Good morning. My name is Lindsay, and I will be your Conference Operator today. At this time, I would like to welcome everyone to the RioCan Real Estate Investment Trust Fourth Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Jennifer Suess, you may begin your conference.
Thank you, Lindsay. Good morning, everyone. I'm 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 Qi, I am required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its 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 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 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 December 31, 2018, 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.sedar.com. Thank you. I'm going to turn it over now to Qi Tang, our Chief Financial Officer.
Thank you, Jen. Good morning, everyone. 2018 was another great year for RioCan. FFO per unit grew by CAD 0.06 or 3.3% from 2017 to 2018, despite completing nearly CAD 1 billion of secondary market assets dispositions and incurring CAD 7.5 million of severance costs during the year. Severance costs were incurred as we further streamlined our operational structure to maximize operational efficiency and to focus on major markets, which will further drive same property NOI and FFO growth. Since September 30th, 2017, there has been a net reduction of 69 employees. Including the severance cost, FFO per unit growth would have been 4.7% for 2018.
It is important to highlight that the trust FFO per unit has increased by nearly 10% since 2016, despite the sale of our $2 billion of U.S. assets in May 2016, the substantial secondary market asset dispositions completed since October 2017, and the severance costs incurred in 2018. As a result of this strong FFO per unit growth, our FFO payout ratio has improved from 83.6% in 2016 to 78.8% in 2017, and further improved to 77.9% in 2018. A significant factor driving our FFO per unit growth was our increasingly strong same-property NOI growth. Our major market assets' same-property NOI grew by 2.2% in 2017, further grew by 2.6% in 2018. Our overall portfolio same-property NOI grew by 2.1% in 2017 and further grew by 2.2% in 2018. Jonathan will speak of how we drive operational growth.
Our committed occupancy increased by 50 basis points from 2017 to 97.1%, with retail committed occupancy increasing 60 basis points to 97.2% over the same period. Our major markets' committed occupancy increased by 10 basis points to 97.7% in 2018. As of yesterday, February 11th, 2019, we have completed or entered into firm conditional or letter of intent deals to sell approximately CAD 1.5 billion of our secondary market assets.
This represents approximately 73% of our disposition target by sales proceeds. The weighted average capitalization rate for these CAD 1.5 billion of disposition is 6.68% based on in-place NOI, materially in line with our IFRS value, of which CAD 1.3 billion of dispositions have closed as of yesterday. We have used a portion of the disposition proceeds to purchase and cancel almost 23 million RioCan units, representing about 7% of the [audio distortion] outstanding units at the start of the disposition program.
At a weighted average unit price of CAD 24.51 for a total cost of CAD 561.2 million. The balance of the proceeds was used to repay debt and fund our development program. As a result of the substantial secondary market asset dispositions achieved and our development completions, we have increased our major market presence by 9.3% to 85.4% as of the 2018 year-end, and we increased our Greater Toronto Area presence by 5.9% to almost 47% as at the year-end, both on annualized revenue basis. In RioCan's 25-year history, the quality of our portfolio has never been better. One indicator is our portfolio's CAD 19.7 average net rent per occupied square foot as of the year-end, which increased by 7.4% from the 2017 year-end. Our Compound Annual Growth Rate, or CAGR, on average net rent per occupied square foot since 2010 is an impressive 3.2%.
The average net rent for our active urban intensification project is CAD 32.26 per square foot, based on approximately 811,000 sq ft of committed or in-place leases as of yesterday, reflecting the quality of the Trust's major markets focused transit-oriented developments, which will further drive the portfolio's average net rent per occupied square foot over time. Our actual maintenance capital expenditures in 2018 were CAD 45.6 million, which were closely in line with our CAD 45 million normalized capital expenditure guidance for the year. Our normalized maintenance capital expenditure are expected to decrease to CAD 40 million in 2019. Jonathan will speak of the reasons for this decrease. Next, I will provide an update on our development program, which represents a great source of net asset value, cash flow, and FFO growth, and provides diversification to our major market-focused retail portfolio.
We continue to make significant progress in our development program in 2018, including the launch of our residential program, RioCan Living, additional zoning applications, continued progress on de-leasing for development, and most importantly, 799,000 sq ft of development completions. As of the year-end, our total development cost balance was CAD 1.2 billion, representing approximately 8.5% of our total consolidated gross book value of assets as of the year-end, a rather limited development exposure. We are pleased with the development yield and value creation we're generating from five of our large development projects that are complete or near completion. These are ePlace at Yonge–Eglinton northeast corner, King Portland Centre, and Bathurst College Centre in Toronto, Frontier in Ottawa, and Sage Hill in Calgary.
These projects are highlighted as they are complete or near completion, and in our view, are representative of the transit-oriented mixed-use developments we focus on, and reflect our ability to complete projects successfully regardless of market cycle, such as our Sage Hill project, which was completed as Alberta continues to face challenges in its economy with historically low oil prices. For these five projects, we expect to achieve an estimated blended development yield of about 5.7% based on estimated stabilized NOI and approximately CAD 231 million of estimated incremental value creation, including CAD 26.5 million of gains on the sale of condo units at two of the projects. As of the year-end, approximately CAD 165.4 million incremental valuation has been recognized through property fair value, applicable interim and fee income, and applicable gains on sale of condo units.
These yield and value creation estimates take into account the Trust's purchase of our partners' non-managing 50% interest in Sage Hill subsequent to the year-end, and the expected purchase of the remaining 50% interest in the residential, rental, and retail portion of ePlace in 2019, based on agreements in place. Jonathan will provide updates on our residential rental leasing to date, which is progressing well. One financial impact I want to note here is a potential lease-up loss, as a newly completed project is leased up over a period of time, regardless of how successful a project may be upon stabilization.
Another financial impact I want to note here is the loss of capitalized interest as a project is complete, which has a potential negative effect on FFO and equals a project cost multiplied by the trust's average annual cost of debt, adjusted for timing of the project completion in a year. This loss of capitalized interest upon project completion could be offset to an extent by the capitalized interest on continued development costs incurred on other or new development projects, there may be still some timing or magnitude difference which could lead to a negative impact on FFO. Over the next two years, our annual development costs are estimated to be in the CAD 400 million-5 00 million range as we progress on our large projects such as Well.
Despite 15% limit permitted under our revolver and credit facility agreement, we expect to keep the total of our property under development and residential inventory as a percentage of total consolidated gross book value of assets at no more than 10%. We remain committed to a strong balance sheet and to self-funding our development program through continuous assets recycling, condo or townhouse sales, air right sales, the sale of remaining marketable securities, strategic development partnerships, and excess operating cash flows after unholder distributions and maintenance capital expenditures. I will provide a quick overview of our credit fundamentals. RioCan continue to focus on the debt to Adjusted EBITDA metric, which was at 7.88 x on a proportionally shared basis as of this year-end, remaining below our target of 8x and remaining one of the lowest among our peers in Canada.
This was accomplished despite the substantial asset sales, large severance costs, and a development cost balance of CAD 1.2 billion. Including the CAD 1.2 billion development cost balance, our debt to Adjusted EBITDA would have been closer to 6x . Our leverage as of the year-end was largely unchanged from the last quarter at 42.1%, in line with our target range. As of the year-end, RioCan's debt composition was roughly 58% unsecured and 42% secured, which benefits our overall cost of capital and provides ample flexibility should general liquidity conditions change. Our pool of unencumbered assets has increased to just under CAD 8 billion and generates 59.1% of our annualized NOI, well above our target of 50%. It is my pleasure to report that we have met or exceeded all of our internal debt matrix targets.
Subsequent to the year-end, we entered into a couple of interest rate swaps to lock in interest rates for CAD 275 million of drawn credit facilities and further decreased our floating interest rate exposure to under 12% of total debt on a proportionally shared basis, holding all else constant as of year-end. We have also completed a new five-year, CAD 350 million non-revolving unsecured credit facility with three financial institutions, which through an interest rate swap, bears an annual fixed interest rate of 3.339%. Given the recent volatility in the debt markets, we believe this is prudent capital management and demonstrates our ability to access multiple credit sources at one of the lowest costs in the industry. We are pleased with our operational and financial results for 2018, we look forward to another great year in 2019.
With that, I'd like to turn the call over to Jonathan for update on our operations.
Thanks so much, Qi. I hope everyone's having a good morning in spite of this nasty weather here in Toronto. Our results are strong and well documented in our various disclosures. Consequently, I will highlight only a few notable metrics from this past quarter and year. Then extrapolate on some key operational themes that really drive RioCan's growth. I'll focus on the portfolio that makes us one of Canada's largest retail landlords and the competitive advantages that accompany this positioning. As Qi mentioned, with the continued success of our secondary market dispositions, over 85% of our revenue is now derived from properties in Canada's Six Major Markets. Our same property NOI growth for 2018 in the major markets was 2.6%, and our major market committed occupancy is close to 98%. These are healthy results and demonstrate the desirability of RioCan's well-located, increasingly mixed-use commercial portfolio.
How are we achieving these results? There has been increasing retail demand for space in the Six Major Markets. RioCan has great locations and compelling tenant mixes curated to suit the needs of the growing communities within these markets. That drives traffic. In other words, we are where the retailers want to be. I'll draw your attention to three additional factors that lend to strong same property NOI and occupancy results. First, due to their impressive and growing demographic profiles, our central and very visible shopping centers attract new entrants into the Canadian market, including foreign retailers such as Decathlon and U.S.-based L.L.Bean, who recently signed a lease with RioCan for their first Canadian location. Evolving concepts are also attracted to our sites.
We've seen this demonstrated across many retail segments, particularly the food and beverage and service commercial sectors, with growth from the likes of Recipe Unlimited, Popeyes Chicken, and A&W. Our strong relationships with these national tenants also serve us well as they look to expand. Second, we've benefited from a creative and industry-leading ancillary revenue program that drives NOI. Sources of ancillary revenue include digital signage, common area licensing, cell tower, and specialty leasing within our portfolio. Additional sources continue to become available due to the desirability of the sites within our major market portfolio. When you add to these factors, continuous redevelopment completions at locations such as Burlington Centre , the strength and solidity of our growing revenue stream is not surprising.
Through our leasing team's industry-leading depth, expertise, and relationships, we've been active in repositioning well-located shopping centers such as Burlington Centre , Yonge Sheppard Centre, and Lawrence Square here in Toronto. Where revamped interior spaces have attracted a new and enhanced mix of strong regional and national tenants. The significant improvements of these shopping environments not only delivers enhanced revenues for our unit holders, but also improves their draw as gathering places for the communities in which they are located. Revenue-enhancing activities are only half the battle. Same property NOI has also benefited from ongoing management efficiency that allows us to reduce operating costs. We have commenced a rigorous review of processes to leverage our scale to drive efficiencies. We are implementing a national procurement program that will deliver cost reduction and provide a consistent level of service that will drive benefits for RioCan, and even more importantly, our tenants.
In its pursuit of a sustainability goal to be amongst Canada's real estate leaders, RioCan is making improvements to deliver operational cost efficiencies and also adhere to its sustainability commitments. One example I'm proud to share is the transition of our portfolio to LED lighting, which allows RioCan and our tenants to save costs and utilize less energy, thus contributing to a cleaner environment. In addition to these operational efficiencies at the property level, organizationally, we've paid a great deal of attention to ensuring we have the appropriate personnel and a right-sized team equipped with the necessary skills to continue advancing RioCan's business through the evolving retail and residential landscape.
Finally, as we continue to shed secondary market assets, which are generally older and therefore require a disproportionate amount of maintenance, and as we continue to complete new developments, CapEx requirements for maintenance are reduced, and spending can shift to investments that add value. For these reasons, as Qi noted earlier, we've lowered our normalized CapEx guidance for 2019 to CAD 40 million. What I've noted above speaks to our existing results and some of the key growth drivers for RioCan. I would be remiss to omit some of the factors that will enable RioCan to sustain and continue to drive these strong metrics. Concurrent with our strategies to drive operational excellence, we continue to unlock the value within our existing portfolio through intensification.
The recent amendment to rent control legislation as it applies to new purpose-built rental development in Ontario, has encouraged RioCan to move forward even more expeditiously to expand our rental residential portfolio. We have the team, the capability, and the balance sheet to bring our major market assets to their highest and best use by capitalizing on opportunities to intensify transit-oriented properties with mixed use and residential developments to generate new sources of cash flow and NAV growth. We continue to demonstrate our ability to successfully deliver development projects and have made significant headway on key projects, including the completion of Bathurst College Centre , which is a new grocery-anchored retail and office project in Toronto that's now fully leased with high-profile tenants. There's also King Portland Centre, which is in Toronto, and it's substantially complete. Both Shopify and Indigo have taken possession of their office units.
We also achieved substantial completion of eCentral, part of our mixed-use project at the corner of Yonge and Eglinton in Toronto. Substantial completion of Frontier, the first phase of a residential rental development adjacent to RioCan's Silver City Gloucester Shopping Centre in Ottawa, is expected in the second quarter of this year. We started the leasing process for units at eCentral and Frontier late last year and earlier this year, respectively, and are very pleased with the velocity and rents we are achieving at both properties. Construction continues to progress as scheduled at The Well in Toronto and has reached grade. Retail leasing will commence this year.
These are just a handful of examples in a portfolio with more than 26.2 million square feet of development pipeline, 16.6 million square feet of which are active developments, including some of the close-to-completed developments that we alluded to in our disclosures. It's notable to point out that the 5.8% yield that we're achieving on those developments does include two assets that consist primarily of a residential rental component. Developments such as these will contribute to our future success while we continue to enhance our revenue by evolving our tenant mix to stay ahead of changing consumer trends, while at the same time driving strong results from operating efficiency and ancillary revenue. We continue to strengthen our major market portfolio by focusing on properties within fast-growing, high population, and high-income areas.
Put simply, RioCan continues to demonstrate that we have the balance sheet, the portfolio, the pipeline of transit-oriented sites, and most importantly, the team to successfully execute and deliver results today and long into the future. Ed, over to you.
Thank you, Jonathan. Thank you, Qi, and thank you, Jennifer. Jennifer is now extra incented to reduce the warning at the beginning since she's now the one giving it. We'll see how that goes in future conference calls. In my remarks during the third quarter conference call just a few months ago, I spoke to the transformation underway at RioCan and our progress in getting to the milestones we set for ourselves. We are quickly approaching those targets, and I think I can say with confidence that by the end of Q2 of this year, we will be either at or very close to what I consider our two most strategic metrics. Namely, having 90% of our revenue coming from the Six Major markets of Canada, now more often referred to as the VECTOM markets. I didn't make that up. Somebody did.
And 50% of our revenue derived from the GTA, the largest, most prosperous, and fastest-growing area in this country. The actual pace of sales of secondary markets is really meant to get us to those two key strategic metrics rather than being an end in itself. As we' re going to hit those numbers this year, make no mistake, those percentages will continue to grow in the future. I feel it's worth a few minutes looking at what RioCan is becoming and will be. First and foremost, we are still, and will be for quite a while, primarily a retail-focused REIT. We own about 35 million square feet of retail space. I expect that number not to change much over the next few years.
The nature and use of that space has changed, fairly dramatically, over the last few years. It will continue to transform in the upcoming years. Rather than simply being traditional shopping center retail, more and more of that retail space will simply be components of mixed-use projects, primarily in urban and/or transit-oriented locations, and will house users that are largely immune to disintermediation by e-commerce. What does that mean to our unitholders? Simply put, higher quality revenue and faster growth. Higher quality revenue has several components, diversity of revenue, quality of the tenant's covenants, occupancy rates, and the ability to re-lease the inevitable vacancies. All of which are essentially driven by the location of the space. The best space in Canada is located in the VECTOM markets, amongst the best space in the VECTOM markets is the GTA.
In urban areas, we are able to build in growth, even into what are considered anchor leases. Even some of the legacy anchor leases we inherited or entered into over our 25 years eventually come to an end. For example, the phenomenal growth in revenue at Yonge-Eglinton Centre has been achieved despite several long-term flat leases with large tenants. Over the next decade, even these will come to an end. Wrapped around this best in Canada retail portfolio is the best balance sheet amongst our peers. While analysts often quote leverage as a % of IFRS values, a far more accurate metric, in our opinion, is net debt to EBITDA. Even with CAD 1.2 billion in ongoing development, ours is amongst the lowest in the sector.
Financial institutions and sophisticated investors get this. The result is our achieving the lowest spreads amongst our peers, as shown by our recent financings. Our cost of debt will go even lower as we replace some commercial debt with lower cost CMHC financing as our residential portfolio grows. Before I get to the non-retail components of worth of RioCan, it is worth a moment to touch on the part of our business that bridges our traditional retail properties to our mixed-use future. This is, of course, our development group, which we started building almost 15 years ago. It has grown and evolved over that time from building pads in existing centers to building new shopping centers, now to planning, zoning, and developing complex master-planned, mixed-use properties.
These can range from the 3 million square foot project now under construction at Front- Spadina in Toronto, The Well, to the renovation and expansion of Yonge Sheppard Centre now nearing completion. To the master planning and redevelopment of large-scale shopping centers having an area of 50 acres or more, such as Shoppers World Brampton and Colossus, both of which are located at or near new transit hubs. The 39 professionals we have in that group enable us to move forward confidently in the transformation of RioCan. While the vast majority of these new income sources will be in the GTA, RioCan is simultaneously creating similar assets in Ottawa, Calgary, and the Vancouver area. With developments in the planning stages in Montreal and Edmonton as well. What are we so busy creating to drive the revenue and value growth we are talking about?
While attention is often focused on high-profile projects such as The Well, or what we are doing at Yonge-Eglinton or Yonge and Sheppard, I think some preliminary numbers of where we are and soon will be are perhaps even more telling. Our office portfolio often gets lost in the shuffle between retail and residential. By the end of next year, it will total over 2.5 million square feet at RioCan's ownership and will continue to grow as our mixed-use development program continues. What office space it is. It is located either at The Well, King and Portland, as well as our properties around Bathurst and College, or at major transit hubs such as Yonge-Eglinton Centre and Yonge Sheppard Centre. While office will soon comprise close to 10% of RioCan's commercial space, it has historically represented a much lower percentage of revenue. This is changing.
For example, our last office leases at our Bathurst College Center at our much higher rents, much higher effective net rents per square foot than the retail below it. The in-place net office rent at YEC, where we own about 750,000 sq ft , have increased almost 60% over the last 10 years, with most of that growth actually coming in the last three years. YEC office is now essentially full, with new demand ever increasing as the Eglinton transit line nears completion. We expect similar results and trajectories of rent growth at Yonge Sheppard Centre as it is completed and existing leases expire. Now to our growing residential portfolio, which I can finally refer to as a portfolio.
With the substantial completion and commencement of leasing at eCentral here at Yonge-Eglinton and our Frontier building in Ottawa. This portfolio will grow materially over the next few years, as will the number of condominium units included in the mix of residential unit completions. We currently have 2,100 rental units under construction or substantially completed, together with 920 condominium units at the same stages. Within two years, by 2021, those numbers will have grown to 4,300 rental units and 1,500 condo units. In fact, the opportunity in our existing portfolio properties are to have about 14,000 units in total, either completed or under construction within five years. Again, a mix of rentals and condos, although predominantly rental. This mix and our program of bringing in partners to individual projects are appropriate for a number of reasons. Condominiums create capital recycling and short-term profits while partnering brings in capital.
While at the same time shining a light on the density values we have created through the long and expensive planning process. Sadly, much of the analyst community really doesn't get a lot of what we have been doing here at RioCan. Part of the blame undoubtedly lies with us, as we perhaps have not explained it with sufficient clarity. While we will get better and spend more time presenting the new reality at RioCan, the way we are going to finally overcome the built-in cynicism about new development is that we are now starting to have completed buildings and actual results, as referred to by Jonathan and Qi. Finally, I will again emphasize that all these new developments, both office and residential, are urban, new, and transit-oriented, ensuring their leasability and rental growth over many, many years. Thank you, and I'd now like to open it up for questions.
At this time, if you would like to ask a question, please press star and the number one on your telephone keypad. Our first question comes from the line of Sam Damiani with TD Securities. Your line is now open.
Thank you, good morning. Thank you very much for the extra disclosure on the development yields. That's helpful for everyone to understand the value creation. Look forward to more similar disclosure in the future. As we look at eCentral and Frontier, can you give us a little bit more granularity on the leasing progress to date?
No. You know what? I'm going to turn that over to Jonathan. We're going to be a little bit cagey on that for the simple reason that we're really just getting going. Of course, you start at the bottom floors because the top floors aren't even finished. In Gloucester, actually, nobody's even moving in until May at Frontier. I'll leave that to Jonathan.
Yeah, I think generally, Sam, both the velocity of lease-up and the rates that we're achieving are ahead of expectation. I think we'll save the granularity for a further stage once we're a little more embedded into the process.
Probably by the next quarter conference call, we'll actually start giving some numbers, but I think it's just too early. To suffice it to say, Sam, as Jonathan mentioned, we're extremely pleased.
Okay, great to hear. Look forward to more there. Just with respect to the change in the portfolio, the dispositions, the major market focus, and things going well in many respects, is there any guidance you're willing to share for 2019 in terms of NOI growth and/or FFO?
I think we've basically given that guidance. We expect to maintain that 2%-3% NOI growth, that will translate into FFO growth of something more than that.
That's only same-property NOI growth.
Right.
Yeah.
One more question, maybe then I'll turn it back. Just an update on the cannabis store opportunity, also, what are you seeing in terms of any recent trends in terms of bank branch closures?
Bank branch closures, I'll take the easy one first, is something that we've been dealing with for probably a decade. It's nothing new. It actually seems to have stabilized. TD Bank, on the other hand, has just taken possession across the street here of an 18,000 sq ft facility that's going to be replacing some others, obviously. That will be the largest facility outside of head office in the metro area. I would say 20 years ago, Sam, we probably had two or three of the banks in our top 10. Today, I think we have one bank left in the top 30. It really is of no impact. In fact, it often creates opportunities for us as they vacate, particularly on the high streets.
Number two, on cannabis, at the risk of making a political statement, only governments could screw up the selling of dope and have a supply. I applaud the Ontario government for privatizing. The fact is, there's no stores open. We have done 20-odd leases here in Ontario. Most of the tenants paid six months up front, which takes them, I think, to the end of April. What's going to happen then? I don't know.
Most of them, in fact, all of them, I don't think it's open to actually apply for licenses until much closer to year-end. We don't really know what the impact is going to be. It's certainly going to be delayed. I think you're not going to see that big gold rush, land rush. We've seen it, and we've taken in, quite frankly, a few million in rent paid up front. What's going to happen in the remainder of this year, I don't know. I think it's more delayed than eliminated. It'll probably be a bigger factor in 2020 than it will be in 2019.
Thank you. Turn it back.
Okay, thanks.
Our next question comes from the line of Dean Wilkinson with CIBC. Your line is now open.
Thanks. Good snowy morning, everybody.
Yes, good morning, Dean.
I guess, Ed, a year ago, you said you were in love with the balance sheet. Is the honeymoon still on?
Yeah. We get constant updates from banks as to indicative spreads. Basically get them almost every day. I won't mention which bank other than to say they're amongst the big banks. We happened to get two yesterday. We are the lowest spread indicated amongst all the retail players. Quite frankly, again, won't mention their names, but the ones that are dominated by one specific retailer used to have better spreads than us, lower spreads than us because they got the sort of nice glow from the mothership. Well, our spreads are now lower than theirs as well, never mind the other retail peers. Yeah, I'm in love with our balance sheet. It will continue to get better, quite frankly, as we continue our partnering program and the odd secondary market disposition.
As, quite frankly, it's been an interesting juggling act, I think I called it a couple of years ago, to go through the secondary markets disposition, while at the same time undertaking that significant development program. Well, they've all gone more or less according to plan. Nothing ever goes perfectly according to plan. I wish we could build things in 20 minutes and sell them in 10 minutes, but it doesn't work that way. The fact is, we've broken the back of the secondary market disposition program. We've essentially done about almost three-quarters of it. The CAD 2 billion in itself was a number. As I tried to emphasize in my remarks, the real strategic metrics are getting to 90% and 50% GTA. We're getting there.
We will definitely get there within the next few months, whether it's by the end of June or sometime in July or August, I'm not sure. We'll get there through selective continued sales and quite frankly, more importantly, development completions. Because all of our developments are in the big cities and primarily here in the GTA. Yeah, I think our balance sheet, quite frankly, is just going to keep getting better.
That's-
Go ahead.
It kind of leads me into a follow-up question on that.
Sure.
It's the issue of that higher quality revenue, faster growth, better quality assets. The cap rate that we're seeing on the dispositions is kind of creeping up. As we get to the tag ends of the last CAD 500 million, it looks like those cap rates are, in some cases, low double digits, but let's call them around an eight. We look at the portfolio once you-
I'd call them more around a 7.5% .
7.5%. Okay. Let's say 7.5%. Mid-7%.
Yeah.
You roll off of that. Now you've got the portfolio in the markets that you want to be in. Would that be more of a 5% cap portfolio versus the 5.5% that's sort of in your current IFRS valuation? Could that actually even go lower as you see more of the multifamily come into that, where there are crazy numbers out there. There's 3.5%, there's 4%, whatever they may be. With that.
Dean, you put your finger on exactly where we're going. Again, don't take that CAD 2 billion as magic. I'm trying to emphasize that. I wouldn't be surprised if our new sales from here on in 2019 are only a couple of hundred million CAD.
The fact is, we expect our secondary market sales, by the way, on an ongoing basis, they're sitting at 7.27%, major markets are sitting at 5.21%. I would not be surprised as the shift of our portfolio changes to see our overall portfolio capitalization rate drop. Dramatically is a word I don't like to use, but when you get a 5% drop, which might be 30 basis points, I wouldn't be surprised to see that happen over the course of the next couple of years, maybe even sooner. Because the assets we're starting to get, the same way our CapEx is falling, as the age of our assets gets younger and younger, as opposed to the age of the CEO. I think you put your finger on exactly where we're going.
Perfect. I will hand it back. Thanks, guys.
Thank you.
Our next question comes from the line of Jenny Ma with BMO Capital Markets. Your line is now open.
Hi. Thanks. Good morning, everybody.
Good morning, welcome back, Jen.
Thank you very much. I wanted to expand a little bit on the disposition program. First of all, maybe Jonathan, you can give us an idea of the estimated closing time for some of the conditional sales you have in hand, assuming all the boxes get ticked off.
Sure. The majority of them are conventional deals with somewhere between the 30 and 60-day due diligence period, and then a 30-day closing period. Now, we've entered into a number of these over the month or so. I think, they range between the end of Q1 and the beginning of Q2 for the most part. Some of the ones that are firm, those are much more imminent. Those are the ones that'll close in the next couple of weeks. Of the various deals that are in play right now, I think anywhere between The majority of them should close, should they all waive and go forward within the next two to three months.
Okay.
We have new ones going on the market as well as we speak.
Yep.
Of course. Well, actually, Ed, that leads into my next question because, on last quarter's conference call, you had discussed sort of the environment, the volatility leading to a little bit of a slowdown in discussions and whatnot.
Yeah.
Now that we've seen some stability, have you seen a little bit of an increase in interest again? Or how do we reconcile that with the comments you made a few months ago in terms of the sales process and interest?
Yeah. No, no. My comments were exactly right at the time, quite frankly. There were two factors that caused those comments to be made. One was the velocity of interest rate increases and the resulting sort of pullback in financial institutions' willingness to finance our buyers of these assets because we're selling it to buyers who generally want leverage. Obviously, interest rates have, if anything, they've gone the other way. They've certainly stopped going up, and they've gone down a bit, which has helped. I'm not sure the bank's willingness to lend has actually opened up. At the same time, the other factor was just the actual mass of assets that was coming to the market, both from us and others. We're not the only guys, although we may be the largest, that want to sell secondary market assets. That hasn't changed either.
But what we found interesting is together with the interest rates coming down and our saying, "Hold it, guys. We've broken the back of it. We're going to take more time on and be quite a bit more selective on what we sell," we've actually found that to increase interest, and we're getting a lot of inbound inquiries more like when we started the process a year and a bit ago. Yeah, we're actually starting to see some healthier numbers on some of these new offers we're getting.
Okay. Would it be fair to say that maybe with that context and all else equal going forward, which we know is not necessarily the case.
Never.
Would it be fair to say that the sale process completing the CAD 2 billion takes a little bit longer than sort of the end of 2009 that you're guiding to with the view that you might get better values from having a little bit more patience?
Oh, yeah. No. First of all, I want to emphasize that the CAD 2 billion is a number. The real target is that 90% of our revenue coming from the major markets, with 50% coming from GTA. That target we're going to hit anyway. At that point, once we get there, even if we're only at CAD 1.7 billion or CAD 1.8 billion.
We're not dedicated to getting to CAD 2 billion. I want to disabuse the community that that's a magic number. It's not. It was an estimate that we made a year and a half ago of what we thought we would need to get to get to that 90% number. There will be certain secondary market assets we don't sell. We have the dominant power center in Kingston, Ontario. Secondary market, but a nice, stable, slowly growing market, and nobody's going to build another one. We have a similar situation in Sudbury, where we have the dominant power center of the whole north, quite frankly. The best tenants in Canada, and nobody's going to build another one, and the tenants have nowhere else to go. Again, a stable market, growing slightly and quite prosperous.
I guess I'm going to say if a year from now I say to you, "You know what? We've sold CAD 1.8 billion of assets, and as far as that ongoing definitive sales program, we're really not paying any attention to it." Having said that, we will be selectively selling on an ongoing basis for the next several years into the 2020s assets that we feel either have no possibility of interesting redevelopment or are just slow growth, low growth, no growth assets that we think we can better use the cash we can get for them somewhere else. A long answer to your question.
That's good color. Thank you.
Thank you.
Just going back to the leasing of some of the rental apartments. Maybe this is trying to go at Sam's original question another way, but as far as eCentral goes, when you think about the kind of demand for rental apartments is out there, can you give some comments as far as what you're seeing? How does it square with seasonality? Are you just seeing so much demand, and it doesn't really matter that it's winter today notwithstanding, and that there's been a lot more activity just given the market fundamentals, or are we still subject to sort of the same factors that drive all rental apartments?
Well, sorry, it's Jonathan, Jenny. If seasonality does come into play, we certainly haven't seen any negative impacts from it because.
We don't expect a lot of visitors today.
Yeah. Today might be a slow day.
Not today.
For example.
We started both programs, both processes in the depths of winter in both Ottawa and Toronto, which have both seen pretty nasty weather so far. Like I said, we are ahead of our estimated lease up to date. The answer to your question is it certainly hasn't played a major factor. If it has for whatever reason, then we're going to have one hell of a spring.
Yeah. If I could just add to that. When the rent control legislation of the previous government, the Liberal government here in Ontario, came in, we actually changed our pro formas. In one major respect, we extended the stabilization period. If I'm not mistaken, Jonathan, from a year to a year and a half.
In most cases, yeah.
Quite simply put, once you're going to have a limit on what you could increase rents for, well, you better get the biggest first rent you can get. While we haven't yet changed our pro formas, the fact is the legislation has changed. We're not as pressed as we are to get the absolute last penny, because a year from now, the market's the market, and without any limitation. I think it's worth adding that call it luck of timing, because the regulations, when they change the rent control, are a bit complex, relating to signed leases and occupied buildings. None of the units that we're bringing on stream are going to be subject to any sort of rent control.
Right
Other than the odd replacement unit. Having said all that, we are hitting better numbers than we had in our pro formas, and we are doing it faster than we expected, notwithstanding the seasonality.
Okay.
It's all good.
That's great. Just a last question. What kind of profile are some of these tenants who are signing up leases? Is it people who are just moving out for the first time? Is it people moving up? Couples and families that need bigger units and that can't afford to buy? Have you surveyed the people who are coming into your sales units?
We do. We survey them all the time. It's really a mixed bag at this point, and it's also very different between the Frontier in Ottawa and eCentral in midtown Toronto. It really is actually a bit of a varying demographic in each case and for each unit type. For instance, we've released some one-bedrooms, some bachelors, which, as you can imagine, have gone to young professionals and people moving out of home for the first time. The two bedrooms that we've released have gone to families who are downsizing. Some older families who really don't need the single-family home anymore, or cohabitation scenarios where people are simply rooming together. It really is a mixed bag.
It's really gonna e , I think, very site-specific, too, those demographics. For example, when we get under construction on Sunnybrook at Bayview and Eglinton, hopefully later this year, if Metrolinx lets us. We expect a lot of retirees from the Leaside area coming into there, because you got transit, you got beautiful walking, going south on Bayview, places to go, restaurants, all that. Whereas Yonge and Eglinton, I think, will tend to be a younger demographic, by and large. Frontier in Ottawa, which happens to be right across the street from the headquarters of CSIS, so it's a very safe building. We're getting a lot of people, young professionals that work at CSIS, and can just walk across the street to go to work. There's a transit if they want to go into downtown Ottawa. Transit stop right next door. It's going to vary.
We have a building we're involved in that we haven't talked about much on Scrivener, which is probably the most attractive location in Toronto. It's Rosedale. It's just going to be around what is commonly known as the Five Thieves Shopping Centre. We're not starting construction probably for nine to 12 months on that one. Our partners in that one are running that one. I'm getting all kinds of calls from people who are looking to sell their homes in Forest Hill or Rosedale and move there. It's really all over the place.
Okay. That's it for me. Stay warm, everybody.
Thank you. Welcome back again.
Thank you.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our next question comes from the line of Pammi Bir with Scotiabank. Your line is now open.
Thanks. Good morning.
Hi, Pammi.
It seems.. Hi, Ed. It seems it's been a pretty benign Q1 despite what is typically a weaker period for closures. How would you characterize the overall tenant demand, say, versus a year ago? Of the 2%-3% same property NOI growth guidance for the year, how does that break out between rent growth versus occupancy gains?
Demand has been similar to last year. There's been, as I mentioned in my remarks, Pammi, there have been some new entrants into the market that have created a bit more tension for some spaces. There are certain sectors that are a lot more popular than others, we're taking advantage of those. I think, by and large, it's at or slightly ahead of where it was last year at this time. With respect to tenant demand. What was the second question?
The follow-up.
No same property NOI.
Yeah. I think the occupancy, as you know, we are already very high, right? Especially major markets, nearly 98%. We expect some occupancy growth on the office side as I think Ed and John touched on earlier. Predominantly will be driven by the core same-property rent growth.
Yeah. I think a couple of the anecdotes, which is where I get most of my information, Pammi, is I had a conversation with the head of one of our larger Canadian fashion brands. Fashion has been-- I think I'm being nice by saying it's been a relatively underperforming sector for us and for them. His comment to me as they were heading into the ICSC convention out in Whistler a few weeks ago, was that, "Well, you know what? We're starting to really slow down our rate of closings. In fact, we're even looking at the odd new store". Life hasn't gotten wonderful yet, but I think in that sector, it's probably bottomed out. We're still going to get the odd bankruptcy here and there.
I think in the fourth quarter, we had Bowring Bombay, who've been looking to go bankrupt for about five years, and they finally got there. I think the big wave of real ugly stuff happening that we usually see in the first quarter, as you quite rightly say, is not happening. There will be spotty things, but by and large, things are relatively stable and we hope for better times.
Got it. Qi, just one question with respect to the lease-up losses that you cited on the residential lease-up period, I guess. Do you have a rough range of what those will look like this year? I'm presuming those will be hitting NOI.
We don't provide that specific guidance. Basically, it certainly will be driven by this rate of the lease-up. Right?
Yeah.
It just initially will be some hitting earlier quarters, as you can imagine, as we lease up, because we have to bear the full operating cost.
Yeah. It won't hit NOI that much as just give us increased interest costs, because instead of capitalizing it, we'll be expensing it.
There will be some NOI impact as well.
Okay.
I have to say, because operating costs, like property taxes.
Well, that's true. Yeah. You still got to pay the property taxes and the other stuff in the building.
Yeah.
That's quite true.
Yeah.
Right. Okay. Just on the lease-up, what did you underwrite for the lease-up of eCentral in terms of the timing to get to a stabilized level?
18 months. 18 months to full stabilization.
Stabilization is 90% or higher? 95% or higher?
Higher.
95%.
Higher. 95%. People forget there are physical limitations in how fast you can move people in. One side of the equation is lease-up, and that's going fantastic. We actually have, I think, at least one that I know of living there already.
We got a few.
We got a few living there. Thank you. You know what? Everybody wants to move on the weekend. There's only so many elevators that you can set aside once you have actually people living in there. It will take the best part of the full year to get there. I think we'll get there faster than what we had performed.
And be mindful of the fact that there are 466 units in that building. It's sizable.
Right. Just last one. Ed, last summer, you talked about potentially exploring some options to unlock value at the entity level if the unit price doesn't catch up to the embedded value that you talked about in the past and certainly relative to the streets.
Yeah.
NAVs. Just given where the NAV discount is today, what are your thoughts on that? Is this still under consideration?
I would say the only thought is we never stop considering. We're certainly not on any specific path, Pammi. It's something that we always look at, and I would really think that over the course of the next 18 months, if unit value doesn't reflect what we certainly believe, and hopefully everybody's starting to understand what we're creating here, then we will explore other options. We're constantly thinking about them, we're constantly talking about them. We're nowhere close to actually doing anything.
Great. Thanks very much.
Thank you. We got time maybe for one more question if there is one. Lindsay?
There are no further questions in queue at this time.
What perfect timing. Thank you all for calling in. We will talk to you in a few months. Bye-bye.
This concludes today's conference call. You may now disconnect.