Ladies and gentlemen, thank you for standing by. Welcome to the First Capital Realty Q3 2017 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 Adam. Please proceed with your presentation.
Okay. Thank you very much, Alina. As usual, we'll start with our typical cautionary statements. Please note that forward-looking statements may be made during today's conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements 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 quarter ended September 30th, 2017, and our current AIF, 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. Let's move on to what you all called in for.
With me today are several members of our executive team, including Kay Brekken, who will present shortly, and Jordan Robins, Jodi Shpigel, and Carm Francella, who are available for questions after our prepared remarks. I'd also like to welcome Alison Harnick to our executive leadership team in the role of General Counsel and Corporate Secretary. Q3 was another really good, really solid quarter. Our OFFO of CAD 0.299, FFO of CAD 0.301, and NAV of CAD 21.70 are all the absolute highest amounts for each of these metrics that we have ever posted in our company's history. Notwithstanding these strong results, I'm the first to caution anyone on assessing a real estate business or any metric on only a three-month time frame.
The theme this quarter is very similar to what has unfolded over numerous quarters now, which is highlighted by our NAV per share, which has increased by a total of 19% since the beginning of last year. This increase came from higher NOI, from increased market rental rates, as well as former development properties that had come online and continue to mature, and also, to a lesser degree, cap rate compression. At the end of the day, this business continues to be about the real estate. We own low-density retail properties in urban markets with leading demographics, leased to necessity-based tenants. Great retail properties in urban markets are performing remarkably well with healthy fundamentals looking ahead.
These locations are the product of choice amongst tenants because the population growth is exceeding retail supply growth, leading to less retail square footage per capita in these markets, and consequently, higher sales per square foot. And we know from experience, this leads to higher rents. Our daily necessity focus adds to the strength of these fundamentals. Even in the U.S., which is a much more oversupplied market, core First Capital use categories such as grocery stores, pharmacies, restaurants, and fitness clubs, not to mention service retailers, will all see net new U.S. store growth in 2017. And that's consistent with what we're seeing on the ground here in Canada. The retail world is evolving. It always has. Clearly, the degree and the pace of change today is more pronounced. It takes more than a great portfolio.
It takes vision, creativity, and a lot of hard work to benefit from this change. Our efforts and capabilities in this regard are on display across the country. You can see it in Toronto's Yorkville Village, Liberty Village, 3080 Yonge, Leaside, Mount Royal Village in Calgary, Brewery District in Edmonton, Olympic Village in Vancouver, Griffintown in Montreal, and I could go on and on. Not to mention properties in the planning stage like Christie Cookie. Other assets in our portfolio may be experiencing less visible change but continue to perform very well given their strong position, like Cedarbrae Mall, Rutherford, York Mills Gardens, our Oakville and Burlington properties, St-Hubert, McKenzie Towne Centre, Gloucester City Centre, Fairway Plaza, Peninsula Village, Pemberton Plaza, and again, I could go on. These 20 assets total CAD 3.1 billion, which is a third of our total portfolio.
Consistent with our strategy of focusing on fewer but larger properties. Like the retail landscape, our thinking continues to evolve. Here's just one example. In some properties, we're dealing with tenants who have an established or could have an established online component to their business. And we know our space can assist great retailers with their omni-channel strategy. We've signed our first lease with a retailer who, in addition to paying a market rate of rent, will also pay First Capital a percentage of their online sales for those delivered within a certain radius of this property. This is new thinking for us. We've been busy on the leasing side.
When you mix great properties in desirable locations with very talented leasing professionals who are forward-looking with respect to the best retail concepts, and you provide them with the right tools. Good things happen on the leasing front, and we have never been better positioned in that regard. Retailers, especially necessity-based retailers like our tenants, want to be located where the most people are and where the population is growing at the highest rate. That's where our properties are located, and this is a big reason behind the progress we continue to make on the leasing front. During the quarter, we completed 174 lease transactions totaling 761,000 sq ft of space. This took our Q3 end-of-period occupancy up by 30 basis points from the end of Q2. Focusing on our important same-property assets, which represents 87% of our total portfolio, we also picked up occupancy by quarter end.
When comparing our same-property average occupancy versus the average throughout Q3 in the prior year, it actually declined by 20 basis points. Now, this provides important context when looking at our same-property NOI, which grew by a healthy 3.1% on a total basis and 2.3% on a stable basis. We achieved this growth notwithstanding a decrease in same-property average occupancy, meaning we had a vacancy drag that was more than offset by higher rents. Very encouraging. In Liberty Village, we continue to have lots on the go. Last month, Mayor Tory hosted a press conference from our office on SmartTrack and the new transit station that will be located adjacent to our King High Line development.
Importantly, he referenced the pedestrian bridge connection over the railway tracks as part of this transit stop that will connect Liberty Village via our King High Line development with many neighborhoods to the north, including Queen West, Parkdale, and Trinity Bellwoods. This is a game changer in terms of taking King High Line and Liberty Village to the next level, and is part of the reason for the scope change and increased investment in King High Line that we reported this quarter. Another neighborhood being taken to the next level is Yorkville, which has really come a long way in what feels like both a short and long period of time. First, I'll cover some of what's happened over just the last few months.
Joining our mix of operating retailers, we opened the first boutiques in Canada for both Belstaff and Italian designer Eleventy in our mall, as well as Jean-Paul Fortin, TNT Concept, Mi'Hito Sushi Laboratory, the Chase Hospitality Group's Palm Lane restaurant, Nanni, SoulCycle, and Elixir Juice Bar. We've also hosted many events and activations, over 80 so far this year alone. During the quarter, one of the highlights was Dalí x, the Salvador Dalí exhibit that increased our daily foot traffic throughout the month of September by over 1,000 people per day. Toronto Fashion Week, which was acquired by a group that includes First Capital, was reimagined, relaunched, and most importantly, relocated to Yorkville in September. In many respects, the work that we're doing in Yorkville reflects our ability to successfully adapt to the fast-changing world of retail today.
As I mentioned, it requires vision, creativity, and a platform that is capable of executing. We've become more and more proactive, not reactive, in our approach to leasing, and Yorkville is no exception. For example, we believed an art gallery would be an important part of our merchandising mix, so we sought out and secured one of, if not the most desirable contemporary art galleries in the country, who has now expanded outside of Montreal for the first time. Galerie de Bellefeuille has been open for a month in our mall, and they are off to a phenomenal start sales-wise. The presence they create and the beauty they add to our Avenue Road frontage is worth a visit on its own.
We also identified beauty as a very important use in this property, I'm happy to report that we have now entered into a lease with Victoria Radford, who will expand and relocate her very successful business into a 3,000 square foot space in our mall next year. This is a big deal, which those familiar with the beauty industry will appreciate. One of the major transformation catalysts in Yorkville was the signing of Chanel to a long-term lease. It seems like a long time ago that we achieved this milestone, and it's led to a huge level of activity ever since. On November 17th, Chanel will open its doors to one of its most beautiful and largest boutiques in North America. Joining them next door in the buildings we're now constructing will be Jimmy Choo, Her Majesty's Pleasure, another beauty offering.
I'm happy to announce Toronto's first standalone Brunello Cucinelli boutique that will be 8,000 square feet in size. Our investment in just Yorkville and Liberty Village alone now stands at CAD 1 billion and growing, which is over 10% of our total portfolio. Moving on to the investments market, we continue to have significant flexibility on how we execute our growth strategy. Given the dislocation between private and public market values for First Capital-type assets, we expect to be more active recycling capital. As many of you know, the majority of Main and Main's properties have been listed for sale. Main and Main has opportunistically morphed into a portfolio with significant residential density. As we've reported, we have over 14 million square feet of incremental density in our business, even without Main and Main.
We expect to realize on some of this value through the sale of some of our Main and Main assets and other smaller transactions that we're currently working on. We're also planning to sell a full or partial non-managing interest in some of our income-producing properties that are great assets, but also an appropriate place to recycle capital into our higher-growth and near-term value creation properties. Given we're at a sensitive point in the disposition process on some of these assets, we won't comment on them further today, but we do plan to update you next quarter. As noted in our MD&A, we've added to our loan investments because we found additional loan opportunities where we really like the real estate and the risk-return profile. We don't disclose individual properties securing these loans, but they are consistent in location and quality to other First Capital assets.
On the balance sheet side, we bolstered our capital position and debt maturity profile by issuing CAD 300 million of 3.75% 10-year unsecured debentures in a successful transaction that was oversubscribed. We also increased our sizable unencumbered asset pool to CAD 7.4 billion. While our objective is to reduce leverage, the timing of our capital recycling activities, namely the closing of planned dispositions, is likely to have leverage tick up in Q4 before coming down in 2018. Every quarter, we're getting better and better at what we do. We have the right real estate in exceptional locations. The talent we now have, and how our departments continue to gel and collaborate and work together as a team toward a common goal is noticeable in our company, and we'll continue to work really hard to achieve our objectives.
With that, I'll now pass things over to Kay to review our third quarter results in more detail. Kay?
Thank you, Adam. Good afternoon, everyone, and thank you for joining us on our call today. We were very pleased with our overall results for the quarter, which is a continuation of our track record of generating higher growth in operating FFO per share. For the quarter, our same property NOI increased 3.1%, which led to an increase in operating FFO per share of 4.5% over Q3 of last year. Our operating FFO of CAD 0.30 per share is the highest quarterly number we've ever posted, an achievement we are very proud of. I will now take you through how we achieved this growth in more detail. Starting on slide six of our conference call deck. Our operating FFO for the third quarter increased 4.5%, or CAD 0.01 on a per-share basis, and 6.6%, or CAD 4.5 million in dollar terms versus the prior year period.
The growth in operating FFO per share was primarily due to same property NOI growth of CAD 2.9 million, driven by higher rental rates and by a CAD 3.6 million increase in interest in other income as we increased our loans outstanding. Moving to slide seven. Our Q3 same-property NOI increased by 3.1% versus the prior year period, primarily due to rent escalations and lifts on renewals. On slide eight, we present our lease renewal activity for the quarter and year-to-date periods. Our Q3 total portfolio lease renewal lift was 3.2% on 438,000 square feet of renewals. On a year-to-date basis, our total portfolio lease renewal lift was 6% on 1,130,000 square feet of renewals. The Q3 lease renewal lift was lower than in prior periods, due in part to a number of fixed flat-rate renewals which occurred in the quarter.
I would also like to highlight that we calculate the lift by comparing the rent in the final year of the expiring term to the rent in the first year of the renewal term, which doesn't always reflect the full lift we are achieving. For example, we completed a five-year renewal with an anchor tenant in Calgary, where market rents have increased substantially, with no increase in the first year of the renewal term, but with meaningful bumps over the lease term. This resulted in an 82.5% increase over the five-year renewal term. However, this lease gets picked up as a flat-rate renewal. We've also had an initiative underway to improve our recovery clauses and have made meaningful improvements in a number of leases.
These improvements are not reflected in our lift on renewal, which is based on net rental rates, but will result in meaningful improvements to gross rent over the renewal term. Moving to slide nine. Our average net rental rate grew 1.9%, or CAD 0.37 over the past 12 months to CAD 19.48 per sq ft, primarily due to rent escalations and development completions. In the third quarter, we transferred 48,000 sq ft of new GLA from development to income-producing properties with an invested cost of CAD 55.4 million, bringing our year-to-date development completions to 110,000 sq ft of new GLA with an invested cost of CAD 100 million. The majority of this space is leased at an average rental rate of CAD 37.44 per sq ft, 92% higher than the average rental rate for our portfolio.
On slide 10, our total portfolio occupancy rate increased by 30 basis points since Q2, as a number of tenants took possessions in centers located primarily in Montreal and Edmonton. At quarter end, we were holding 0.8% of our portfolio intentionally vacant for redevelopment. Slide 11 highlights our five largest developments that accounted for the majority of the CAD 41.4 million in development and redevelopment spend in the quarter, bringing our year-to-date spend to CAD 114 million. In the quarter, we decided to undertake additional work in both our King High Line and Yorkville developments and have adjusted our cost to complete, our estimated completion dates, and our weighted average yield on our development projects in total to reflect these changes. Adam already touched on some of the additional work we are doing in King High Line.
In Yorkville, we have undertaken a number of initiatives, and I want to highlight a couple of these. We launched a third phase, which will expand the mall into areas currently used as back-of-house to generate additional income. We are remodeling the existing loading docks to create additional leasable space and increase capacity for our tenants. We are expanding and augmenting the existing entrance off of Hazelton Avenue, including the canopy out to the street to create a third main entrance, which will drive greater foot traffic and create a direct connection to our other properties on Hazelton Avenue and Yorkville Avenue. The benefits from these investments are not reflected in the yield on day one but will generate meaningful contributions to our results over time.
All of these investments create future value for our tenants, for the local residents who frequent our properties, for property owners in our communities, and for First Capital Realty. Our development pipeline at quarter end totals 14.3 million sq ft of additional density, including 2.5 million sq ft of retail density and 11.9 million sq ft of residential density, with 530,000 sq ft currently under active development. We have been doing further work on our development pipeline to quantify additional density within our portfolio and to quantify the value of our density. We expect to have a further update on this in Q4. Slide 12 shows the factors driving the growth in operating FFO and in FFO during the quarter and the year-to-date period. This slide also highlights our year-to-date operating FFO payout ratio, which improved to 74.1% from 77.7% in the same prior year period.
Slide 13 touches on our other gains, losses, and expenses, which are included in FFO. During the quarter, we recognized CAD 400,000 in other gains due to a CAD 1.4 million increase in unrealized gains on marketable securities. This gain was partially offset by a non-cash loss of CAD 1 million on the early redemption of our Series I convertible debentures. We have one remaining convertible debenture outstanding, which we have the right to redeem early next year. Slide 14 summarizes our ACFO metric. As discussed on prior calls, effective Q1 of this year, we adopted the ACFO cash flow metric as defined by REALPAC to replace AFFO, our prior cash flow metric. Our ACFO working capital adjustments primarily relate to prepaid and accrued realty taxes due to seasonal variances in these items over the course of the year.
Our CapEx deduction is actual maintenance CapEx spend in the quarter, which includes both revenue-sustaining and recoverable CapEx. Our Q3 ACFO was up CAD 4.7 million or 7% versus the prior year period, primarily related to higher NOI and higher interest and other income, which I discussed earlier. Information on our third quarter financing activities is on slide 15. In the quarter, we issued CAD 300 million of Series U 10-year unsecured debentures at an effective interest rate of 3.8%. We also redeemed in cash CAD 51 million of Series I convertible debentures with an effective interest rate of 6.2%. Slide 16 summarizes the size of our operating credit facility and our unencumbered asset pool, as well as our key financial ratios. Our unencumbered asset pool is now CAD 7.4 billion or 75% of our total assets, an increase of CAD 700 million since the start of the year.
Our net debt-to-EBITDA ratio increased slightly in the quarter, and we expect a further increase in Q4. We expect this metric to decline next year as we complete the sale of a number of assets held for sale at quarter end and additional assets we decided to list for sale post quarter end, as the proceeds of these dispositions will be used to reduce outstanding debt. Slide 17 shows our 10-year debt ladder. Our weighted average interest rate has declined to 4.4%, and our weighted average term has increased to 5.4 years. We continue to have future opportunity for interest rate roll-down in our near-term maturities. We have CAD 156 million in remaining 2017 debt maturities with a weighted average interest rate of 5.4%. Overall, we are very pleased with our strong financial position and our solid results for the quarter and the year-to-date period.
At this time, we would be pleased to take any questions you have. Alina, can you please open the call for questions?
Certainly. Thank you. 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. Maybe in regard to the asset sales, if you could expand a little bit on the types of assets you're going to look to sell and the rationale for that. Is it really just continuing to cull the portfolio and selling off assets that maybe would have slower growth?
Hi, Mark. Thanks very much for the question. As you know, we've done a lot of the heavy lifting in terms of the portfolio over the last few years. We've sold about CAD 1 billion of real estate really since 2012, which has really changed the composition of our portfolio when you couple that with the several billion CAD that we've invested in it. We're at a stage now where we're quite happy with the assets we own. As you know, we have a pretty active development program. We've found some pretty great investment opportunities, when we do that, we're looking at the most efficient sources of capital. Right now, I'll give you one example. We're pursuing the sale of a 50% non-managing interest in our London portfolio. We really like the London market. Good university, pretty stable employment, stable population growth.
We do believe we will get good growth out of the assets. We don't think we'll get the same level of growth and value creation there, notwithstanding it'll be good, as we can in some of our other more urban properties. That's why for us, we look at it and say it makes sense to recycle part of that capital. We'll bring in a partner. We'll enhance our return on our remaining invested capital through a little bit of fee income from the partner. We'll have the opportunity to redeploy that into the active developments that I know you're very familiar with. That's the kind of thinking behind it.
Thanks. As you execute on this and complete some of the larger projects, you've completed a lot of the work in Liberty Village and in Yorkville. Some of these assets really become a large part of First Capital. Does that concern you at all? Is that an issue? Would you look to JV maybe some of those assets, or because of the strength of those properties, are you comfortable with that?
I mean, you look at Yorkville and Liberty Village alone, it's running at roughly 10% of our total portfolio. I've got to tell you, we're thrilled with that. If we could write the script, it'd be higher because there's nowhere in the country, there's other places that may be similar that we have, but there's nowhere that's got more compelling demographic profiles, more compelling fundamentals looking five, 10, 20 years ahead as those markets. We've assembled such a nice position, and we've had the ability to influence some of the transformation of those neighborhoods. So it takes critical mass to be able to do that. We just think those will be amongst our best-performing, highest value-creating investments in the portfolio. So we're delighted it's a heavy position.
Someone else may look at it and say, "That's a lot of concentration." We look at it a little bit differently.
Great. Thank you very much.
Okay. Thanks, Mark.
Thank you. The next question is from Michael Markidis. Please go ahead.
Thank you, and good afternoon. I just wanted to touch on the King High Line bridge. I certainly understand how that's going to help that property and also your Liberty Village assets. It's also going to help a lot of the neighbors. I'm just wondering, is that your total expenditure, or is that a joint initiative, or is it just something that you're doing on your own?
Hi, Michael. There's two bridges, which makes things a little more confusing. There's a bridge that currently is in place that's owned by Metrolinx that crosses adjacent to the King High Line development over King Street to the south side. That's the one that we're going to take on the responsibility to upgrade. The second bridge is located adjacent to the planned SmartTrack station, and that's also on the north side of King Street, but on the north side of the railway tracks, whereas our King High Line development's on the south side of the railway tracks. That bridge, the expectation based on what John Tory has said, that bridge we're expecting to not be paying for. I apologize if there was some confusion, but there are two bridges that we were talking about.
Okay. I guess, so that first bridge, I guess, if you will, and some of the changes you sort of talked about in Yorkville Village, so that's a reason for the development yields going from about 5.3 to 5.1?
Yeah. Well, that's certainly part of it. We've got 600 feet of frontage along King Street. King Street West and King High Line. On the north side of our property, there's a similar amount of frontage of what the High Line is. It's where the bridge connection over King Street runs to along our property, and that will ultimately tie into the city's bridge. We have made some scope changes to that bridge, in anticipation of the increased pedestrian flow that will now come from the SmartTrack station. It's related to that. Also, some of the details and how it presents and how it feels, yeah, we've revisited that as well. It's the bridge, but it's also the path connection between the two bridges that run along the 600 feet of north frontage on the property.
Okay, great. Thank you. You had mentioned the renewals. This renewal spread to 2.7 and if I understand correctly, that anchor tenant that has the big increase on average over the term, but it's flat in year one. That would be part of the reason why it was like 2.7%?
Yeah, absolutely. Looking at any of these metrics, no matter how strong or soft they come out in a quarter, you got to do it with a grain of salt. There are some inherent shortcomings in the renewal spread calculation, and especially in an urban portfolio like ours, where you have tenants that are coming off leases where market rents have increased dramatically, like the anchor tenant that Kay was referencing. Sometimes there's a degree of sticker shock, and they're doing great business and can afford the rent, but perhaps they didn't plan for it in their budget or what have you. In this case, we were quite amenable to great covenant, to great tenant.
We were quite amenable to actually leaving the first-year rent flat in the renewal term, but with very significant escalations to the point where by the end of the 5 years, the rent's 82.5% higher than the first year. That doesn't get captured in the renewal spread calculation. There's other things we've been working on, like improving our CAM recoveries. We've had a lot of success with Carm and his group in that regard. Again, that gets totally ignored in the renewal spread calculation. I think it's certainly a soft number in Q3. I can tell you, we're not seeing any structural or inherent issue. We think it's a one-off quarter. When you look through, beneath the surface, things are much better than they appear in the quarter.
Okay. Yeah, that makes sense. Like on average, if you looked at on an annual basis, you're still looking at mid to high single-digit kind of thing, barring anything unusual?
Absolutely. That's what we expect.
Okay, good. Lastly, I wonder if you could just give it a little color on your strategy for making loans.
Well, we've been in that business for a very long time. Generally, I don't think there's a lot changed in how we look at it. To clarify, there are really three scenarios where we believe it makes sense for us to use our balance sheet in loan transactions. One is on occasion to facilitate the disposition of properties through the use of VTBs. We've historically done that where it's made sense. I would expect that in some cases we'll continue to do that. We've got some of that on our balance sheet to date. Another scenario is through some of our joint venture partners. As you know, we've entered into joint ventures for a variety of reasons. In some cases, part of the overall investment in the partnership is financing part of our partner's equity.
We've certainly done that. I would expect we'll continue to do that. In other cases, I would call them more on the opportunistic side, where there's an opportunity to make an investment in a piece of real estate that we really like. It may not be an equity investment initially. We do like the real estate. If we can make those investments with a compelling return profile given the risk, for us, we look at that saying, look, there's an opportunity potentially of getting an equity interest in the property, which would be great. Failing that, there's an opportunity to invest in the debt of the property and earn an acceptable return. We're happy with either one of those outcomes. Those are the three scenarios. We've pretty much always had a loan book.
It's been a small part of our business. It'll continue to be a small part of our business. However, this particular quarter, we were able to find more opportunities than we had in the past.
Those would be in the third category this quarter, sounded like.
Correct. Yes.
Just so I understand, this is a property basically you'd love to own, but at the current time, there's only an opportunity to make a loan on the property. Presumably you're doing a high loan or a high LTV, which is basically a loan and a piece of sort of de facto equity, and you're saying, well, either I'll get a good return on this, or I'll loan the property.
Yes, with the exception of the high LTV. We're not generally looking for kind of mez type LTV. There were two loans advanced in the third quarter. Each of them were first mortgages on properties, and I would describe them as relatively conservative LTVs.
Why would they go to you for a loan when they could? There's lots of, like if it's a regular loan on a good property, why would they go to you, First Capital?
It depends. Some of this has been sourced through our existing relationships, and some of these investments or borrowers didn't qualify for bank financing, either through the state of the property. One of the properties is going through transition. Bank financing wasn't an option. It was with us.
Oh, okay. I understand. Thank you. That's it from me.
Okay, great. Thanks very much, Michael.
Thank you. The next question is from Pammi Bir. Please go ahead.
Thanks. Good afternoon. With respect to the Main and Main sale process, just curious how the interest has been so far, and if there is any sort of further clarity on a sense of timing of when we may start to see some of this transact.
Well, we are right in the middle of the process. For obvious reasons, we are not going to say a whole lot. The interest has been very strong, which is what we expected. It was a little stronger than we expected. That is not going to give you a firm indication of where this process concludes. Literally, we are right in the middle of it.
Is it likely that we will see this sort of transact in batches, or is it leaning more towards a larger transaction?
It is really too early to tell, Pammi.
Okay.
It's too early to tell. Both of those are very realistic possibilities at this stage, but it would be too early to indicate which one's more likely to occur.
Okay. Just going, if you look at the CAD 170 million of asset value that you've shown or you've got disclosed, how much of that relates to the three properties that you expect to retain?
I don't have that handy, Kay. I'm not sure.
I can get back to you on that, Pammi. We'll come back to it.
Okay. Sure. Just one sort of housekeeping. In your interest and other income, I guess this goes back to perhaps the mezz loan or the loan discussion, were there any non-recurring fees earned in Q3? I'm just curious as to what sort of run rate you see that running at for the next 12 months or so, specifically the fees and other income, because that did spike up in the quarter.
Yeah, look, every quarter, we have non-recurring things that are running through the P&L. In terms of the run rate, Kay?
Yeah. I think it's very hard to predict the run rate on something like this, Pammi. It really depends on what opportunities we find for new loans, what loans get extended. I don't think it's something that we can predict going forward.
Okay. Maybe if we just take a step back and look into 2018 overall. Do you see anything that would, say, prevent you from hitting sort of similar mid-single-digit-type FFO growth next year?
Well, our plan is, if we are going to comment on 2018 FFO growth, it'll be on our next conference call. Look, we're now running 2016, 2017 with really strong operating metrics, really strong core FFO growth. The business is in great shape. Not to say it's easy, but we're making a lot of progress and gaining a lot of traction on a lot of fronts. Our expectation is that 2018 will also be a good year.
Okay. Just maybe lastly, on the development side, in terms of what you're spending versus what may come on stream or online next year, how should we think about that overall?
Well, we've been investing in and around CAD 200 million a year in development. I think we're going to track slightly below that this year. I think we're going to We've transferred about CAD 100 million year to date into IPP from development. I think we'll track below the annual spend slightly in 2017. In 2018, as you know, we have some major projects that are nearing completion. I would expect that our spend in 2018 is somewhere in the range of that CAD 200 million. The transfers to IPP should exceed that next year.
Okay. All right.
Okay, Pammi.
Yeah.
Can we come back to your earlier question? I think your question was what's the fair value associated with the three properties we're retaining in MMUR. Is that correct?
Yes.
Okay. That's about CAD 30 million.
Okay, great. Thanks very much.
Okay, thank you, Pammi.
Thank you. The next question is from Sam Damiani. Please go ahead.
Thanks, good afternoon. Just on the disclosure you're anticipating in Q4 on the development pipeline, can you give us an idea on the types of information that you expect to disclose?
Hi, Sam. Well, look, let me start by why we're planning to disclose. We've identified a significant amount of incremental density that can be added to the existing assets we own, there are some inherent shortcomings with respect to reflecting that value in a lot of the properties based on the restrictions imposed by the IFRS method of calculating it. Our expectation is to update, number one, the amount of incremental density, because it is a fluid number. I would say based on the preliminary work that we've done, that's not complete, the number is likely to increase versus decrease.
Secondly, we're going to attempt to apply some rough valuation parameters, and enough color around what we believe it's worth, in hopes that we provide more clarity to investors and the public on how to appropriately value that density, which we believe is not being appropriately valued to date. Understandably so, because the tools haven't necessarily been provided to do that. That's our intent. The devil's in the details. Obviously, you have issues like what the density would be worth today if the site was totally unencumbered. You take Liberty Village, for example, we have a lot of real estate in Liberty Village that's surrounded by high-density real estate, and we're sitting there with large single-story buildings with surface parking. The demand and the market's there today to monetize that. The real estate's worth more vacant than it is leased, but it's encumbered with leases.
You can see that's one example of how valuing that density can be a little bit challenging.
That makes sense. That'll be very helpful. Just looking at that 14 million square feet of incremental density today, will you disclose how much of that is currently captured, valued on the balance sheet?
That would be our plan, yes.
Yeah. Okay.
Because the real idea is to help investors with the valuation of that density. Some of it is reflected in our IFRS fair value, and some of it is not. We think it is important to provide enough information to investors to understand it, look at it, and make a more well-informed decision on the value of our company.
Perfect. That will be helpful. Just looking at the dispositions next year, a couple of things. You mentioned London. Are you doing a 50% interest in your entire London portfolio?
I have to tell you that we haven't fully concluded on that, but if it is not on the entire thing, it will be the vast majority. We are not under contract by any means, but we are at the stage now where we are exposing the majority of the portfolio to a group of what we describe as logical and compatible partners. We have been encouraged with the interest that we have received. I would say it will be either the majority or all of the London portfolio.
Okay. Then when you look at dispositions in 2018, as you say, to bring the leverage down, what would be the quantity of dispositions you anticipate transacting on over the course of the year?
At that quarter end, Sam, we had CAD 223 million listed as held for sale, including MMUR.
Is that it? That doesn't include London?
That does not include London. London was a decision post quarter end, that would be in addition to that CAD 223 million.
What you're saying is right now, that and London is all you're anticipating selling at this point?
As of right now. Again, it's fluid, Sam.
Okay. Just on the One Bloor East transaction that was announced a little over a year ago, what's the status and the timing of that turning into an income property asset on the books?
Sam, it's Jordy. How are you?
Hi.
As you know, we've announced deals with Nordstrom Rack. It's their intention to open in May of 2018. We've also announced a deal with McEwan's grocery store. All told, we've got about 70% of the property leased. Nordstrom Rack is in possession today. The expectation is that we'll give McEwan's possession of their space in the second quarter of 2018. We expect to physically close on the property and get title in the fourth quarter of this year. The expectation is that we should be receiving rents, or will be receiving rents from Nordstrom's in May. We'll be receiving rents from McEwan's likely in the fourth quarter of 2018.
From a construction perspective, the priority was getting Nordstrom in possession and is now getting McEwan's in possession. The rest of the retail area has lagged from a construction perspective. The timing's going to be a bit staggered. On the majority of that remaining space, we're in active and lengthy negotiations. We would expect, at some point reasonably soon, to make further leasing announcements. That space is going to be behind in terms of opening and construction from the Nordstrom Rack and McEwan space.
Certainly, Sam, the demand for the remaining space has been quite strong.
I'm sure, and that's good to hear. Basically, FFO will be impacted in the first half of the year as a result of what you just said.
If you recall, the way we structured the investment is, we invested the capital last year and are earning a return on that capital. When the property is fully leased, because it's not fully leased right now, we have an expectation on where that yield will fall. We believe that the low end of the yield will be similar to what's being earned on the current investment. If we do better than that, which we are cautiously optimistic on, then we'll do better. I don't think it'll be material early in the year, just given how it's being transferred into the portfolio.
Okay. Thank you.
Okay, thanks, Sam.
Thank you. The next question is from Matt Kornack. Please go ahead.
Hi, guys. Adam, I just want to quickly go back on that discussion point. Is it because it'll come in as straight-line rent, or will you continue to capitalize interest, at least for the first quarter of the year on that space?
Hi, Matt. The way it's practically going to happen is, it's not going to all come into the income-producing portfolio at the same time. Nordstrom and McEwan's will be at a stage where the space is turned over to tenants, and that'll come in at one point. We still are going to have work to do on the balance from a construction perspective. Part of that space is going to end up in development after legal title transfers, until the space reaches a certain point from a construction perspective. What you're going to see is likely throughout 2018 is kind of a staggered series of transfers as the space progresses to completion, which again, will be broken up and not done in a lump sum basis.
Okay. No, fair enough. That makes sense. On Main and Main, I didn't fully understand the disclosure in the MD&A. Is the capital that you get back from the sales remaining in the vehicle to develop the three assets that remain, or will you receive your portion of that capital back in cash to invest in other opportunities in First Capital more broadly?
We expect that there'll be a distribution of capital.
Okay.
As the three remaining projects require additional capital, we'll fund it accordingly.
Okay. Makes sense. You mentioned, and it's interesting in terms of getting a % of online sales for a tenant, can you speak to where that is geographically? Maybe not the urban versus rural or suburban is fine. If you've been able or successfully been able to push that out to other tenants, given the context and given what's going on in e-commerce.
Yeah, no, look, it's a very good question, Matt, because there's obviously a lot of change going on and we feel like we understand the value of our real estate. We have a good handle on the demographic tailwinds that should drive value in the real estate long term. The details of what that looks like in terms of the activities and configuration of the space, when you fast-forward 10, 15, 20 years, it gets a lot murkier. I can tell you that the specific lease was done in an urban part of Toronto. The way we're looking at the evolution of physical space and the digital world is not a competition between the physical world and e-commerce, but more a belief that the most successful retailers of the future will have a really strong capability in both physical space and in the digital space.
We've seen in other countries like the U.K., where the digital transaction platforms are more advanced, that there's space that's got a ton of value, and the value's not fully reflected in the sales per sq ft that are being done in the space. How do you capture that value? One of the creative ways that we think is possible is to do what we've done here, where there are benefits that extend beyond the physical footprint of the space. It's going to generate sales in the physical space, but also digitally. In this case, we were happy that we kind of came to an agreement with the tenant where for product or sales that are delivered within a certain radius of our property, there could be a direct or indirect tie back to that space.
We'll get a percentage of the sales. We have not done that. That was the first deal we did. We just signed it, like over the last few weeks. Certainly, it's something that's top of mind for us in a lot of properties, and will be an important part of the lease negotiation on certain transactions that we pursue going forward.
Interesting. Last question. With regards to Yorkville Village, I know it's still early days. A lot of it's just opened. It sounds like you're tracking foot traffic and maybe sales. I don't know if you would've gotten anything at this point. How is it tracking so far, at least the enclosed mall portion? Is your expectation that once the tenants move in on Yorkville Avenue, be it Chanel and Brunello Cucinelli, et cetera, that that will drive additional foot traffic to the enclosed mall portion as well?
Yes. I think Yorkville is the type of asset and the type of neighborhood that in three months, in six months, in one year, in five years, in 10 years, in 20 years, just gets better and better. We have a rare opportunity there, given our significant holdings, to now design buildings and do things that help facilitate traffic to all of the properties in the area that we're in. When we reveal the plans for the design at 101 Yorkville, what you'll see is that there's been a lot of thought behind the design to facilitate pedestrian traffic all the way from Bloor through Cumberland into Yorkville and ultimately into our mall through the way the laneways are aligned and facilitated. Yeah, we are tracking traffic in the mall.
Look, I just listed a whole bunch of retailers that have just opened, that makes a huge difference. The foot traffic in the mall every month is going higher. I think it's a steep and steady climb. I don't think you flick a switch and you double your foot traffic in four weeks. We're very encouraged, more encouraged than we've ever been, and we have more conviction in the value potential opportunity in Yorkville today than we've ever had. I think when you open tenants like Chanel and Jimmy Choo and Brunello Cucinelli and some of the others, that only helps. It helps the whole neighborhood.
You're bringing in a beauty tenancy. It sounds like you've got another, I think it was 30,000 sq ft, if I remember correctly from the call, that's going to be added in phase 3. It's fairly fashion intensive now. Would you change the offering in the mall in that component of the space that's coming on, or is it going to be similar type tenancies?
Look, we're in negotiations with tenants on the majority of the space that's left, and I would classify them more as unique retailers versus fashion-oriented retailers.
Okay, great. Thanks, Adam.
Okay, thank you, Matt.
Thank you. The next question is from Heather Kirk. Please go ahead.
My questions have pretty much been answered, but maybe just one on the loans receivable. If you strip out the One Bloor loan that's going to get paid back in Q4 at 4.5%, what would the average interest rate be on the balance?
I haven't done that calculation, Heather, but we can certainly get back to you on that.
Thank you.
Okay. Thanks, Heather.
Thank you. Once again, please press star one at this time if you have a question. The next question is from Dean Wilkinson. Please go ahead.
Thanks. Afternoon, everyone.
Hi, Dean.
Pretty much everything has been answered for me as well. Just one clarification, Kay, maybe. The CAD 21 million number of the share of profit from joint ventures. Can you just remind us what's in that number, and was there anything extraordinary in the quarter around that?
Yeah. The share of profit in joint ventures includes Main and Main Urban Realty, as well as College Square. There was a fair value gain on Main and Main in the quarter of about CAD 14.3 million.
14.3. Okay. That is crystal clear. That's it for me. Thanks.
Okay, thanks very much, Dean.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Adam.
Okay. Well, I would just like to thank everyone again for calling in and for their interest in First Capital Realty. We look forward to continue moving this business forward and reporting to you on it next quarter. Have a great afternoon. Thank you, and bye-bye.
Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you now disconnect your line.