Good morning, and welcome to Primaris REIT's third quarter 2022 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. I will now turn the call over to Claire Mahaney, Investor Relations. Please go ahead.
Thank you, Emily. During this call, management of Primaris REIT may make statements contained 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 REIT's control, that could cause actual results to differ materially from those that are disclosed and/or implied by such forward-looking information. Additional information about these assumptions, risks, and uncertainties are contained in Primaris REIT's filings with securities regulators. These filings are also available on Primaris REIT's website at www.primarisreit.com. I'll now turn the call over to Alex Avery, Primaris' Chief Executive Officer.
Good morning, and thank you for joining us today to discuss Primaris REIT's third quarter 2022 results. On the call with me are Patrick Sullivan, President and Chief Operating Officer, Rags Davloor, Chief Financial Officer, Leslie Buist, Senior Vice President, Finance, and Graham Procter, Senior Vice President, Asset Management. Our Q3 results mark nine months since we completed the spin-out of Primaris REIT. As with the prior two quarters, Q3 was very strong, featuring double-digit same property NOI growth, rising occupancy above consensus FFO per unit, and a 5% upward revision to our 2022 NOI guidance. With 60 days left in the year, we are feeling pretty good about how 2022 will finish. Three weeks ago, we attended ICSC in Toronto, meeting with dozens of retailers.
The mood was optimistic, with retailers rolling out expansion plans that had been delayed by pandemic circumstances in 2021 and earlier in 2022. Many retailers are benefiting from easing of supply chain issues that were common earlier this year, while acknowledging that rising interest rates may temper sales growth. With retail sales now above 2019 levels in the past two quarters, retailers are doing well. This strength among the retailers has allowed us to deliver faster than anticipated recovery in NOI, as reflected in our results and our forecast. Beyond this strong performance to date, there remains substantial further opportunity to drive NOI growth as we recapture economics on retail sales performance. Demonstrating disciplined capital allocation is a cornerstone of our strategy. We continue to actively explore both acquisitions and dispositions. As is abundantly clear, the capital markets are disorganized and dynamic.
We see opportunity in this environment of our balance sheet. In 2022 to date, our primary choice for capital allocation has been our normal course issuer bid. As detailed in our disclosure, our leverage neutral NCIB purchases completed in the first nine months of 2022 have added CAD 0.57 per unit to our NAV and contributed more than CAD 0.04 to our annualized FFO run rate. With this quarter's results, we have also announced our inaugural distribution increase, effective with the December distribution payable in January. Our board approved the 2.5% increase or CAD 0.02 per unit annually in the first of what we plan to be a program of regular annual distribution increases. Our plan to increase distributions every year is a direct result of our differentiated financial model.
Our low leverage and low payout ratio provides substantial flexibility to grow the business with retained free cash flow. The CAD 0.04 of growth in our annualized FFO run rate contributed by our NCIB activity in the first nine months fully covers the distribution increase within our target payout ratio. While per unit growth from the NCIB is very helpful, we continue to see significant internal growth potential, bringing our occupancy back to more stabilized levels in the low- to mid-90s% range over the next few years. This is consistent with our 4.9% increase to 2022 NOI guidance. Now I'll turn the call over to Pat to discuss our platform, operating and leasing results, followed by Rags, who will discuss our financing, financial results, and provide you with an update on our disclosure package.
Thank you, Alex, and good morning. Through 2022, enclosed malls across our portfolio experienced a significant rebound in tenant sales, with Q2 and Q3 sales exceeding 2019 comparable levels. Our team is working hard to deliver on our business plan, and our strong operating results reflect normalized shopping behavior, recovering tenant sales productivity, and the strength of our team. We continue to experience exceptional growth in our net operating income that exceeds our initial forecast. Our outperformance on NOI growth is coming from a number of sources. Rising occupancy, rising sales for those tenants on percentage rent deals, which include percentage rents. Strong tenant sales have pushed many tenants on net leases past their sales breakpoint, and our percentage rental income is increasing.
Specialized leasing income is returning to pre-pandemic normals. Non-recoverable expenses are falling due to lower bad debt, along with increased occupancy, specifically related to former vacant anchor premises. Our recovery ratios are improving as we convert tenants on preferred rental terms provided to maintain occupancy during COVID back to net leases. During the third quarter, sales averaged 109% compared to the same period in 2019, with rolling 12-month sales averaging 99% of comparable pre-pandemic figures. Food courts, typically a barometer for mall traffic, continue to show rising sales activity, with third quarter sales being 100% as compared to pre-pandemic figures. Q1 portfolio food court sales were 74%, and Q2 was 93% by way of comparison.
We saw a strong back-to-school school sales season in August and September, and anticipate sales growth in December 2022 as compared to December 2021 as sales and shopping behaviors continue to normalize. Categories including food courts, personal care services, footwear, and fashion related to work apparel continue to show strength, and we expect this trend to continue. Several of our malls are reporting all-time highs in sales productivity with Orchard Park in Kelowna, Peter Pond Mall in Fort McMurray, and New Sudbury Centre in Sudbury now producing at more than CAD 700 per sq ft. Total committed portfolio occupancy was 91.7%, up 430 bps from Q2 2022 due to leasing and remerchandising activities. Same property occupancy was 92.5% at quarter end, and the acquisition properties were 89.7%.
The acquisition properties in-place occupancy grew by 5% from the second quarter. 3.7% of that is related to demolition of 60,000 sq ft of Sears space at Quinte Mall and the removal of 70,000 sq ft of second-floor space at New Sudbury Centre, which is not leasable. The remaining 1.3% increase in occupancy is the result of our leasing team executing on the strategic plan for the portfolio we developed at the start of 2022 when the properties were first integrated into the portfolio. Leasing activity is strong, continuing the trend from prior quarters, including transactions with structured variable rents or gross rents. Year to date, we have completed 69 new CRU transactions, including 23 in the third quarter encompassing just over 172,000 sq ft. We continue to realize normalized leasing activity in the market.
By way of comparison, our leasing team completed 79 CRU deals equating to 161,000 sq ft through the first three quarters of 2019. Overall, renewal rents were up 2.5% for the quarter. If we exclude four CRU tenants totaling more than 14,400 sq ft renewed during the quarter at lower rents and on a short-term basis, renewal rents would have increased by 4.3%. With sales increasing and positive absorption, we expect metrics to continue to improve. Enclosed malls have evolved over the past decade to include more necessity-based tenants, with the percentage of space allocated to small shop fashion diminishing. Within the Primaris portfolio, our top five tenants contributing just over 19% of our annual minimum rent are Canadian Tire, Walmart, Loblaws, TJX, and Bell Canada.
These top five tenants are all investment grade rated. Grocery and pharmacy have become an integral part of our overall tenant base, with contributions from these tenants representing 11% of our annual minimum rent. During the third quarter, we successfully negotiated a lease extension with Red River Co-op Grocery Store at Grant Park in Winnipeg. Red River occupies approximately 57,000 sq ft and renewed for an additional 15 years. Fashion tenants continued to be an important to the merchandise mix, and we are pleased to have completed two transactions during the quarter with Lululemon at both Regent Mall in Fredericton and High Street in Abbotsford. During the third quarter, we completed five transactions with Specsavers, an international optical chain with revenue exceeding CAD 5 billion. Specsavers has now committed to open nine stores within the Primaris portfolio, encompassing over 17,000 sq ft.
In addition, Sephora, an international company owned by LVMH, opened three new stores in our portfolio during the quarter, located at Place d'Orléans, Stone Road Mall, and McAllister Place in Saint John, New Brunswick. Primaris now has eleven Sephora locations in our portfolio, and we anticipate to expand on this relationship further. The new deals with Lululemon and the expansion of both Specsavers and Sephora in our portfolio demonstrate the benefit of having an internalized management team with a nationwide portfolio, enabling us to enhance merchandise mix, drive traffic and rents, and further diversify our tenant base with creditworthy tenants. Lastly, on August tenth, Dufferin Mall received final approval from the City of Toronto with regard to the development of four acres of land known as Dufferin Grove. With that, I'll turn over the call to Rags to discuss our financial results.
Thanks, Pat, and good morning, everyone. Our differentiated financial model, including very low leverage, a low payout ratio, and significant retained free cash flow, is a significant strategic advantage for Primaris REIT. During the quarter, we entered into a CAD 200 million unsecured three and half year non-revolving delayed draw term loan. As of today, we've hedged CAD 100 million of the underlying BA at 3.77% over a five year term. This would lock the rate on the CAD 100 million that has been hedged at 5.27%. The facility is now fully drawn, with all proceeds used to repay maturing mortgages. This facility, along with our existing revolving CAD 400 million facility, provides us with the funds to refinance the majority of expiring mortgage debt for the current year.
We have a stated secured debt as a percentage of total debt target of 40% or under 40%. As at Q3, this ratio stands at 36.7%. With the new facility now fully drawn and another mortgage repaid subsequent to quarter end, as of today, this increases our unencumbered asset portfolio to CAD 2.8 billion and our secured debt to unsecured debt to 27.6%. 90% of our asset base is currently unencumbered. By disconnecting assets from secured debt, we enable the active management of our property portfolio while providing maximum flexibility to produce a well-laddered debt maturity profile. At present, our most attractive use of capital is buying back units at a deep discount to net asset value per unit on a leverage neutral basis.
Our NCIB has been in place, and we are buying back units and canceling units daily. As of yesterday, we had bought and canceled approximately 3.2 million units at an average price of CAD 13.65 per unit, translating to a 38% discount to our NAV per unit. This activity has positively impacted NAV per unit, as Alex indicated, by CAD 0.57 per unit and CAD 0.043 per unit of FFO on an annualized run rate basis. This program is very accretive. Our board approved the 2.5% increase or two cents per unit annually. The first of what we plan to be a program of regular annual distribution increases.
We continue to expand and refine our disclosure package and intend to have a best-in-class reporting with the goal of creating useful and insightful financial and operational information to help you understand and evaluate our business. New disclosure additions for this quarter include tenant allowances and leasing costs across our tenant types and changes in NAV quarter over quarter on a total dollar and per unit basis. Our financial forecast can be found in Section 14 of the MD&A. There's been a significant amount of unpredictable change and volatility in the past 10 months. Tenants are performing very well with a strong rebound in sales. We updated our financial forecast for the current year based on our outperformance this quarter and our outlook for the balance of the year.
To summarize, we have increased our forecasted net operating income by CAD 9.9 million- CAD 211.6 million. In order to give additional clarity and information on the total portfolio results, we have produced a supplemental package where we benchmark Q3's actual results versus the 2021 pro forma for the combined property portfolio and provide tenant sales and productivity data by mall and compare sales by province as a percentage of pre-pandemic sales produced in 2019. ESG is an essential component of responsible governance. Primaris is in the process of transitioning beyond its current CSR initiatives to establishing an ESG framework that aligns to and enhances our strategy and responsiveness to the evolving needs of primary stakeholders. We are making great progress in the development of a robust board-led ESG strategy.
Our ESG committee, led by board member Anne Fitzgerald and myself, completed our materiality assessment in Q3, and we have identified the most material ESG factors that affect our business. These factors were approved by the board, and we are now integrating these factors into our corporate strategy, defining metrics, and also targets. By integrating ESG into our corporate strategy, we'll be in a position to better identify risks and opportunities. Now to our financial results. Same property net operating income was up 10.3% in the quarter, driven by strong rental growth and effective cost management at the property level, primarily in connection with the H&R portfolio. Our enclosed malls across the portfolio have experienced a significant rebound in sales growth, and many of our operating metrics are improving substantially.
FFO and AFFO per unit average diluted was CAD 0.41 and CAD 0.32 per unit, respectively. Primaris FFO and AFFO payout ratios were 48.6% and 62.7%, respectively, within our FFO payout target of 45%-50%. Given our outlook and excess free cash flow available after paying distributions, operating capital expenditures, and leasing costs, we presently intend to allocate capital to future share buybacks. Primaris fair value of investment properties was CAD 3.1 billion, with external valuations received for three properties in the quarter, with fair values totaling CAD 830 million, or 27% of the portfolio. On a portfolio basis, we incurred an unfavorable fair value adjustment of CAD 60 million, mainly driven by increases in the discount rate and terminal cap rates used in our valuation models, capital spending and straight-line rent.
The fair value decline was partially offset by value increases driven by strong NOI. The cap rate on the portfolio increased 25 basis points to 6.77% in Q3. Based on the appraised value of our assets, we ended the quarter with a NAV of CAD 21.86 per unit and debt to total assets of 29.6%. Average debt to adjusted EBITDA for the first nine months was 5x. Primaris REIT's scale and highly differentiated financial model acknowledges both the clear preference public investors have for REITs with conservative financial models, and the advantages of having the lowest leverage among Canadian REITs. We are committed to our differentiated financial model, enabling Primaris to self-fund its internal growth. We are very happy with our financial and operating results for the first nine months.
Our KPIs are improving, including our leverage metrics, even throughout the buyback program. Our capital structure was previously designed to weather market turmoil, and we are in excellent position to pursue our growth strategy. In conclusion, we have a wide breadth of attractive investment opportunities. Our excess retained free cash flow allows for internally funded growth and reduces our reliance on external capital sources. We believe the structure should support a reasonable cost and access to capital. As we move through the balance of the year, we will continue to build out our financial and operating disclosures and welcome your feedback. We endeavor to provide you with the information you require to assess and value our business and progress. With that, I'll turn the call back to Alex.
Thank you, Rags. Our third consecutive quarter of strong results, third consecutive and most significant guidance increase to date, and our inaugural distribution increase reflect the strong recovery and outlook in our business and our team's ability to capitalize on that opportunity faster than previously expected. We have multiple drivers of growth ahead of us, spanning occupancy improvement, converting modified leases back to conventional net lease structures, compounding excess free cash flow to drive per unit cash flow and NAV, and capital recycling opportunities. We continue to prioritize raising awareness about Primaris REIT, communicating our strategy, building a public track record of strong results with each quarter that goes by, and demonstrating disciplined capital allocation are all key to building institutional support. Over the next several months, we plan to initiate a board outreach program, connecting members of our board directly with the investment community.
This is considered a governance best practice, but it is rarely adopted. We also plan to raise awareness about our properties by hosting property tours. Our properties look great and are performing very well. To see them is to appreciate why our results have been as strong as they have been. We expect the time that we are investing in raising awareness will be rewarded over time with more research coverage, more investor confidence in our value proposition. Just this Monday, Mark Rothschild from Canaccord Genuity initiated coverage. He joins Gaurav Mathur from iA Securities, Sumayya Syed from CIBC, and Sam Damiani from TD Securities, who all initiated coverage earlier this year. Dean Wilkinson might be standing in for Sumayya on this call, as Sumayya now has a five-day-old baby.
We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.
Thank you. If you would like to ask a question, please do so now by pressing star followed by the number one on your telephone keypad. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. If you change your mind and would like to be re-removed from the queue, please press star followed by two. We'll just take a brief pause to allow the queue to fill. Our first question today comes from Mark Rothschild with Canaccord Genuity. Please go ahead, Mark.
Thanks. Good morning, everyone. Looking at the beat and the guidance, to what extent was this in relation to maybe you being a little bit conservative in the guidance, or did something change and were things just stronger than you anticipated that led to that? Maybe just connected to that, as we look to 2023, are you seeing any slowdown in leasing or people taking it, being a little more cautious as potential softening of the economy, or do you anticipate further occupancy increases?
Good morning, Mark. That was multiple questions. We'll try and tackle them all. I'll start with, I guess, the beat and the guidance. You know, we've been reflecting on our guidance practices and they evolved through the spin-out. I think what is, in retrospect, a unique aspect to our guidance is that we provided a point guidance, as in a single number rather than a range. I think in retrospect that may have just been more the bottom end of the range. We probably could have provided better guidance had we provided a range. I guess to the extent that you know we were conservative, we were looking to provide a number that we were confident that we could deliver.
There was a little bit of that, but, you know, frankly, the business has been performing better than we were expecting. We've been able to capture a lot of the opportunities that we knew were there faster than we had anticipated. You have to remember that when we were putting this guidance out originally, you know, we were working on it in the summer of 2021 and the early fall. At the time, you know, the world was a lot different. Sales are now back above 2019 levels, and they clearly were not in Q4 of 2021 and Q1 of 2022.
The business has been evolving, and you know, as noted in some of our comments, we've been working on you know, restoring lease terms and lease structures to more conventional levels, and that's been a big driver of our performance year to date. Pat, do you want to address some of the questions about the current retailer environment?
Yeah, as Alex mentioned, and we've mentioned in our script, the sales have really rebounded strongly, probably faster than anyone anticipated. I was really looking to see how September sales were. Back to school season's always a big part of the year, and we were very pleased to see that back to school was as strong as it was. September came in at a very healthy number, and it was generally 4.10% across all of the different categories right now. It's really created a lot of activity in the leasing market. There's a lot of interest from retailers in expanding their store count and growing their footprints, getting into the markets, you know, across Canada further.
The one thing that came out of the pandemic is retailers really, really learned the malls where they were able to make money and where they weren't. I think there's a lot of focus right now on where can I open a profitable store, which is good news for us because we tend to have very, very strong malls in markets where our cost side is not so significant.
From those comments, is it fair to assume that you're not seeing any slowdown in leasing and that you can improve occupancy further over the next coming quarters?
Agreed. Yeah. We're seeing good activity in the leasing market, and we expect occupancy will continue to grow.
Okay, great. Looking at the next quarter, I think you have some smaller maybe redevelopment projects that are expected to be completed. Can you just give a little more information on the square foot and maybe an average rent and just timing of that and, you know, how we should expect that to impact results in the coming quarters?
Lansdowne Place in Peterborough has a Sport Chek that's gonna open up in the next few weeks. It's a relocation from elsewhere in the mall, it's an increase in square footage. That's gonna have an impact in the first quarter next year. Cineplex opens at Kildonan from 35,000 sq ft in, I think it's the third week of November. That's gonna, that's a pretty substantial benefit, NOI-wise. They occupy 35,000 sq ft. It's a brand new build. They're relocating from an existing theater at the mall, which was really a very low rent. It was an old dilapidated theater, so that should have an immediate impact next year.
Northland Village redevelopment, it's gonna be done in phases, and I think there's some contribution later in the year from tenants moving into a portion of what is retained after we demolish the shopping center. Following that, we have, I think Winners. Winners is gonna open in Q3 at Quinte Mall from 30,000 sq ft. That's a relocation. FreshCo in Medicine Hat will be a late 2024 commencement. L.L.Bean opens up later this year from a portion of the Sears box in Cataraqui Centre. That'll have an impact early next year. Earlier this year, we had Sport Chek, sorry, Planet Fitness and Structube open from Orchard Park.
I think the Planet Fitness opened up in May and Structube opened up in July, so that there'll be some benefit to next year's income as well from those tenants. Generally, all of those tenants pay in the mid to upper teens to lower twenties in terms of net rate, net rents.
Okay, great. Maybe just one more question. The comment in regard to the buybacks was that it will be done on a leverage-neutral basis. There's different ways to look at it. With NOI EBITDA growing, if you do it on a debt-to-EBITDA basis, you can, you know, justify or maybe even more than justify, you can buy back units without raising equity or asset sales. Is that the way to look at it? And would that allow you to continue to be active even if you're not using, let's say, retained cash flow or asset sales to fund unit buyback, or would it only come from actually raising equity through asset sales, obviously not through the public market?
Yeah. No, Mark, you raise a good point. I mean, the way that I guess we've been thinking about it and the way that we've been pacing the cadence of the buyback is effectively upon our excess retained free cash flow. So, you know, basically the AFFO after we pay our distribution, what's left over, and we've pegged that number at about CAD 60 million a year, which corresponds to the, you know, roughly CAD 5 million a month that we've been buying back. But you touched on the point that our debt to EBITDA on a, you know, three-month basis was 4.8x , and as the NOI and EBITDA continue to grow, we actually get about CAD 5 of debt capacity for each CAD 1 of NOI that we see rise.
We can certainly accelerate that buyback if we so wanted to. There is a certain amount of capital that we need to reinvest into the properties, you know, above and beyond sort of ordinary maintenance. You know, those are investments that we get good returns on. Sometimes it's a bank pad or a repositioning, and we have been investing in that alongside the NCIB. With our stock price where it is, our NCIB is very clearly the highest and best use of our excess free cash flow and our excess capital. You know, I would expect that we'll continue to be active on the NCIB so long as our unit price discount persists at these levels.
As noted in our disclosure, I mean, CAD 0.57 of NAV contribution in just the first nine months of this year on a relatively small investment is a huge driver of NAV growth. You know, to the extent that we wanted to singularly associate our distribution increase with the NCIB activity, it more than fully covers the increase that we delivered. We've been active on the NCIB ever since September 30th as well. That number should grow the CAD 0.043.
Okay, great. Thanks so much.
Our next question today comes from Dean Wilkinson with CIBC. Please go ahead, Dean.
Thanks, morning, everyone. I'm probably not far away.
Morning, Dean.
I'm not far away from a five-day baby myself. Real good, Alex.
There's still a long way to go in the earnings season.
Yeah. Tell me about it. Couple of quick questions. When I look at, I commend you for probably taking a more realistic view of where cap rates are in this environment. I mean, a lot of companies are saying, "We haven't seen any transactional volume. We're not adjusting cap rates. We're not taking the marks." How did you come up with sort of where you are on that, call it a seven terminal cap rate and just over an eight on a discount in the absence of any material transactions?
A big part of it was discussions with JLL, who does our appraisals. Given that there's so little activity, we had to look to other sources. We sort of took some of the smaller market stuff and adjusted that more aggressively. Overall, you know, we try and give JLL a cross-section of the portfolio by region and by asset type, and then look for the feedback from them. We also, you know, look at the surveys and talk to other appraisal firms. It's really driven by that because you're right, trying to look at external transactions and comps, there aren't any. It's a bit of a gut feel and feeling that, you know, an adjustment is appropriate.
You know, we made the sort of 25 basis points adjustment.
Yeah, no, again, I commend you for doing it. Alex, around the distribution, you know, I think that your plan here is to just sort of get on that virtuous cycle of being able to increase that on an annual or if not, you know, more frequent basis. When you're looking at that, is it just a straight up shot at a payout ratio relative to the AFFO? Or are you also looking at it just in terms of, you know, a dividend yield relative to the underlying unit value and what the competitive set sits at?
Yeah, interesting question, Dean. It is a topic that, you know, is an interesting one to be talking about in this current market environment. You know, as we were discussing it with the board, you know, there was an acknowledgment that, in a market like this, you're probably not going to get a whole lot of credit for it. That really wasn't why we're doing it, and we're not thinking about, you know, a target distribution yield on our units or on our NAV or anything else like that. It's really part and parcel of our differentiated financial model. When you have leverage as low as we do and a payout ratio as low as we do, you know, we've got that CAD 60 million a year that we can reinvest in the business.
As you noted, the markets over longer periods of time tend to reflect well on companies or REITs that increase distributions on a regular basis. That's a process, you know, to earn that reputation and that support in the market takes years. You know, as we were thinking about that, we thought it was prudent. We had ample, you know, cover to do so given the accretion from our NCIB. But as Mark asked earlier, you know, or noted earlier, our debt-to-EBITDA is below target, so we have, you know, ample capital investment opportunity to drive our, you know, our FFO and our NOI higher through investing further capital. We're quite confident that, you know, that level of distribution increase was prudent.
You could make an argument for a higher level, but you know, as with everything that we're doing, we're trying to do it in a conservative and prudent manner to deliver in the long term.
Yeah. No, we've seen that before. I think the answer to this question is no, but I'll just make sure. Given you know the wide discount, and you and I have talked about wide discounts in the past, and where your leverage is, would you consider taking the leverage up a bit to do something more significant in forms of an SIB, or just the NCIB activity is enough for you?
Yeah, the answer is no. In fact, our executive compensation structure includes keeping the leverage within the target range. We're incentivized on that basis, and that again is, you know, a view to the long term rather than the short term. We do have this excess free cash flow that is funding our NCIB activity, and we're quite happy with the rather outsized impact that it has had so far. I think we're gonna continue, you know, on the path that we're on. The payout ratio is also a factor in our compensation and, you know, keeping it in that 45%-50% of FFO is another one of our metrics. We're pretty keen to stay the course, but I guess that would be the position.
Perfect. That's it for me. Thanks, guys. I'll hand it back.
Thank you.
Our next question comes from Sam Damiani with TD Securities. Please go ahead, Sam.
Thank you. Good morning, everyone. Just wanted to touch on the payout ratio with the distribution increase. You know, given the high end of your payout ratio target is 50% of FFO, does that basically mean for 2023, you're comfortable or expecting FFO in the CAD 64 range or better?
That's a good question. We have not provided guidance for 2023 as of yet. You know, I would say, without getting too specific, that we, you know, the growth that we've seen throughout the year, if you look at, you know, Q1 versus Q2 versus Q3, and where we're expecting to go in Q4, there's been a trajectory of growth. You know, I think there are some things in the future that we can do that have a more material impact to drive FFO per unit growth, including continued NCIB activity, but also recycling some capital out of our non-income producing land holdings. Is it possible that our payout ratio could be at the top end of our target range next year? Absolutely. Could it be slightly over? Possibly.
Maybe it'll come in under. You know, at current and based on the long-term plan and the trajectory, that was more of the thinking around the distribution increase.
I hear you. On the sort of capital recycling topic, I don't know if it's for everybody, but for me, when you made your opening remarks, Alex, right after you said, you know, capital markets are volatile, and we see opportunities in this environment, my line went muted for about 10 seconds, so it felt like I might have missed, you know, the big zinger. If there's any more color you can share in terms of what you're seeing in terms of opportunity and your desire and ability to both acquire and dispose in the near term, would be of interest.
Sam, your line didn't go mute. When I was printing out my notes for the conference call, the printer printed the first five or six pages and then glitched and started again. I needed to find my spot. there wa-
No zinger. Okay.
Yeah. No, there was no zinger. To your question really, I mean, it's interesting on the acquisition and disposition front. We have discussions with multiple prospective vendors, generally in the institutional class of investors. We're looking at larger assets. On the disposition side, the things that we've been exploring tend to be smaller assets, you know, looking at private buyers. Some of those are, you know, higher cap rates than our average. You know, that market continues to be a lot more active. You know, we're optimistic that we can be active on both acquisitions and dispositions in what is really a volatile and dynamic market.
Okay. Last question for me, just on, you know, as you say, the third consecutive quarter with a sizable beat and guidance increase. I mean, part of the issue with a company like Primaris is the unique asset class with respect to other REITs and a little bit different seasonality. It was a little bit difficult to sort of nail down with precision what the seasonality would look like financially for Primaris. Just in hindsight now, with three quarters under the belt, how should we think about seasonality going forward as it relates to what we've experienced in 2022? Do you expect it to be any different in any way in terms of revenue and NOI versus what we've seen?
I think you know, we've had great sales this year that we didn't expect. The seasonality component has returned back to normal. Our specialty leasing, which has always been an important integral part of our income, has really dipped in the two years, 2020 and 2021, and was uncertain coming into this year. We very much have gone back to normal. I think that aspect of the business is stabilized. I think the one issue we have in kind of predicting the future is the timing of converting the tenants back from variable rent leases to regular leases. We've started that process.
There's a lot more that are happening, and because they were on percentage of sales or gross rents and our additional rents are not, they're just being set now for next year. It's hard to put an exact number around it, but with the ones we have converted are actually contributing quite a bit more rental revenue than under the old structure. I think that's gonna continue, but it's hard to put a pin in exactly what that number is gonna be. There's gonna be some fluctuation around that in the next 12 months. The rest of our business, I think, has gone back to a more normalized business.
Yeah, Sam, if you're up for the exercise, I think if you were to try and reconstruct the 2021 seasonality, there was a lot of noise that went through, particularly the Q4s from last year. The seasonality to Pat's point would have been amplified in 2020 and 2021, certainly. That progress to move the leases back to a more conventional structure would suggest a lower level of Q4 seasonality.
Makes sense. Okay, thank you. I'll turn it back.
Thanks, Sam.
Our next question comes from Gaurav Mathur with iA Capital Markets. Please go ahead, Gaurav.
Thank you, and good morning, everyone. Just staying on the acquisitions line, how has the opportunity set sort of changed, if at all, when you've been looking at it over the last six months?
I'm not sure how much the opportunity has changed or the opportunity set may have changed. There remains a large universe of enclosed retail properties in Canada with owners that are, for a variety of reasons, looking to reduce their exposure and their weightings. I think what has probably changed over the last six months is people are getting a better, you know, opportunity to evaluate the Primaris performance and, you know, understand, you know, what transactions can look like, and we continue to be active.
You know, there's no pressing need, like there's no distress in the market as far as people need, people needing to sell. They, they're very deliberate, and it just, there's a long lead time involved. That's the big change I would say today versus prior years, where things are put out, broadly marketed and, you know, with big deadlines. While today it's a longer process and it's more private.
Okay, great. Just staying on that line of questioning. From an FFO growth perspective, you know, as you're looking at these opportunities, how are you also trying to ensure that you're not just, you know, growing for the sake of growth?
Yeah, no, you raise a good point, and we mention it a lot. We talk about it a lot, capital discipline. The way we're, you know, really looking at it is we wanna make sure that transactions that we do are, you know, neutral or better to our NAV. Generally speaking, we wanna see them increase the average quality of our portfolio. There are some benefits to scale, particularly in the enclosed shopping center business. Really we're, you know, looking at the potential acquisitions that we're evaluating and, you know, asking ourselves the questions of, you know, does it contribute to a higher same-property NOI growth trajectory in the future? You know, will it be additive to the FFO per unit? Those are, you know, a couple of the screens that we're using.
You know, we look at other things like what's the, you know, long-term potential from excess land and, you know, transit-oriented properties. There's a whole broad spectrum of things that we're looking at, but, we're absolutely not looking to grow just to grow.
Okay, fantastic. Just my last question, I'm switching gears here. When you're looking at different tenant types across the portfolio and over the next 12-18 months and, you know, just beating the recession drum, any concerns and, you know, a decrease in net new store openings across the portfolio?
Not necessarily. I think with sales rebounding, there's an enthusiasm from retailers to open stores. Like I haven't heard of any pullback because they're concerned about where things are going because things are so buoyant right now. In terms of you know, potential failures and so forth, there was such a clean out in 2020 of all the marginal retailers that I would have had on the list for the next probably two to three years. They were basically flushed out or they were able to file CCAA bankruptcy protection and restructure the business. I think for the next 18 months there, it's gonna be a fairly stable market and we're gonna see good leasing activity continue.
Okay, great. Thank you for the color, guys. I'll turn it back to the operator.
Thanks, Gaurav.
Thank you. We currently have no further questions, so I will hand the call back to Alex to conclude. Thank you.
Thank you, operator. With no further questions, we will close today's call. On behalf of the Primaris team, we thank you all for participating in the call. We look forward to speaking with you again, and I guess thank you and goodbye for now.
Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.