Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust fourth 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 Suess, Senior Vice President and General Counsel. You may begin.
Thank you, 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&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 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 strategies 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 of 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 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 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 31st, 2020, and management's discussion and analysis related thereto, as applicable, together with RioCan's most recent annual information form, that are all available on our website and at www.riocan.com. I 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 first quarter, and I look forward to taking you through RioCan's quarterly operating metrics shortly. First off, 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-19 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 Qi's 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. 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-19 and what it's done to our operations. I'll also discuss the initiatives we've implemented to support the long-term success of our business. Our funds from operation per unit in the quarter was a healthy CAD 0.46.
Our first quarter major market results demonstrate the quality of the portfolio. They include commercial same property NOI growth of 3.1%, which I should add is our highest since 2011, committed occupancy of 97.3%, and a 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 CAD 33. We understand the environment in which we're currently operating is profoundly different from the conditions we experienced in the first quarter. My message today is that the same attributes that delivered our strong first quarter results are currently seeing us through these challenging times. They're also going to drive us in our long-term growth. How are we handling COVID-19?
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. 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. 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 six major markets and 51% from the Greater Toronto Area. 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 am 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% 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 a last means of support. To date, we have not granted relief to any of our top 30 tenants.
Ultimately, we approved approximately CAD 15 million of April rent deferrals, which represents approximately 17% of total April gross rent. 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. Leveraging one of the many potential remedies available to us, including potentially drawing on the approximately CAD 30 million in outstanding security deposits, issuing default notices, terminating leases, and/or commencing enforcement proceedings on a case-by-case basis, p ending bankruptcy, we anticipate we will collect most, if not all, that is owed to us. This is why we've always made the strength of covenant a priority in assessing prospective tenancy.
The recently announced Canada Emergency Commercial Rent Assistance Program, rolls off the tongue, or CECRA, appears to be designed to provide further relief to independent retailers. As a responsible Canadian landlord and industry leader, we believe it's incumbent upon us to actively consider participating. 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. We're 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. 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. 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-19, we believe the collection of approximately 97% of April's residential rent is a testament to the desirability of RioCan Living's offering. These are high-quality buildings. They're in prime transit-oriented locations.
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-19, 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 mixed-use projects continue to progress. Brio, 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, Frontier, and Brio, RioCan Living has more than 1,800 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 CAD 150 million in hard and soft development costs from a base of a CAD 500 million 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 aspect of our operations.
Amongst other cash management initiatives, we've identified close to CAD 1 million per month in operating expense and efficiency improvements for the duration at least of the current state of restricted operations, close to CAD 35 million 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 visits. 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. We're confident that these strengths are going to support us as we steer RioCan through the COVID-19 crisis and continue to deliver sustainable net asset value and FFO growth as the landscape normalizes. Thank you very much for joining. 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, Jonathan, and good morning, everyone. As Jonathan highlighted, RioCan reported strong first quarter results. FFO increased by CAD 2.4 million compared to Q1 last year. We achieved this despite the dilutive impact of CAD 306 million dispositions, CAD 7.7 million lower transaction gain from equity accounted investments, CAD 4.8 million lower residential inventory gains, and CAD 3.9 million lower lease termination and other fee income. Such dilutive 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&A expenses. FFO per unit was CAD 0.46 for the first quarter. The trust FFO payout ratio was 77.4%. This was a 50-basis point improvement over Q1 last year. As of March 31st, 2020, our portfolio's average net rent per occupied square foot was CAD 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 trust net book value per unit was CAD 25.92 as of this quarter end. This increased by 2.3% over Q1 last year, incorporating a net fair value decrease of CAD 24.3 million during the quarter. The current COVID-19 pandemic had little impact on our first quarter results. However, it is difficult to predict the long-term impact of the pandemic on property valuations as of this quarter end, g iven the various risks and uncertainties as outlined in our MD&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 a relative basis. This is the case even though over 50%, or 21.2 million 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 CAD 165 million for our entire 42 million square feet of development pipeline. Most of the fair value is related to air right sales secured for The Well and 5th & 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 13 million square feet, primarily through the addition of future phases of existing development potential. Even though we have put a temporary hold 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 31st, 2020, we had CAD 1 billion liquidity in the form of cash and cash equivalents, and undrawn line of credit. Our unencumbered assets stood at CAD 9.2 billion, generated 60.9% of our annualized NOI, and provided 222x coverage for our unsecured debt. Our debt to adjusted EBITDA was 8.2 x, and debt to total assets was 43%. Excluding the CAD 1.4 billion development balance on our book, our debt to adjusted EBITDA ratio would have been 6.4 x. During the quarter, we issued our inaugural green bond, the first of a Canadian REIT. The green bond is currently included in the Bloomberg Barclays MSCI Green Bond Index.
The CAD 350 million seven-year green bond with the annual coupon rate of 2.361%, effectively refinance the CAD 400 million debenture maturities this year. In addition, we only have CAD 126 million in mortgage maturities yet to be refinanced or have refinancing commitments in place. These mortgages all mature 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% for our entire debt portfolio from 3.44% as of the year-end. Our debt structure is largely 61% unsecured and 39% secured as of this quarter end.
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. This is certainly a different sort of earnings call in a couple of ways. Number one, we're of course keeping all the physical distancing remote, hopefully you can hear me well. If I sound like I'm shouting, it's because I probably am shouting. It's certainly different in that way. 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-19 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 portfolio is capable of generating in normal times.
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 quote, this will change everything, unquote, pundits who would have us believe otherwise. 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, the 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. RioCan liquidity, as Qi has noted, is in about the best shape it could possibly be, with almost CAD 900 million, it's a big number, even 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 gains 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 arrangements with RioCan, are national covenant retailers whose only escape from 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. Let's remember, a lease is a contract, which even though it's called a lease. With regard to the smaller tenants that comprise an important 15% of our revenue base, we believe that most of them will survive the two or three months of closure they are enduring.
Hopefully, between the deferral arrangements RioCan has offered and the assistance the government is putting into place, virtually all of them will in fact survive. When we are speaking together again in about three months, collections over the second quarter 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 one to three years, but in the acceleration of everything caused by this crisis, I think it's best to simply focus on the next 9- 12 months. Clearly, over the next few weeks, retailers will be reopening, and in fact, that is already happening in several provinces. 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. As we progress into 2021, I believe matters will start to return to the old normal, and the strength of RioCan'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 first quarter.
RioCan 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 2009. Unless one believes that the situation prevailing over the last couple of months is going to last for many years, it is actually inexplicable. While there is no doubt that 2020 will be a challenging year, RioCan has encountered them before. In 2008, the financial crisis, 2015, with Target vacating nearly 3 million 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 or delay in our 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 re-zoning 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 you. Ladies and gentlemen, if you have a question at this time, please press star then the number one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for a question. Our first question comes to the line of Dean Wilkinson of CIBC. Your line is open.
Thanks. Morning, everybody. 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 the couple of ensuing months for your tenants is ability versus willingness. I think that you kind of alluded to this in an earlier media interview, saying 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?
Is there an opportunity in there, I guess now that we're past the 1st of May, to go back and reclaim some of the more desirable space for tenants who may have dug their heels in? Can they remedy the situation and in three months, we're going to be talking about sort of the next issue that we all face?
That was a long question, but a good one. I think for the first several weeks of April, RioCan took the view that this is an unprecedented situation. We're not going to press our tenants. In some, there is a lack of availability. What became very clear as we moved 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. There was a real lack with many of the national retailers to even engage in conversation.
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. 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're already seeing it playing out, is the tenants who have actually been in trouble for the last two years, and they're often, quite frankly, in the apparel business, they're not going to survive, or they're going to survive it in a very diminished, restructured form. We understand that. Hopefully, there'll be very few. Apparel actually accounts for, I think, just about 8% of our overall revenue.
They're not all going to go, that's for sure. It will have an impact, and generally, they're small stores and something we can deal with. 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. 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 this situation.
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 notices, and 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, yeah, I'd be less than forthright if I didn't tell you that, number one, we will be exercising remedies, and number two, I'd be less than forthright 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. It's a very complicated process. It's one 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. We don't want to be taken advantage of. 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 enough trouble with that. I hope that answers your question, Dean.
Absolutely, it does. I guess a follow on maybe for Qi. 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. I guess it becomes a tenant receivable. Perhaps sometime down the road, as you say, there's going to be certain tenants who do fail from this, and there will be an allowance for doubtful accounts. We may not see that until well into the latter part of the year or perhaps into 2021. Is that how we should be thinking about that, Qi?
Well, I think we will have to do our assessment on that potential bad debt allowance as early as actually Q2. By that time, we'll have more information, more visibility. We couldn't really say whether that will be the case or what the magnitude will certainly be. As part of our reporting process, that's when we will go through internally.
Okay, great. That's it for me. I will hand it back for some others. Thanks, everyone.
Our next question comes from Pammi Bir 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 Qi, just again, with respect to bad debts, can you comment on the process by which you assess collectability? Then, just again, clarify, do you intend to actually provide disclosure on the amount of bad debts going forward?
Yes. We do. That's part of our regular disclosure process. In terms of how we assess, effectively, really, it will be tenant by tenant. We use our management best judgment based on the information available then and make that judgment call. Of course, as part of the upcoming reporting cycle, we will disclose the information accordingly.
Yeah, Tommy, it's really not complicated. There's some clear markers. If somebody goes insolvent. Other than what we're going to recover through the insolvency, which is typically limited to three months, you're going to write anything more than that off. You do eventually get it back. We still got some money coming in from Sears, believe it or not, two years later, which we'll probably get positive because I think we did already write it off. That's in the larger tenant world. In the smaller tenant, it's not that different. Somebody has got one store, it's got a midnight move. You're going to take your security deposit, and if they're not able to reopen, you will judge what kind of covenant you have and whether it's appropriate or worth it to go after them in the legal system.
Then you're going to make a judgment on each of those situations. Right now, even though we haven't taken any write-downs for this quarter, and if I was a little optimistic, I'd say we're going to collect it all. That's the attitude that we actually go into this collection process with. By July, August, by the end of June, as we're preparing those second quarter reports, we will have a pretty good idea. Whereas today we don't.
Right. Of course, the pandemic doesn't affect Q1, so for Q1 reporting, we don't have much of a receivable beyond the normal receivable position.
Got it. Just going back to your comments about apparel, Ed. In light of Reitmans liquidity concerns, I guess, issued last week and the Gap as well, can you just comment on what approach you're taking with respect to their leases within your portfolio?
We're treating them right now just like any other tenant. If one watched the Reitmans stock, again, not a big surprise. I think this is a stock that several years ago traded at CAD 10. Pre-pandemic was trading at CAD 0.50. Clearly, it's gone down from there, unfortunately. Our larger tenants help. Happily, they're not near as big a tenant for us as they used to be. They're much smaller. Most of the locations they occupy for us are in the big cities. A couple right here at Yonge-Eglinton Centre, or I guess one. One they gave up.
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, then we deal with the trustee in the normal courses. There's well-established processes for all these things. What's so unprecedented is to have so many large tenants suddenly say, we're not paying because our stores are closed. 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?
Obviously, there's two variables in every valuation. There's probably more than that. I would say there's about three that we're going to look at. Number one is the cap rate. 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. I'm not in the room, so to speak. That didn't change much. There's just been no precedented transactions that have taken place, really since this COVID-19 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 first quarter 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 three months from now. 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 re-lease the space? What's going to be the cost of re-leasing that space? It's a pretty involved property-by-property process. 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. We'll have a pretty good idea of what's going on by the end of June. The third metric that Qi touched on, but I'd like to emphasize a little bit.
We've created more zoned re-development 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 to trigger it. Whether that transaction, as Qi mentioned, was the actual sale of air rights at The Well or at 5th & THIRD, which I'm sure it was always almost a pleasant surprise, s hows 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 partner experienced pros that we deal with. We value our remaining half at what we sold the other half for.
Other than that, we haven't written it up. Many of our peers do, writing those up and really reflecting a fair value is something we're going to look at as we look 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, we're going to, again, do it very cautiously and on a property-by-property basis. Those are the three factors that we basically use. I'm sure the guys who actually do it could probably add other things. That's in general, 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, Ed. There's not much we can add to that.
Okay. I got it. We're in agreement. Thank you, Pammi.
Thanks very much. I'll turn it back.
Our 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. Is this the pandemic having an early impact, or was there anything unusual that sort of hit leasing perhaps in March?
Well, on [peer] one, there were a couple of small retention. Retention is renewals, isn't it? Right. Okay, sorry, renewals. No, I don't think there was anything extraordinary that happened this quarter. Most of these renewals, you've got to appreciate that, Sam, they're six months ahead of the actual renewal date. I would be surprised. 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 it.
Actually, what I've been pleasantly surprised, and I'm not getting to 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. 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.
I don't know if Jeff's on the line, but would you say your leasing velocity in some ways hasn't changed? How has it changed, I guess, in the last two months?
Wow. I'll turn that over to Jonathan, but I think it changed because nobody's meeting anybody. Nobody's seeing anybody to get a tour of a site which, typically, tenants want to have, is unusual today.
Yeah.
Go ahead, Jonathan.
I would say the operative word is pause. I think that there are 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 they will ramp up their operations and pay for these deals as soon as their business operations return to a bit more of a normal state. We have not seen a lot of deals dropped, which is something entirely different. We do believe that given the strength of our portfolio, there will still be activity on our available spaces.
Okay, that's helpful. Did you say, Ed, in your comments that tenants representing 60% of rents are closed right now? Did I hear correctly?
Yeah, it's roughly correct. I'm calculating by revenue rather than space which aren't always the same thing, but the revenue numbers are actually more important to us than the square footage.
The [LVA] is around the same.
Is it about the same? Thank you, Jonathan.
Yeah.
Yeah, 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. I'll speak for myself, as great a cook as my wife is, you get tired, and you want to have food delivered sometimes. I think that's happening with a lot of people. There are more and more takeout and delivery things happening, so t hey're in business. There's a lot of business being done on the internet by regular retailers. Again, I'll speak for me.
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. I'll ask the concierge, I say, is that today's delivery? He said, no, this afternoon's. We've already delivered around four times. A surprising number to me of those boxes are from retailers. They're from Sephora. I'm not sure why somebody needs a 2-ft by 2-ft box of cosmetics, but things grow. 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 business. Obviously, not the amount they would be if they were open.
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. We've been hearing this from our retailers. It's part of the reason Jonathan and his team came up with the RioCan Curbside Collect program because we could witness in our own properties how the amount of order and pick it up is quite incredible, and 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 Fortinos, obviously, that's open, but they're at the back of the shopping center, so these people weren't going to Fortinos.
There's a Dollarama, which I know is open. They're sort of the other end of the building. These people are going to Canadian Tire. Canadian Tire wasn't open at that moment. They were all doing order and pick up. There had to be 50 cars snaking around because it really wasn't set up very well for it. When Jonathan and his team mentioned to me this idea for actually striping out areas, putting up proper signs, and so on 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. 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 till this is 100% over. I think everybody understands that. There will probably be an equal minority who are unafraid to do anything. 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. 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. You know what? Their delivery and shipping is a bit not up to what it used to be. It 's what I'm hearing from everybody.
Yeah, they're increasing their bricks-and-mortar profile as well. I think you're also seeing, just further to Ed's 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. These stores are taking on, they're evolving. They're taking on a new meaning for these retailers. The one thing that's for certain, though, these retailers would be loath to give them up because they're so well-positioned and penetrating neighborhoods that it would be so inefficient for them to give up those locations. That's why we really are seeing this accelerated enhancement of this omni-channeling principle.
I think that means that there's a lot of relevance and increased relevance for these brick-and-mortar outlets.
No, that's a great add, Jonathan. I'll just give a little last close, because I can't help it, to that. The one Whole Foods we own, remember Whole Foods is of course, owned by Amazon, is half of it's a distribution center at this point. If you go to the one we have on Bayview, north of Eglinton. Not just distribution center, it's really being primarily used as a order online and pick it up, which is unusual for Amazon. The other supermarkets are obviously doing the same thing now. They're big enough boys, they accommodate themselves. 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 distributional warehouses.
They know the critical part, not only do 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 of this world.
That's great. Thank you.
Your next question comes the line at Joanne Rodriguez. Your line is open.
Hi. Yeah, hi. There was an article in The Globe and Mail Friday about a group led by the pension funds, also including yourself and I believe SmartCentres along with some of the larger retailers, seeking a plan in discussions with the government whereby you guys would abate, you guys meaning the landlords, would abate 1/3 of the rent, the government would loan the other 2/3. I realize the final details haven't been put out yet on the government's plan on dealing with larger tenants. I was wondering if you can confirm if that's a program that you guys would be amenable to, what percentage of the 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 five weeks ago, but n othing moves quickly. We put together a proposal that essentially you're correctly in exchange for certain tenants paying us in cash 2/3 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. First, we would essentially be guaranteed the rent. It's for a limited period of time, essentially through the end of this year. The number of tenants that ultimately, and again, I have no idea what the government's going to come up with. I've been involved in some subsequent conversations, but certainly not all of them.
As anybody who's dealt with government knows these things take a lightning round once they start getting put through various policy considerations and budget considerations and many other considerations, including just public policy sieves that they put everything through. We do expect something to happen as early as this week. 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. In many cases, 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.
Obviously, the number of tenants who, or retailers who are going to put themselves through 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. Obviously, they will be amongst the ones who are totally shut down. I talked about people are doing a certain amount of their business over the Internet. There are certain tenants like gyms. Yeah, perhaps an individual trainer can make a little money doing sessions over the Internet, but the gyms are closed. 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. There's probably a handful of sectors. I think it'll be quite limited. There will be a handful of sectors.
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 re-lease it. 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, [Gillian], that I believe, I made the 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. Yeah, look, it's a price that must be shared amongst all stakeholders. I get it. Nobody saw this coming. You had mentioned 40% of the portfolio being essential services, I think. The balance, what percentage is closed, say, like a Cineplex or a 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. Until I actually saw boxes from Sephora in my lobby, I didn't know Sephora was effectively operating. All the health and beauty people are operating in certain ways. 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%-12% of the overall. That would probably be the focus, and probably even less than that, of this large retailer program as a percentage of our revenue base. Not insignificant. But certainly something for us that's quite manageable.
And temporary.
Yeah. Well, of course, temporary. It'll be for this year, and it should enable these retailers, and accordingly ourselves. It'll leave us with a lot less work to do as far as re-leasing all these premises.
Okay. Great. That's helpful. Then just lastly, I missed the beginning of the call because my one-year-old threw a fit that I wouldn't let her get in the oven with the pizza I was putting in. I apologize if I missed this. As of today, what was May rent versus April rent, kind of five days in?
You didn't miss it because you know what? 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. We put out a number on an April rent collection, which it has gotten better since we put those numbers out. 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.
Your next question comes the line of Tal Woolley of National Bank. Your line is open.
Hi, good morning.
Morning, Tal.
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? Do you expect a second wave of this? What are sort of the scenarios you are kind of contemplating for the operating environment over the next little while?
Yeah. Obviously, we're not scientists, Tal.
Yeah
You're right. We all guess things. We're all walking around with our masks and Purell just like everybody else. I made the statement, I think we're all working on one assumption, that certainly by the beginning of June, 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 or two months. Quite frankly, the health scenarios, they've sort of gotten a little bit twisted.
If we all go back to the middle of March when this started, and I'm on the board of a hospital, so I won't mention which one because I don't want to be accused of giving out inside information, t he whole point of isolation, the whole point of everything, people hiding in their houses was to prevent the healthcare system from being overwhelmed. It wasn't to eliminate this terrible virus. People were going to get it. Two 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 the fatalities have been in the long-term care world.
If you do the numbers, and I'm not making light of anybody dying, there's probably been about 300 fatalities outside of the long-term care system. It's a big number, but more people than that die in six weeks of heart disease or cancer, and hospitals, and this is across the board, not just the hospital I happen to be on the board. They never came close to full capacity. Never mind being overwhelmed, they never came close. Most hospitals, if you're going to have the easiest time getting into the ER or getting a bed than you have had in the last 30 years because they basically stopped all what's called elective, although having stents put in your arteries, I'm not sure why that's elective.
Some of my doctor friends feel that more people will probably die from postponed surgeries in Ontario than have died from the coronavirus, again, outside of the long-term care system. 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. 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 fitness piece about ramping up testing, somehow it happened. They're doing a lot of that, and that will continue. 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 immunity to this spread. I think we're going to see, 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-odd states that are open. They're open for business. They've opened their parks. They've opened their beaches. Simon, I believe, as of yesterday, opened up about 60 of their couple hundred malls in the U.S. We're going to see what happens. Georgia has now been at it for a week. For whatever we may think of the people governing Georgia, we'll see if there's a big surge there.
I think we've 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 two or three weeks, but quite frankly, seeing what's going on in the United States, we have a shopping center in Prince Edward Island. It's open. We have a shopping center, just one in PEI, one in New Brunswick. It's opening this week, if I'm not mistaken. We have one in Manitoba.
Opened yesterday.
Which opened yesterday. We're getting an early look in our own portfolio. All three 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. Of all our malls, I think there was maybe one or two that were actually fully closed and now have to reopen. Most of our malls are old school. They have supermarkets in them, and other essential retailers. Yeah, we've scenarioed this to death. 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, two or three weeks. I hope I answered your question.
Okay. Then just 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? Do you think the demand's 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 two years, over the course of 2018 and 2019, essentially, we sold off 10 million square feet of space. I think it's important for everybody to remember that. That space that was virtually all in what I'll call the secondary markets. I really believe that our urban-centered, major market-centered, great suburban-centered portfolio, it's just one where tenants want to be for the simple reason they can do a lot of business. I'll turn over the structuring question back to Jonathan.
Yeah, I think, again, it hits the main principle, which is that given the strength of our portfolio and its increased dominance in these major markets, we should be able to dictate more of a normal type of lease. 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. I think for some of the smaller entrants that we want, quite frankly, in our urban environments, there will, of course, be a willingness and a need to structure something that might be a little more based on their success. Again, that's just at the start of their tenure. I think that it will eventually convert into a conventional lease structure.
I think that was something that we were considering, quite honestly, before COVID-19. Again, I think we have a willingness to consider different types of lease structures, but I don't think it'll be a pure necessity because of COVID-19. It's not going to change lease structures dramatically.
Okay. Just lastly, can you just comment in terms of where things stand with Hudson's Bay and the JV?
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. Insofar as the joint venture is concerned, it is business as usual.
Outside of the joint venture, I'd just add, we own 50% of two Hudson's Bay stores. One in Georgian Mall, I believe, one in Is it Oakville?
Oakville Place.
Oakville Place, where Hudson's Bay actually owns the other half as a joint venture. In our joint venture, we own 13%, Hudson's Bay owns, I believe, 87%. It's largely them. We have one store in Prince George where essentially they pay no rent. Outside of the joint venture, our exposure to Hudson's Bay, because they started closing their Home Outfitters, I think we have one or two left.
Yeah. That are just diminishing.
They are just rolling off. Our exposure to Hudson's Bay outside of that joint venture is very tiny.
Okay. Thanks very much.
Thank you.
Your next question comes from Sam Damiani of TD Securities. Your line is open.
Thanks.
Be quick.
Yeah, I'll be quick. I just wanted to follow up with, on the liquidity side. How much of that CAD 1 billion of liquidity do you envision using for the development program? Do you see needing a little extra liquidity just to 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 dev.
Development.
Development program. Sorry. You know what? We've played that out. I think Qi 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. 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 focused on liquidity. Qi, I think, somewhat was surprised when she took over as CFO a few years ago, when I said to her, Qi, anytime our availability of liquidity goes under CAD 500 million, I get very nervous. 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 CAD 500 million.
Maybe it gets to CAD 500 million. We plan on getting through to the end of the year with everything moving along exactly the way it is today. Hopefully speeding up in the fourth quarter as we start coming out of this or beginning of 2021, with plenty of liquidity still in hand.
Sam, don't forget, we have almost CAD 9.2 billion unencumbered assets. Which means we could mortgage all those certain assets and then leave the line of credit largely undrawn to maintain very high liquidity.
Yeah. You know what, Sam? I'll 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, for me, it's like buying insurance.
Right.
I am a believer in you almost can't have too much liquidity, even if it costs you a little money. I think we pay 20 basis points standby fee on our line. So what? In the scheme, when you're in a crisis like this. Equally important, and it's something I should touch on, there will be a world after COVID. As the world starts coming out of it's just like in the 2008-2009 financial crisis. I'll quote the famous Warren Buffett, who at that time, he was just in his late 70s. Now he's 89, and everybody's still listening to him. He said that, when the tide goes out, you find out who's swimming naked. In 2008 and 2009, the tide went out, y ou found out who was swimming naked very quickly. We found out most of the U.S. real estate industry was swimming naked.
Yep.
As were most of the banks. That gave us a huge opportunity in the United States, which my only regret is we didn't even go bigger. Canadian investors were nervous, so we went big, but we still made CAD 1 billion in six 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, whether that's the next two months, three months, or one year, there will be some real estate owners that were swimming naked. We want to have the liquidity to, quite frankly, take advantage of any tremendous opportunities that may come up as a result of some people not having liquidity. Besides insurance, that's the other reason we like to have as much as possible.
Thank you.
Thanks, Sam. One more?
There are no further questions at this time. I would like to turn the call back to Mr. Sonshine 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. 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 well 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, that will quite frankly make me very sad. Because right now it's scheduled to be my last speech as your CEO. 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. I think we all miss that. That's one of the reasons, quite frankly, I'm confident that the world will bounce back a lot quicker than the pundits will have us believe. Will there be some interim changes, for example, in offices? Yeah. Open space offices will probably only be able to use half their 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.
I thank you for calling in on, like I say, wherever you are, and we'll talk to you in a few months, if not sooner. Bye-bye.
This concludes today's conference call. You may now disconnect.