lesser extent, retained operating cash flow. Our evolved strategy is focused on continuing and accelerating our peer-leading NAV growth. That objective remains a top priority. To advance this, we will exercise a bit more flexibility. For example, we would accept lower leverage and consequently, slightly less immediate growth in FFO for a short period of time if it was the result of a disposition transaction that significantly advanced our strategy. If this scenario is well executed, we'd expect any impact on short-term growth and leverage to be fully or more than fully offset by an increase to our multiple. The reverse holds true if we have the opportunity to advance our strategy on the investment side.
This always takes a bit of balancing over the near term in order to take advantage of opportunities, over the medium term, our leverage objectives are similar. Our strategy work contributed to us reconsidering our corporate structure. As we announced, we're pursuing a conversion from a corporation to a real estate investment trust. Becoming a REIT will provide us with a number of advantages. First, it will allow us to benefit from a larger pool of potential investment capital by having FCR included in various REIT indices and being eligible investment for REIT ETFs and REIT-dedicated investment funds. With our existing corporate structure, we don't qualify for all of these, this capital would be incremental. We believe this will initially represent several million shares of additional demand at the time or near the time we convert.
Second, the conversion to a REIT will enhance comparability to our peers, virtually all of which are REITs. Finally, we will be able to deliver the benefits of our business to investors in a more efficient manner. I'd like to touch on one final benefit our strategic focus offers First Capital. The quality of our portfolio with its large mixed-use properties in very exciting neighborhoods, has been an important factor in our ability to attract and retain some of the most talented people in real estate. We have an incredibly capable team who most enjoy applying their skills to these types of properties and creating value for all of our stakeholders. The increased focus will also benefit our people and our platform.
We've laid out for you today our evolved strategy, the means by which we'll achieve it, how we'll measure our progress, and our intention to convert our corporate structure to a REIT. I'll now pass things over to Kay, who will speak to our strong fourth quarter and annual results in more detail. Kay?
Thank you, Adam. Good afternoon, everyone, and thank you for joining us today. As Adam mentioned, we were very pleased with the milestones and the strong results we achieved in 2018. I will now take you through those results in more detail. On slide six of our conference call deck, which is available on our website in the Investors section under Conference Calls, we show the factors driving the growth in FFO for the quarter and the full year. For 2018, we achieved strong FFO growth of 4.4% or CAD 0.05 on a per share basis. Excluding re conversion costs of CAD 1.5 million, our FFO per share growth was even stronger at 4.9%. In dollar terms, our FFO increased by CAD 19 million or 6.6%. The primary driver of this growth was a CAD 17 million increase in NOI due to three key factors.
First, growth in same property NOI of CAD 11.6 million, primarily driven by rent escalation. Secondly, growth in non-same property NOI of CAD 2.8 million, primarily due to development completions. Thirdly, growth in NOI of CAD 2.5 million due to the net impact of acquisitions and dispositions completed over the past 12 months. As expected, our FFO for the fourth quarter decreased CAD 0.01 per share over the prior year, primarily due to re conversion costs incurred in the fourth quarter of this year, higher non-recurring gains realized in the fourth quarter of last year, and the impact of de-leveraging from the July 2018 equity issue. Moving to slide seven. Our same property NOI increased by a solid 3.1% for the fourth quarter and for the full year versus the prior year period. The growth was driven by rent escalations, higher occupancy levels, and solid lifts on lease renewals.
On slide eight, we present our lease renewal activity for the quarter and annual period. Our Q4 total portfolio lease renewal lift was a strong 9.2% on 825,000 square feet of renewals when comparing the rental rate in the last year of the expiring term to the first year of the renewal term. We achieved a double-digit lease renewal lift of 11.9% when comparing the rental rate in the last year of the expiring term to the average rental rate in the renewal term. On an annual basis, our total portfolio lease renewal lift was also strong at 8.4% on 2.9 million square feet of renewals, and even higher at 10.9% when comparing the rental rates in the last year of the expiring terms to the average rental rate in the renewal term.
We are quite pleased with this metric, considering the above average leasing volume that we completed in 2018. Moving to slide nine. Our average net rental rate surpassed CAD 20 per square foot for the first time in 2018, and grew a healthy 2.8% or CAD 0.55 over the prior year to CAD 20.24. This growth was primarily due to development completions, renewal lifts, and rent escalations. 2018 was a big year for development completions, with 283,000 square feet of new GLA being transferred from development to income-producing properties. This included major project completions at Mount Royal West in Calgary and at Yorkville Village in Toronto, including completion of the mall in 102 to 108 Yorkville. We also completed new space in our King High Line, One Bloor East, 3080 Yonge, and Brewery District projects, amongst others.
Of the space transferred, 89% was occupied at an average rental rate of CAD 37.33 per square foot, which will contribute a meaningful CAD 9.4 million of incremental NOI. On slide 10, our total portfolio occupancy rate increased by 60 basis points over the prior year to an all-time high of 96.7% due to significant leasing activity over the last 12 months. We were pleased to welcome a number of first-time tenants to our portfolio, including the opening of SAIL, a Canadian outdoor equipment and apparel store, to massive lineups, as you can see on slide 11, at our Galeries de la Canardière property in Montreal. Additionally, we were pleased to welcome the much-anticipated opening of a Mark McEwan gourmet grocery store at One Bloor Street East in Toronto, shown on slide 12.
This space is a great example of our team's vision and creativity to drive value creation through design enhancements and leasing. Slide 13 highlights our six largest developments that accounted for the majority of the CAD 50 million in development and redevelopment spend in the quarter, bringing our annual spend to CAD 214 million. These investments in dense, high-growth neighborhoods, including Liberty Village and Yorkville Village in Toronto, the Brewery District in Edmonton, and Mount Royal West in Calgary, are consistent with our evolved strategy. As of December 31st, we had identified approximately 22.5 million square feet of additional density within our portfolio. This represents a substantial opportunity relative to the size of our existing portfolio, which is approximately 24 million square feet. Less than 13%, or 2.9 million, of the 22.5 million square feet of incremental density is included in the fair value of investment properties on our balance sheet.
This 2.9 million square feet includes approximately 300,000 that is under active development. It is valued as part of our development projects. 2.6 million square feet of incremental density, which is included in our IFRS values at approximately CAD 157 million or CAD 60 per square foot. The remaining 19.6 million square feet of density is not included in our IFRS values, primarily due to lease encumbrances which will free up over time. Slide 14 shows the factors driving the growth in FFO during the quarter and annual period. This slide also highlights our FFO payout ratio, which has improved meaningfully from 82% in 2015 to 71% in 2018 due to significant earnings growth over the past three years. Slide 15 touches on our other gains, losses, and expenses, which are included in FFO.
For the year, we are reporting other gains of CAD 0.7 million, comprised of net gains on marketable securities of CAD 3.6 million, partially offset by re conversion costs of CAD 1.5 million, and non-cash losses on the early redemption of convertible debentures of CAD 0.7 million. For the fourth quarter, we recognized other losses of CAD 1.6 million, primarily due to re conversion costs of CAD 0.9 million. Slide 16 summarizes our ACFO metric. We generated an additional CAD 23.5 million in adjusted cash flow from operations or a 9.7% increase over the prior year, primarily due to higher NOI. This increased cash flow resulted in a meaningful improvement to our ACFO payout ratio, which declined from 86% last year to 79.6% this year. Slide 17 summarizes our 2018 financing activities. During 2018, we completed CAD 389 million of new mortgages with 10 to 12-year terms at an attractive average effective interest rate of 3.7%.
This was much lower than the 5.4% average effective interest rate on the CAD 340 million of debt that was repaid. We also completed a CAD 200 million equity offering in July to fund our growth and strengthen our balance sheet. Slide 18 summarizes the size of our operating credit facility and our unencumbered asset pool, as well as our key financial ratios. 70% or CAD 7.3 billion of our total assets are unencumbered, which gives us significant financing flexibility. Our net debt to EBITDA ratio and our debt to asset ratio both improved in 2018, primarily as a result of CAD 250 million of dispositions, the CAD 200 million equity offering, and increased EBITDA of CAD 14 million. Slide 19 shows our term debt ladder. As a result of our 2018 refinancing activities, our weighted average interest rate declined to 4.2% at the end of the year from 4.4% at the start of the year.
Our weighted average term to maturity is now 5.5 years. Our remaining 2019 debt maturities have an average effective interest rate of 6%. We continue to have opportunity to refinance this debt at lower rates. Given our evolved strategy in pursuit of a re conversion, we are not providing FFO guidance for 2019. However, we would indicate that we expect our 2019 same property NOI growth to be at least as strong as it was in 2018, and our 2019 lease renewal lift to be similar to 2018. We expect to invest between CAD 150 million to CAD 200 million in development and to complete between CAD 300 million and CAD 400 million of development. We do not expect to take a meaningful amount of space offline for development during the year. For the three years leading up to 2018, we did about CAD 100 million of dispositions annually.
This increased in 2018 to CAD 250 million of dispositions. Based on our evolved strategy, we are not setting a specific target, but would expect the number to be meaningfully higher in 2019. Before I conclude, I would like to touch on the REIT conversion. There are multiple ways to convert to a REIT, and we are currently evaluating more than one alternative. These alternatives have different degrees of complexity and as such, different cost implications and different implementation time frames to name just a few. Until we determine the ultimate path we will take, we are unable to give definitive guidance on these outcomes. Our objective is to convert within the next 12 months, and we do believe, for all the reasons Adam previously mentioned, that a REIT conversion will have a positive impact on shareholder value.
We do not expect any of the potential structures we are considering to have an impact on our current liquidity or leverage levels, or to have a negative impact on any of our debt holders. We are very pleased with the results for the fourth quarter and for the full year. 2018 was another outstanding year that would not have been possible without the dedication and support of our entire team. We are very proud of all of the milestones that our team accomplished in the past year, and we look forward to executing on our new strategy and objectives in the year ahead. At this time, we would be pleased to answer any questions you have. Operator, can you please open the call for questions?
Certainly. Please press star one at this time if you have a question. Our first question is from Mark Rothschild. Please go ahead. The line is open.
Thanks. Good afternoon, everyone.
Hi, Mark.
Hi. In regard to what you called the more refined investment strategy, is it possible to quantify in any way the difference you expect on your same store NOI, maybe in regards to the leasing spreads you get on these, what you'd call weaker assets or maybe non-core assets, as compared to the assets, the remainder of the portfolio that you want to retain?
Yeah. We certainly don't look at them as non-core assets, per se. To me, there's a bit of a negative connotation around it, and when you look at these assets in isolation, they're very good properties. We just think that as an organization, we can do better over the long run by allocating the capital to a different type of property. If you look at our same property NOI growth over the last five years, we've been running at on either side of 3%, the average is a touch below that. Clearly, our expectation, as we go forward, is that the portfolio will generate, or at least have the ability to generate higher growth than we've had in the past. We believe it will be higher than 3%. Lease renewal rates, ultimately, that's a very important component of same property NOI growth over time.
We've been running at, call it, 8%-10% on average. Again, we'd expect that to bump up as well.
Did you have a number at all for what you've been getting on these assets you want to sell? Would those assets been getting 8%-10% as well, or would that be closer to 2%-5%, maybe?
It really depends. They are good assets. Over longer periods of time, the expectation is that they just don't have the population density and the growth and the same type of implications in terms of barriers to entry. Some of them have generated pretty good growth. When we look at the opportunity going forward and the ability to leverage scale in these high-growth neighborhoods and integrate other things like, additional density, that's where the mindset has shifted. Again, that's why I say I wouldn't describe them per se as non-core assets. I just think when we look at the next 10 years, the next five years, we look at the platform capabilities. Where we've had the most success, it's been on these higher growth neighborhoods where we generate scale, and where we apply the most talented people in the organization.
That's where they like spending time, and that's where the set of ingredients are most abundant to create value. Yes, they're lower than average, for First Capital, and obviously, that's a key component. If you look at our metrics versus our peers, we've been a leader on those metrics. That's why I say these are not bad assets.
Just in regards to West Oaks Shopping Center, is that a property that you would classify as maybe inconsistent with the investment strategy going forward? In regards to the sale, if there's something else that motivated it, and maybe if you could give us information on what the cap rate was on the sale.
Yes. I will do that, Mark. Yes, it is inconsistent with the evolved strategy. We approached our partner, who was very happy with the asset. We expressed our desire to sell, given the evolution of our views on the world and our strategy, and they agreed to sell with us. Again, when we looked at that asset, we looked at demographic profiles. We looked at population density within five kilometers, 110,000 people versus our 250,000 average. With our publicly stated objective to get to 300. Diluted from a demographic perspective. We looked at our incremental density pipeline. We had identified zero incremental density that we attributed to that property. That's what rendered it inconsistent with the evolved strategy. We still think the NOI will continue to grow in the asset.
We traded out of it, again, CAD 91 million, CAD 345 a square foot, mid-5% cap rate.
Okay. Thanks a lot.
Okay. Thanks, Mark.
Thank you. The next question is from Tal Woolley. Please go ahead, your line is open.
Thanks. Good afternoon. Just on the REIT conversion. This has come up in the past, just in past calls and conversations. There's always been shelter available to push out the timeline. You've also talked about the structure having some limitations in how you run the business. I know you provided your rationale, but I'm just curious, what changed to motivate the conversion now?
Hi, Tal. A REIT conversion is something that's been on our radar for several years, as you're well aware of. For all of the reasons that we included in our press release and that Adam touched on, we did feel like now was the appropriate time to pursue this conversion. Additionally, in light of the anticipated increase in property dispositions, coupled with the strong growth in earnings that we've experienced over the past several years and expect to continue to experience, a REIT structure is expected to be a more efficient structure to deliver cash flow to our investors going forward.
Tal, the only other thing I'd add, you touched on, and correct me if I'm wrong, some type of limitation between the two. We don't see any limitation or any impact on the type of activities we conduct in the business, moving to the REIT structure, based on the strategy.
Okay. Just to clarify, the comment around efficiency, are you referring to just from a tax implication standpoint? I'm just curious whether were you expected to sort of be running down on your shelter, running low on shelter available going forward?
Yeah. Look, efficiency is not limited to tax. There's a lot of variables. If you look at the expanded capital pool, and delivering benefits back to our investors, we expect a positive impact on shareholder value share price. That's one way of delivering that value back. It's certainly much broader than just tax.
Got it. I'm not sure if it's too early to answer this, any thoughts with respect to the current dividend?
Well, it's still CAD 0.215 a quarter.
That's very helpful.
Look, we review it every quarter with the board, and if and when there's a further update, we'll certainly let the market know. As of right now, you guys have the current update.
Okay. Maybe just switching to the asset sales. When you look at the proceeds, should we think of it as primarily being earmarked for developments, just based on the commentary, or should we expect that some of the proceeds will be put to use in acquisitions or even some debt reduction?
Look, I hope it's all of those. Acquisitions, we've been fortunate to find pockets of opportunity that are in properties that are consistent with our strategy that have some level of rational pricing, where we do have a value creation vision that we believe we can execute. Certainly hopeful that at least a portion of disposition proceeds will go into some of those. Visibility on those, given the competitiveness of the market and the markets and neighborhoods we operate in, is pretty short-sighted. Certainly, there's better visibility on development. We have a very consistent deep pipeline of opportunities that are very aligned with the strategy we've laid out. Certainly some of it will be earmarked for that. If there's excess, it would go to debt reduction, whether that's permanent or temporary, it'll depend on other opportunities. We're not averse to that either.
Okay. Just on these asset sales, have you already started the process of marketing these in any sort of portfolio, or has that not yet started?
Yeah. We always have things in the market. We've got a little more in the market or that we're pursuing right now than typical. I would say we probably have a little more, in terms of irons in the fire, than we're prepared to transact on. That'll put us in a position where we can select the ones that represent the best opportunities, the most compelling transactions. We don't have to transact on all of it. We always have things that we're pursuing. We have a little bit more right now than we've typically had.
Okay. Maybe just the last one for me. I realize you're not providing FFO guidance for the year, if you stripped out the conversion costs that you expect and then factor in this new strategy or refined strategy, what would you consider an achievable target? Perhaps even, what do you hope to achieve this year in terms of growth?
Well, Kay gave you the key ingredients for it, the missing pieces that need to be assumed relate a little more on the leverage and acquisition, disposition side. Just to back up for a second, the announcement we made really outlined a roadmap. One of the reasons we're not providing specific guidance is, number one, the impact of the REIT conversion is not 100% known, as you know, any cost associated with that would flow through FFO. They're one-time costs. Certainly, any dollar we spend, we see a multiple of value on over the long term. The second relates to our ability to continue to be opportunistic. We always have been, in terms of executing our strategy.
On this, what we laid out, it really relates to the pace and the timing, which is very tough for us to peg because we don't know which opportunities will be available, both on the investing side or the divesting side, for us to take advantage of over the next couple of years, even over the next 12 months. I'd say that our balance sheet gives us flexibility to take advantage of those opportunities when they arrive. The fundamental things that have been important to us have not changed. That's namely NAV and FFO growth. To your point, over the last few years, we've done very well on these. Versus three years ago, our NAV is up 24%, our FFO is 22%. That's all on a per share cumulative basis. It's not a quarter-to-quarter business. We've never operated it that way.
Even 2018 was a good example. Our FFO in the second quarter per share was up 11.5%, and in Q4 it was actually down a bit. On the year, we delivered mid-single-digit growth. We improved our portfolio, we decreased our leverage. That's been the case for a few years. That's how our business works. It'll really depend on how aggressive we execute the strategy. I think you have the key ingredients, that you'll need to model up the answer to your question, and really the balance is going to come back to what I just talked about in terms of opportunities and which ones we're able to take advantage of.
Got it. Thanks very much.
Okay. Thanks, Tal.
Thank you. The next question is from Sam Damiani. Please go ahead. The line is open.
Thank you. Good afternoon. Adam, just as you think about the new refined strategy, I think you alluded to different property types, would you go to the extent of acquiring other property types like office, hotel, or residential buildings in your sort of neighborhoods that you're targeting?
Absolutely. I mean, we did. We bought a majority interest in the Hazelton Hotel, which has been one of the top-performing hotels in the city, first five-star hotel. We didn't buy it because we decided that hotels is a great investment on its own. We saw it as a great investment due to the strategic value that it brought to us based on its location in that neighborhood. That's definitely an evolution of our strategy. We, I would say, have become more asset class agnostic, more neighborhood-focused. Obviously, we've done very well with retail and have deep expertise. We'll continue to exploit that, but if the right residential property or office property or hotel property was available for investment in a way that we thought we could add value, create value, and matched our strategy, we would not hesitate for a moment to pursue it.
Okay. That's interesting. Just on the strategy affecting it over the next, call it two to three years, I guess you've identified 10% of the portfolio that could be disposed, either 100% or 50% interest. Does that get you where you want to be in terms of your density going up to 300,000 people and your portfolio transformation? How far up the quality scale, do you want to go? How does that balance against your FFO growth targets as well?
Look, I think it gives us a lot of flexibility to progress our strategy in a meaningful way. The question on whether it fully gets us there, and we've kind of given ourselves a two-year timeframe on the demographic objective. A big part of that'll be what other opportunities do we find over those two years on the new acquisition or investment side. The other thing that we'll be doing over those two years is a large increase in getting properties and the unrecognized value in the density pipeline ready for development. Now, how much of it we proceed on from there, we will determine at the time, but significantly advancing a meaningful chunk of that is going to be part of our strategy to try and surface some of that value.
That'll put us in a position, in probably a couple of years, because these things don't happen overnight, where we have a lot of opportunity there. We'll assess it as we go. We said it's approximately 10% of our portfolio. Some of these assets are wonderful assets. We'd love to retain an interest in them. Other logical partners we know would like to co-invest in them. Others, they just don't fit our strategy, and we'll look to divest of all. It's a meaningful number for us that will allow us to advance the strategy in a meaningful way. There's not going to be a finish line. We'll assess this as we go. I'm sure once we make our way through that, which will take some time, we'll reevaluate our situation, our portfolio, how the strategy's evolved, and we'll give you more updates at that time.
I appreciate that. Just finally, with this moving upward in quality, how does it change your outlook on leverage actually, a payout ratio too, which was brought up earlier in the call. I mean, targeting higher quality, lower yielding assets, doesn't necessarily augur well with high leverage and high payout ratios. Just wondering, not that the company has that, but how do you think about changing your goals with respect to leverage and payout ratio over time?
It doesn't augur well if you're starting from the very beginning. Really to Dori's credit, we've been making those types of investments for a lot of years. At our AGM, I think we put up a slide about the return profile of some of these investments, and they look like a hockey stick, right? We're now kind of off the blade of the hockey stick and on the very steep upward trend on a lot of them. That gives us flexibility to invest in new ones. From a leverage perspective, I'd prefer to talk about it over the medium term because I touched on flexibility to go up or down depending on opportunity when we think we have that flexibility over short periods of time. Over the medium term. Our leverage objectives would be similar.
Some of these investments carry a lower yield at the beginning, they also carry lower risk and lower cash flow risk, with better upside potential. This is a program, it's not a single investment, so we're going to manage how much we have on the go at any given time. Payout ratio, we've made a lot of progress on that over the last few years. We're retaining an amount of operating cash flow that's made a difference and has become noticeable. At some point in time, and we're certainly closer to that point in time than we were two years ago, three years ago, four years ago, we've always said our intention, and this will be a board decision and subject to board approval. The intention was to start to resume dividend or distribution increases.
Once we do, the intention would be to do it on a regular, ideally annual basis, and return at least part of the FFO growth back to shareholders or unit holders through those dividend and distribution increases. Look, in a business like ours, where we have a great use of proceeds, it's a very efficient form of capital, we have always articulated ourselves as a desirable investment when you look at us from an all-in return perspective. Yes, capital appreciation is an expectation, so is dividend or yield growth.
Thank you. Appreciate the call.
Thanks very much, Sam.
Thank you. The next question is from Jordan Robins. Please go ahead.
Hey, Adam. I jumped on late, so I apologize if this has been asked and answered, but in speaking about your strategy of targeting high growth neighborhoods or nodes, I was just wondering if you had maybe a couple of specific examples of neighborhoods where you either have a small position that you'd like to significantly increase or where you don't really have a position at all.
Yes. Certainly, we do. We're reluctant to talk about that publicly because these are very competitive markets. I don't think it serves our purpose well to make it well known that we're planning to target a specific neighborhood, then all of a sudden increase the price when our LOIs go in. I'd refer you to ones that are public, you look at Yorkville Liberty Village, that's over 12% of our balance sheet right now. You look at when we started there, you look at the demographic density. Yorkville's got almost 800,000 people within the five-kilometer radius. It's got all the fundamentals we look for. If you look at our investment activities over the last two or three years, I think you can get a pretty good picture for the characteristics of the neighborhoods that we're looking to invest in. Again, it's not city specific.
The big evolution in the strategy is the boundaries have shrunk for us. This is not about a major market. This is about targeted neighborhoods within the major market. It's about density, it's about transit orientation, public infrastructure. How walkable is it? We look at walkability scores. We talked about that on a conference call last year. How connected it is to other neighborhoods, population growth, our ability to gain a meaningful retail position and have influence over the merchandising mix of the retail, our ability to introduce things like public art that elevate the experience people have in the neighborhood. Those are the characteristics. As we build positions, we will talk about them publicly. That's not a short process, you'll need to give us some time to do that. Certainly, we have them identified.
It just doesn't serve our purpose to make it broadly known until we get some scale.
Fair enough. Thanks.
Okay. Thanks, Jordan.
Thank you. The next question is from Jenny Ma. Please go ahead.
Hey, good afternoon.
Hi, Jenny.
Adam, when we're thinking about the new strategy, when we're looking back at the acquisitions that First Capital has done over the last couple of years, they're certainly in the right markets, but how would you characterize that bunch as being fitting into your new super neighborhood category? Does it all fit that criteria? I'm just trying to think about how you're going to target acquisitions either of IPP or development land going forward.
No, it's a good question, again, the way I think of it is more of an evolution of the strategy. It's certainly not a transformation. It's an evolution, and what we believe will get us to the next level. If you look at the acquisitions that we've done, generally, they've all been very consistent with the strategy. Again, we've been putting this together for a long time. This has not been worked on over the last two or three months. It's been longer than that. When you look at the Hazelton Hotel acquisition and the shoppers on King Street, that kind of tucked into our Liberty Village portfolio. Then the Yonge-Roselawn acquisition that we're making, which that in itself has enough scale to create something that certainly is consistent with the evolved strategy.
Generally, the acquisitions that we've made in recent past are very consistent with very few exceptions.
Is it fair to say that your pool of potential acquisition opportunities remains fairly unchanged from where you've been?
I would not say that it has remained unchanged because I would say, it's more selective in terms of geographic boundaries, and more flexible in terms of, let's say, the asset class, and how it would've fit into First Capital a few years ago.
Okay.
Even two or three years ago.
When you think about that 300,000 population number, is it like a hard line, or are you flexible to get the average to about 300,000? If you see a neighborhood that's sitting at, call it, 240 or something, but you are looking for 10 years and you can see some growth there, is that something you would target, or are you very adamant about staying above the 300,000 mark?
Well, look, we put it out there as a pretty clear objective that we will measure ourselves to. I noted that these objectives will guide our activities, so they will guide them. It's not gospel. In some ways, the example you just gave, we see a neighborhood that's got 240,000 people, but we think it'll get to 400,000 in a reasonable period of time and we can take an early position, then certainly we would do that. If you look at the investments we made in 2018, the average density was over half a million people. There's going to be a very strong correlation to our investment activity and an above average level of population density. If you're asking will there ever be an exception, I'm sure there will be.
Okay. That's helpful. My next question is probably for Kay. With regards to the REIT conversion, I know you mentioned there's different avenues of conversion and different timeframes, but would you be able to speak a little to what criteria, what priorities you're focusing on when you're deciding which route to take?
Sure, Jenny. It's obviously a very detailed and thorough analysis that we're undertaking in terms of how our structure looks today and how we can make that structure most efficient going forward in terms of operating the business, managing the business, thinking about the compliance requirements of being a REIT, and our structure and what makes most sense for us. We also take into fact returning cash flow to our shareholders and what's the most efficient and best way that we can do that going forward. We look at our business activities and our plans. We consider that. We obviously think about our debt holders, as I said earlier, we want to ensure there are no negative implications whatsoever for any debt holder as part of this conversion. Those are all factors that go into our thought process behind this.
Are there any that are weighted more heavily than others?
I wouldn't say that there's necessarily something that weights more heavily than others. It's really looking at the combination of the factors that works best to align with our strategy and what we're trying to achieve over the long term.
Okay. I presume that would be related to why the Board hasn't approved this yet, because I assume you have to take a more detailed plan to them before they can, I guess, give their blessing. Is that fair?
That's correct. The Board fully understands the benefits and the reasons and the rationale of why we're pursuing this and is in full support of this. Until we land on a final structure, the Board cannot approve the conversion.
Okay.
I think it's progressed to the point where obviously we felt it appropriate to disclose it. Kay has given you a timeline that we're targeting, which is inside of the next 12 months. Clearly there's been work that's been done. Still a number of details to fully flush through before the board approves a detailed structure.
Okay. Great. Thank you very much.
Thanks a lot, Jenny.
Thank you. The next question is from Michael Markidis. Please go ahead. Your line is open.
Thank you, and good afternoon. Just wondering, you have a lot of residential density, Roselawn, Christie Cookie, Humbertown, Semiahmoo. Does this new strategy push you more towards rentals over condos?
It's a good question, Michael. Look, the density pipeline has garnered a lot of attention internally and the residential component, specifically. No, our preference, the last few years, has always been, to ideally build rental. We just see long-term, that's the best opportunity for us to create recurring growing cash flow streams, which at the end of the day is the crux of our business. We have a number of properties where the economics are just significantly more compelling, like in Humbertown, on the phase that we announced last quarter, to do condo. I don't think that the structure or the strategy that we've announced has had any impact on that. It's more around what the economics look like and can we rationalize one more so than the other.
Okay. Any sense of what the future mix might be five years down the road or 10 years down the road in terms of retail and other?
No. I should be clear on this. The evolved strategy is, we said it'll end up diversifying the asset class to some degree, but this is not the primary objective. We're interested in the highest quality positions that we can make in the most attractive neighborhoods. That's what's going to drive the mix, not a set target where X% is going to be retail, Y% residential. Retail's had a bit of a negative connotation to it. That's not what we feel in our business. That's not what we feel on the ground. The results year after year have demonstrated that. We actually love retail still, and we see a ton of opportunity in retail. We see great opportunity combining that retail with other uses to create dominant positions in high-growth neighborhoods.
That's what it'll drive it, much more so than an asset class target.
Mm-hmm. With the new strategy, does it mean that your development program will be stepped up?
Look, over the next year or two, I think we will likely continue to be in that CAD 150 million-CAD 250 million range. Based on the strategy to try and surface some of this additional value, I can tell you that we will certainly, when we start looking at 2021 and beyond, we will certainly have the opportunity to step it up in a meaningful way. The financial commitment to get to that point is not material, we're in the process of pursuing that. As we get closer, we'll make decisions around if we stepped it up, how much we stepped it up.
Okay. Would a market like London, Ontario, meet your new criteria?
No.
No. Okay. Is it fair to assume that you have 12% of your balance sheet in Yorkville and Liberty Village. Would some of those properties be a good candidate for a 50% sort of passive interest?
Not anytime soon.
Not any, okay. Sure. Thank you.
Okay. Thanks very much, Mike.
Thank you once again. Please press star one if you have a question. Our next question is from Dean Wilkinson. Please go ahead.
Thanks. Afternoon, everyone. I'll make this quick because we're through an hour. Okay. On the REIT conversion, you might not be there yet. Would this constitute a taxable event?
As I said, we are still working on this structure. We're still evaluating multiple alternatives. They do have different implications in terms of tax, so it's too early to provide a definitive answer on that.
Okay, fair enough. When you turn to the asset sales going forward, given sort of the rationale for converting over is sort of the burndown of the tax shelters. Would there be CCA recapture on that, such that you see a potential special dividend, or is there a way that you're going to be able to fully encapsulate that and keep it within the REIT structure?
Yeah. Just so we're clear, Dean, again, the reasons we outlined are much broader than the one you just referenced for the REIT conversion. In terms of the second part of the question, we're way too premature to determine whether a special distribution is in the future. Just way too early. We haven't finalized the details of the structure of the REIT, let alone looking at the specific date and the amount of dispositions and the tax characteristics of properties that are being sold, which we have not fully identified which properties are being sold, what structure they'll be sold under, and what the tax implications are. If and when we get to that point, certainly it'll be a part of the decision-making process on when we sell, what we sell, et cetera.
If it makes sense at the time to trigger a special distribution, that's what we'll do.
Right.
If it doesn't, yeah.
It's an upside problem, right? That's.
Yeah. The truth is, it is just too premature for us really to speak with any degree of clarity around it at this point.
No, that is fair enough. I kind of expected it as I asked that. That is it. I will hand it back. Thanks, guys.
Okay. Thanks very much, Dean.
Thank you. There are no further questions registered at this time. I return the meeting back over to you, Mr. Paul.
Okay. Thank you very much, operator. Thank you everyone for your time this afternoon, your continued interest in First Capital. Clearly, it's a very exciting time for our team, and we very much look forward to updating you on our progress in the near future. Thank you very much. Have a great afternoon.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
OMG.
What's that?
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