Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Second Quarter 2020 Conference Call. At this time, all participants are in a listen only mode. After management's presentation, there will be a question and answer session and instructions will follow at that time. I would now like to hand the conference over to Jennifer Sous, Senior Vice President and General Counsel. You may begin.
Thank you, Chris, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD and A and financials on RioCan's website earlier this morning. Before turning the call over to Jonathan, I am required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward looking statements, including statements concerning RioCan's objectives, its strategy to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.
These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally expected accounting principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the Trust's underlying core performance and provides these measures so that investors may do the same.
Additional information on the material risks that could impact our actual results and the estimates and assumptions we apply to making these forward looking statements, together with details on our use of non GAAP financial measures, can be found in the financial statements for the period ended June 30, 2020, and manage discussion and analysis related thereto, as applicable, together with RioCan's most recent annual information form that are available on our website and at www.sedar.
Com. Thank you, Jennifer, for that poetic introduction, and thank you for all of you for joining us today. I know you've been listening to a lot of these quarter end conference calls, and I'm just going to jump right into it. Here's what I want to share with you. First, I need to give you an update on our Q2 operating metrics and particularly the impact of COVID-nineteen.
But I'm also going to talk about how our strengths are going to help us recover. I also want to talk about what we're doing to support RioCan stakeholders, including our unitholders, our employees, tenants and their customers. This is all with a view for giving you our overall vision for our recovery and our future growth. Let me state the obvious and say that this pandemic has had a major impact on this quarter's results. We're far from satisfied with them.
That said, we fundamentally do not feel that these results are in any way indicative of our long term performance and underlying value. What we're not doing is sitting on our hands and waiting for things to turn around. That's not what you've entrusted us to do. For 26 years, we've consistently demonstrated our adaptability, innovation and drive. Here's what I will tell you.
What we will do is leverage our deep experience and our major market portfolio and strong liquidity to innovate, adapt and thrive in the face of all of this. I'll walk you through the Q2 results now and then I'm going to shift to provide more color on what we're doing both short and long term to protect and grow the business. I'll start with something that is clearly on the top of everyone's mind, rent collection. For the quarter, cash collected, agreed upon short term deferral arrangements and anticipated SEKRA proceeds collectively represent 87 of build rent and this is based on our pre pandemic rent roll. Our efforts continue to focus on maximizing the collection of the remaining 13%.
In the unfortunate event of unresolved tenant defaults, we have $29,000,000 in security deposits and another $5,300,000 in letters of credit from tenants that can offset rents owed. Shifting to what we've seen so far in the Q3, there's a positive trend in our cash collection. 85% of July's rent has been collected in cash as of July 28, 2020. And again, this is based on our pre pandemic rent roll. We expect this upward trajectory to accelerate as more businesses resume operations and our collection and negotiations continue with smaller tenants.
85% of our tenants are now open and operating. Consumers are going out to shop and most of our tenants are gaining momentum. Let me give some insight into our rent collection process. We worked with our tenants to find sensible solutions. We tailored our approach on a case by case basis to support their specific set of circumstances.
Now in my position, I've had the opportunity to sit down personally with a number of these tenants to try and find a solution. And it's great to see the impact of working something out with them that helps them survive and helps our business in the long term. Now in some instances where we had healthy tenants with strong covenants, we were open to short term deferral arrangements and we're now collecting on these. The duration of the deferrals was typically 12 to 18 months with the vast majority expected to be paid back by mid-twenty 21. In rare instances where an abatement was the most practical solution, it was granted in exchange for something of value to RioCan, including the extension of terms or the inclusion of valuable redevelopment rights.
In certain instances, RioCan was able to unlock significant amounts of future value to our advantage. The abatement terms all end by December 31, 2020, at which time these tenants will return to full contractual rents. The bottom line is this, every dollar matters to us. We've used our resources and energy to ensure that no rent is left behind. We will continue to execute on this thoughtful strategic approach to driving smaller independent tenants.
These tenants form a critical part of the Canadian economy and they're a key part of the fabric of our retail ecosystem. When the SEXO program launched, we actively participated on behalf of approximately 1800 qualifying tenant locations. The program provides eligible tenants, which are mostly small businesses, with a 75% gross rent reduction for the quarter. As part of the program, landlords kick in 25% of the rent and the government covers 50%, leaving those eligible tenants with the obligation to cover the remaining 25%. For RioCan, the total separate rent abatements are estimated at $9,900,000 for the quarter.
Now in exchange for our participation, RioCan and the industry will benefit from the long term survival and sustainability of these businesses. This is simply good business practice. Moving now to our operating metrics for the quarter. Same property NOI growth was negative 10 0.8% and FFO per unit was $0.35 Our major market committed occupancy and leasing spread numbers for the 2nd quarter were healthier were healthy at 96.8% and 7.3%, respectively. However, the reality is the COVID-nineteen related business closures will impact these numbers through the balance of 2020.
As we're talking about closures, it's important to note that more than 3 quarters of RioCan's annualized rental revenue are from necessity based and service oriented tenants. This category of tenants are more resilient to changes in economic cycles. In addition, we significantly reduced our exposure to the vulnerable fashion category over the last 10 years, such that it now represents only 8% of our annualized rental revenue. I expect that number to drop even further in the future. Now there have been a lot of CCAA filings since March, but of all the retailers that have filed for CCAA protection, confirmed closures represent only 0.5 percent of RioCan's total rental revenue.
We all understand, however, the TCAA filings allow companies to restructure, restructure and it doesn't mean that all locations simply close-up. Often, the restructured businesses emerge leaner and more strategically structured to support sustainable growth. There are more restructurings and failures to come. However, as you know, for the last decade, RioCan has concentrated its portfolio in the highest growth regions in Canada, more than 90% of our revenues generated from Canada's major markets and more than 52% comes from the GTA. We're going to continue to lean into the desirability and convenience of our locations.
Moving now from our commercial portfolio to our residential portfolio, RioCan Living. In the face of COVID-nineteen, the collection of over 99% of our Q2 residential rent is a testament to the desirability RioCan Living's offering. We have high quality buildings in prime transit oriented locations in the major markets of Canada. Residents recognize the efforts of our property managers to keep their spaces safe and to look after their well-being. To date, we're fortunate to report that to our knowledge, there has not been a single instance of COVID-nineteen at any of our RioCan Living properties.
Leasing continues to progress well at our rental residential properties, including Brio, which is our 163 unit rental residential property in Calgary and is our first with partnered Fort Block REIT. The project was completed at the end of March 2020, arguably the most unfortunate timing possible for a residential project in the hard hit Calgary market. But in spite of this, the project is already 31% leased, results that could be attributed to its location, the quality of the offering and the professional management by our partner, Boardwalk. RioCan Living will continue to add high quality rental residences to our portfolio over the next few years. In addition to the combined 857 units at East Central, Frontier and Brio, RioCan Living has more than 2,700 additional purpose built rental res units under construction, 840 of which are going to start renting in the next 12 months.
Most of these units are located in Toronto and Ottawa, and we're confident in these markets and whatever the short term impact of COVID-nineteen, these markets and our offerings within them will thrive in the long term. We also have 3,500 condo and townhouse units that are either completed or under development. Now these include 11 YV in Toronto's Yorkville neighborhood and UC Towers in Oshawa. 11 YV is 98% presold and EC towers are 87% presold. Construction has commenced at both of these exciting RioCan Living projects.
Now these projects had much needed high quality residential inventory into a very tight market, and they also provide RioCan with additional revenue diversification. We'll also diversify through our ongoing urban mixed use projects such as The Well in Toronto, where construction is progressing nicely. The office component has reached 23 of 36 storeys and approximately 84% of the office space is pre leased. I can state with confidence that these results validate our continuing focus into mixed use communities. There's no question rent collection and maintaining the security of our income were our priorities in the Q2.
But running a business isn't just about collecting rent. There are also social issues that impact the communities in which we serve. We've got a keen understanding that during uncertainty, the companies that emerge as leaders are those that recognize that this is not the time to abandon corporate citizenship, but rather to stand up for change and lead the way. At the end of the Q2, we made the important pledge to listen and learn from one another and have hard, honest conversations about racism and equality and diversity. To that end, we've taken some important first steps, including committing to assembling a RioCan Diversity and Inclusivity Council and signing the BlackNorth CEO pledge, which was initiated by the Canadian Council of Leaders Against Anti Black Systemic Racism.
Another priority as we move through the stages of opening is ensuring that our customers feel safe. RioCan shopping centers and office have reopened and all of our assets are now fully operational. Because of government regulations, retailer reopens have been gradual. We've been proactive in our safety measures and fully compliant with regulations. We open these spaces with necessary safety protocols to protect employees and customers.
Customers and tenants recognize the efforts we've taken to keep them safe, and they've demonstrated a desire and willingness to return to our shopping centers. It will take time as everyone adjusts, but our outlook is optimistic as we see the weekly cycle of stores reopening, confidence increasing and corresponding increases in consumer traffic. Looking ahead, there's no question that the recovery will be long with the balance of 2020 expected to experience ongoing challenges in our sector. However, as we've consistently demonstrated here at RioCan, we are built for the long term with 26 years of proof behind us. I'm confident that with one of the strongest, most versatile and seasoned leadership team at the helm, we'll continue to adapt and evolve in lockstep with the new realities and consumer spending patterns.
We'll make our sites and shopping centers more relevant in the evolving landscape. Your leadership team is thoughtfully exploring the many ways that we can change our portfolio to further diversify our income streams. Our goal is always to provide or to drive the highest and best use from our extremely well positioned real estate assets. RioCan's intensification program is going to continue to unlock the significant value that's inherent in our existing assets. And what it also does is really improve our business by adding substantial net asset value and diversifying our sources of cash flow.
We know that it would be great to intensify and redevelop every single RioCan shopping center. However, that's not realistic nor is it prudent nor is it practical. We are continuously looking, however, at our established and convenient locations to execute for a variety of new and relevant commercial uses. An omni channel strategy forms an important part of our retail ecosystem. There's a critical intersection between e commerce and well located bricks and mortar.
Well situated space has become a much needed commodity during the pandemic, opening a range of possibilities, including offering our sites as additional means for retailers to manage last mile costs and complexities, a form of distribution or micro fulfillment centers and has exceptional community care centers providing much needed extra space and services to support nearby hospitals. As space requirements within hospitals become more and more constrained, there's been a push, a very palpable push to move many of the non critical services off-site and our locations serve as ideal candidates to house such services. We believe this trend will continue. There are many other examples of innovative uses to which our portfolio really does lend itself and we're carefully considering each of them. We don't give trends, but we also don't sit idle.
As we always have, we'll continue to leverage our experience and insight to quickly make sound decisions that lend themselves sustainable growth. As we move forward, I'm proud of our ability to maintain a high level of responsibility, support and access for all of our stakeholders through this crisis. We have a team, locations and balance sheet. We also have the drive expertise and relationships to weather the storm and continue to reposition the portfolio for the long term growth and profitability. Qi, over to you.
Thank you, Jonathan, and good morning, everyone. Jonathan has provided a fairly fulsome summary of our Q2 results against these unprecedented times. Expanding on value creation and adapting for the future, I will now focus on our discussion on net asset value, capital allocation and liquidity. Given that there were largely no data points for property valuations under the pandemic, we had to look more intensely at a number of factors to estimate the effect of the pandemic on property cash flows and capitalization rate as well as the estimated effects of the downturn of the oil and gas market in Alberta. We reviewed and analyzed individual asset fundamentals, including geographic location, property type, local positioning and competition, tenant covenants, rent cash collections, estimated vacancies, timing and cost of re tenanting as well as deal pricing.
Following our assessment for the quarter, we wrote down 3.1 percent or RMB452 1,000,000 of our IFRS value for investment properties, including assets held for sale. This included a write down of almost 11% for enclosed centers and 4.8% for our assets in Alberta. As a result of the write down, our net book value per unit was $24.45 as of the quarter end. The pandemic has and continues to present a unique set of circumstances that remain fluid and uncertain. The short and long term impact of the pandemic on Ryokan's investment property valuation is difficult to assess and predict, particularly given the relatively low volume of market transactions.
As pandemic related events unfold, further adjustments to our IFRS value of investment properties may be required. It is worth reiterating that aside from a handful of projects with firm agreements for air rights or land sales in place, our current book value does not reflect much of the value of our development density. Specifically, we have 21,500,000 square feet of density that we have either accomplished the complex and lengthy process of obtaining municipal zoning or already submitted a comprehensive zoning application. The majority of such density is not valued on our books. Our development projects are nearly all mixed use developments within Canada's 6 major markets, 73% in the GTA alone.
They will provide meaningful value creation when complete. In addition, we also have a number of condominium or townhouse projects under construction or under development that will provide us with strong inventory gains to further boost our net value growth. A good example is our 11 YV project in the prestigious Yorkville area of Toronto. It is estimated to provide 60 5,000,000 to 71,000,000 inventory gains at our share. We remain committed to our development program and unlocking the significant value inherent in our portfolio.
Last quarter, as part of our liquidity enhancement initiatives, we temporarily paused certain new or early stage projects and lowered our development spend guidance for the year. Considering our quick construction productivity gains after a short slowdown at the outset of the pandemic as well as desired project starts by our committed tenants, our expected development spend has been refined to $400,000,000 range for this year. With respect to dispositions acquisitions, we reported gross proceeds of $33,000,000 from a sale of interest in an income producing property. There were no acquisitions during the quarter. As of July 28, we have firm or conditional deals to sell assets for gross proceeds of RMB302 1,000,000.
These assets are mostly located in the major markets. The dispositions consist of about 220,000,000 income producing properties and 82,000,000 development properties. The income producing properties have a weighted average in place capitalization rate of 4.2 percent based on firm or conditional deal prices and the development properties do not have material in place NOI. These dispositions enable lower cost of capital towards transforming our portfolio. Currently, retail accounts for about 90.5 percent of the Trust's annualized rental revenues, followed by office at 7.8% and residential at 1.7%.
As more RioCan Living residential rental buildings currently underway are completed and stabilized, the residential proportion of the Trust portfolio will grow and the mixed use nature of the trust portfolio will expand. As for our balance sheet strength, real can continue to maintain ample liquidity of RMB1 1,000,000,000 in the form of cash and cash equivalents and undrawn lines of credit as of the quarter end. Our unencumbered assets stood at RMB8.7 billion. The unencumbered assets pool generated 62% of our annualized NOI and provided 2 21x coverage for our unsecured debt. Our debt to adjusted EBITDA metrics was 8.8x and debt to total assets was 44.4%.
During the quarter, we secured additional net mortgage refinancing of RMB284 1,000,000 while repaying $150,000,000 Series U debentures upon maturity and lowering our revolving line of credit utilization by $50,000,000 Overall, we further lowered our weighted average effective interest rates by 6 basis points to only 3.29% as of the quarter end. We also further reduced our floating interest debt exposure from 3.5% last quarter to 2.8% this quarter. Our debt structure was 58% unsecured and 42% secured as of the quarter end. Currently, only RMB82 1,000,000 in mortgage maturities for 2020 have yet to be refinanced. All have refinancing commitments in place.
These mortgages all mature in the latter half of the year and are expected to be refinanced in due course. With a consistently disciplined approach to managing our balance sheet and capital structure, we will maintain strong liquidity and financial strength. Our financial capacity and flexibility position us well to navigate through the current pandemic. With that, I'd like to turn the call over to our CEO, Ed, for his closing remarks.
Okay. Thank you, Jennifer, Jonathan and Qi. This has undoubtedly been the most unusual quarter I've experienced in the over 26 years that I've been CEO of RioCan. The reasons are obvious, but it introduced a whole new issue into being a landlord, a time when some tenants simply feel they ought not to be required to pay rent as opposed to traditionally not being able to. However, as Jonathan and Qi have indicated to you, I think RioCan has come through this very difficult quarter quite well from the point of view of rent collection and liquidity.
Both, but particularly rent collection because I know that's everybody's focus, during the remainder of the year will continue to get even better. This belief is not merely a hope, but is based on the actual rent collection for July of 80 at 85% of pre pandemic rent roll. And I suspect, in fact, I know this will likely end up slightly higher as our government tenants typically pay at the end of each month rather than the beginning, but at least they pay. In addition, agreements and arrangements involving rent abatements have already been reached with all tenants of consequence and are baked into my views. In fact, my view and strong belief is that for the rest of this year, we will likely average a collection rate in the range of 90% plus of our pre pandemic rent roll, subject, of course, to further bankruptcies and the unlikely possibility of going back into any form of shutdown.
While the actual rent collection results are, I believe, quite satisfactory considering the situation, we are certainly not satisfied with the FFO achieved this past quarter. We're quite confident that for the year, RioCan will achieve FFO in the neighborhood of $1.60 plus. This number, while perhaps higher than some analysts expect, is also not satisfactory. And we will certainly strive to do better even this year and we certainly have opportunities whereupon this figure can be improved. I believe this is one of the first signs that we have actually given this sort of guidance.
But we are comfortable in doing so as all the bad news of which we are aware such as abatements and retail bankruptcies have been built in plus a contingency for unexpected bad news. The reason we are giving this guidance at this time is not only to counter some of the fear and anxiety that is clearly out there, but also to reassure our investors of our continued commitment and ability to maintain our current level of distributions. As we have said in the past, we consider our distributions a promise to our unitholders. And while the Board of RioCan are, of course, the decision makers on this matter, management currently sees no reason to recommend any changes to our current distribution. In fact, we believe that sometime during 2021, we will be back within our stated goal of having the distribution to be no more than 80% of our FFO.
This is due to our confident expectation that 2021 2022 will show significant growth from the new disappointing baseline created in 2020. This growth, which I believe will be in the double digit range, will come as a result of re leasing the spaces that are being opened up through bankruptcies and terminations as well as reaping the gains inherent in the values we are creating through our rezoning, redevelopment and development programs. These programs where we expect to invest over the next couple of years in excess of $400,000,000 per annum will be funded through some sales and through our continuing program of selling 50% interests in development and income producing properties. After several months investors hiding in their foxholes, investment activity has resumed, albeit at a slow pace. But it is clear that the GTA is still considered one of the best and fastest growing markets in the world.
Judging by the approaches that we have been getting, it is also understood that with the rezonings completed and underway that RioCan has been so busy with, it is the owner of some of the best redevelopment sites in the GTA. And as Qi has pointed out, these values are not currently reflected in our net asset value calculations. In closing, I would like to differ from all the pundits who currently predict not only the death of retail, but quite a few, the death of office as we know it. What we're going through now is temporary. While no one knows exactly when it will end, it will end.
When that happens, human nature, which never really changes, will require gathering places and social interactions, and RioCan owns the properties where those will occur. We already see this desire for social interaction today after only a few months of isolation. And I believe that once people feel a little bit safer, most of life will go back to pre pandemic normalcy. There will of course be some lasting changes, particularly the acceleration of e commerce's share of the retail dollar. RioCan is working on several plans to take advantage of those changes rather than suffer from.
Finally, I thought I'd throw in a word on our residential initiative. The basic premise of our building, rental residential buildings besides the fact that we own some of the best sites in Canada for that is a basic that basic premise was that tenants will pay a little bit more for a slightly smaller premises if the buildings are new, well designed, have the proper amenities, gets professional management with security of tenure and perhaps most of all the best locations in Canada. I think Brio, as Jonathan mentioned, is such a great example of that, bringing it to market in March, right when the pandemic started. So everything's been done virtually and being able to have leased already just in a few short months, 31% of the units at more or less budgeted rents that would budget we set quite some time ago, I think is a great testament to what we're doing. We're actually quite excited within a month, we will be launching our building called Pivot, which is at Yonge and Shepherd, much larger building, about 3 65 units.
And I think that it once again, our basic premise on residential will be proved out. So now I'm happy to open the floor to any questions that there may be after all the presentations.
Our first question comes from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks and good morning.
Speak a little louder, Pammi, please.
Sorry, I'll try this. Hold on one second. Is that better?
Yes.
Okay. Just regarding the $220,000,000 disposition agreement post Q2, Can you maybe just provide some color on those assets? That 4% cap rate looks pretty strong. So just curious, some context there would help.
I don't think we want to get into individuals. The numbers speak for themselves, Pammi. They're obviously partial interests as opposed to entireties because they are some of our better assets clearly. When investors in these times come hunting with money, they want quality. We own a lot of quality, but I don't think we want to get into specific transactions until we are able to announce their close.
Okay, got it. Just in terms of the rents that were not collected or remain unresolved in Q2, I think it was about 6%. Can you maybe again maybe just provide some color there on the types of tenants and what those relate to and how the discussions are going?
I'll give an early answer, but I'll let Jonathan provide any details that he wishes to. They're probably largely fashion tenants. And we understand, I mean, fashion was having a lot of difficulties before the pandemic. So we are taking a patient view. But having said that, we're quite confident in the collectability of most, if not all, of those rents, partly because we have some pretty good security deposits we're sitting on, but partly because their only choice to paying is to go into CCAA.
And then they got to pay most of it anyway if they want to continue. But Jonathan, if you want to add any color to that?
I can only add very little to that. But really, I mean, we've prioritized the tenants that haven't paid from largest to smallest and really we've made great traction with all of the larger tenants. So by and large, the remaining 6% are that sort of middle sized tenants that aren't small enough to qualify for SECRA and haven't been at the top of our list. But we are getting to them 1 by 1 and having bespoke conversations with each of them. And we're confident that over time those rents will be collected or deals will be put in place to get the majority of those rents.
Yes. Pammi, what you have to appreciate and why we're working down, we have 6,000 tenants. Now about half of them were forced to shut in March, maybe a little more than half. I'd say about half our space was forced to shut. So it's probably more like 4,000 plus of those tenants.
And it has been the way we've chosen to go at it, Basically, the entire company, including myself and Jonathan, have been turned into rent collectors. 1 by 1, conversation by conversation, we did our best and I think we've been quite successful in trying to keep the relationships. It's very easy to just send out notices of termination. And in some cases, we did do that when we found we were getting no cooperation. But keep in mind that 6% that's uncollected is after provisions.
So we've already given our best guess and that's part of the provisions that were taken in the Q2 and why I said I'm pretty confident. We've assumed pretty well the worst in making our assumptions and why I'm confident that $1.60 plus number is going to happen and that we're going to collect most, if not all of that 6% missing. And that's why I'm also comfortable then not only we're going to end up we're going to end up in the 90 plus on a continuing basis, including looking backwards. And one of these days, the CRA will even send us the sacro money.
Actually that's CMHC, sorry. And I can add to that that we've actually reached the verbal unfinished on paper deals with a lot of the tenants that have not been reflected in these numbers. So that adds to our confidence.
Okay, Pam. Got it.
Yes. No, that's helpful. Just last one for me. Can you just maybe expand on some of the opportunities that you're talking about with respect to, I guess, participating in logistics, good logistics of omni channel retailing? There were some comments that you made earlier and also I guess in your letter as well.
Yes, I can take this, Pammi. There's a a number of opportunities that we're considering and we've been approached by a number of companies as well. And these are largely either existing retailers looking to set up logistic,
I guess,
premises or hubs in our well located shopping centers or taking part of their existing stores and transforming them into that type of micro fulfillment center. But what we've really been that are looking to expand into Canada to set up these types of hubs within our properties. And I mean, that's just one example, but we've also been working on a personal pickup and delivery system, which would also be in some of our mixed use and existing retail facilities that would also facilitate that omni channel.
Yes. What I'd like to add, I think, look, everybody's done a lot of online ordering over the last 3 months, except for me because I refused to do it, but the just on principle. But the and even I did it. I ordered some books, not from the big guy, but from the Canadian representative that sells books. But the fact is logistics and getting stuff delivered and getting stuff into people's homes has been an enormous problem for everybody.
And many of our retailers have reached out to us and said, look, you got these great shopping centers, can you help us? So part of what we're doing is really being driven by the retailers, being driven by existing technologies. We're not going to come and become a technology difference in the logistical side of the e commerce business. And we're going to be that's going to be one of our many focuses over the next couple of years.
Thanks very much. Our next question comes from Mattel Woolley with National Bank Financial. Your line is open.
Hi, good morning. Good morning. Good morning. Maybe if you could just talk
a bit about in all of these conversations you've had with your tenants over the last little while, what have been some of the surprises, both positive and negative with respect to maybe the different categories of tenants you're primarily having to deal with right now?
Well, you know what, let me hit a little of that first. I don't think there were that many surprises for me. I mean, obviously the types of users that really needed more help were obvious because again, because of what was going on with the pandemic. Obviously, the ones that were totally shut down and probably won't be able to get back to full operation of their business till who knows when next year. So it wasn't a surprise.
For me, the biggest surprise actually was in one of the conversations I had with 1 of our large fast food retailers, who had adapted their business so quickly, to take out and delivery that actually they were going to be changing their model of their premises on a go forward basis because what they found that even though their sales were only 60%, 70% of what their pre pandemic sales were. Their margins were so much higher because they didn't have a whole dining room to fill up that they were going to focus their that's been in business for a long time. So that was a bit of a surprise. This is a company that's been in business for a long time, but it took this pandemic for them to figure it out. Jonathan, you spoke to a lot more tenants than
I did. Certainly, I spoke to a lot of tenants. But Tal, I would ask that by saying my biggest surprise was the reaction that we got from tenants that are U. S. Based relative to their U.
S. Landlords. At the outset, we were expecting to be treated in a similar fashion to the U. S. Landlords, if not worse, simply because Canada is not as significant a base as the U.
S. Is for them. But it actually turned out that in many instances, we were paid in full well in advance of or under better conditions than our U. S. Counterparts, our U.
S. Landlords. And I've been trying to figure out why that results occurred. And I'd like to say it's because we're just such great landlords. But I think in large part it's which is true.
But I think in large part it's also because of the regime up in Canada is a little bit different with respect to the rights landlords have. And I think tenants really focused on ensuring that their business within Canada was sustainable and they didn't want to risk losing any location. So we really did right out of the gate do quite well with a lot of the U. S. Tenants where a lot of people had written them off and suggested that they might not pay their rent to the Canadian landlords.
So that was a nice surprise.
Okay. My next question, you've obviously provided some FFO guidance specific FFO guidance for the first time, which unfortunately now drags you into the conversation about what are some of the assumptions underlying that. Can you give us an idea of what are some of the vacancy and leasing assumptions you're making for the balance of the year to come to that $160,000,000 guidance?
The assumptions are that generally, I'm not going to get into numbers with HugTel because I don't know them offhand. But the fact is we expect occupancy to go down to as low as 94% as a result of further bankruptcies and terminations where we just decide that the deal the tenant ultimately is fact, they don't close at all at fact, they don't close at all at first and they keep paying rent. But in I don't want to talk about specific tenants, but sort of the 1st fashion retailer that declared, we had 43 of their stores. They're keeping 30 odd. Now we know on a 5 or 6 of them, we're not going to be able to reach deals that that's what they'd like to keep that we're satisfied on.
So we're expecting to get those 5 or 6 back and end up keeping probably just over half of the number of stores we had previously. So that's sort of the occupancy basis of that sorry, of that guidance, that $1.60 plus. The other side of it is any leasing we're doing now, we don't expect to hit this year, hit the bottom line because it takes time. It takes time to get leasing done, particularly when nobody can travel to go look at premises. I'm amazed at the number of leases we are doing, where it's virtual, it's a matter of just people getting on the phone, getting on teams and giving virtual tours.
It's quite remarkable how the weekend people have adapted to this. So it's getting done. But I don't think we're looking at much new leasing hitting our bottom line in 2020 at all.
No, not a lot at all. And I think that's a philosophical approach where we're not knee jerking just to fill space. I mean, if there's an opportunity to rid ourselves of a tenant that is less than a lesser prospect going forward given the current conditions, we will actually be fine with letting that premise scope vacant and then taking the next few months to lease it up, which would reflect in the existing FFO prognostications. And to add to Ed's point about some of the assumptions, we've of course, I mean there's going to be an impact based on ancillary revenue, parking revenue, things of that nature that simply our normal course. But during the COVID-nineteen crisis, people are not parking, certainly not in the next few months.
I think that will shift, but they're not parking in some of our parking lots. And we're not being able to do some of the programs that we often did carry out during the course of the year, such as pop ups and farmers markets and things of that nature that actually were increasing in the prominence with respect to our FFO. So I think a lot of that was stripped out over and above the unfortunate leasing slowdown that we'll see for the course of this year. But I think that next year is certainly going to look a lot brighter in that regard. Okay.
And then just my last question on Seacra. This appears to be the program that it doesn't seem like anybody is really in love with it and there has been some questions about the execution of it and how it proceeds going forward. They've extended it by a month. The government clearly is interested in giving this money to people. Do you expect that we could see Seacra either the eligibility expanded or continue to extend the term of the program?
You know what, I can tell you that it is extremely complex. I don't think I'm exaggerating where I say we put together a team of about 25 people who basically for and a lot of part timers on top of that who spend all their time working on this, I've heard it pronounced 18 different ways, SECRA program. CMHC, who is administering it, does want to give away the money. But with everybody working remotely, anybody who says everybody is just as efficient working from their dining room table with a laptop as they are in an office doesn't live in the real world. And everything takes longer than it should.
More mistakes happen. It took us 2 months to just put together all the information going out to tenants because they had to sign an attestation as to what their sales were that had to come back. And then there it had to be done on a property by property basis rather than a tenant by tenant basis. So you had to wait for virtually every eligible tenant in that property to have given you the information that you needed to make the application. It was a painful, painful process.
Here we are, Monday, but here we are 7 days later with no cash from them yet. I expect it will come this week or any day thereafter. So yes, they've extended to July. Nobody's quite sure what that means. Happily, what we seem to have indicated or the indication from our tenants is very few tenants will actually qualify if they keep the qualification as having lost 70% of your sales.
Yes. And I think the philosophy behind the 4 months that they've put forward was it was really supposed to bridge tenants while they were closed. And now as there's increasing openings, I think that the government will likely not bring it forward beyond July, but again, who knows.
Okay. Thanks very much, guys.
Thank you.
Our next question is from Jenny Ma with BMO Capital Markets. Your line is open.
Thank you. Good morning, everyone.
Good morning. Good morning.
So just an extension on the Seacra, my understanding is that the July qualification basically happens for everyone. So does that suggest that there's going to be another $3,300,000 of secret expense running through Q3?
You're right. It does anyone who qualifies for the 1st 3 months can qualify. We have told our tenants that we are going to consider each one of theirs, but it won't be an automatic. We are going to we're going to establish we have established our own set of parameters to determine if they qualify for the July component of it.
Okay. So I guess with the max We're
not going to give away that 25% of our rent unless we feel the tenant really needs it. Right.
Okay. So the max fee credit expense would be 3.3, but depending on it'll probably be less?
Yes. It'll be something, but it'll certainly be far less than the 3.3. Dollars That is correct.
Okay. So when we think through the FFO guidance of 1.60 dollars given that bad debt in Secro was about 0 point 0 $6 this quarter, does that it suggests it's about $0.40 for the next couple of quarters. Does that mean that there's not much bad debt being baked into the second half of the year?
Jenny, it's Qi here. So we actually already baked in our best estimate of the future quarters' bad debt and including the potential 5% rent collection in July, it's only 28 days after the beginning of the month, as you can imagine. So the provision for the second half of the year on quarterly basis is certainly less than the Q2, as you can imagine.
We've taken some pretty knocked down assumptions, and that's why we ended up at only $0.35 because we took a lot of forward provisioning.
Okay. I'm just wondering when you're deciding what is in the bad debt versus dividing line between actually recognizing it as a bad debt versus, I know you said it was small amount, Ed, but the portion that was sort of still unaccounted for, is it the fact that it gets papered and it becomes bad debt? Or is it timing? Just any color on that would be helpful.
You're partly right. It's not paper yet. As Jonathan said, we're well down the road on that last 5% or 6%. We expect the bulk of it. The only way at this point, I think most of it would be bad any of it would become bad debt is if we agreed to abatements, which generally is a 4 letter word here, which again, if we felt we were going to agree to any abatements, it's already built in.
So we're quite confident that that last little 5% or 6% will get collected.
And just to further add to Ed's comment, Jenny, we literally did tenant by tenant assessments. And for the one service outstanding ARs and tenant by tenancy certainly take into account any negotiations, any agreements already in place and also our best estimate on how much or what portion may be collected, may not be collected. So we provided the provision that way. So it's a very thorough approach.
Okay. So there were a number of tenants that we understand or heard that had not paid rent, largely because their business models just didn't work well in a pandemic, and you have a handful of them in your top tenant list. Have you addressed the
go forward with most of them?
And is that being all of them?
Jenny, we've addressed the go forward. We're not going to talk about any specific tenants because it's inappropriate. And quite frankly, we insisted and they insisted on confidentiality because every single tenancy arrangement has been really specifically tailored between RioCan and them. And but everybody in our top ten has been addressed for the balance of 2020.
Okay. That's also why I didn't name any names. Thank you. So, just a quick accounting question. On the percentage rent for this quarter, it's tiny, but I'm just curious as to why it was negative.
There was some adjustment. I think accounting, as you
know Probably backward adjustment. Yes.
Okay. Okay. Is it fair to say that it will probably be fairly tepid in Q3 and maybe with an improvement in Q4?
Yes, I think that's fair to say. The bulk of our percentage rent comes from people like supermarkets.
Yes. And overall
Fashion guys who are starting to do some pretty good business. So yes, I think that's a fair assessment of characterization.
And on annual basis, Jenny, on annual basis, without pandemic, it's never a big dollar.
Yes. It's a small part of our business.
Okay. And then last question is, Ed, again, not getting to specifics, but can you talk about the buyer profile for the disposition?
Say that again?
Buyer profile.
Buyer profile. Who's looking at buyer profiles? Buyer
profiles. Well, actually the buyer profiles are very interesting and I'm hoping over the course of the next 6 to 8 weeks, we'll be able to actually announce deals and they range from foreigners. Actually, one of the deals that we have under contract is with a foreign entity. One that we're that's just in the negotiation stage is another foreign entity from different countries, I might add. The other one is under contractor Canadian Institutional Investors.
So it's a pretty mixed group and we're seeing a lot of interest.
Okay. And do you have an idea of when
they might close if you get a deal done?
Yes. Some of them will start closing as early as next month.
Yes. But some of them push off to the Q4.
Yes. Some will be in the Q4. I think you'll see a and today's uncertain times, quite frankly, we don't want to give specifics or make any specific announcements until the deal actually close Because what I learned when I was a lawyer, Jenny, a deal is closed. This is really old news because you'll hear what I say that not only you got the check, but the check cleared. Now today, nobody deals in checks anymore, but that's when a deal is closed and that's when we'll announce the specifics, but you'll see some of that as early as August.
Okay, great.
Thank you
very much.
I think we'll just stamp it at the registry office.
I used to say that too. Thank you, Jenny.
Our next question is from Sam Damiani with TD Securities. Your line is open.
Thanks and good morning. I just wanted to talk about the rent roll. Has there been any changes to leases to modify the rent? So if you're collecting whatever percent of the rent today, like is that on the same denominator that we had in Q1?
Yes, that's why we actually were at pains to talk about pre pandemic rent roll. It is the same rent roll that you had in Q1. Let me be very clear about that. Lease modifications as you call them, we really have done very few, almost none on a go forward basis. Not that there weren't a lot of requests, but we were not going to let ourselves be taken advantage of for tenants to modify their leases for the next 5 years.
And number 1, that didn't happen. There are obviously the deferrals and abatements are dealing with 2020 period. And we did not change the numbers. We don't indulge in that kind of jiggery pokery.
Okay. And just looking at the bad debt expense, again, we're not going to obviously name any specific retailers, but there's categories that are clearly more challenged than others and what we all know who they are, the fitness and theaters and what caught sit down restaurants. How have those categories factored into your bad debt relative to some of the other types of retailers?
Well, I would say they're more on the categories you mentioned, they're probably more in the nature of abatements rather than bad debt at this point. And Jonathan and Qi, I think largely the bad debt relates to some after
conversations with those tenants, after after conversations with those tenants, after in some cases, thorough reviews of their financial statements, and we assess which ones we thought would survive and which ones wouldn't. And some so it really did go across categories. I don't think we can characterize them in any one specific manner. But largely, some of them were larger national tenants, but only a few and then a lot of them were the midsize or smaller regional or local tenant.
Got it. Last question is just on the rental residential, the rents at eCentral slipped a little bit in Q2 versus Q1. Is there any additional color you can provide either on a month to month trend or what was going on?
Yes. I think during the course of the pandemic, when we were deep into it, there was a bit of a slowdown. I think that was just a byproduct of the fact that people didn't want to leave their houses, people didn't want to do anything. They were somewhat paralyzed. And any leasing we did do was all virtual and you couldn't even really show off your amenities and things that really fell.
The amenities weren't operating. Exactly. But what and so that of course we saw a slowdown in leasing velocity over the course of April, May and even into June. But we're seeing that pick up quite dramatically in the last 4 weeks. And the rents again will fluctuate only minorly based on that velocity.
And so we think that we're confident in their increase.
Plus we stopped doing increases for the short term. I think we've agreed not to do any increases until October. And quite frankly, we could take down more CMHC money. There we could take down more CMHC money. There, nobody's been more open than that.
Very good. Thank you very much.
At 1.8%. That's why we were pushing.
Cheap money. Thanks very much.
Thank you. Thanks.
And there
are no further questions at this time. I will now turn it back over to Mr. Sunjohn for closing remarks.
Thank you very much. Thank you for staying with us for the full hour. I know there's probably lots of calls going on over the course of the day. And like I said, we think compared to expectations, we did very well. Nonetheless, we are completely unsatisfied with the final results and we'll do better in the future.
Thank you and talk to you again in a few months. Bye bye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.