Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust 4th Quarter 2019 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 call over to Jennifer Suss, Senior Vice President and General Counsel. You may begin.
Thank you, and good morning, everyone. I am Jennifer Stu, 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'm required to read the following cautionary statements. 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 accepted at company's Principal 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 additional 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 applied in 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 March 31, 2020, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information forms that are all available on our website and at www.zarc.com. I'll now turn the call over to Jonathan Gitlin, our President and Chief Operating Officer.
Thanks so much, Jennifer, and good morning, everyone. Really appreciate you taking the time to participate in today's call. We're very pleased with our strong results that we achieved in the Q1, and I look forward to taking you through RioCan's quarterly operating metrics shortly. First off, I think we recognize that the Canadian real estate landscape has changed considerably in the recent weeks. And I'll certainly focus on the significance of COVID-nineteen and its impact on our operations.
However, it's important that we highlight our healthy Q1 results and highlight the fact that they were driven by the quality of our major market portfolio, our desirable locations, our resilient tenant mix and our experienced leadership team. Along with the strength of our balance sheet, which Steve is going to speak about in a minute, these are the attributes that have primarily driven RioCan's success for the last 26 years and will fuel growth long into the future. So I'm going to begin with an overview of our Q1 operating results, and I'll then highlight the key initiatives we've implemented to mitigate the impact of COVID-nineteen and what it's done to our operations, and I'll also discuss the initiatives we've implemented to support the long term success of our business. So our funds from operation per unit in the quarter was a healthy $0.46 Our quarter our Q1 major market results demonstrate the quality of the portfolio and include commercial same property NOI growth of 3.1%, which I should add is our highest since 2011, committed occupancy of 97.3% and the renewal of 117 leases with a healthy upside in rent of almost 6%, just under 5.9%. Our blended spreads for new leasing and renewals was 6.5%.
In addition, we signed 74 new leasing deals with an average rent of over $33 We understand the environment in which we are currently operating is profoundly different from the conditions we experienced in the Q1. But my message today is the same attributes that delivered our strong first quarter results are currently seeing us through these challenging times and they're also going to drive us in our long term growth. So how are we handling COVID-nineteen? Well, at the outset of the crisis, RioCan mobilized rapidly and effectively to address the new market dynamics. We immediately engaged our pre established crisis management team, executed our pandemic plan and transitioned to an efficient and fully remote workforce.
But beyond our immediate response to the crisis, it's important to note that over the last 10 years RioCan has strategically transformed its portfolio to make it more resilient for times like these. And as a result of this transformation, our portfolio is now concentrated in Canada's fastest growing, most densely populated high income areas. We've got over 90% of our annualized rental revenue generated from Canada's 6 major markets and over and 51% from the Greater Toronto Area. And because of this, we also benefit from a resilient, well diversified tenant base and a strong focus on necessity based and service oriented tenants. I'm now going to shift to the important subject of rent collection for our commercial operations.
From the outset of this crisis, we tailored our approach to rent collection. Our position is clear. Those who can pay need to pay, so we can offer relief to those who need it most. We offered an automatic interest free 60 day gross rent deferral with 12 month payback period to qualifying independent tenants that requested relief. Independent tenants represent approximately 15
percent of RioCan's revenue.
The automatic deferral allows RioCan's resources to focus on approximately 85% of our revenue that comes from national and regional tenants. We leverage our scale and our relationships to negotiate terms of relief, if any, with the position that RioCan views itself as the last means of support. To date, we've not granted release to any of our top 30 tenants. Ultimately, we approved approximately $15,000,000 of April rent deferrals, which represents approximately 17% of total April gross rents. The quarterly RioCan collected around approximately 66% of non deferred April gross rents.
To maximize our ability to collect revenue in the near and long term, our focus is now on enforcing leases with national and regional tenants that represent the majority of our rental revenue. The leveraging is one of the many potential remedies available to us, including potentially drawn on the approximately $30,000,000 in outstanding security deposits, issuing default notices, terminating leases and or commencing enforcement proceedings on a case by case basis, pending bankruptcy, we anticipate we will collect most, if not all, that is owed to us. This is why we've always made the strike of covenant a priority in assessing prospective tenancy. Now the recently announced Canadian Emergency Commercial Rent Assistance Program, Rolls Off the Tongue or SEPRA, appears to be designed to provide further relief to independent retailers. Now as a responsible Canadian landlord and industry leader, we believe it's incumbent upon us to actively consider participating.
So upon receipt of additional program details from the federal and provincial governments, which we believe is forthcoming, we'll continue our due diligence to determine the eligibility of our various properties and whether the program is in the best interest of our business and tenants business. While we are strategically managing our rent collection process, it's important to acknowledge the critical competitive advantages that support the security of our income. We've got tremendous scale. We've got long term relationships with our tenants. We're not overexposed to any one single tenant and no one tenant accounts for more than 5% of our annualized rental revenue.
Our portfolio consists of desirable, established convenient locations, recognized for their growing appeal to customers. We complement and accelerate this appeal through mixed use intensification. Even in a challenged economic environment, tenants will be reluctant to give up these prime locations. And finally, RioCan's leadership team has demonstrated success in navigating significant and unexpected tenant failures in the past, including Target and Sears. We consistently replace vacancies with strong compelling tenants that continue to strengthen our portfolio.
Now with respect to our residential operations, our first two rental residential buildings being East Central in Toronto and Frontier in Ottawa are representative of future RioCan Living projects. In the face of COVID-nineteen, we believe the collection of approximately 97% of April's residential rent is a testament to the desirability RioCan Living's offer. These are high quality buildings. They're in prime transit oriented location. Residents also recognize the significant effort of our property managers to keep their spaces safe and to look after their well-being.
These are places that people want to be and will continue to want to be. In spite of COVID-nineteen, construction stops and slowdowns, RioCan Living will continue to add high quality rental residences to our portfolio over the next few years. As residential construction is considered essential, the majority of RioCan makes these projects continue to progress. Rio, which is 163 unit rental residential property in Calgary and our first development with partner Boardwalk REIT was completed at the end of March. In addition to the combined 857 units at East Central from Tierra and Brio, RioCan Living has more than 1800 additional purpose built rental residential units under construction.
We also have 3,000 condominium and townhouse units either completed or at various stages of development. These projects will add much needed high quality residential inventory into the market and at the same time, they provide RioCan with additional revenue diversification. We will however ensure that we are judicious about 2020 expenditures by pausing spend on new or early stage development projects. We've deferred approximately $150,000,000 in hard and soft development costs from a base of the $500,000,000 budget. That being said, RioCan is going to continue our important intensification work.
The program delivers obvious benefits, including improving the profile of our portfolio, adding net asset value and diversifying our sources of cash flow. In addition to effectively managing our development expenditures, we're actively containing costs and we're enhancing liquidity across every asset of our operations. Amongst other cash management initiatives, we've identified close to $1,000,000 per month in operating expense and efficiency improvements for the duration at least of the current state of restricted operations, close to $35,000,000 in municipal tax and HST deferrals, a more than 60% reduction in the 2020 revenue enhancing CapEx budget, and we've also made temporary staffing level adjustments as appropriate. While diligently taking measures to enhance our liquidity, as always, RioCan continues to listen to the immediate and long term needs of our tenants. For example, we announced yesterday that we plan to enhance the shopping experience at our centers across Canada through the launch of curbside collect.
The program is designed to respond to the evolving retail landscape by offering a safe and convenient way for retail tenants and consumers to transact curbside as businesses reopen. Longer term curbside collect is expected to make it easier for merchants and shoppers to coordinate transactions on a regular basis, improve margins for RioCan tenants by mitigating costs associated with those last mile logistics and drive consumer traffic and repeat business. So in closing, we're operating more efficiently than we ever have before, and we're going to apply these learnings going forward. Our healthy first quarter results are a testament to the inherent strength of our portfolio, our tenant mix and our experienced team, and we're confident that these strengths are going to support us as we steer RioCan through the COVID-nineteen crisis and continue to deliver sustainable net asset value and FFO growth as the landscape normalizes. Thank you very much for joining, and I'm going to turn it over to Qi Tang, who will tell you a little bit more about the financial strength and disciplined capital approach supporting our success.
Qi?
Thank you, Johnson, and good morning, everyone. As Johnson highlighted, RioCan reported strong Q1 results. FFO increased by $2,400,000 compared to Q1 last year. We achieved this despite the dilutive impact of $306,000,000 dispositions, $7,700,000 lower transaction gain from equity accounted investments, dollars 4,800,000 lower residential inventory gain and $3,900,000 lower lease termination and other fee income. Such diluted factors were more than offset by our strong same property NOI growth, NOI from acquisitions and completed developments, higher residential rental NOI, higher other income and lower G and A expenses.
FFO per unit was $0.46 for the Q1. The trust FFO payout ratio was 77.4%. This was a 50 basis point improvement over Q1 last year. As of March 31, 2020, our portfolio's average net rent per occupied square foot was $19.77 for our commercial portfolio. This represents a 3.2% increase over Q1 last year and a compounded annual growth rate of 3.5% since 2015.
These results continue to demonstrate the increasing quality and strength of our necessity based urban and mixed use portfolio. The truck network value per unit was $25.92 as of this quarter end. This increased by 2.3% over Q1 last year, incorporating a net fair value decrease of $24,300,000 during the quarter. The current COVID-nineteen pandemic has difficult impact on our Q1 results. However, it is difficult to predict the long term impact of the pandemic on property valuations as of this quarter end.
Given the various risks and uncertainties as outlined in our MD and A, we have incorporated the present value impact of the 60 day rental deferral that we approved subsequent to the quarter end as well as estimated tenant vacancies and resulting leasing expenses in our property valuations as of this quarter end. We hope to have more visibility and greater certainty in future quarters in assessing the short term and long term impact of the pandemic on property valuation. As we have emphasized in the past, we have not recognized as much incremental fair value gains in our urban major market development pipeline as some peers may have on relative basis. This is the case even though over 50% or 21,200,000 square feet of our pipeline have zoning approvals or zoning applications submitted. Our zoning entitlements are the highest among our peers.
As of this quarter end, we have recognized a cumulative fair value gain of $165,000,000 in our for our entire 42,000,000 square feet of development pipeline. Most of the fair value is related to airway sales secured for the well at 5th and third. It also includes gains realized upon sale of 50% co ownership to our partners, such as in the case of Sunnybrook Plaza. During the quarter, we expanded our pipeline by almost 30,000,000 square feet, primarily through the addition of future phases of existing development potential. Even though we have put a temporary code on some new or early stage projects during the current pandemic, we are confident in the long term value creation of our development program and remain committed to it.
Let us now turn your attention to our strong balance sheet and liquidity position. As of March 31, 2020, we had $1,000,000,000 liquidity in the form of cash and cash equivalents and undrawn line of credit. Our unencumbered assets stood at RMB9,200,000,000 generated 60.9 percent of our annualized NOI and provided RMB222 coverage for our unsecured debt. Our debt to adjusted EBITDA was 8.2x and debt to total assets was 43%. Excluding the $1,400,000,000 development balance on our book, our debt to adjusted EBITDA ratio would have been 6.4 times.
During the quarter, we issued our inaugural green bond, the first of a Canadian rate. The green bond is currently included in the Bloomberg Barclays MSCI Green Bond Index. The $350,000,000 7 year green bond with the annual coupon rate of 2.361 percent effectively refinanced the $400,000,000 debenture maturities this year. In addition, we only have $126,000,000 in mortgage maturities yet to be refinanced or have refinancing commitments in place. These mortgages all matured in the later half of this year and are expected to be refinanced in due course.
As of this quarter end, we further reduced our floating interest rate debt exposure to 3.5% from 6.4% as of the year end. We have also lowered our weighted average effective interest rate to 3.35 percent for our entire debt portfolio from 3.44% as of this year end. Our debt structure is largely 61% unsecured and 39% secured as of this quarter. With a consistently disciplined approach to managing our balance sheet and capital structure, we will maintain strong liquidity and financial strength. This will allow us to drive growth in the ever changing marketplace as well as to navigate through the current pandemic.
With that, I would like to turn the call over to our CEO, Ed, for his closing remarks.
Thank you, Jennifer, Jonathan and Qi. So this is certainly a different sort of earnings call in a couple of ways. Number 1, we're, of course, keeping all the physical distancing remote. So hopefully, you can hear me well. If I sound like I'm shouting, it's because I probably am shouting.
So it's certainly different in that way. But the second way it's different is that most of you, I suspect, will tend to pay little mind to the Q1 results as they were largely unaffected by the COVID-nineteen crisis that erupted in mid March. However, it is worth noting that in addition to providing a solid base for what will be an interesting 2020, it does indicate what RioCan's restructured and slimmed down REIT portfolio is capable of generating in normal times. And I assure you, normal pre COVID times will return, even though it is often hard to imagine that when most of us are sitting at home, doing our best to work remotely and getting very bored in sitting at home. I am a great believer in human nature and our basic drive is for social interaction.
This will resurface much more quickly than the this will change everything pundits who would have us believe otherwise. But rather than carrying on about my cynicism regarding all the articles about what the post COVID world will look like, I will simply give you my view of what RioCan will look like in the short term, medium term and what real estate is actually all about for longer term. The short term is what the markets and analysts tend to focus on. This has turned into a breathless analysis of monthly rent collections. While I understand that people want something they can measure, in my view, it is a relatively unimportant metric unless it is impactful to an entity's cash flow, which in our case, it certainly is not.
Recamp liquidity, as Qi has noted, is about in about the best shape it could possibly be with almost $900,000,000 it's a big number, I have trouble saying it, available to draw on our operating line as of yesterday. While I understand that people tend to focus on these short term metrics, as I said, Monthly rent payments are not an indicator of what will eventually be collected. As Jonathan took you through a little bit, almost all of the tenants who have simply not paid as opposed to the mostly smaller tenants who have entered into 60 day deferral arrangement with RECAN. Our national covenant retailers whose only escape for eventual payment is to not only lose some of their best locations, but then to be perhaps followed by insolvency. We are confident that virtually all of the tenants we are busy serving default notices upon will indeed pay what they owe under the contract.
And let's remember, at least is a contract, which even though it's called at least. With regard to the smaller tenants that comprise an important 15% of our revenue base, we believe that most of them will survive the 2 or 3 months of closure. They are enduring. Hopefully, between the deferral arrangements RioCan has offered and the assistance that government is putting into place, virtually all of them will, in fact, survive. When we are speaking together again in about 3 months, collections over the Q2 will be reviewed in hindsight, and they will be able to be looked at in a much fuller and better perspective.
The medium term, generally 1 to 3 years, but in the acceleration of everything caused by this crisis, I think it's best to simply focus on the next 9 to 12 months. Clearly, over the next few weeks, retailers will be reopening and in fact, that is already happening in several provinces. But obviously, those openings do not return us quickly to the old normal. Sanitation, physical distancing and other safety measures will be required until science or the passage of time takes us to the place where people once again feel safe in a crowded environment. RioCan will adapt to this temporary condition and help our retailers do so as well.
A small and first example of this is RioCan's announcement yesterday of our curbside collect program, which Jonathan referred to and which will make it a lot easier for our retailers to satisfy those customers who would prefer not to enter the physical store. But as we progress into 2021, I believe matters will set to return to the old normal and the strength of Recan's portfolio and its locations in our big cities will become obvious. Our continued development programs will be yielding more fruit and our results will once again reflect the metrics displayed in our Q1. WEE CAM has a portfolio of irreplaceable properties And as Canada returns to normalization and for many years thereafter, these properties will continue to yield income and development opportunities. The market has reduced the equity value of RioCan by over 40% in a very short time.
The resulting disconnect between our real value and the trading price has not been as great since 2,009. Unless one believes that the situation prevailing over the last couple of months is going to last for many, many years, it is actually inexplicable. While there is no doubt that 2020 will be a challenging year, RioCan hasn't counted them before. In 2008, the financial crisis 2015, with Target vacating nearly 3,000,000 square feet of RioCan space and in 2017, Sears Bankruptcy. That's not to mention all the smaller bankruptcies that are just part of the retail landscape these days.
From each of these crises, RioCan has emerged stronger and that will be the case once again. Before I finish, I want to commend our executives and the entire RioCan team for the incredible job they have done. No reporting date changes are delayed and are unfortunately to be virtual AGM, a movement to remote work and all while dealing with the mandated closure of about 60% of our tenants. Not to mention a whole new set of facts and ever changing regulations on every construction site that we have underway, all while dealing with municipalities, many of whom are not quite ready to work remotely to keep our multiple rezoning applications moving along. All in all, I am extremely proud of them.
It is their competence, skills and adaptability that continue to allow me to be so confident about RioCan's short, medium and long term future. Thank you, and I'd like to open it up now for questions.
Thank And our first question comes from the line of Dean Wilkinson of CIBC. Your line is open.
Thanks. Good morning, everybody. Good morning.
Welcome to my dining room. Ed, I wholeheartedly agree with your comment on the focus on the monthly rent collections leading to a reckless analysis. The market seems to be saying, well, that rent that you didn't collect is a permanent impairment to NOI. So the value gets knocked down by that much, which obviously doesn't make sense. I think something that's going to get tested here in a couple of ensuing months for your tenants' ability versus willingness.
And I think that you've kind of alluded to this in an earlier media interview, saying that it's going to be gloves off for those tenants. When you look at that 28% who hasn't paid, how do you determine sort of a willingness versus ability? And is there an opportunity in there, I guess, now that we're past the 1st May, to go back and reclaim some of the more desirable space for tenants who may have dug their heels in? Or can they remedy the situation and in 3 months, this is we're going to be talking about sort of the next issue that we all face?
Let me that was a long question, but a good one. I think for the 1st several weeks of April, RioCan took the view that, you know what, this is an unprecedented situation. We're not going to press our tenants. In some, there is a lack of availability. But what became very clear as we move towards the end of April, in some, it was just a lack of willingness where they just said, you know what, I'd rather use your balance sheet, RioCan, to finance this interruption in my revenue than I would my own.
And I'd rather keep mine for when I need it, when I got to resupply my stores. And there was a real lack with many of the national retailers to even engage in conversation. So that's what led us to as we roll towards the end of the month to what you referred to as our and perhaps I've referred to as our gloves off attitude. And we're going to we know some tenants, it's a question of availability. We know some tenants won't survive this.
Generally, what our experience has been, and I think you've already seen it playing out, is the tenants who have actually been in trouble for the last 2 years and they're often, quite frankly, in the apparel business, they're not going to survive it or they're going to survive it in a very diminished restructured form. We understand that. Hopefully, there will be very few. Apparel actually accounts for, I think, just about 8% of our overall revenue. So they're not all going to go, that's for sure.
So but it will have an impact. And generally, they're small stores and something we can deal with. We are taking the nice thing about our default notice is that we are still in the process of sending because as you can imagine, with our portfolio and the necessity to get it right with each lease, it's a cumbersome, lengthy process, but it's getting done. Where they have gone out, at a very minimum, we've gotten the unwilling tenants' attention. And we're currently engaged in discussions with virtually every tenant to whom we've sent default notices.
Based on the progress of those discussions, the reasonableness of those discussions and we will take into account the particular situation of those tenants and we'll take into account whatever government programs are ultimately available to assist both the landlord and the tenant in the situation. But we will also where we don't feel that tenants are being forthright with us or being reasonable in their approach, we will not hesitate to exercise the remedies that are available to us once the grace period is under default. And this isn't they all have differing well, not all different, but sometimes it's 10 days, sometimes 15 days. It depends on the specific lease. When those grace periods are gone, yes, I'd be less than forthright if I didn't tell you that number 1, we will be exercising remedies and number 2, I'd be less than fortunate if I didn't tell you that there are certain locations that we very much wouldn't mind getting back.
Now that may be because we have a development that would be facilitated to move faster if that particular tenant was gone or it's an under market rent in some of our fantastic urban locations where we know there's higher and better users that would snap up that space. So a very complicated process. It's what we want to do sensitively to our tenants because at the end of the day, they're our tenants. They're our source of revenue and we want to treat them right as best we can, but we don't want to be taking advantage. And we certainly to this point, I think our good nature may have been taken advantage of by some retailers.
I'm not going to name anybody specific anymore. I got myself in a number of that. And I hope that answers your question,
Absolutely, it does. I guess a follow on maybe for Chi then. In how you account for this, as you said, you expect to recover all, if not most of this. You're going to continue to book this as revenue through the income statement and I guess it becomes a tenant receivable. And then perhaps sometime down the road if as you say, there's going to be certain tenants who do fail from this and there will be an allowance for doubtful accounts.
But we may not see that till well into the latter part of the year or perhaps into 2021. Is that how we should
be thinking about that, Chi?
Chi? Well, I think we will have to do our assessment on allowance as early as actually Q2. So by that time, we'll have more information, more visibility. We couldn't really see whether that will be the case or with the magnitude certainty. But as part of our reporting process, that's what we will go through in terms.
Okay, great. That's it for me. I will hand it back for some others. Thanks, everyone.
And our next question comes from the line of Hailey Buhr of RBC Capital Markets. Your line is open.
Thanks and good morning. Just maybe building off of Dean's last question there, I guess for Chi, just again with respect to bad debt, can you comment on the process by which you assess collectibility? And then just again clarify that you intend do you intend to actually provide disclosure on the amount of bad debts going forward?
Yes. We do I mean, that's part of our regular disclosure process. In terms of how we assess effectively, really, it will be tenant by tenant. We look at use our management's best judgment based on the information available then and make that judgment call. And of course, as part of the upcoming reporting cycle, we will disclose the information accordingly.
Tommy, it's really not complicated.
There's some clear markers. If somebody goes insolvent, then other than what we're going to recover through the insolvency, which is typically limited to 3 months, You're going to write anything more than that off. You do eventually get it back. We're still we still got some money coming in from Sears, believe it or not, 2 years later, which will probably be a positive because I think we did already write it online. But the that's in the larger tenant world.
In the smaller tenant, it's not that different. I mean, somebody has got one store, has got a midnight move, you're going to pick your security deposit and if they're not able to reopen, you will judge what kind of covenants you have and whether it's appropriate or worth it to go after them in the legal system. And then you're going to make a judgment on each of those situations. But right now, even though we haven't taken write downs for this week or a week. And if I was a little optimistic, I'd say we're going to collect it all.
And that's the attitude that we actually go into this collection process with. But by July, August, as we're by the end of June, as we're preparing those 2nd quarter reports, we will have a pretty good idea, whereas today we don't.
Right. And for the pandemic doesn't affect Q1. So for Q1 reporting, we don't have much of a receivable beyond the normal receivable.
Got it. Just going back to your comments about apparel Ed, in light of Reitman's liquidity concerns, I guess, issued last week and the GAAP as well. Can you just comment on what approach you're taking with respect to their leases within your portfolio?
No. I don't think we want to I mean, we're treating them right now just like any other tenant. I mean, if one watched the Reitman stock, again, not a big surprise. I think this is a stock that several years ago put it at $10 and pre pandemic was trading at $0.50 So clearly, I think it's gone down from there unfortunately. And our larger tenants health and happily, they're not near as big a tenant for us as they used to be.
They're much smaller. And most of the locations they occupy for us are in the big cities, a couple right here at Yonge Avenue, I guess the one they gave up. So but we will continue on the process even with a tenant who is clearly in some distress and that will be largely in the apparel industry until there's a, god forbid, a trustee appointed, and we deal with the trustee in the normal process. There's well established processes for all these things. It's so unprecedented is to have so many large tenants suddenly say, we're not paying because our stores are closed.
And I get that and we're working our way through it.
Got it. Maybe just one last one for me. You made some comments with respect to how you're approaching the valuation of your properties. Can you just provide perhaps some context around how your assumptions are evolving as we work through the next over the balance of this year?
Yes. I mean, obviously, there's 2 variables in every valuation. There's probably more than that. But I would say there's about 3 that we're going to look at. Number 1 is the cap rate.
And obviously, we didn't really change much in the way of cap rates, if anything. I'm not really part of that valuation process. I just see the results. Not in the room, so to speak. But that didn't change much.
I mean there's just been no precedent that transactions that have taken place really since this COVID situation started. Everybody says there's very few. I haven't seen hardly any. The other part is NOI, and I think that's probably what you're driving at. We made some very small impairment assumptions on NOI at the end of the Q1 on the assumption that a certain percentage of our independent tenants would not make it.
Whether that's a good assumption or bad assumption, I have a feeling we'll know 3 months from now. So we make certain assumptions based on what we see going on as to what's going to happen with certain tenants. Are they going to survive? If they're not, how long is it going to take to release the space? What's going to be the cost of releasing that space?
It's a pretty involved property by property process. And we will start going through that intensively, I suspect, in June. Happily, it appears that most, if not all, of Canada will be reopened in some fashion within a month. So we'll have a pretty good idea of what's going on by the end of June. And the 3rd metric that Chief touched on, but I'd like to emphasize it real quick, we've created more zoned zones, redevelopment space, residential office on our own sites than any of our peers.
Unlike many of our peers, we haven't valued it as part of our IFRS valuation process until there was a transaction trickery. And whether that transaction, as Qi mentioned, was the actual sale of air rights at the well for 5th and third, which I'm sure some it was always almost a pleasant surprise, shows you the quality of people we deal with, where that sale of air rights actually closed at the end of March in Calgary. Or it's a sale of a 50% interest to a partner like Killam or Boardwalk or many of the other partners experienced pros that we deal with, we then value our remaining half at what we sold the other half for. Other than that, we don't we haven't written it up. Many of our peers do.
And writing those up and really reflecting a fair value is something we're going to look at as we roll through the year because we think we're actually doing ourselves and our investors a disservice by taking that extremely conservative attitude. How much that will be? I don't know, and we're going to again do it very cautiously on a property by property basis. So those are the three factors that we basically use. I'm sure the guys who actually do it could probably add other things, but that's in general.
And Jonathan, I don't know if you want to add anything to that or G?
No, I think you hit the nail on the head. There's not much we can add to that.
Okay. I got it. Order in agreement. Thank you, Pam.
Thanks very much. I'll turn it back.
And your next question comes from Sam Damiani of TD Securities. Your line is open.
Thanks. Good morning, everyone. Just maybe to start off on the tenant retention this quarter, 83% is the lowest I think we've seen since 2016. I don't want to read too much into it, of course, just a quarter. But is this the pandemic having an early impact?
Or was there anything unusual that sort of hit leasing perhaps in March?
Well, Pier 1, there were a couple of small retention, retention is renewals, right? Okay, sorry, renewals. No, I don't think there was anything extraordinary that happened this quarter. Most of these renewals, you
got to appreciate that, Sam, they're 6 months ahead of the actual renewal date. So I would be surprised if in fact, I'm almost sure the pandemic had nothing to do with that. Unfortunately, just quarter to quarter, it depends who comes up, what rent we're asking, if it's a very profitable store for them, if we have a better use for Actually, what I've been pleasantly surprised, and I'm not giving you a view of second quarter numbers on this, is that in the middle of this pandemic, we're still getting lots of renewals and sign ups and new leasing on stores that are currently closed. So I'm actually pleasantly surprised on that. And that's quite frankly one of the reasons that leads me to believe very strongly that there are very few retailers who are just saying, I'm out of business.
So I don't know if Jeff's on the
line, but would you say your leasing velocity in some
ways hasn't changed? In other Well, again, I'll turn that over to Jonathan, but I think it would be a
Well, again, I'll turn that over to Jonathan, but I think it would be I mean, it changed because nobody is meeting anybody, nobody is seeing anybody to get a tour of a site, which typically tenants want to have. It is unusual today. But I
would say the operative word is pause. I think that there is simply a lot of deals that we were working on that have been put on pause for a small period of time and tenants have acknowledged that, that they will ramp up their operations and pay for these deals as soon as things do return. I mean their business operations return to a bit more of a normal state. But we have not seen a lot of deals dropped, which is something entirely different. So we do believe that given the strength of our portfolio, there will still be activity on our available spaces.
Okay. That's helpful. And did you say, Ed, in your comments that tenants representing 60% of rents are closed right now. Is that if I did I hear correctly?
Yes. It's roughly correct. About 40% of our and I'm calculating by revenue rather than space, which is always the same thing, but the revenue numbers are more important to us than
the But GLA is the right thing to say.
Is it about the same thing? Yes, about 40% of our revenue base is what I'd call essential. And they're carrying on business. About 60% isn't considered essential. Funny thing is they're carrying on business in different ways.
Even though restaurants are closed, it's quite remarkable to me how particularly as April turned into May, how they've ramped up their takeout and delivery business. And I'll speak for it myself, as great a cook as my wife is, you get tired and you want to have food and I think that's happening with a lot of people. They're more and more takeout and delivery things happening. So they're in business. There's a lot of business being done on the Internet by regular retailers.
I mean, again, I'll see as the odd time when I actually leave my little lair, I walk through the lobby of the condominium building I live in and the number of boxes sitting there are quite incredible. And I'll ask the concierge, is that today's delivery? He said, no, this afternoon. We've already better it out. But a surprising number to me of those boxes are for retailers.
They're from Sephora. I'm not sure why somebody needs about a 2 foot by 2 foot box of cosmetics, but these are all. They're from the Bay. They're from Indigo. They're from all kinds of retailers that are closed, but they're doing some amount of it, obviously not the amount they would be if they were open.
But I always look for silver linings. And I think the silver lining for our brick and mortar retailers out of this pandemic is going to be that they are all going to be upping their e commerce abilities. It's part and we've been hearing this from Aretha as part of the reason Jonathan and his team came up with the REIT CAN curbside collect program because we could witness in our own properties how the amount of order and pick it up is quite incredible, not just from food. I drove by our Lawrence Allen, beautiful building actually, And I couldn't believe the havoc going on. And this was last Saturday in the parking lot.
Since I know there's a Fortino's, obviously, that's open, but they're at the back
of the shopping center.
So these people weren't going to Fortino's. There's a Dollarama, which I know was open, but they're sort of at the other end of the building. These people are going to Canadian Tire, and Canadian Tire wasn't open at that moment. So they were all doing order and pick up. And there had to be 50 cars sneaking around because it really wasn't set up very well for you.
So when Jonathan and his team mentioned to me this idea for actually striking out areas, putting up proper science and so on. In the curbside collect, I said, you know what, it's brilliant. Let's start rolling it out across the country and let's see what else we can do. So I think the silver lining will be the greater use of e commerce by bricks and mortar tenants who their e commerce platform is built around that bricks and mortar facility, which is used it makes returns a lot easier, it makes immediate gratification a lot easier, even if you're afraid to go in the store, which there will be a minority of people who are afraid to go into any store to list as 100% of them. I think everybody understands that.
There will probably be an equal minority who are unafraid to do anything. And the vast majority will be where they want to be careful, but they're not going to give up their entire life to be careful. So I think that's a silver lining. And I think the other silver lining is because of the overuse of delivery services, the big gorilla whose name I hate to mention called Amazon. Their delivery and shipping is a bit not up to what it used to be.
Yes. And they're increasing their bricks and mortar profile as well. And I think you're also seeing just further that comment beyond just click and collect, you're seeing a lot of these stores, these retailers use their existing bricks and mortar locations as fulfillment centers, meaning that they are having deliveries not from their suburban fulfillment centers, but they're actually using the stores as the source for the delivery because it's much cheaper and much easier for them. So these stores are taking on they're evolving and taking on a new meaning for these retailers. The one thing that's for certain though, these retailers would be low to give them up because they are so well positioned and penetrating neighborhoods that it would just be it would be so inefficient for them to give up those locations.
And so that's why we really are seeing this accelerated enhancement of this omni channeling principle. And I think that means that there's a lot of relevance and increased relevance for these bricks and mortar outlets.
Yes. That's a great add, Jonathan. And I'll just give a little last close as I can help it to that. The 1 Whole Foods we own, and Whole Foods is, of course, owned by Amazon, half of it's a distribution center at this point. If you go to the one we have on Bayview North of Ellington and not just distribution center, it's really being primarily used as a order online and pick it up, which is unusual for Amazon.
And the other supermarkets are obviously doing the same thing now, and they're big enough boys, they accommodate themselves. But in our various conversations with CEOs of the supermarket chains and the drugstore chains, their entire growth strategy is built around bricks and mortar. Having said that, they're all investing in e commerce, they're investing in distribution warehouses, but they know the critical part at not only the people want to pick up food and pick it themselves, but having that last mile distribution center, as Jonathan described it, is critical to them being able to compete with the Amazons and the Walmarts in this world. Thanks, Sam.
That's great.
The question will be coming from.
Thank you.
And your next question comes from the line of Joanne Rodriguez. Your line is open.
Yes. Hi. There's an article in The Globe and Mail Friday about a group led by the pension funds, but also including yourself and I believe SmartCenters along with some of the larger retailers seeking a plan in discussions with government whereby you guys would abate you guys meaning the landlords would abate a third of the rent and the government would loan the other 2 thirds. And I realize the final details haven't been put out yet on the government's plan on dealing with larger tenants. But I was wondering if you can confirm if that's a program that guys would be amenable to.
And then what percentage of portfolio, I realize it might be small, but what percentage of the portfolio would fall under that bucket?
Sure. We were indeed part of the group. We actually started probably about 5 weeks ago on this, but nothing moves quickly. We framed put together a proposal that essentially you're correct. In exchange for certain tenants paying us in cash 2 thirds of the rent gross rent, which would in effect be not loaned to them specifically by the government, but in exchange for the government giving them larger loans, which would not just be for rent, but probably would be available for their own capital purposes.
But first, we would essentially be guaranteed the rent. It's for a limited period of time, essentially through to the end of this year. And the number of tenants that ultimately and again, I have no idea what the government is going to come up with. I've been involved in some subsequent conversations, but certainly not all of them. And as anybody who's dealt with government knows, these things take a lightning moment.
I want to say that we've got to go through various policy considerations and budget considerations and many other considerations, including just public policy, says that they put everything through. We do expect something to happen as early as this week, but the I don't know what it's going to look like. As part of the original proposal, it was fairly punitive to the tenants, the retailers that were seeking those loans. And in many cases so for example, not only did they have to not have dividends being paid, not only did they have to stop any buybacks, at least in the original proposal, and this was put forth by the retailers themselves, the executives had to take pay cuts. So obviously, the number of tenants who are retailers who are going to push themselves to that process are retailers who don't have any choice.
I suspect that will be a relatively small number, but they will be important ones. And obviously, they will be amongst the ones who are totally shut down. I talked about people are doing certain amount of their business over the Internet. Well, there are certain tenants like gyms. Yes, perhaps an individual trainer can make a little money doing sessions over the Internet, but the gyms are closed.
And not only are they closed, it's going to be a bit of a ramp up for them. We know that. They know that. They're going to need those government loans. And there's probably a handful of sectors.
I think it will be quite limited, but there will be a handful of sectors and it will be up to the landlords to choose quite frankly, which tenants you're prepared to do that with for that limited period of time. If we feel a tenant has no chance to survive, we'd rather just take back the space and release. Most of the quality tenants that we deal with, we think they will survive. Some of them are iconic Canadian names and they have great brands. They just need a little help from government and from us getting through that.
To the extent we enter into those, obviously, we would take a reserve immediately for what we agreed to not collect for the remainder of this year. It's one of the many reasons, Joanne Gillan, that I believe I made a comment 2020 will be not only a challenging year, but an interesting one where you're almost creating real partnerships between some landlords and some tenants.
Right. Okay. Yes, I mean, look, it's a price that must be shared amongst all stakeholders. I get it, nobody saw this coming. But you had mentioned 40% of the portfolio being essential services, I think.
And so the balance, what percentage is closed, say like a Cineplex or gym? And then what percentage is operating in a limited capacity, say like a restaurant that's open for takeout or stores that are open for pickups?
That's a pretty tough measurement. A lot of it is just we happen to know. I mean, until I actually saw boxes from Sephora in my lobby, I didn't know Sephora was effectively operating and all the health and beauty people are operating in certain ways. So I can't give you a specific answer, but I would say the ones that are completely closed, the gyms, the Cineplexes, probably are no more than 10% to 12% of the overall. And that would probably be the focus and probably even less than that of this large retailer program as a percentage of our revenue base.
So not as significant, but certainly something for us that's quite managed And Cyber. Yes. Well, of course, it will be for this year. And it should enable these retailers and accordingly ourselves, I believe, has got a lot less work to do as far as releasing all these premises.
Okay, okay. Great. That's helpful. And then just lastly, and I missed the beginning of the call because it's my 1 year old through fit that I wouldn't let her get in the oven with the pizza I was putting in. So I apologize if I missed this.
But as of today, what was May rent versus April rent kind of 5 days in?
You didn't miss it because what you may have missed was my comment saying that I find the whole concentration on month by month rent collection to be quite useless. And we put out a number on an April rent collection, which it has gotten better since we put those numbers out as we've said. We are not going to be issuing month by month rent collection numbers because it just doesn't mean anything in our opinion. We'll give you all the numbers at the end of the quarter when we always do.
Okay, fair enough. Thanks. I'll turn it back.
And your next question comes from the line of Tal Woolley of National Bank. Your line is open.
Hi, good morning.
Good morning, Tal. Scott. I think where
I wanted to start was just one of the things that's such a joy to do during these types of events is scenario planning, trying to game out how these things sort of play out. Can you talk to what your sort of base case operating scenario is over the next year? Like do you expect a second wave of this? Like how are you thinking? What are sort of the scenarios you are kind of contemplating for the operating environment over the next
little while? Obviously, we're not scientists, pal. And but you're right. We all guess things. And we're all walking around with our masks and Purell just like everybody else.
But I made the statement and I think we're all working on one assumption that at certainly by the beginning of June and I think earlier, most of our retailers will be permitted to carry on business. Quite frankly, the scientists, the epidemiologists and probably most people didn't know there was such a specialty. I did because I actually know an epidemiologist. They've been running Canada for the last 2.5 months and or 2 months. And quite frankly, the health scenarios, they've sort of gotten a little bit twisted because if we all go back to the middle of March when this started, and I'm on the Board of the hospitals, so I won't mention which one because I don't want to be accused of giving you an inside information.
But the whole point of isolation, the whole point of everything, people hiding in their houses was to prevent the health care system from being overwhelmed. It wasn't to eliminate this terrible virus. People were going to get it. And 2 things have happened. The bulk of the fatalities in Canada have been in the one place that these scientists never really thought about or the politicians never paid much attention to, which is our long term care facilities.
In Ontario, close to 80% of fatalities have been in the long term care plan. If you do the numbers, and I'm not making light of anybody dying, there's probably a bit about 300 fatalities outside of the health care system outside of the long term care system. It's a big number, but more people than that die in 6 weeks of heart disease or cancer. So and hospitals, and this is across the board, not just the hospital I have in the upper quarter, they never came close to full capacity. Never mind being overwhelmed, they never came close.
Most hospitals, it's you're going to have the easiest time getting into the ER or getting a bed than you've had in the last 30 years because of they basically stopped all what's called elective, although having stents put in your arteries, I'm not sure why that's elective. And some of my doctor friends feel that more people will probably die from postponed surgeries in Ontario that when then have died from the coronavirus, again, outside of the long term care system. So I think though they have sufficiently scared the bejesus out of everybody that people are careful. Have we eliminated community spread? No, obviously not.
There are
still new cases being developed even or being found. And part of that is because they've ramped up testing to actually, I think Ontario has done a pretty amazing job, particularly in the last couple of weeks. Once Premier Ford got that business piece about ramping up testing, somehow it happened. So they're doing a lot of that and that will continue. So I don't really expect right now a second giant surge.
I expect that this disease will be with us until there is an effective vaccine or it somehow disappears because there is no more. I think we're going to see I mean, again, we're going to get a bit of a benefit in a backwards way by watching what's happening in the United States. As of today, I think there's 30 off states that are open. They're open for business. They've opened their parks.
They've opened their beaches in the sun. Simon, I believe, as of yesterday, opened up about 60 of their couple of 100 malls in the United States. So we're going to see what happens. I mean, Georgia has now been at it for a week. And for whatever we may think, I see the people governing Georgia, they we'll see if there's a big surge there.
So I think we're going to be we played out all kinds of scenarios internally, but I think we're going to have the benefit of getting those scenarios a little more educated over the course of the next 2 to 3 weeks, but quite frankly, seeing what's going on in the United States. We have a shopping center in Prince Edward Island. It's over. We have a shopping center just one, 1 in PEI, 1 in New Brunswick. It's opening this week if I'm not mistaken.
We have 1 in Manitoba which opened yesterday. So we're getting an early look in our own portfolio. Now all 3 of those actually had essential tenants in it, so they were never totally closed. The difference, quite frankly, in our malls as opposed to the big fashion malls is they have a pretty good sprinkling of essential tenants. So of all our malls, I think there was maybe 1 or 2 that were actually fully closed and now have to reopen because most of our malls are old school.
They have supermarkets in them and other essential retailers. So yes, we've scenario this to depth. But again, I think we're going to have the benefit of very good information coming to us over the course of the next very short time, 2 or 3 weeks. I hope I answered your question.
Okay. And then
in the new leasing market,
do you expect
you might have to get a little creative just on how you structure new leases right now given that we're going to sort of be in this ramp up mode? Or do you think the demand is vibrant enough to continue to sort of sign standard ish looking leases?
Well, before I turn it over to Jonathan, who will give you the main answer, I would point out that RioCan, over the last 2 years, over the course of 2018 2019 essentially, we sold off 10,000,000 square feet of space. I think it's important for everybody to remember that. And that space that was virtually all in what I'll call the secondary markets. And I really believe that our urban centered, major market centered, great suburban and center portfolio. It's just one more tense.
I want to be for the simple reason they can do a lot of business. But I'll get I'll turn over the structuring question back to John.
Yes. Again, it's the main principle, which is that given the strength of our portfolio and its increased dominance in these major markets, we will we should be able to dictate more of a normal type of lease. But that being said, of course, we are always willing to consider different kinds of structure depending on the tenancy. I think again for a lot of the national tenants, there will be no need to consider any type of novel structure. But I think for some of the smaller entrants that we want quite frankly in our urban environment, there will, of course, be a willingness and a need to structure something that might be a little more based on their success.
And again, that's just at the start of their tenure. I think that it will eventually convert into a conventional lease structure. But I think that was something that we were considering quite honestly before COVID-nineteen. So again, I think we have a willingness to consider different types of lease structures, but I don't think it will be a pure necessity because of COVID-nineteen. It's not going to change lease structures
dramatically. Okay.
And then just lastly, can you just comment in terms of where things stand with Hudson's Bay and the JV?
I mean, at this point, it's business as usual, Tal. We own with them a lot of very strong properties. They have, as you know, not been operating in those properties. But insofar as the joint venture is concerned, it is business as usual.
Yes. And outside of the joint venture, I'd just add, we really we own 50% of 2 Hudson's Bay stores, one in Georgian Mall, I believe, one in is it Oakville Place where Hudson's Bay actually owns the other half and we'll joint venture. But in our joint venture, we own 13%. Hudson's Bay owns, I believe, 87%. So it's largely in demand.
And then we have one store in Prince George, where essentially they pay no rent. So outside of the joint venture, our exposure to Hudson's Bay because they started closing their own outfitters, I think we have
1 or 2 left that
are just rolling off. So our exposure to us is to stay outside of that joint venture is very tiny. Okay.
Thanks very much.
Thank you.
Your next question comes from the line of Sam Damiani of TD Securities. Your line is open.
Thanks. Yes, I'll be quick. I just wanted to follow-up with on the liquidity side. Like how much of that $1,000,000,000 of liquidity do you envision using for the development program? And do you see the REIT needing a little extra liquidity just to be sort of buy some insurance as we get through the next few months of revenue shortfall, cash revenue shortfall?
I missed the word when you said program, the word development program, sorry. You know what, we've played that out. I think Chi is one of the best scenario developers and forecasters. And we've done that not only for our Board, but we're continuously updating those on literally a week by week basis. And even though I may or may not have this reputation, but the culture, which I like to think I've contributed to here, is actually one that's always full on liquidity.
I mean, Chi, I think somewhat surprised when she took over as CFO a few years ago, when I said to her, I said, Chi, anytime our availability of liquidity goes under $500,000,000 I get very nervous. And she looked at me like, what? But the fact is I do. And I think under all the scenarios we've played out from now until year end, I don't think that line actually gets drawn down to $500,000,000 Maybe it gets to $500,000,000 So we plan on getting through to the end of the year with everything moving along exactly the way it is today and hopefully speeding up in the Q4 as we start coming out of this. We're being at 0.1 with plenty of liquidity still in hand.
As I said, don't forget, we
have almost forget, we have almost $9,200,000,000 unencumbered assets, right, which means we could put mortgage on those certain assets and then leave the line of credit largely undrawn to maintain very high liquidity. Yes. And
you know what, Sam, just one last word to add there. And maybe because I'm old school, even though it can cost you a little money because you do pay standby fees on our line, It's like buying for me, it's like buying insurance. And I am a believer in you can't you almost can't have too much liquidity. Even if it costs you a little money, I think we paid 20 odd basis points standby fee on our line. And so in this scheme when you're in a crisis like this And equally important, and it's something I should touch on, There will be a world after COVID.
And as the world starts coming out of it, it's just like in the 2,008, 2009 financial crisis and I'll quote the famous Warren Buffett, who at that time, he wasn't he was just in his late 70s. Now he's 89 and everybody is still listening to him. But he said that when the tide goes out, you find out he's swimming naked. And in 2,008, 'nine, the tide went out, we found out it was swimming naked very quickly. We found out most of the United States real estate industry was swimming naked as were most of the banks.
And that gave us a huge opportunity in the United States, which my only regret is we didn't even go bigger. But Canadian investors were nervous. So we went big, but we still made $1,000,000,000 in like 6 years. I don't think we'll have that kind of opportunity again, but there is no doubt in my mind that as we come out of this crisis over the whether that's the next 2 months, 3 months or a year, there will be some real estate owners that were swimming naked. And we want to have the liquidity to quite frankly take advantage of any tremendous opportunities that may come as a result of some people in our lives.
That's science insurance. That's the other reason we like to have as much as possible. Thank you. Thanks, Anne.
And there are no further questions at this time. I would like to turn the call back to Mr. Sunshine for his closing remarks.
Okay. Well, thank you for dialing in, in what is a bizarre time. It's too bad we couldn't do it on Microsoft Teams. I'd like to see where you're all sitting or Zoom or whatever you call. But for this number of people, the technology really isn't that great yet, but it's another one that will get better.
I have been amazed, even speaking as old school guy, at how the technology has adapted itself to getting everything done remotely like I mentioned in our results. This call took place on time. All our Board meetings took place on time. Our AGM is happening when originally scheduled. Unfortunately, no in person speeches and that will quite frankly make me very sad because right now it's scheduled to be my last speech, so I as your CEO.
So it's on the one hand amazing, but I think like everybody, I miss social interaction. I miss being able to talk to individual shareholders at the end of the meeting and meeting them and talking to them and being able to answer their questions while I'm looking at them. So I think we all miss that. And that's one of the reasons, quite frankly, I'm confident that the model will bounce back a lot quicker than the pundits will have us believe. Will there be some interim changes, for example, in offices?
Yes. Open space offices will probably only be able to use after space for a time period. Once we have this under control, I am sure we will quickly be able to go back to the efficient and quite frankly, probably more productive manner of doing business that we all have. So I thank you for calling in, like I say, wherever you are, And we'll talk to you in a few months, if not sooner. Bye bye.
And this concludes today's conference call. You may now disconnect.