Good morning, and welcome to Primaris REIT third quarter 2023 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. During this call, management of Primaris REIT may make 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 REIT'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 are contained in Primaris REIT's filings with securities regulators. These filings are also available on Primaris's website at www.primarisreit.com. I'll now turn the call over to Alex Avery, Primaris's Chief Executive Officer.
Thanks, Claire. Good morning, and thanks for joining Primaris REIT's third quarter 2023 conference call. Here with me today are Patrick Sullivan, President and Chief Operating Officer, Rags Davloor, Chief Financial Officer, Leslie Buist, Senior Vice President, Finance, Graham Procter, Senior Vice President, Asset Management, Marty Bobrowsky, Senior Vice President, Legal, and Claire Mahaney, Investor Relations. Our business continues to deliver steady and attractive growth across virtually all metrics. Same property cash NOI rose 5.2% in the first nine months of the year, with rising occupancy and strong leasing spreads. We have now owned Conestoga Mall for almost four months and are very pleased with how the property is performing, how the staff we onboarded are fitting into the team, and how the transaction has acted as a catalyst in accelerating discussions and negotiations for further acquisitions.
Conestoga Mall is illustrative of the type of acquisitions Primaris is focused on, being a market-leading mall with mass rapid transit connectivity in a medium-sized, high-growth Canadian market. The benefits of the acquisition extend beyond just the positive effects on our portfolio and traction for further acquisitions. Completing the first major acquisition in nearly a decade has created a lot of excitement and energy among the team. With further acquisitions on the horizon, Primaris is growing, which creates opportunities for our existing team members and the capacity to bring on new resources. At the same time, this growth creates efficiencies with our management platform, capable of adding several more properties with only minimal additional overhead. We also just reconsolidated most of our Toronto staff into one office, which seems to have amplified the level of energy around the office. Growing is fun.
This quarter, we have made further progress towards our goal of driving NOI across our portfolio through raising occupancy to stabilized levels and converting leases back to standard terms. This opportunity remains very significant within our portfolio, and we expect to drive above average same property NOI growth over the next few years and potentially longer, as we find further opportunities in the portfolio and acquire new properties where we believe we can surface further growth. Reflecting the continued strength and momentum we are seeing in the business, our Q3 results with our Q3 results, we announced a 2.4% increase to our distribution, effective with the December distribution payable in January. We also introduced 2024 guidance, reflecting continued growth in occupancy, rents, NOI, and FFO. Capital investment and allocation perspective.
As noted on our last call, we are actively pursuing both acquisitions and dispositions, including an increase to the assets held for sale line item on our balance sheet. While the capital markets may be volatile and participants might be somewhat hesitant, we are open for business and are finding lots of people to talk to. I'll now turn the call over to Pat to discuss operating and leasing results, followed by Rags, who will discuss our financial results. Pat?
Thank you, Alex, and good morning. Following several years of headwinds, the current environment for the Canadian mall ownership is very favorable. On fundamentals, the current supply of quality retail space in Canada is limited. There has not been a new mall built in decades. Current new construction is very limited, and the majority of vacancies made available by failed department store anchors has primarily been absorbed or demolished. Population growth is expected to continue in Canada, with record high immigration levels of over 450,000 immigrants per year to 2025. With the rising cost of living in Canada's largest cities, medium-sized, high-growth markets, where Primaris owns leading malls, are experiencing historically high population growth, growth rates.
Given the lack of new supply and the population growth over the last 20+ years, malls in our markets are typically located at, in the center of town, where the population has grown around the mall over the years. Our 23 shopping center portfolio is situated on over 1,000 ac of land. Not only are these properties in the center of their communities, but they are located close to major transportation nodes and public transit, with broad zoning permitting a wide range of uses beyond retail, enabling potential future value creation. This land has been made more valuable over the past 10 years as traditional department store anchors have closed down, or their leases restructured, removing development constraints. Tenant sales, productivity, and volumes have rebounded and surpassed pre-pandemic levels at the majority of our properties.
The dialogue is very productive, with tenants and retailers looking to transact... Rents have been adjusted downward during the pandemic. Ours are still considerably lower than where they were pre-pandemic, and with a financially healthier tenant base, Primaris is in an excellent position to capture this rental growth across our portfolio. Occupancy levels across the Canadian retail REIT peer sheet set are essentially at stabilization in the 95% plus range. Primaris has at least 400 basis points of runway until we are at stabilized levels, allowing us to capture the strong demand for space that we're seeing from tenants. It is this combination of low supply, rising sales, population growth, and increasing tenant demand for quality space that creates a significant opportunity to drive rents and occupancy higher to quality tenants with the ability to pay increasing rents over time, driving NOI growth.
Our leasing and operations teams have integrated Conestoga Mall into our platform and have begun to surface opportunities for growth in the center, including an increased interest from tenants, which we are confident will translate to significant income growth, consistent with our existing assets over the next 24 months. With new and exciting retailers unique in the market, including Apple, lululemon, and lululemon, Conestoga Mall is amongst the top 15 most productive malls in Canada and is highly accretive to the Primaris overall portfolio quality. Same-store sales at Conestoga Mall were CAD 970 per sq ft in August 2023, which makes the property the highest performing mall in the Primaris portfolio. Our growth opportunity for this property is to reduce the almost 50,000 sq ft of vacancy and short-term temporary tenancies with long-term tenants.
By way of comparison, Orchard Park in Kelowna produces CAD 809 per sq ft and has an occupancy rate, including short-term tenants, that is 3%—sorry, vacancy rate, that is 3% or 20,000 sq ft. Further, given the high productivity of the mall, we are confident that we'll be able to increase rents paid by tenants with leases due to expire over the next few years. For the past several years, Primaris has been very focused on preserving occupancy as the Canadian mall sector absorbed the departures of Target and Sears. Retailers transitioned to omni-channel business models and the pandemic-driven government-mandated lockdowns and mall closures. In 2023, portfolio in-place occupancy rose to 91%, and we have good visibility to reach the stabilized occupancy above 95% over the next few years.
Our leasing team has begun to prioritize rent growth in their discussions as we gain negotiating leverage. This can be seen from our growing leasing spread since the REIT formation. We expect to continue to push leasing spreads over the next several quarters as available space in our portfolio declines. Our NOI growth outperformance in the third quarter is supported by strong fundamentals we are experiencing in our national full-service platform and team. Specifically, growth is coming from a number of sources, being: rising occupancy, completion of remerchandising of former anchor tenant premises, increasing sales due to healthy demand, and partially due to rising inflation, driving percentage rental income higher.
Especially link, leasing income is returning to pre-pandemic levels, falling non-recoverable expenses due to lower bad debt, along with increased occupancy, specifically related to formerly vacant anchor premises, and our recovery ratios are improving as we convert tenants on preferred rental terms, provided to maintain occupancy during the pandemic, back to net leases. We ended the third quarter with committed occupancy of 92.8%, up from 91.5% at the end of the third quarter in 2022. Over the past 18 months, we have shown consistent progress in growing occupancy. Our in-place occupancy at Q3 2023 is 91%, which is 5% higher than at the start of 2022.
Same property, same store sales productivity is at an all-time high of CAD 621 per sq ft as of August 2023, and including Conestoga, productivity rises to CAD 643 per sq ft. We are starting to see sales for some tenant sales stabilize year-over-year, although tenant sales continue to be very strong and our negotiations with tenants for new leases and renewals are very robust. During the quarter of 2023, our leasing team completed 155 transactions, encompassing 449,000 sq ft, including 41 new deals, which is the highest number of new deals completed in a quarter since 2018. Of note, we completed 54,000 sq ft of large format deals, including a 20,000 sq ft fitness facility at Medicine Hat.
We also finalized new transactions with Hot Topic and Torrid for five locations and three deals with Lovisa, an Australian-based jewelry chain. In addition, we renewed five major tenants encompassing 88,000 sq ft, including Best Buy at Place du Royaume and two Old Navys at Orchard Park and Park Place. Overall, renewal rents increased 4.2% over previous in-place rents during the quarter, and 5.8% if we look to the first nine months of the year. With tenant sales having risen considerably over the past 24 months and growing occupancy, we anticipate continued positive momentum in rental growth. Not captured by our renewal rent change is the conversion of leases with preferred rental terms, such as percentage rent in lieu of base rent, back to net leases.
The implication being that there are additional gains to those that are captured by the traditional net lease, net to net lease renewal analysis. On a same property basis, at quarter end, there were 268 tenants, representing approximately 12% of our tenant base on preferred rental structures. This is a reduction of 67 leases from December 31, 2022. With a number of other leases completed and commencing later this year, this figure will continue to decline during the balance of the year, which will have a significant positive impact on our NOI for Q4 and into 2024 and beyond. And with that, I'll turn the call over to Rags to discuss our financial results.
... Thanks, 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. We are reiterating our balance sheet targets in 2023 guidance and announced detailed 2024 guidance metrics. Reflecting strong results to date and the strength of our business, we are guiding towards the higher end of the range for our 2023 same property cash NOI guidance of 4%-5.5%. In connection with FFO per unit, we've provided 2023 guidance of CAD 1.56-CAD 1.58 per unit. During the fourth quarter, we will be taking a CAD 2.2 million one-time charge relating to the consolidation of our space and the resulting sublease of our office space on Wellington Street.
Going forward, we will realize CAD 750,000 per annum in G&A savings as a result of this deal. For 2024, we are forecasting an occupancy increase of 0.8%-1%, contractual rent steps and rental revenue of 1.25%-1.5%, and same-property cash NOI growth in the range of 3%-4%. G&A is expected to be in the range of CAD 32 million. We expect recoverable operating CapEx to be in the range of CAD 16 million-CAD 18 million and leasing capital within CAD 28 million-CAD 30 million, reflecting increased leasing activity. Development CapEx is estimated to be CAD 30 million-CAD 40 million, allocated primarily to Northland Village and Devonshire Mall. We are providing guidance for 2024 FFO per unit of CAD 1.60-CAD 1.63.
Further details of our 2023 and 2024 guidance can be found in Section four of the MD&A, titled Current Business Environment and Outlook. ESG is an essential component to Primaris's overall strategy with both risk mitigation and opportunity optimization standpoints. Last month, we received our inaugural GRESB results and received two green stars within the peer group range. We scored above peers in a variety of areas, including energy, water, waste, emissions, building certifications, and risk assessment. We have identified areas for improvement, such as stakeholder engagement and tenants and communities, to name a few, and our teams have already begun working in these areas. The submission was a culmination of months of data collection and analysis.
The data collected from GRESB formulates the baseline environment and social data sets, which we intend to develop targets for the core environmental and social ESG factors. The results also highlight key areas of focus to advance, excuse me, Primaris' ESG plan. We are looking forward to publishing our inaugural ESG report by year-end, providing relevant and important disclosures that addresses our key ESG factors and strategy, enabling our financial stakeholders to assess our progress, strategy, and impact. With respect to financial results, same-property cash NOI was up 3.1% for the quarter, driven primarily by higher revenues from base rent, specialty leasing, and lower bad debt expense. Same-property cash NOI growth for the shopping center portfolio was 3.2%.
As Pat already mentioned, tenant health is strong across our portfolio, and our many operating metrics are continuing to improve, capture and grow. Interest expense is up CAD 6.7 million over Q3 last year, primarily attributable to year-over-year increase in interest rates, higher average borrowings, primarily due to the impact of the Conestoga Mall acquisition. Our weighted average interest rate now sits at 4.96% versus 2.73% at December 31, 2021, almost doubling, while at the same time, we have extended the weighted average term to maturity of debt to 3.6 years from 1.7 years. With no debt maturing for the balance of 2023 and only two mortgages maturing in 2024, we are very comfortable with our capital structure and our low leverage model.
At this point in time, the majority of the impact of rising interest rates have been already baked into our financing costs, and we have very limited debt rolling over. FFO and AFFO per unit diluted for the quarter was 42.1 cents and 29.6 cents, respectively. On the quarter, the AFFO and AFFO payout ratios were 49.4% and 70.3%. Primaris' fair value of investment properties was CAD 3.4 billion, with external valuations received for three properties, with fair values totaling CAD 326.8 million. On a portfolio basis, we incurred an unfavorable fair value adjustment of CAD 23 million for the quarter, mainly driven by adjustments to terminal cap rates and discount rates.
Based on the value of our assets, we ended the quarter with a NAV of CAD 2,176 per unit, average net debt to adjusted EBITDA of 5.3x , and debt to total assets of 35%. Our exposure to floating rate debt is approximately 11% as a result of the Conestoga acquisition, which we intend to term out at fixed rates, most likely with an unsecured debenture issue in the near term, with unsecured financing in the future. Unsecured debt now comprises 76% of total debt, with unencumbered assets of CAD 3 billion and 0 net debt maturing in 2023. We are well-positioned with reduced refinancing risk and access to liquidity. Primaris has been in the market continuously repurchasing units since March 2022 under the NCIB.
As of yesterday, we have purchased for cancellation 7.3 million units at an average value per unit of approximately CAD 13.80. The program is very accretive to unitholders, given the current discount to our NAV of CAD 21.70. As we mentioned early, earlier, our financial structure enabled us to execute on our acquisition strategy. Conestoga Mall was acquired with existing liquidity without the need of incremental new financing. This transaction demonstrates the advantage Primaris has with having one of the lowest leverage among Canadian REIT providers. We are very pleased to have executed a transaction of this quality while preserving our industry-leading financial metrics within target ranges, thereby enabling us to continue pursuing investment opportunities. We put a lot of emphasis on Primaris's differentiated financial model in our disclosure.
The power of this model is intentional and is a critical pillar to our strategy and our growth story, and forms part of our compensation structure. Maintaining a conservative financial model and generating free cash flow after distributions and CapEx is a core focus which we will not deviate from. With that, I'll turn the call back to Alex.
Thank you, Rags. Our strong third quarter results and our third annual distribution increase reflect the optimism we have about our business and our team's ability to capitalize on the opportunities we see in the market. We are pursuing multiple drivers of growth, including driving occupancy higher, converting modified leases back to conventional net lease structures, compounding excess free cash flow to drive per unit cash flow and NAV growth, and capital recycling opportunities. The time we have invested in raising awareness about Primaris REIT and demonstrating our ability to acquire market-leading shopping centers in growing markets is beginning to be rewarded with more research coverage and growing investor confidence in our value proposition. Just this Monday, Mario Saric from Scotiabank initiated coverage.
He joins Sam Damiani from TD, Sumayya Syed from CIBC, Mark Rothschild from Canaccord, Lorne Kalmar from Desjardins, Matt Kornack from National Bank, Brad Sturges from Raymond James, and Fred Blondeau from Laurentian, all of whom have initiated coverage over the last 22 months. We also concluded our second board outreach program last week, connecting members of our board directly with the investment community in the absence of management, which is considered a governance best practice that is rarely adopted. Following a highly successful first property tour in May, we are planning our second tour, which will be getting investors out to see Conestoga Mall later this month. We are looking forward to seeing all of you there. In conclusion, we are very pleased with our progress to date.
We remain focused on communicating our strategy, building a public track record of strong results, and demonstrating disciplined capital allocation, all of which are key to building institutional support. Our best-in-class capital structure is key to our ability to thrive in this environment, including our first milestone acquisition closed in July, and plans to accelerate our capital recycling initiatives. We would 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 during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star, then two. We'll pause for a moment just to compile a Q&A voice list. Your first question comes from the line of Sam Damiani of TD Cowen.
Thank you. Good morning, everyone. First off, nice to see the guidance for 2024, so thank you for that. I'm just wondering if you could outline a little bit of the assumptions built into that in terms of acquisitions, dispositions, or buybacks?
So, thanks, Sam, and good morning. As it relates to acquisitions, we've run the forecast a number of different ways, but, as you know, our acquisition focus is really on assets that enhance the quality and medium-term, long-term internal growth profile. And our objective on acquisitions is to really have them be relatively neutral to our FFO. And so, you know, acquisitions in or out doesn't really have much of an impact on the go-forward forecast. But you know, I guess while we're on the topic, we continue to, you know, advance discussions and negotiations on a number of fronts, and we're optimistic that we'll be able to deliver further acquisitions similar to the Conestoga transaction.
Yeah, just on the disposition front, Sam, we've modeled roughly CAD 100 million of dispositions during the course of the year that would impact FFO.
Okay, and I see you've got CAD 92 million- Sorry, go ahead.
Yeah, no, that's basically the number, the amount that we've identified in their investment properties held for sale. This number will be, you know, it's a number we continuously review and assess, and, you know, certainly, we would be looking to do more. It's really more of a timing issue on the dispo side, the market conditions dependent and also driven by the level of activity on the acquisition front.
Yeah. And those dispositions, it's a mix of land and anchor properties, so I guess the blended yield could be-
Correct.
Could be rather low.
That's correct.
Okay. Just finally, was there any buyback activity assumed in your guidance, either for the rest of 2023 or into 2024?
Yeah, at a lower rate than where we're currently running. If you recall, we had been running at 20,000 units a day for a long time. We had pulled it back to 5,000 in advance of a blackout period and, you know, sort of finalizing the terms of the Conestoga acquisition. And then when we came out of blackout after closing that transaction, we ramped it up to 30,000 units a day, and that was basically to catch up for having run at 5,000 units a day. In our forecasts, I think we'd estimated somewhere in the neighborhood of 10,000 units a day. But you know, it's fluid. We review it all the time.
We are in the highly advantageous position to have a, you know, very strong credit profile and low leverage balance sheet, as well as a low payout ratio. So we have excess cash flow that we can direct towards what we think are the best return investment opportunities out there. And I think you can expect to see us continue to buy back units, but not likely at the same pace that we're currently running.
Okay. And last one for me, just on, on, I guess, Northland Village and ultimately Devonshire, you know, two rare instances of developing new functional retail real estate in the country. Just curious what you're seeing in terms of tenant demand for those projects and specifically, and if your plans for Devonshire are getting a little more refined.
Yeah. Hi, Sam. Northland Village, the tenant demand is very strong. We're approaching, I think about, just under 90%, leased up on the development, the space that's under development, and there's another 6% or 7% that relates to tenants that are conditional, so there's very little left to do. With regard to Devonshire, we are proceeding with work on, on the demolition of the, the Sears box. We'll be doing that in the next—in the upcoming year. And the space inside the mall that we're going to remerchandise, we're well advanced on lease negotiations with, with tenants for that space, and master planning the remaining, the, the 18 ac that'll be remaining after we tear down the Sears box.
Okay, great. Thank you, and I'll turn it back.
Thanks, Sam.
We now have next... The next question comes from the line of Fred Blondeau of Laurentian Bank Securities. Your line is open.
Thank you, and good morning. First one for me, maybe for Patrick, you seem to be pretty bullish on the environment here. I was wondering in terms of demand for space across your portfolio if you still see some of your retailers expanding their footprint or looking to do so, or they're starting to feel the macro headwinds. I guess my question here is, what's your scenario on the macro impact on demand for 2024?
Hi, Fred. I think demand is not showing any signs of slowing up. Tenant sales have risen considerably since the end of the pandemic, and they're surpassed where they were pre-pandemic. I think that's got a lot of retailers feeling very good about the future. We're seeing Americans look to Canada. One of the dynamics at work in the U.S., there's tenants that are closing stores across a lot of the C and D malls. So essentially, they're shrinking their footprint in the U.S., and they're looking to offset that by opening more stores in Canada. So there's an interesting dynamic at play there, but generally, with sales where there are, tenants are still very bullish, and I'm not really hearing any concerns about a pullback as of yet.
Mm-hmm. No, that's helpful. Thank you. And while I got your attention, Patrick, just looking at financing conditions, that seems to arguably be stabilizing. Would you say the buyer pool for your targeted assets is becoming more competitive, or it's more like status quo on that front?
Buyer pool for our assets? I think really, no, I don't think there's a lot of other competitors looking to buy shopping centers right now, especially at the size and scale that we're looking.
Yeah, it's a really, a big part of the sort of the liquidity issue or the financing dynamics is the larger the asset, you know, the less, likely it is that we're gonna face competition. There's still reasonable liquidity, sort of, for the smaller sized assets, which is why we're comfortable with our, our view that we can execute on these dispositions. So the financing is, is generally available for the smaller assets, but the larger assets, it's, the, the market is a little bit dislocated right now.
It's a smaller group of owners that own the types of properties that we're interested in acquiring. So it's a small community with which we're engaged and, you know, we continue to have a lot of productive discussions with that group. On the disposition side, you know, the assets that we're selling are generally smaller, more liquid, and have a broader buyer pool.
That's great, thank you. Then, maybe last one from me, maybe for Alex or Rags. Just, following up on Sam's question. Looking at your 3%-4% same property NOI growth guidance for 2024, I was wondering if you could give us a bit more color in the assumptions there. I mean, do you feel like it will come a little bit more from revenue or expenses or a combination of both?
It'd be a combination of both. There's really a few drivers that allows us to drive this growth. The rental, embedded rent steps in our portfolio-
Mm-hmm
... which is quite, quite strong. There's the, the mark to market on renewing leases and getting the rental uplifts. There's positive absorption, as far as vacant space. And then there's a conversion of, sort of these, hybrid structures that were leases that were done during the, the pandemic and converting them back to, to true net leases, so then we, we should see improvement in our recovery ratios. So there's, the, the four big drivers that we, we have and, you know, we're, that's, that's sort of what we're focused on.
Mm-hmm. That's great. That's it for me. Thank you.
Thanks, Ruth.
We now have Mark Rothschild of Canaccord. Your line is open.
Thanks. Good morning, everyone. Just in regards to the guidance and the occupancy increase that you're expecting, how much of that or is most of that from specific vacancies, such as maybe an empty Sears space that you expect to lease up? Or is this just general overall portfolio improvement that you expect, that maybe can even continue going forward over the next couple of years?
Good morning. No, I think there's a combination that's coming into play. One is we're gonna demolish the Sears box at, at Devonshire Mall next year. That's 200,000 sq ft, so that's gonna have an impact on occupancy. But as well, we, we have a considerable amount of new leasing that's taking place, replacing, vacant space, and, that's gonna, that's gonna be a catalyst for driving occupancy next year. So it's a combination of both.
Well, and one thing, Mark, that we're really focused on is, you know, you see some seasonality where Q4, you have the, you know, seasonal tenants, temp tenants that come in, and we're really focused on trying to move that into permanent tenants so that when you see the bump in occupancy, we get the benefit of that for the entire year rather than sort of some seasonal ups and downs. So that's an area that we're increasingly focused on as our occupancy levels get tighter and, you know, it'll drive sort of more consistent revenue.
Okay, great. And maybe just one more. There clearly aren't many buyers out there for the types of properties that you guys own, and even more so for weaker type of enclosed malls. Are you seeing any distressed opportunity, any weaker assets that you maybe look at and say: "Well, we have the tenant relationships, we have the expertise, we can create value and make some money in them?" Or are you just gonna continue to stay away from anything that's not up to the quality that you guys want for the long term?
Thanks, Mark. We have been approached by many, many, many owners of malls, a lot of whom own malls that we think are, as you've highlighted, opportunities. But really, our strategy is to continue to build on our portfolio of, you know, market-leading shopping centers in sized markets. And we're focused on upgrading the portfolio, not necessarily pursuing opportunistic turnaround opportunities. That might be, that might be an opportunity that, you know, we would consider at some point in the future, but right now there's a window of time during which a lot of properties that would, you know, have generally, as a statement, not have been available for acquisition over the last 20 years, that are available today. And so we're really focused on acquiring these, scarce and, highly attractive market-leading shopping centers.
You know, I feel like the opportunities for turnaround are always there. There's always properties that have been undermanaged or undercapitalized, but, you know, we're pretty narrowly focused right now on doing deals like Conestoga. You know, fantastic asset. It's really been a pleasure to welcome it into the portfolio and, you know, we're looking to do similar transactions.
... Okay, great. Thanks so much.
Thanks, Mark.
We now have Lorne Kalmar of Desjardins. You may proceed with your question.
Thanks. Good morning, everybody. Just flipping back to the acquisitions, how have, if at all, conversations changed with vendors since the Conestoga acquisition?
Morning, Lorne. As we, I think, I don't know if it's hoped or expected or some middle point between those two descriptors, we were optimistic that demonstrating a transaction like the Conestoga transaction would accelerate and facilitate further discussions, and we're pretty confident that that has happened. We have a lot of, a lot of discussions ongoing. There's, I think, very few owners of enclosed malls in Canada that we don't have discussions going on with. And, you know, we're optimistic we'll be able to deliver on some of these discussions. And there are, you know, it came up earlier, but there's really relatively few others that have the same kind of buyer profile that we have.
If you look in the transaction market today, there's, you know, very limited availability of financing for some parties. You know, there are other constraints that hold people back. When it comes to enclosed shopping centers, you know, we've talked about it before, but owning one enclosed mall is not a very good business plan. You need to have scale, you need to have a platform. We have a very strong platform with a 20-year plus track record. We have a differentiated financial model, very low leverage, and the ability to finance. I mean, we don't go into our engagements with prospective vendors with financing conditions because we don't need to. And that's highly unique. And you know, as a general rule, we know these properties very well.
When we go into discussions, you know, we have a really good idea of what the shopping center is, and we don't, you know, we don't need to go back for haircuts and, you know, retrades, which seems to be an increasingly common occurrence in the transaction market today. So we make it as painless as possible to do deals with us. And you know, I think we're getting a lot of... It's resonating with vendors, and we're expecting to be able to transact further.
I am looking forward to some upcoming announcements. And then maybe for Pat, you know, we've talked about the strength of the retailers and, you know, you haven't really seen a pullback yet. What do you think has to materialize to see some sort of pullback?
I think we're starting to see tenant sales level off right now. There's still strong traffic to the shopping centers, and I'm not sure I see that abate. I think there's a balance that's kicked in with the tenants and their e-commerce business, where, you know, there was a great movement pre-pandemic to buying more online, and I think it shifted to picking up in store and shopping more at the store. So there's a better balance in that regard. I think at some point we're going to see... Like I said, we are seeing a leveling off now. There's been a tremendous run in sales for the past 24 months to a point where we're well beyond where a lot of tenants were in 2019.
You know, but that's not going to indicate our ability to raise rents given where their sales have gone, even if there is a modest pullback.
Okay, thank you. That was very helpful. And then maybe last one, just a ticky-tacky one. Just, could you maybe give a little bit of color on the lease term income? And then also the, I believe it was the, the parking and sundry revenues were elevated versus historical. Can you maybe give us an idea if that's a good run rate or if there's something one time in there?
Yeah. On the other and sundry income, there is a big chunk of it is one time. It was really some cleanup of kind of credit accounts and miscellaneous sort of revenue accounts, and we didn't want to internally put that or externally put that in revenue or contra expenses because we track our recovery ratios, and it's a key KPI, so it really didn't fit anywhere. So to be honest, it just kind of got jammed into there rather than creating a separate line. For the most part, it's a one-timer.
You know, there's always noise every quarter, because you're losing, you know, you're dealing with CAD 400 million of gross revenue, so CAD 1.75 million is neither here nor there in the grand scheme of things, but in the quarter it created a little bit of noise. But for the most part, it would be non-recurring.
In the lease termination income, it was related to Buffalo Wild Wings terminations. There was two restaurants, they've left Canada. Both have been leased out subsequently.
Okay, great. Thank you so much for the color. I'll turn it back.
Thanks, Lauren.
We now have Matt Kornack of National Bank Financial. Your line is now open.
Hey, good morning, guys. It's nice to hear a discernible positive tone shift in terms of retail performance since I last covered the space. But with regards to pricing power, can you, can you give us a sense as to, to what the threshold is before you can start to push rents? It's nice to see that they're no longer flat to down. You're getting a bit of a spread, but maybe give us a sense. Orchard Park looks like it's a very well-performing asset. Like, what would spreads be there versus the broader portfolio, and what will it take for the rest of the portfolio before you start to see the spreads I think that you alluded to in your initial comments moving higher?
Yeah, I think Orchard Park spreads are strong for a number of reasons. One is the mall performs over CAD 800 a foot, and two, it's got a very high occupancy rate. And I think as we increase occupancy, we increase our ability to push rents higher just because there's limited amount of space. But I think generally what we're finding in Canada overall is there's no new supply, especially in the enclosed mall space, there won't be. There is a desire to be located in enclosed malls simply because it's typically where the majority of the retail sales are done in any of the communities, especially where we're located. And the space is shrinking. So, tenants are looking to expand their footprint in Canada.
The sales are very strong and, no, we have been able to drive rents higher. I mean, one of the positive aspects of our leasing, we really have been able to push getting annual increases in our rents into leases in the past few years, and that's been a tremendous ability. That's given us the ability to show year-over-year growth in rental growth in rents, outside of just the lease end increase.
Okay. No, that, that's a fair point. And then, I guess as you look to the broader portfolio, and kind of your peers in the unenclosed space, pushing rent into the mid-teens, like, I mean, is that something you see on the horizon at some point within the enclosed space, or is it really an occupancy push for the next couple of years, and then you'll get to the rent escalations of that magnitude?
Yeah, I mean, it's generally an occupancy push. I mean, our average CRU rent is considerably higher than the average rent found in most of the unenclosed format malls. So it's, you know, it's pretty typical for both mall average rent lift to be in the single digit range. But as I mentioned, I mean, we're pretty happy with our rental growth on an annual basis that we've been able to build into most leases.
There's... And then, I guess, you know... Sorry, Matt. Just, you know, having done what you do, there's a desire to have sort of a continuous, steady data stream. But the reality is that, you know, our portfolio isn't that large, and quarter to quarter, individual transactions do create noise in that metric. And, you know, we've had investor meetings where, you know, we get a question about, like, why did, you know, X, Y, Z happen this quarter? Or why didn't X, Y, Z happen this quarter? And, Pat sometimes says, "It's been 90 days." Like, things take time.
When you look at, when you look at that leasing, you know, spread, the mall business is also, you know, in a, you know, unsatisfying manner, you know, from a, you know, analyst perspective. It's, it's a little bit more nuanced than office buildings or industrial buildings, where market rent is market rent. You know, in an office building, the rent goes up a little bit as you go up floor by floor. Our property type is more complex than that. You know, we're, we're really focused on curating the right tenant mix, and sometimes that, you know, doesn't necessarily maximize short-term revenue. It's really a longer-term game that isn't well suited to measuring on a 90-day basis.
All of that said, I think what you're getting at is, you know, are we feeling an acceleration in our ability to capture, you know, leasing upside? And I would say absolutely, we are. You know, we've got a slide in our investor presentation that shows the per capita enclosed shopping center space in Canada, and it peaked in 1991. Some of that is the lack of new supply, some of that is population growth. But as we look out between now and the end of this decade, that decline in per capita shopping center, enclosed shopping center space is actually accelerating. And the amazing thing about that is two things. One, the replacement cost is 4x what our enterprise value reflects on a per sq ft basis.
And number two, even if you wanted to create that space, and you could afford to build that space, to assemble parcels of land that are 40 ac, 50 ac, 60 ac, 70 ac in, you know, central locations in, in Canadian markets, mid-sized, large markets, is virtually impossible. So we have a, what we think is a tremendous medium-term, long-term opportunity. And as Pat, you know, referred to, as we get our occupancy closer to that stabilized, you know, mid- to high-90s% range, we really do move into the driver's seat in terms of a lot of these lease negotiations. But it's happening, and on a quarter-to-quarter basis, you'll just have to bear with us because, you know, individual leases do skew these things. And I think last quarter we were, you know, in the 8% range.
This quarter, we're in the 4% range. You know, I would think, you know, high single digits is a pretty reasonable place to expect us to come out, and you know, maybe it'll be higher than that.
... So that, that's great color. I appreciate it. Just very quickly on CapEx and repositioning, it seems like this portfolio has already gone through a lot of that. There's a few smaller bits, but for the most part, would you say everything CapEx-wise that you've wanted to do has been done with the exception of maybe a few anchor tenant boxes being cut up and repositioned?
Yeah. We're through the anchor transitions for the most part. There's a couple left. Devonshire will get knocked down, and we'll remerchandise the interior of the mall. But for the most part, we're through that program, and really, the bulk of our CapEx is going towards leasing up the space and getting back to the 95% mark.
Okay, perfect.
We now have-
Thanks a lot.
-The next question from Mario Saric of Scotiabank. Your line is open.
Hi, good morning, guys. Given, I'm the new kid on the block, I've got a couple of clarification questions and then a couple of more automatic ones. Just, one clarification on the occupancy guidance for 2024 being up 80-100 basis points year-over-year. I think Pat mentioned it does include the demolition of the Sears space at Devonshire, which I think would add about 200 basis points or so to occupancy. So can you just kind of reconcile those two?
The, uh-
What the occupancy expectation would be, including and excluding demolition, I guess, in 2024?
Well, the Sears occupancy guidance, like the Sears demo, is actually baked into the 2023 year-end, sort of guidance on occupancy. So the 80 basis points to 100 basis points pickup in occupancy, for 2024, excludes the impact of Devonshire, because we assume that that's taken out of the denominator, at December 31, 2023. So to the extent that the timing slips, then, you know, the pickup might be bigger. But, you know, we've made the assumption that we'll adjust the denominator and numerator this year, and so that pickup is meant to be net absorption that offsets the impact of Devonshire.
Perfect. Okay, thanks, Rags. Then maybe just sticking with you, I imagine you're somewhat happy to see the U.S. payroll number this morning with yields coming down.
Yeah.
If you had to do an unsecured venture today, can you give us a decent range in terms of where you can get it done?
Sure. I mean, it depends what time of day and what day of the week you ask, but it's been so volatile. I would say right now you're in the 6.75% range. You know, if you asked me a week and a half ago, I'd have said 7%-7.10%. If you asked me a week ago, I'd have said, like, 8.5%. You ask me now, I would say it's 6.75%, maybe lower.
Somewhere between 3% and 10%.
It is really bouncing around, but yeah, it's 6.75%, either side of that.
All right.
6.75%-7% is probably the zone that we're currently seeing.
Perfect. We'll use the midpoint of three-10. And then maybe a similar question in terms of then versus now, just on Dufferin Grove. Like, we are seeing more articles come out about delayed condo construction in Toronto, given the higher rate environment. How would you characterize market perception on the fair value of Dufferin Grove versus three months ago? Like, specifically, like, do you sense the bid-ask spread is widening or is it narrowing?
You know, it's interesting because,
Or, is there a bid to begin with?
Yeah, it's a unique development site in a lot of respects. It's shovel-ready, it's by a transit site, it's large. You know, 4 ac is a big parcel, and the ticket size is very large as well. So to your point, over the last 30, 60, 90 days, it seems like there has been a growing awareness of the lack of liquidity in that market. We've seen that for 15 months, I would say. You know, as we were coming into the summer last year, it was apparent that, you know, there wasn't a lot of depth to that market, and a lot of the transactions that, you know, have been taking place are highly structured.
Two years ago, there was a real premium if you could deliver shovel-ready sites, and now there's a preference for, you know, holding income rather than shovel-ready, which is kind of a you know, an inversion in that market. Do we know what that's worth? I mean, I don't want to say your guess is as good as mine, but I just did. We have an appraisal, and we carry it at that appraised value. It's on our balance sheet as a separate line item so that investors and analysts can look at it and come to their own conclusion. But, you know, it's challenging to assess what that might be. I mean, the bid-ask spread today would be wide.
It's been wide for a year and a half, and we don't have any better information than anyone else as it relates to, you know, what to say on that asset. You know, we're in the fortunate position where we don't need to be a seller of that asset today, and, you know, we're highly confident that the value of that site medium-term, long-term is very, very high. And, you know, we've had a lot of discussions about it being more than what is represented on our balance sheet, under the right conditions. But, you know, we're sort of in the dark a little bit as well because we haven't been marketing it.
We do regularly get approached about it, and there's a couple of different buyer pools that approach us about it. There's the opportunistic buyer who, you know, hears noise in the market about, you know, land values. And then there's the strategic, longer-term, largely, you know, family office types. And they don't generally start the conversation with price. They start the conversation with, you know, "How do we plan this over, you know, 10, 15, 20 years?" And if you made me pick which type of a buyer we'll end up selling that to, I think it'll be that family office, you know, intergenerational wealth group.
I mean, the opportunity for that buyer to participate in the broader 21 ac parcel at Dufferin is also something that, you know, I think is a reasonable expectation to consider. You know, that's a site that has, you know, tremendous potential. You know, you think you look at The Well, and, you know, Allied and RioCan have created a really special property there. This is, you know, 2.5x the size of that site from a land area perspective, and sits on an existing subway station, not contingent on, you know, future transit plans.
Got it.
Sorry, that was a long answer.
No, it's okay. That's, that's great. That's great color. Just zoning in on the family office, if that indeed is, let's say, a potential type of buyer, would you say the family office buyer 15 months ago would have paid a premium for a shovel-ready product, or is it just a different mindset altogether in terms of how they think about the go versus not-go decision?
You know, for the most part, I would say that 15 months ago, there were other buyers that were, you know, it was the, you know, merchant condo developer. And some of those are the same, you know, backed by the same family offices. But, you know, when you look at Dufferin, it really is a larger opportunity. We have all of the leases at Dufferin, you know, revert to our control by 2040, 2041. You know, 17 years from now, 16-17 years from now. That seems like a long time, but in the timeline of Toronto, you know, municipal approvals and planning and all of the rest of that, it's actually not that far in the future. And, you know, the 4 ac is an opportunity.
I think as we brought the 4 ac to the zoned, entitled, severed phase, that made us think a little bit more about the long-term opportunity at Dufferin. You know, with the benefit of time to reflect, I think, you know, there's definitely a argument that the whole 21 ac should be dealt with, you know, together. Where, you know, you don't want to have someone buy and build a 4 ac parcel, and then, you know, at some point over the next 17 years, someone, you know, comes in and buys another 4 ac and then buys another 4 ac. If you can do something on 21 ac, you know, that's a, that's a real city-building type of an opportunity.
You know, to the discussion that we're having, I mean, the right capital profile for that type of a project is, you know, really long term. You know, you're starting with a discussion where 17 years is the starting point, and, you know, we're highly confident that it's a tremendous development site. There continues to be, you know, robust growth in Canadian population. Toronto continues to be a very attractive market globally, and, you know, we're thrilled that we own the asset. And, while we haven't 100% figured out what to do with it, we don't need to. There's no gun to our head.
Got it. Okay, last one, just, not to exclude Pat. Pat [inaudibe], just, a question on GROC ratios. In your experience, are you able to generally increase them in an environment where tenant sales levels are flattening out, notwithstanding, call it the existence of a mark-to-market high? The GROC ratio is too low, are you able to increase them in a tenant sales flattening environment?
To offset Alex's long answer, I'll keep it short. Yes.
Okay. That's it for me. Thanks, guys.
Thanks, Mario.
We now have Sumayya of CIBC.
Thanks, and morning. Just wanted to follow up on the occupancy discussion. You're on 92.8 committed, and looking at your projection for next year, it's the same amount of increase as 2023. Sounds like retailer demand is still pretty strong. Just wondering if your projection could be higher and if there is some conservatism that you are factoring in in your outlook.
I think there's a possibility it could be higher. Just looking at what's going on in terms of leasing activity, where we're at in various negotiations between large format tenants and CRU tenants, I'm very optimistic we'll hit our target and optimistic we'll pass it.
Okay, and just lastly, on the held-for-sale assets, if you have the LTV handy, that'd be helpful, and also expected use of proceeds.
Is there any debt on the held for sale?
No.
No.
No. No, all the assets are free and clear. They're all unencumbered.
Okay. And then any thoughts on the expected use of proceeds?
Well, just to pay down debt. You know, as we draw the op lines, you know, we'll pay down. So we're always juggling, you know, looking at doing unsecured to term out draws on the op line. But if we have visibility on, you know, how we size the unsecured and factoring in potential proceeds from asset sales, you know, it's that, and then also, potentially, you know, financing new acquisitions, so using the proceeds into new acquisitions. So it's sort of a combination of everything.
Okay. Thank you. I'll turn it back.
Thank you. We have our final question on the line from Brad Sturges of Raymond James.
Hey, good morning. I'll keep this quick.
Hey, Brad.
Just, just to, I guess, round out the, just to round out the discussion on occupancy, I just want to clarify, does that, the, the guidance on occupancy in 2024, does that include, dispositions within, in that figure? So is that a net number after dispositions?
No, it doesn't include dispositions. We just look. We're looking at the portfolio sort of holistically and saying that this is where we see the drive in occupancy. So we didn't factor in, because it's just like it's at the margin, right? The, you know, a lot of the dispos are vacant land, so that has no impact.
Yeah, it's. I mean, we've got a bunch of different things. We've got a whole bunch of leases that we, you know, have signed. We have a bunch of leases that, you know, we're close to signing. You know, we look at that, we try to back into what that implies in terms of an occupancy lift. Then we look at, you know, where we are, you know, over a multi-year period between getting here to, you know, a stabilized occupancy. And, you know, it's kind of a, you know, sort of a rough estimate of the trajectory that we expect in the occupancy. And, I mean, you know, we were talking earlier about the impact of the Devonshire Sears box, and I feel like we haven't been clear enough.
And part of the challenge is that it's not entirely clear, but, you know, the 80-100 basis points is a core, excluding demolition of space, trajectory-oriented kind of guidance. And, I guess, the third piece that makes it complicated is that, when we look at the business, we really look at, you know, what we describe as like real leases, the permanent tenant, multi-year lease. And we kind of look at the short-term, specialty leasing type of a tenant as... Well, we refer to it internally as vacant, even though, you know, there are tenants paying rent in that space.
And so we're looking at disclosure going into 2024 that will, you know, try to further refine how we describe occupancy, and talk a little bit more the components of occupancy that is specialty leasing.
Got it. Just as you continue to evolve from, like, a remerchandising perspective or strengthening the quality of the leases that you have in place, you know, would you expect any more lease surrender revenue in the next couple of quarters? And then secondly, like, percentage rent leases are down to, I think, 5% of leases. Is that kind of a stabilized level that you expected going into 2024, or do you see that trending down further?
I think, number one, I think, yeah, there's gonna be some lease surrender income next year. I'm pretty certain, we're having a few discussions with tenants that we'd like to replace, and, they'd like this to facilitate it. In terms of the percentage of leases, when you include all the, all the variable leases, including gross rent, you know, ones with caps and stuff short, we're around 12%. That's sequentially gone down 1% in each of the past, quarters this year. And the trend for that is to get it down to about 6%, which is our historical norm. So there's still quite a runway to get there, but and we're making really good progress every quarter.
That ties into the recovery ratios as well, which we're expecting to, you know, drive into the 90s. You know, ideally, it would be 100%. We'll see whether we get there.
That's a great color. I appreciate it. I'll turn it back.
Thanks, Brad.
Thank you. As we have no further questions at this time, I'll turn it back to Claire.
Thank you, operator. With no further questions today, we'll close today's call. On behalf of the Primaris team, we thank you all for participating in our call, and we look forward to speaking with you again on our Q4 call, and we will see you on our property tour later this month. Thank you and have a great weekend.
Thank you. You may now disconnect.