Good morning and welcome to Primaris Real Estate Investment Trust's second quarter 2024 results conference call. At this time, all lines have been placed on mute. After the prepared remarks, there will be a question-and-answer session. You may ask one question and a follow-up, at which point you may return to the queue. I will now turn the call over to Claire Mahaney, Rags Davloor, Vice President, Investor Relations and ESG. Please go ahead.
Thank you, Operator. During this call, management of Primaris Real Estate Investment Trust may make forward-looking statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Primaris Real Estate Investment Trust's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions, risks, and uncertainties is contained in Primaris Real Estate Investment Trust's filings with securities regulators. These filings are also available on our website at primarisrealestate.com. I'll now turn the call over to Alex Avery, Primaris Real Estate Investment Trust's Chief Executive Officer.
Good morning. Thanks, Claire, and thanks for joining Primaris Real Estate Investment Trust's second quarter 2024 conference call. Joining me today are Pat Sullivan, President and COO; Rags Davloor, CFO; Morty Bobrowski, SVP Legal; Graham Proctor, SVP Asset Management; and Claire Mahaney, VP, IR and ESG. With our second quarter results, we have delivered another very solid quarter with continued growth across virtually all of our metrics: 6.8% growth in FFO per unit, increased guidance for FFO per unit and NOI for 2024. Occupancy rose more than 3% from a year earlier for both in-place and committed occupancy. Importantly, we saw material improvement in our recovery ratios, which is an important but lagged manifestation of the progress we have been making converting pandemic-era lease modifications back to standard lease terms, as well as continued progress raising portfolio occupancy.
Over the past two and a half years, as a relative newcomer to the Canadian REIT landscape and with a strategy focused on what was until recently an out-of-favor property type, more than a few people have described Primaris as a "show me story." We are extremely pleased with the results we have been showing since the spin-out. Notable highlights include more than 700 basis points of occupancy improvement, same property NOI growth approaching 20% aggregate growth over our first three years by the end of this year. Tenant average sales in our portfolio have risen more than 25% from $539 per sq ft at Q2 2022 to $676 per sq ft today. Notably, Simon Property Group reports average tenant sales of $745 per sq ft.
We acquired two of Canada's top 15 malls for CAD 640 million in 2023 and are actively engaged with a number of potential vendors for a number of further acquisitions of similar-caliber malls. We have also risen from the 19th largest constituent in the S&P/TSX Capped REIT Index to 14th place and expect to make further improvement in this ranking by year-end. We received a BBB high stable investment-grade credit rating from DBRS Morningstar. We have also built out a CAD 1 billion unsecured debenture program. And perhaps most interestingly, we have absorbed CAD 0.14 per unit of higher interest expenses while still delivering positive FFO per unit growth and expect to see that FFO per unit growth accelerate from here. Our in-place weighted average interest rate of 5.2% is now above the marginal cost of a five-year unsecured debenture based on recent market pricing.
In summary, the team at Primaris is collectively very proud of the track record we've been building over the past 2.5 years since becoming a standalone REIT again and see significant runway for further growth. This future growth is expected to come from further occupancy gains, significant recovery ratio gains with higher occupancy and lease standardization, the benefits of a growing and increasingly high productivity mall portfolio as management takes advantage of the REIT's growing scale, as well as the benefits of the REIT's differentiated financial model, allowing Primaris to compound capital at a significantly greater pace than our peers. We continue to be very active in discussions on several acquisitions and dispositions. We have the capacity for more than CAD 1.5 billion of acquisitions and require no financing conditions in our deals.
This profile, as a well-capitalized and credible counterparty, is a real differentiator in what is currently a challenging transaction market for many. During the quarter, we closed on the sale of Garden City in Winnipeg, Manitoba, for $31 million, in line with our IFRS fair value. This is our first non-core income-producing property disposition entered into since the spin-off and aligns with our strategy to focus on owning a growing high-quality portfolio of leading enclosed shopping centers in Canada. This disposition improves our overall portfolio quality and growth profile, demonstrates Primaris's ability to transact, and provides proceeds available to fund further acquisitions. During Q2, we also completed the tuck-in acquisition of the Zellers Grocery Store Building and associated land for $19.7 million at Conestoga Mall in Waterloo.
This building is connected to the mall and completes our ownership of the site, expanding the land area to 59 acres from 50 acres previously. I'll now turn the call over to Pat to discuss operating and leasing results, followed by Rags, who will discuss our financial results.
Thank you, Alex, and good morning. As the largest owner and manager of enclosed shopping centers in Canada, measured by mall count, we have very good visibility into the performance of a wide network of stores across many retailers and banners nationwide. The financial health of tenants continues to be quite favorable, and the dialogue with tenants looking for new and expansion opportunities remains robust. Our business performance is very strong as a result of rising occupancy across our portfolio, which is driving higher recovery ratios and strong leasing spreads. Our NOI growth in the second quarter continues to be supported by the strong fundamentals we are experiencing, including low retail supply, strong tenant sales, population growth, and increasing tenant demand for quality space, as well as our national full-service platform and team.
Occupancy is rising, former anchor premises are being re-merchandised, sales remain strong, non-recoverable expenses are falling, and recovery ratios continue to improve. As a result, same property cash NOI was up 1.3% for the quarter as compared to Q2 2023. If we drill down to our same property shopping center performance, excluding the large contribution in 2023 from the recovery of prior year's property taxes tied to successful tax appeals, same property cash NOI growth was almost 6% for the quarter and 4% year-to-date on the same basis. In Q2, portfolio in-place occupancy was 93%, up 1% from Q1 and up 3.2% as compared to Q2 last year. Committed occupancy was 94.4% versus 91% in the same quarter last year.
We remain focused on driving our occupancy back to historical levels of 96%, at which point we'll be in a position to drive rents further upward and proactively replace underperforming tenants. Leasing activity remained very strong, with 74 leases renewed at spreads of 6.8% for the quarter, and 30 new deals were committed to for over 100,000 sq ft. We expect to sign additional new deals during the remainder of 2024 in excess of 50,000 sq ft. Not captured by our renewal leasing spreads is the conversion of leases with preferred rental terms, such as percentage rent and leave of base rent, back to net leases. The implication being that there are additional rental gains beyond those that are captured by the traditional net-to-net leasing spread analysis, and our leasing spreads understate the growth we are experiencing.
At quarter-end, approximately 8.5% of our tenant base was on preferred rental structures compared to 11% at year-end and 15% at the beginning of 2023. With a number of other leases completed and commencing later in the year, this figure will continue to decline during the balance of the year, which is having a significant positive impact on our NOI for 2024 and beyond. The conversion of variable rent leases back to net leases, along with higher occupancy, is being reflected in our rising recovery ratios. Recovery ratios measure the landlord's ability to recover mall operating and maintenance costs, such as common area maintenance, utilities, and property taxes. In-place occupancy is about 1.5% less than the committed occupancy and 3% below our long-term target occupancy level.
That, coupled with an expected continued reduction of variable rent leases, will drive recovery ratios higher and, in turn, NOI higher for the next few years. We have 580,000 sq ft of 2024 lease maturities remaining, with about 60% of that being CRU. We are well advanced in discussions with the remaining 2024 expiring tenants and have no concerns pertaining to the completion of outstanding negotiations. Same property, same store sales productivity remains very high at $625 per sq ft, and including Conestoga and Halifax productivity, it rises to $676 per sq ft. For the past 24 months, tenant sales have rebounded significantly from their pandemic-era lows, with many retailers operating in our properties now reporting their highest 12-month rolling sales figure at the property since opening. Sales productivity and growth should be viewed over the long term given ongoing re-merchandising efforts and the seasonality of the shopping center business.
Our ability to grow rent is tied to sales performance of our tenants. However, the overall mall productivity figure does not necessarily reflect the strength of our tenant sales base. Our focus remains on driving occupancy and NOI higher, not on undertaking action simply to drive the reported mall productivity figure higher. Over the long run, we anticipate sales growth at our properties due to the strong fundamentals in the enclosed shopping center industry being a 30-year low in per capita enclosed mall square footage in Canada, coupled with increasing population. To conclude, our business is performing very well, and we are positioned to capture continued growth within our malls. With that, I'll turn the call over to Rags to discuss our financial results.
Thank you, Pat, and good morning, everyone. Strategically, we continue to focus on our differentiated financial model represented by low leverage, low payout ratio, and significant free cash flow, which we believe is a major strategic advantage for Primaris REIT. Given our strong results to date and confidence in the strength of our business, we are raising our 2024 cash NOI guidance by CAD 2 million to a range of CAD 267 million-CAD 272 million, and our FFO per unit guidance range by CAD 0.02 to a range of CAD 1.63-CAD 1.66. As a reminder, our guidance does not contemplate future acquisitions or dispositions, nor the deployment of the current CAD 25 million of cash on hand.
Further details of our 2024 guidance can be found in Section 4 of the MD&A titled "Current Business Environment and Outlook." We continue to strive for best-in-class disclosure and have provided new and advanced information on additional occupancy metrics and have disclosed estimated future contractual rent steps out to 2026. With regards to dispositions, we currently have CAD 126 million of assets held for sale and are in various stages of discussions on the majority of the disposition asset pool. The team is continuing to progress on ESG initiatives, including the completion of our second grant submission in June, and have determined six core environmental and social metrics for which targets will be developed later in the year. These metrics include energy intensity, green building certifications, tenant and employee engagement and satisfaction, and our GRESB score.
We're also working towards formalizing a climate strategy aligning to the proposed CSDS S1 and S2 standards, have initiated various energy savings pilot projects, including sub-metering, and have successfully concluded the implementation of a utility data collection system. Our operating and financial results for the quarter remain very strong. Tenant health is strong across our portfolio, and our many operating metrics are continuing to improve capturing growth. For the quarter, FFO per unit diluted was $0.42 per unit as compared to $0.39 per unit for the same quarter last year, an increase of 6.8%. Our average net debt to adjusted EBITDA was 5.7 times, unchanged from Q1, and within our range of four to six times. As a reminder, this range forms part of our executive compensation structure with a top end of the range of six times.
At present, we have nothing drawn on our CAD 600 million credit facility and are ready to capitalize on potential acquisition opportunities. Subsequent to quarter-end, we repaid a CAD 49 million mortgage with cash on hand and currently have no debt maturing for the balance of 2024. With unencumbered assets of CAD 3.3 billion, full availability on our CAD 600 million operating line, and no remaining debt maturing in 2024, we have reduced refinancing risk and have access to significant liquidity. As Alex mentioned, we have capacity for more than CAD 1.5 billion of acquisitions and require no financing conditions in these deals. Our total available liquidity today is CAD 635 million, giving us lots of room to capitalize on future investment opportunities. Primaris has been in the market continuously repurchasing units since March 9, 2022, under the NCIB.
As at quarter-end, we have purchased for cancellation CAD 8.8 million units at an average value per unit of approximately CAD 13.79, or an approximate 38.4% discount to NAV of CAD 22.04. This program is very accretive to unit holders. Maintaining a conservative financial model and generating free cash flow after distributions and operating capital is a core focus, which we will not deviate from. And with that, I'll turn the call back to Alex.
Thank you, Rags. Our business performance is very strong as a result of rising occupancy across our portfolio, which is driving higher recovery ratios and strong leasing spreads. Our acquisition properties are contributing meaningfully to our financial results and are enhancing our operating platform by increasing our relevance with retailers. We expect to see a material acceleration in NAV and cash flow per unit growth over the next few years, driven by internal growth, reinvestment of excess free cash flow, and stable valuation metrics. We have two notable investor events coming up in September. The first is our annual board outreach program, connecting members of our board directly with the investment community in the absence of management. This is considered a governance best practice that is rarely adopted. The second event is great for those looking to better understand our business.
We're looking forward to showcasing our latest acquisition, the Halifax Shopping Centre, at an investor day and property tour later in September. In addition to touring the asset, we plan to spend some time discussing our leasing and operating strategies, the ins and outs of mall merchandising, mall lease structures, capital plans, retailer trends, tenant performance, and much, much more. We hope you can join us. To conclude, capital allocation is always top of mind at Primaris. We spend a lot of time talking about the differentiated financial model because of the very significant advantages it offers to our unit holders, including superior FFO and NAV per unit growth, as well as the financial flexibility to execute on the REIT's corporate strategy to grow the scale and quality of our business. We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.
Thank you. If you'd like to ask a question during this time, simply press star followed by one on your telephone keypad. If you'd like to withdraw your question, press the hash key. You may ask one question and a follow-up, at which point you may return to the queue. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sam Damiani from TD Securities. Please go ahead. Your line is now.
Thank you. Good morning. Thank you. Good morning, everyone. Yeah, great quarter. Great to see the guidance raised again. Just on, I guess your commentary talked about a target occupancy of 96%, which I believe is up from 95% previously. Just wondered if you could talk about what parts of the portfolio are driving your confidence to raise that target level.
Hi, Sam. Yeah, I mean, historically, we were 95%-96%. I think we have confidence we can get to the 96% level. Just there's a lot of leasing activity. The large-format tenant activity remains very strong, and that's been driving a lot of the occupancy growth. But on the CRU side, we're really seeing a lot of activity, a lot of new deals, and a lot of space to be taken up. So comfortable throwing out the 96% target.
Great. Okay. And maybe just sort of follow-up, looking at the other side of it, is just with the sort of macro backdrop that we're all facing, what are you seeing in terms of your watch list for tenants? People talking about discretionary retailers, some of them coming under some pressure. Just wondering if you're seeing any points of pressure in your portfolio today.
I don't think the watch list hasn't really changed in any way for us in the last six months. There was a big clean out, as we've talked about before, during the pandemic. There's tenants that we've had our eye on whose sales growth hasn't kept up with a lot of the other tenants. And not that there's really any risk around them, but just tenants that we identify as not really being able to grow the rents on the renewal. But in terms of sales overall, we're still seeing positive sales. And I think I mentioned at my speech, the last two years has been a significant run-up for tenants in their sales. And some of these tenants have never hit the sales figures in our portfolio that they're at right now.
A big run-up, even if there's a slowdown in the incremental growth in their sales, they're still well above their historical sales volumes when they last set the rental terms. I don't really see any issue with growing rents in the future.
The next question comes from Mario Saric from Scotiabank. Your line is open.
Hi, thank you, and good morning. Maybe for Pat, you talked about enhanced pricing power as you approach your target 96% occupancy, which is 300 basis points higher than today. Can you maybe just elaborate on how that works? For example, is the pricing power kind of linear in that going from 94 or going from 93 to 94 is the same as going from 95 to 96? Can you just talk about what the implications are for leasing spreads and when you expect that to really accelerate?
I'm not sure I expect the leasing spreads to grow materially where they are today. I think we're getting high single digits, and I think that'll probably continue even as we get closer to our target. We will have more competition for space, especially in our higher productivity malls, which we're already realizing right now. Some of the malls like Halifax and Orchard, we really have very limited vacancy. So we have a lot of competition for space as it is, which helps drive rents. But do I think it's linear? Not so much. I think it'll accelerate the closer we get to 96, for sure. Right now, we've been tending to hang on to tenants that we would like to, in a perfect world, replace just to maintain occupancy and NOI, but that will not be the case as we get closer to being full.
Yeah, I guess that's where the big lift is. Not so much on when you look at renewal spreads. It's the ability to replace tenants that we believe are low productivity with high productivity tenants. And so on that retenanting, we're going to get a big pickup in spread. So it sort of works its way through differently rather than just looking at pure renewal spreads.
Got it. Okay. And then my follow-up is just maybe pertaining to that kind of re-merchandising, retenanting as that evolves and as the portfolio curation kind of evolves. Can you talk about whether you have any updated thoughts on what the appropriate GROC ratios are in the portfolio, kind of where they stand today, and any change in terms of where you think those can land over time upon successful kind of execution of your retenanting mix?
Yeah. I mean, GROC is a very generic measurement. It doesn't really take into account tenant margins and such work. But historically, we've always been around the 14.5%-15%. Right now, we're trending in the 12%-13% range. So I do think we'll see a return back to where we were historically, around 14.5%-15%. And we're very comfortable, and I think the retailers are comfortable at that point as well.
The next question comes from Lorne Kalmar from Desjardins. Please go ahead. Your line is open.
Thanks. Good morning, everybody. On the recovery side, I think you touched on a couple of times. Could you maybe give us an idea of where the operating cost recovery ratio is now, how that kind of compares to maybe last quarter and year over year, and how you kind of expect maybe the cadence of timing on it getting back to the historical levels?
Sure. Hi, Lorne. It's been kind of lumpy. It really depends on the timing of the tenants converting back to net leases and when the tenants are occupying space and paying us rent. At the pandemic lows, we were probably in the low 70s, and right now, we're around 80% on the CAM side and getting close to 80% on the tax side. Our historical number on the CAM side is close to 100%. And on the tax side, it was 92%-93%. So we still have a long runway to go in terms of getting back to our historical norms. And that will be driven by occupancy and also reducing the variable rent leases. But it will come in lumps. There won't be any kind of linear path to getting there.
Okay. And then thanks, Pat. And then on the follow-up side, you talked about property tax recoveries in the quarter being down versus last year. But I was just wondering, what would be the quantum of that number in the quarterly results? And is that something we should sort of make sure we strip out for the coming quarter?
The property tax recovery was a prior year adjustment. So our tax appeal at a specific property was successful, and then we received a refund. And that's what we recorded. So it was a one-time event. And Ontario is a very specific market for tax appeals. They happen in arrears, and they take time to settle. And so there's no real guidance that we can ever provide as to when this stuff's going to be settled. But we expect there to be further prior year adjustments coming for tax appeals in Ontario as we continue to settle. We've only settled probably a couple compared—we've probably settled about 20% compared to the Ontario portfolio as a whole.
It's a non-recurring, recurring type of kind of like lease termination income that's lumpy and unpredictable, but it tends to happen fairly regularly.
It really is specific to Ontario, more than any other province.
The next question comes from Mark Rothschild from Canaccord Genuity. Your line is open.
Thanks. Good morning, everyone. The comments about occupancy and the boost to the NOI guidance, even though it's relatively minor, still positive. Is this affected at all, or how does this relate to when we see a slowing economy and, in general, things have been slowing down? Are you seeing that at all, or is this just maybe population growth is still driving better fundamentals?
Population growth has certainly been driving fundamentals. The sales at the mall, like I said, they're not accelerating at the pace they were before, but it was a tremendously steep curve in terms of growth for a number of tenants in the portfolio over the last two years. There continues to be strong tenant growth in some sectors. In others, it's leveling off. Really, we haven't seen a decline. Personally, I've actually been waiting for a month where we really see a downturn, but it just hasn't materialized yet.
Yeah. Because of the sales shot so far ahead, that's why the GROC ratio has come down to below historical averages. To the extent that you do see a sort of flattening in retail sales, our financials are likely to reflect continued growth as we narrow that gap between the current GROC ratio and the historical average. We have quite a bit of embedded growth, even if sales were to plateau here.
Okay. Great. Maybe just following up on that, and it kind of still reminds me where you bought the grocery store. Is there more to buy around there? Is this part of, is there going to be some sort of redevelopment or major capital invested into that property, or is this just one last little thing to do there?
Yeah. I would say it's more of the latter. It's always ideal to own the whole property and control the whole property. This was an opportunity where Loblaws was looking to sell their store and recycle their capital into something else. It's the kind of thing where the time to buy it is when it's for sale. So they let us know that they were open to selling it, and we thought it would be a strategically logical acquisition to make. We don't have any specific plans, but as you know, there's a light rail station on the site. If in the future there were to be a large tenant departure, having the extra land and the extra area and controlling the site would give us more flexibility if we wanted to do some redevelopment.
But it's really just more of a, the opportunity was there, and it's the kind of acquisition where if you didn't make it at some point in the future, you might be kicking yourself.
The next question comes from Brad Sturges from Raymond James. Your line is open.
Hey, good morning. I'm touching on the progress you guys have made on the preferred rent structures. Obviously, you've reduced your exposure quite a bit over the last 12 months or so. How much lower can that exposure go? I guess the question is, where does that stabilize? And I guess, what would be the potential timing of how long that could take to get there?
Hi, Brad. Yeah. We're about 8.5% now, and historical numbers are around 5%-6%. And we'd like to get to 5%. I think getting to 5% will probably be a combination of converting a few tenants back to net leases, and it will be others will just simply be replaced. Those are the tenants that really got through the pandemic, were put on these leases, and really haven't got back to where they used to be and are becoming less relevant. So those will be tenants we target to replace. And it'll be a combination of two things that get us there. And that'll probably take another 12-24 months, probably more than 24 months.
Okay. Great. And just on the same property guidance of 3%-4%, I think that range kind of suggests the back half of the year could be a little bit stronger than the first half. Just wondering if there's key elements of the guidance that we should be thinking of that's driving, I guess, a little bit better growth in the back half. Yeah. I think part of that is just some of the lumpiness. I mean, the headline number this quarter was 1.3, but if you remove the prior year tax recoveries from last year and this year, it was 5.9. And so if you think that that's the underlying trend in the business, I think you should kind of think along that trajectory for the back half of the year.
There's always a little bit of noise in all of the financials, but we think, on average, 3-4 is where it'll come in for the full year.
The next question comes from Matt Kornack from National Bank Financial. Your line is open.
Hey, guys. Just with regards to the acquisition and disposition market, there's been a fair bit of press about certain malls for sale and some of your assets for sale. Can you give us a sense as to the pipeline on both of those for you at this point?
Thanks, Matt. Yeah. We have a tremendous amount of discussion going on both the acquisition and the disposition side. McAllister Place has been listed through a process, a public process with brokers. And we have many other discussions going on a number of properties with sort of off-market private discussions. It certainly feels like there is an increase in the capital available to buy property, and the direct market transaction volumes are picking up very clearly. And so that bodes very well for our disposition program. And from an acquisition perspective, there's a little bit of seasonality to transactions, particularly with institutions, where you sort of have a plan for the year. And as you roll through June and July, if you want to get something done by the end of the year, you kind of need to sit up straight and start getting stuff done.
We've had a lot of discussion going on over the last, specifically the last month or two, and multiple different properties that we're engaged on with multiple different vendors. We're optimistic that we'll be able to get some stuff done this year.
Okay. Makes sense. And then just a quick one on Halifax. You saw the expected occupancy gains, and pretty significant ones this quarter. Can you confirm if those would have been there's higher straight-line rents, so I assume maybe there's some fixturing, but what the NOI impact would have been for this quarter and what kind of residual NOI impact we'd see in Q3 as a result of that lease-up?
Yeah. We'd have to dig into those numbers. We don't have that off the top of our heads.
Okay. Would it be possible? Is there a material amount that would be impacting Q3 relative to Q2, or would this quarter have seen the bulk of the benefit?
Oh, is there rent commencement?
Yeah. I think almost everybody commenced in Q2.
Yeah. Most of them did kick in in Q2.
They were all set to start at Q2, if I remember right, because it's in March, right?
Yeah. From the series. Yeah. So most of it should be in there now.
You will get a pickup in Q3 because sorry, just to finish off, you will get a pickup in Q3 because Q2 may not reflect a full quarter's worth.
Yeah. It's immature.
But they're all in place.
Yeah. Thanks, Matt.
Next, we have a follow-up question from Sam Damiani from TD Securities. Your line is open.
Thanks. Yeah. I just wanted to ask about the capital structure. The REIT's 2.5 years old. It's grown significantly and yet maintained a very disciplined capital structure, maintained low leverage. And there's still big acquisition sort of goals for the next sort of near to medium term. But I guess longer term, as the acquisition expectations perhaps are going to be a little bit less in relation to the size of the REIT, how do you envision the sort of longer-term capital structure relative to where it is today?
I think one of the great benefits of the way that Primaris came to be a standalone REIT again with the spinout and the flexibility to effectively design the REIT from a blank slate, we pretty much put the capital structure exactly where we want it. In terms of how that evolves, if we're not in acquisition mode, we do have lots of things that we can reinvest into in the portfolio. We've got some redevelopment work going on at Kildonan Place and at Northland Village, and there's some stuff happening at Devonshire. We do, from time to time, have opportunities to renovate or put additions into the properties. But we also have the flexibility to buy back stock. Right now, I think spin to date, we're 9.3 million units that we've repurchased at almost 40% discount to NAV.
That is wildly accretive to both FFO per unit and NAV per unit. But what's sometimes lost is that it's actually beneficial to buy back stock, even if you're at NAV over the long term, if you believe that there's a lot of growth in your portfolio. And that's something that we'll cross that bridge when we get there. But as it stands right now, if we weren't focused on acquisitions, we'd probably be leaning more heavily on the NCIB activity. So we really like the low payout ratio, low leverage structure, and think that it ultimately delivers higher FFO per unit growth and NAV per unit growth just by virtue of having a lot more capital retained in the vehicle. And so I don't anticipate us changing that at any point, frankly.
Next, we have Sumayya Syed from CIBC. Your line is open.
Thanks. Good morning. Just wanted to touch on the margin. It did improve this quarter. Noting the early discussion around recoveries, is there any meaningful seasonality in Q2? Also, how much of a factor in the margins improving are the leases being converted back to net leases versus occupancy improving?
I really couldn't comment on the weighting of which one has benefited the recovery ratios growing more. I think it's a matter of timing of when the deals actually convert back to net leases and when the tenant actually opens. Given our pipeline of tenants that are in the committed bucket and the fact we're still working with tenants to convert leases, I think we've got a really good runway to keep this momentum going for the next 24 months.
Yeah. There are three elements to the margin that can sort of move that number around. So you're quite right. There's some level of seasonality, especially when you're dealing with property tax recoveries and certain CapEx. So that can move the margin around at the margin, so to speak. There's obviously the improvement in recoveries that moves the margin around. And then there's the growth in rents. So if the rents grow at a faster pace than expenses, then that, again, will alter the margin. So it's all three sort of go into the mix. So it's hard to sort of isolate which one of each, how much it drives. We could probably figure out the analysis and look to provide sort of enhanced disclosure going forward.
What's really neat about the margin opportunity, if you look in our disclosure, we have the percentage rent in lieu of base rent leases. Those are leases that are in effect right now. So while we haven't disclosed it, we have visibility to that number continuing to come down by virtue of having already executed deals where, in the future, the next lease that commences will be a standard lease form. So this is a lagged data set, and we already know that those 90 leases that are left, we've already dealt with a number of them. It's just that they haven't kicked in yet. So we have pretty good visibility there. And the recovery ratio and the margin expansion also are things that tend to lag.
We're expecting that this margin improvement that we saw this quarter is sustainable and is part of a trend that we think will continue for multiple quarters into the future.
Okay. Thanks. And then I just want to touch on occupancy specifically. The CRU category is now bumping up against almost 90%. And how much room do you see to grow that? I guess naturally, that has a bit more turnover there versus the large format segment.
Yeah. I think if I look at our history, we're probably 3%-4% growth in the CRU side. Yeah, up to 93%-94%.
Great. Thank you.
Thanks, Samaya.
Next is a question from Mario Saric from Scotiabank. Your line is open.
Hi. Sorry. Just one follow-up to the follow-up earlier on, coming back to the GROC ratio for Pat. Based on your extensive experience, have you seen in the past GROC ratios move up during periods where tenant sales are flattening, flat, or even decelerating a little bit?
Yes. Yes, I have because there's generally, when the rents get set, say, five years ago, the tenant sales were at a certain level. Their sales go up over time, and then they might flatten out. But then we have a catch-up on the rent to reset their number. So the answer is yes, they will move up over time, even if tenant sales flatten or even slightly decline because the tenant is able to pay more given where their sales were set when they first entered into the lease.
Got it. Okay. That's it. Thank you.
Thanks, Mario.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. There are no further questions at this time. Claire, I turn the call back over to you.
Thank you, Operator. With no further questions, we'll close today's call. On behalf of the Primaris team, we thank you all for participating and look forward to seeing many of you at our Investor Day in Halifax in September. Thank you, and have a great long weekend.
Thank you. You may now disconnect your line.