Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the RioCan Real Estate Investment Trust Third Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Mr. Edward Sunshine, you may begin your conference.
Good morning, everyone. Thank you, Casey, and thank you everybody for calling in. To start the conference, I'll turn it over first to Christian Green to give us the preamble.
Thank you, Ed, and good morning, everyone. The presentation materials we will refer to in today's call were posted together with the MD and A and financials on RioCan's website earlier this morning. Before turning the call over to Chi, 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 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 or 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 September 30, 2018 and management's discussion and analysis related thereto, as applicable together with RioCan's annual information form that are all available on our website and at sedar.com.
Qi?
Thanks, Christian, and good morning, everyone. For the Q3, I'm pleased to report that we once again delivered solid growth in occupancy, same property NOI and FFO per unit, while making good progress on our strategic disposition and development programs and maintaining our strong balance sheet and credit fundamentals. As of yesterday, October 30, 2018, we have had approximately $1,300,000,000 of dispositions in place relating to our strategic disposition program, including closed, firm, conditional or letter of intent deal for 65 properties. This represents approximately 63% of our disposition target by sales proceeds. The weighted average capitalization rate for these $1,300,000,000 dispositions is 6.49% based on in place NOI materially in line with our IFRS value.
As a result of completed asset sales and developments, our portfolio is becoming increasingly urban and focused in Canada's major markets. We have increased our major market exposure from 75.2% in Q3 2017 to 84.1% this quarter. Our Greater Toronto Area presence has been drawn from 40% in Q3 2017 to 45 0.5% in the current quarter. As anticipated, all of the performance metrics for our major market portfolio are exceeding those of the secondary market assets. Our committed occupancy has further grown by 20 basis points from the previous quarter to 90 7% with retail occupancy also growing by 20 basis points to 97.2%.
Our major markets occupancy is 98%. In place occupancy grew 60 basis points from the previous quarter to 96.2%, while major markets in place occupancy grew 50 basis points to 97.5%. Jonathan will provide you with more details on the operational performance of the portfolio later on in this conference call. For the Q3 of 2018, we achieved same property NOI growth of 1.6% for the overall portfolio, consisting of 2.1% for our major market assets and a 0.7% decline for our secondary market assets. For the 1st 9 months of 2018, our same property NOI increased by 2.3% for the entire portfolio and by 2.8% for our major markets portfolio, while secondary market assets same property NOI decreased by 0.3% over the comparable periods.
This same strong same property NOI performance coupled with 501,000 square feet of development completion and our active NCIB program led to a 2.5% increase in our quarterly FFO per unit in Q3 2018 and a 3.7% increase in our year to date FFO per unit. Our quarterly FFO per unit of $0.47 this quarter is the highest quarterly FFO per unit in RioCan's history, excluding Q4 2015 when we received one time target settlement income. This FFO per unit growth was accomplished despite more than $900,000,000 of dispositions closed since October 2017 $4,800,000 of severance costs on a year to date basis. Even though the realized gains from the sale of marketable securities were $1,800,000 higher this quarter than the same quarter in 2017. We also had $1,400,000 lower dividend income from such marketable securities over the same comparable period.
Therefore, marketable security gains and dividend income are not a key factor contributing to our FFO per unit growth in the quarter. Our continuous FFO per unit growth speaks to the quality of our portfolio considering dilution effect of the dispositions completed to date and significant investments in our development program. As a result of the FFO per unit growth, our FFO payout ratio improved from 80.5% for the quarter and remaining below our 80% target. It is worth noting that for the 9 months ended September 30, 2018, our actual maintenance CapEx was $5,300,000 lower than our normalized maintenance CapEx. Looking ahead at the coming quarters, we have major mixed use residential project come to the earnings stream in the next 2 to 3 quarters, including gains from the condominium units, I.
E. Condo portion of our Yonge Eglinton Northeast Corner project and Kingling Condos at our King Portland Centre project. We will start marketing the rental unit soon at both the rental building at Yonge and Eglinton North Sea Corner in Toronto and Frontier Apartments at Gloucester in Ottawa, which will start to generate rental income in the first half of twenty nineteen. Our development pipeline represents a tremendous opportunity for RioCan to diversify our source of income and generate long term NAV growth as we harvest our large portfolio of urban transit oriented retail sites in Canada's 6 major markets and intensify them into new mixed use properties. As of September 30, 2018, RioCan has recognized $99,800,000 IFRS fair value for our substantial 26,500,000 square feet of development pipeline.
This represents only an insignificant portion of the future NAV growth that will be generated from the development program as the majority of 72 point $7,000,000 of the $99,800,000 fair value that has been recognized to date is based on the discounted present value of air ride sales that have been secured at the Well in Toronto and 5th and third project in Calgary. As projects reach anticipated milestone, we expect that additional fair value that is not currently recognized will be recognized over time, subject to prevailing economic and market conditions. Jonathan will discuss more about our development progress and anticipated completions next. And next, let's take a look at our balance sheet strength. In our view, the most important measure of the company's financial strength and the one that we maintain a keen focus on is the debt to adjusted EBITDA.
Our debt to adjusted EBITDA was 7.79 times on a proportionate share basis as of this quarter end, which remains below our target 8 times and one of the lowest among our peers in Canada. This was accomplished despite our strategic disposition program and approximately $1,300,000,000 development on the balance sheet. Excluding the $1,300,000,000 development on the book, our debt to adjusted EBITDA would have been approximately 6 times. In anticipation of receiving substantial disposition proceeds in the Q4 of 2018, we began we again maximized our NCIB purchases prior to entering the blackout period in late September due to quarter end reporting. For the same reason, our leverage was unchanged from last quarter at 42.4% as of September 30, 2018.
In addition to a conservatively managed capital structure, we are focused on maintaining access to multiple sources of capital and financing flexibility by managing our portfolio of unencumbered properties to achieve a balanced secured versus unsecured financing strategy. As of September 30, Ryokan's debt was 59.1% unsecured and 40.9% secured. This provides benefits to our overall cost of capital and provides ample flexibility should the general liquidity conditions change. Furthermore, we have met or exceeded our internal leverage and coverage targets as of the quarter end. Overall, we are very pleased with how we are doing operationally and financially and the progress to date with revenues from the first of our major urban transit oriented residential projects.
With that, I would like to turn the call over to Jonathan for update on RioCan's operations this past quarter.
Thanks so much, Qi. Good morning, everyone, and thanks for dialing in. Excuse me, I'm pleased to provide the operational update for the Q3 of 2018. Our Q3 results continue to demonstrate the benefits of RioCan's major market strategy and execution. I'll begin with a focus on our income producing portfolio and I'll follow it up with highlights from our development program.
VeoCann's operating performance remains strong in Q3 with the results demonstrating the critical role that bricks and mortar outlets continue to play in the retail landscape, particularly within Canada's major markets. Our results were bolstered by the strength of our major
for the full year 2018 remains in
the range of between 2% 3%. Our occupancy rates are back in line with our historic average, largely due to demand in the major markets where more than 200 of RioCan's assets are located. RioCan's portfolio committed occupancy rate increased 20 basis points over the previous quarter to 97% in Q3. Committed occupancy in our major market portfolio continues to be exceptionally strong now at 98%. It's important to note that these occupancy numbers reflect strategic leasing efforts, meaning we are not simply filling spaces.
We are carefully curating tenant mix to enhance our shopping centers and the communities that they support. Our leasing results for Q3 were also excellent. RioCan completed 971,000 square feet of new leasing in the 3rd quarter and an average rent per square foot of $27.83 More than 90% of this new leasing was completed for properties in Canada's major markets. Our new leasing results represent 2.5 times the amount of leasing completed in the Q3 of 2017 at an average net rent per square foot that was more than 25% higher than Q3 2017, results that further underscore the value of our major market assets. 196 renewals totaling approximately 1,469,000 square feet of space were completed during the Q3 of 2018 at an average rent of $20.77 The average rent per square foot on tenant renewal decreased by $0.29 per square foot or 1.4 percent in the quarter, while the retention rate for Q3 2018 further improved to 93.8%.
The decrease in average net rent was primarily due to 10 lease renewals with anchor tenants, 6 of which occurred at properties located in secondary markets. If you exclude these renewals, the average net rent growth was 4.1% for the quarter or 5.1% in our major markets. Now our major market properties are located precisely where existing and new to market tenants want to be. For example, Decathlon, a new to Canada value price large format French sporting goods retailer plans to open their first location in Ontario with a 55,000 square foot store in one of RioCan's properties in Ottawa. Also, as previously mentioned, the quality of RioCan's major market portfolio presents opportunity following the legalization of recreational cannabis.
As with any opportunity, we're focused on curating the right tenant mix and over the past several months, we've been reviewing authorized retailers to ensure they align to our operating standards. The deals we have made to date reflect these standards. Once the regulatory landscape within Ontario has been clarified, RioCan expects to see far more completed leases within its portfolio. The quarter also saw the completion of Burlington Centre, a key redevelopment with our partner Kingsett Capital. When redevelopment projects such as Burlington Center shift to completion, we anticipate a meaningful impact on the center's operating results as during redevelopment there's a natural drain on CapEx, same property NOI and occupancy, which reverses upon project completion.
Our work at Burlington Center showcase our deep commitment to being an integral community pillar. Burlington Center is one example of a property that through redevelopment has become a true community hub. This approach is becoming embedded in our business strategy and the renovations underway at our Lawrence Square and Yonge Sheppard Centre here in Toronto also demonstrate the integral role RioCan is playing in communities. This approach will translate into long term growth across our entire portfolio as community relevance will fuel higher occupancy sales and rent per square foot. I will now shift from our income producing portfolio to RioCan's development program.
RioCan's development team is unique in the industry due to its composition of best in class experts from a range of specialties including engineering, city planning, high rise residential and retail construction. The team is committed to developing properties that meet and exceed our stakeholders' needs. And based on the quality and performance of the team, I'm confident that they will continue to execute with the same discipline and high standards that we've seen thus far. During the quarter, we continued to make significant progress in advancing our development pipeline with an additional 264,000 square feet of space at RioCan's interest completed and becoming income producing in Q3. By year end, we anticipate a total of 818,000 square feet of urban income producing and net asset value enhancing space, many of which are mixed use transit oriented properties.
654,000 square feet of our urban intensification, NLA under development have committed or in place leases at a weighted average net rent of approximately $32.06 further highlighting the value and demand of these urban spaces. Site excavation continues at our flagship mixed use development of the well and is on track to be completed by the end of 2018. Foundation work is in progress for the 36 story office tower located at Front and Spadina. Together with our partner Allied, we are making significant progress on leasing the commercial component of the project. The well is very attractive to tenants as is evidenced by the up to 71% of the 1,100,000 square foot office space already pre leased to an impressive roster including Shopify, Index Exchange and Spaces, a subsidiary of Regis.
Retail leasing is expected to start in earnest in 2019. We achieved substantial completion of the commercial space at King Portland Centre in Toronto and expect purchasers of units in Kingly, the condo portion of the project to take occupancy in the Q2 of 2019. Bathurst College Centre in Toronto was substantially completed and fully leased to strong and high profile retail and office tenants, including Sobeys, Winners, Scotiabank as well as leading international as well as an international leading technology company. Since 2011, we've worked closely with the city and community on this property and its completion is an example of the strength of the work being done by our asset management, leasing and development teams. Over the next month, we will start leasing residential units in eCentral, the first purpose built rental development in the RioCan living portfolio.
ECentral is located at the iconic intersection of Yonge and Eglinton in Toronto steps from RioCan's Yonge Eglinton Centre with access to the Yonge subway line and future Eglinton Crosstown LRT. Residents will begin moving into their rental units in 2019. In December 2018, we'll begin leasing the residential rental unit in Frontier in Ottawa, another high quality RioCan living project located in a prime area adjacent to main transit line and steps from RioCan's Silver City Gloucester Shopping Center. These two projects combined with will deliver approximately 700 income producing units by the end of 2019. And I should just add that the Frontier project is with our partners Killam REIT.
From Q4 2018 to the end of 20 20, we're expecting development completions of approximately 1,300,000 square feet at RioCan's interest net of air light sales. The value created through the completion of our development projects is significant with the annualized stabilized NOI expected to be approximately $46,000,000 at RioCan's interest. As discussed, Q3 saw the completion of a range of key developments and our pipeline continues to indicate strong future results. The Trust's leading position in the zoning approvals obtained for its development pipeline presents a competitive advantage with 45% of its pipeline or 11,900,000 square feet zoned and another 20.3% or 4 point or sorry, 5.4 1,000,000 square feet with zoning approvals that have been submitted. These locations are centrally located in high demand areas where the changes in use can maximize the value of the real estate and enhance the productivity of the space.
Our Q3 performance was strong and our major markets results were even better. After my 1st full quarter as RioCan's Chief Operating Officer, I'm excited and proud about our progress to date and confident in our future as we transform RioCan to a more urban and diversified portfolio. Those are the operational highlights. I'm now going to turn the call over to Ed.
Thank you, Jonathan. Thank you, Qi. A lot of numbers in those reports. Happily, they're all good numbers. So during our last quarter conference call, I went into some detail as to the transformation underway at RioCan and what we will look like just a few years down the road.
Essentially, we will derive over 90% of our income from Canada's 6 major markets, 50% from the GTA and we'll have dramatically expanded our office holdings, all located within the GTA and created a significant residential portfolio consisting of newly built transit oriented apartment buildings located exclusively in Canada's 6 major markets, but again with an emphasis on the GTA. As is evident from our quarterly report, we are well on the way to achieving the portfolio metric goals we have set for ourselves. Notwithstanding the headwinds created for our secondary market disposition program by a rising interest rate environment. While those headwinds may result in our moving a bit more slowly next year, with that program, I am confident that by year's end we will be at about $1,500,000,000 of dispositions either closed or under contract or about 75% of our total target. But while market forces are slightly slowing down one component of our existing strategy, they are significantly elevating and validating our creation of office and residential assets.
The office market in the GTA is quite simply better than it has ever been. Vacancy rates in both downtown and midtown are at an all time low and market rents have increased by a double digit percentage over the course of this year alone. The fact that all of our newly constructed office space at Bathurst College and at King and Portland is 100% leased at rates above pro form a and that the Wells office component is over 70% pre leased with delivery 2 years away certainly confirms and tells that tale. And with respect to our about to become reality residential assets, rent growth has been equally significant. Rents of $4 per square foot per month are becoming relatively common in the GTA in the very few newly constructed purpose built rental buildings that are coming on street.
We believe that we have coming to the leasing market this fall, the best located and best designed buildings in the country. And we are quite optimistic that the rents we will achieve will be well above our performance and result in significant value creation. Having said that, I believe it is also important for society that more affordable rental housing be created in the GTA for those young and older people who are not investment bankers or cannabis entrepreneurs. We have existing shopping centers that could be very suitable for that type of rental development and we are working on a construction design that would address the affordable side of the market. Over the course of the next while, we intend to try to work with the various levels of government to become a part of the solution to the problems created by the significant increases in residential rents.
It will be solved by government initiatives to encourage its construction by the private sector rather than piling on evermore rent controls, which history tells us always ends badly. To sum up, I would say that I'm very pleased with our progress in changing the direction of RioCan And I would like to thank the excellent team we have here for doing all the heavy lifting required to get us to where we are today. That work is far from finished, however, and I expect them all to only get better and more efficient as we continue down this path. Our unit value sadly does still not reflect what is being created here at Grecan. And while I hope that that will eventually rectify itself, I've also learned that hope is not the best strategy.
So while there is no doubt in my mind that the strategic initiatives we have underway are correct and starting to bear impressive fruit, I want you to rest assured that we are never satisfied and we will continue to explore new initiatives. So that's all I got to say right now. I'm happy to open it up for questions for anybody of we have our entire senior executive team here actually. So please go ahead.
Thank you. And your first question here comes from Dean Wilkinson with CIBC. Please go ahead. Your line is open.
Thanks, Casey. Good morning, everybody.
Good morning.
Ed, I guess, as RioCan Living is about to become RioCan Live as it were, do you have a sense of what kind of gains we could be looking at it in the very near term just on the turnover of ePlace and King and Portland and perhaps to a lesser extent, Winfield Farms?
You know what, Chi could probably, if she wants to give you numbers, I hate to forecast numbers like that. I mean, we are looking at fairly significant gains in 2019 from all of the properties you mentioned. We're also looking quite frankly at significant IFRS value gains from the RioCan Living rental building. But to put out those numbers today, I think I'd be loathed to do that. You agree, Chi?
Yes.
Okay.
Lowes or low?
Lowes.
They're not low.
They're pretty good.
And I guess dovetailing into that, when we look and I think this is something that you sort of we batted around a fair bit in the past. Just on the issue of the air rights, you've got about $72,000,000 booked in your IFRS valuation largely related to the well and 5th and third.
Those are already sold effectively.
Those are sold, right? And that's sort of the discounted present value.
Exactly.
So when you look and that's probably less than 10% of the potential air rights that exist within
Actually, I think the non well component is more like we'll go ahead and answer your question before I give you an answer.
What has to happen on any of the other developments, I guess from an accounting perspective before GE can sort of start recognizing that and people can sort of tangibly see, okay, yes, here's some more of the value that comes to this because over time it's going to be significant?
That's a good question and one that I have addressed to both our auditors and to, Chi and her team over time. And as best as I understand it and I'll stand to be corrected here by Chi, you basically need a triggering event and a triggering event quite simply is started construction of a new building, where we then move from to the yield method of IFRS calculation rather than simply cost, which is what we do right now until a building is ready to move. And we have protocols in place for all of the parameters that have to be satisfied in order to be able to move to that yield method. It can go as far as knowing your construction costs, having zoning and building permit approvals in place, etcetera, etcetera. So basically the cake in that sense has to be pretty fully baked with all that's left to be do is actually build it and lease it.
And at that point, we start recognizing some value. Obviously, we tend again to be on the conservative side of that evaluation because that would be recognized in accordance with whatever our performance is at the time we start construction and happily the way rents have gone in virtually every market we're operating in. I expect we will do a lot better than pro form a, but again, we are load and that's LOA t h e to amend those pro formas significantly until we actually have evidence by actual lease up. So we're going to start seeing that happening in the next couple of quarters on our first buildings. The second type of thing that can happen quite frankly, is a transaction.
Whether that's selling air rights like we did in the well or at 5th and third
or
it's bringing in a partner like we previously did in a few transactions like Sunnybrook, where we brought in concert properties or that's probably the most notable one. I would expect to see both sides of that those two possible ways to recognize that value start to happen more often in 2019. I can't tell you which one will be more prevalent, but I think both will be there. And I think over the course of 2019, we will be recognizing significant value because and again, I think unrecognized just in the density itself we have in the neighborhood of close to $1,000,000,000 of unrecognized value. So, but I think I've probably gone, I've given an accounting lecture here, which I did not mean to do, But nonetheless, I took the time to learn all that stuff.
So I've now shared it
with everybody on the call. You cover everything.
We're all wiser for your education.
Did I get it all changed?
You got it right.
You got it right. Yes.
So the short answer is that you will recognize the fare back further gradually, right? Not
necessarily, if you do transactions, that can be fast.
Yes, that makes sense. Totally makes sense. Last one for me, Chi, just normalized CapEx for 2019, should we be using sort of around that $1.16 number again?
We actually will provide further guidance in our Q4 earnings. What do you mean actually the dollar oh, the per square foot Scott? Yes.
Per square foot. Yes.
We will provide further guidance in our Q4 earnings release.
Okay, great. We'll look forward to that.
Yes, right now. We're still working on
it quite frankly. We're about a week away from finalizing our 2019 budget. And of course that CapEx is part of that budget.
Perfect. I will hand it back. Thanks everyone.
Dean, thank you.
Your next question is from Sam Damiani with TD Securities. Please go ahead. Your line is open.
Thanks and good morning. Just to follow on, on the topic of the budget, it's about 11 months ago, we had the anniversary of your last distribution increase. Is that something we should expect to see again going forward?
I would think not. You know what, since we've gone out of the equity raising business a few years ago, and we've learned that our capital is very precious. And whether we use that capital for NCIB, which has really been a significant return of funds by the end of this year. I think we'll be looking in the neighborhood of $500,000,000 of money returned to our unitholders through that NCIB. We really don't feel the need to do that, to increase our distribution.
We're yielding. I think it makes me ill to say this, but we're yielding about 6% right now. And I think we can put better use of those funds with the value creation we have undergoing here at RioCan.
Recan. And just back to the residential strategy, just given the market, the way it's evolving, higher construction costs and whatnot, do you see air rights sales potentially as a better way of servicing value rather than developing on balance sheet in more cases?
The answer is, it's going to always be a combination of developing. Our prime goal is to create income. That's what we are here to do for our unitholders. And we do that by recurring income. We do that by building rental buildings rather than selling off air rights.
But some of the projects we'll have coming on stream over the next couple of years will be very, very large in scale, whether that's where I hope a couple of years at the Eglinton and Laird or at Shoppers City Brampton or it's even something like here Ontario in Sandalwood, which very few people even know where that is. And it's in Mississauga and there'll be a transit stop right at that corner. We'll call for a mix. I mean, nobody wants to develop all at one shot, a 1000000 square feet of residential at one site. So that can easily be handled by and again just using very rough numbers, each site will be unique by saying, you know what, we're going to sell off a half a 1000000 square feet in air rights, generate gains, generate capital, reduce the capital requirements on a RioCan and then build the other 500,000 feet as couple of rental buildings.
So it'll be a constant mix of those 2 with our prime goal really being to create rental income though rather than gains on sale of air rights.
And at the Investor Day last spring, I think you made the comment that rental residential would likely never become more than 10% of total NOI at RioCan. Is that something first of all, did I get that right? And secondly, is that something you'd reiterate today?
Well, first of all, you're asking me to remember something from 8 months ago. So that's hard, but I think that sounds right. I think the word never is one I would probably amend. I think using that number, there were a couple of parameters that are starting to change. First of all, the size of our portfolio, the retail income is diminishing from the secondary markets, although it will start going again as we finish our primary market developments.
But I think realistically and I try particularly at my age not to look more than like 5 to 7 years down the road. I think that's doing pretty good. I think within that 5 to 7 years we're not going to get over 10%. So I would still stick with that.
Fair enough. Okay. Thanks very much.
Your next question is from Pammi Birth with Scotia Capital. Please go ahead. Your line is
open. Thanks. Good morning. Ed, just to clarify your comments on the disposition program, do you expect to be at $1,500,000,000 by the end of this year or the end of next year? And then just maybe if you could expand on your comments around the market forces slowing down the pace?
Sure,
Sure. First of all, and I'm looking at Jonathan who continues to have responsibility for our disposition program in addition to all the other responsibilities he's taken on, he's actually starting to get shorter. He's getting worn down a little bit. But $1,500,000,000 is a number that I'd like to see us be at and I think we'll come pretty close to it if we don't get there by the end of 2018, I. E.
Over the next 2 months. We've got a lot of things on the hop. They're not quite signed yet. You never know for sure, obviously, number 1, if they'll get signed. Number 2, if once they're signed, they'll actually be completed.
But with those cautions, I'm feeling pretty good that we'll be at that $1,500,000,000 this year, which will leave us call it $500,000,000 to undertake over the course of 2019, which was sort of the time we gave ourselves. Now that time may be slightly extended by those market forces I referred to and you've asked me about and they're really, I would call them 3. 1st and foremost is the rising interest rate environment. The people we are selling these properties to are not what I'd call conventional purchasers, I. E.
Other REITs or pension funds. They're largely private individuals or groups of private individuals who really are relying on leverage to make these things be great deals for them, which quite frankly they are. The banks because of the rising interest rates and just generally where we are perhaps in the business cycle are, I would say tamping back a little, the amount of principal that they're giving approvals to. So that holds back either a purchaser altogether or it leads him to give us to look to give us a slightly lower price. And quite frankly, we're not conducting a fire sale.
And if we can't get a price that we're happy with on a particular property, we'll just take it off the market for a while, which is okay. The second factor I think is the mere fact that there's a lot of secondary market for sale. We're our own worst overhang. When we're talking about selling $1,500,000,000 in just over a year in the secondary markets of this country, that's a lot of assets. So I think that's the other, the second reason.
And I think the third one is that, the lack of growth in the secondary markets is maybe becoming a little more apparent to everybody. I think you can see it in our Q3 numbers, even though they were probably a little bit, it's better than that shows because we had some anchor renegotiations as renewals rather as Jonathan mentioned. So I think that's sort of becoming apparent, which maybe further narrows the buyer base a little to those who say, okay, I want the stability and I don't really care about the growth. So that's fine, but that's starting to be a narrower buyer base. So I would say those are the 3 factors that are causing us to look at maybe slowing it down a little as we roll into 2019.
Thanks. That's actually really helpful. Just maybe extending on that, if you look at cap rates, I think CBRE recently cited an uptick in the Toronto Power Center Cap Rate segment. Just curious what you're seeing today in your core markets and are you seeing any notable changes?
You know what power centers and that's much more of a factor quite frankly in the United States. Power centers in the United States are not looked at favorably these days. That's something quite frankly we knew 8 years ago when we went into the United States, which is why we primarily bought supermarket anchored strips. We haven't really seen any deterioration in cap rates and power centers. Now having said that, the bulk of our power centers with 1 or 2 small exceptions are located in the major markets.
And what they have underlying them is the possibility of future redevelopment even though that development may be 10 or 20 years away. When you look at properties, I'll take an example like RioCan Elgin Mills, which is at Elgin Mills in 404, but as suburban as you can get. And yet, I think Mr. Valentine is pretty well full. We're seeing good rent growth and anybody knows looking at that property that one day and it may be a generation away, that's going to get redeveloped.
And in fact, but in the meantime, you're still getting great growth of building 1500 homes in the property immediately adjacent to the north on that property today. So we haven't seen any John Gifflin, you want to maybe comment on that? Yes. We haven't seen any deterioration.
No. And I'd also have to say there haven't been many data points recently. So CBRE's report, they have to put 1 out each quarter, but I don't think there have been many trades in the major markets that include power centers. And the ones that we have seen have actually been fairly lucrative field. So I don't necessarily agree with the comment, but and I also agree with Ed's comments.
Okay. Thank you.
All right. Just last one for me. Just on Leon's and the brick, it seems like they might be looking to optimize their footprint. Any sense of any potential impact in your portfolio at this stage?
Leon's quite frankly owns most of their own real estate that I'm aware of. Mr. Ballantyne is quickly looking to look at our exposure. We have very little exposure. I don't recall any of them being in the top 30 even.
And so I'm not aware of any of our sites at all that are at risk with them. John?
No. No.
I don't expect any impact from that at all.
Okay. Thanks very much.
Thank you.
Your next question comes from Michael Smith with RBC Capital Markets. Please go ahead. Your line is open.
Thank you and good morning.
Good morning,
Michael. Just we have a new government in Ontario, who I from what I understand, they may be considering rethinking rent control, maybe given a holiday for rent control for new buildings for 5 or 10 years. I wonder if you have any comments on that? And should that something like that pass, would that change your strategy in terms of the mix of rentals versus condos?
I certainly have no inside information on that. I would certainly welcome it. Having a, what I call a stabilization period was when the previous government first announced it was probably the prime sort of initiative that we suggested strongly suggested to the then government. It was not taken seriously. I think it would be a very smart thing to do because what's happening quite simply right now is that most new purpose built buildings are being because you look down the road and you say, well, wait a minute, I'm going to be limited to 2.5% rent increases.
You're looking to start at the highest base you can possibly do and I can tell you that when that new legislation came in under the previous government, we quickly changed all our pro formas to expand the stabilization period, I. E, the rent up for that very reason saying, well, you know what, we're going to hold out. We're not going to bring these properties to market as quickly as we can. We're going to take our time and aim for the highest rents because those rents are not going to grow that fast because of these rent control legislation. So I think if the government does do that, I think it would be a very smart thing for them to do.
It would certainly encourage rental housing and it will encourage units, apartment units that are already built being brought more quickly to the rental market. Whether it would change our strategy, probably not. I mean we did change one building from rental to condominium being the Kingly, but that was probably more out of just being mad at the previous government than any other reason. But it would certainly encourage us to move ahead more quickly on some of the rental buildings.
Okay. Thank you. And just on the topic of rents, I mean, Ed, I think you said that you're seeing strong rents right across everywhere. So is that fair to say the frontier as well like
Absolutely. It's not just a Toronto story. I mean it's primarily a Toronto and Vancouver story, but we're seeing it in Ottawa. Our partners in Calgary are telling us the same thing. I mean, we've got the building well underway there in partnership with Boardwalk and it's right across the board.
And so eCentral, that I think when we first started talking about that a couple of years ago, you're talking 3 mid-3s, if I remember correctly. Now we were over 4. So this is ahead of your expectations, but costs were up. So in terms of like the
Let me correct you, Michael, and I'll try to interrupt. You got to remember the good thing about something like eCentral and some of the other buildings we already have underway, 90% of the contracts, the subcontracts for a building like East Central are really by the beginning of construction, they're locked in. In that case, you're talking 2 years ago. So and that's the case, that's just something we do as prudent developers. And so the costs on eCentral really are not up from 2 years ago.
The only thing that's up is the expected income.
So your pro form a will be over?
We will well exceed the return expectations we had when we started this project 3 years ago.
Okay, great. And just switching gears, going to the well, I think you're going to start leasing the retail, I guess in 2019. I wonder if you could just give us just update us on your vision, if there's been any changes, are you talking to any like what are you what types of tenants are you thinking of?
Well, look, I think there really hasn't been any significant obviously a very unusual for RioCan retail facility. And I think it's going to be a bit of a precedent setting retail component in an urban environment. The anchor is going to be a food hall, is going to be a food experience for people, which is going to be a mix of a place to go eat and places to buy ingredients to make your own meals and places to buy prepared meals to take home with you. It'll be a mix of that in the neighborhood of 85,000 or 90,000 square feet, which I believe will be something that the city has never seen. It's happened in places like New York and of course London and other places in Europe.
But I think this will be quite an experience. So with that as the anchor, I think what you'll find in the restaurant at another 300,000 feet is much more experiential retail as opposed to conventional retail. There will be a mix of conventional because obviously people still need to buy pharmaceutical items, for example. So there will probably be a drugstore that will have some that will also sell some of the excuse me, some of the staples that people also need that they aren't going to get in the food hall as boring as toilet paper. But guess what, people still need toilet paper and Kleenex and all those other staples.
So we got to provide that to the huge population that we have there. I mean, keep in mind, we're going to have 10,000 people either living or working on-site and that's going to be there every day before we get the 100,000 that live within walking distance of this place. So I think it's going to our vision is to actually have it almost be part of the street. I mean that's something that's important to understand. You're going to be able to walk down from King Street through a park into the well, and then continue on what will seem like a street except it will have grass instead of paving.
Although there'll be some elements of stone in it, it'll be quite attractive. All the way down to Front Street, pedestrian bridge, crossing the railroad tracks to connect the enormous number of residential units that are south of the railroad types. And if Mayor Tory is successful and certainly we hope he is in building the rail deck park, Well, guess what? That will be the front door of the well and that will also somewhat influence the kind of retail that we ultimately put in there. As you can tell, we're pretty excited about it.
And I think when Toronto sees it in about 2.5 to 3 years, they will be equally excited by it.
And for that food hall, would it be tenants similar to like an Eataly or something like that, which I understand is now going to Bloor Street?
Yes, Italy is supposed to be open sometime next year, but that's more that's a very like elements of an Italy would be a small part of what we're creating. You'll be able to get foods from everywhere in the world at this location. There'll be a heavy dose of Asian. There'll be kosher butchers and how all butchers, there'll be all kinds of fresh produce. So that kind of thing I don't think is part of Italy.
I've been in Italy and in New York. So I don't know exactly what it's going to look like here. I know it's primarily driven I think by LoblawWestin together with Terrone, if I'm not mistaken. So I'm sure it's going to be great. It's primarily Italian.
Pardon? Primarily. Yes, obviously, Italy, it's primarily Italian. Ours is going to be much more international in scope. But I'm looking forward to Italy because I live in the neighborhood.
Okay. Well, that's it for me. Thank you.
Thank you, Michael.
Your next question is from Matt Kornack with National Bank Financial. Please go ahead. Your line is open.
Good morning, Matt.
Good morning. Quickly on the assets where you had lower turnover spreads and mentioned that they were in secondary markets, can you speak to whether or not those are conditional in terms of sales or will those be sort of future sales going forward?
I'm going to turn that over to Mr. Kiplen. Yes. Some of
them are under contract and some of them have in fact already been sold. So I don't have the exact percentage, Matt, but I would say that the majority of the leases that led to the negative renewal spreads were in properties that are, like I said, under contract.
And so if you want to surmise that one of the reasons that led us to accept a slightly lower rent was to get the renewals locked away to permit the sale, you would be correct.
Okay, fair enough. And then presumably that's why you still have some confidence in the 2% to 3% same property NOI growth
going forward. Exactly. Those are one offs.
Okay. And then just the last question me. You mentioned some interesting comments with regards to affordable housing. In the current form under the current regime, I know CMHC has been doing some things to try to encourage the development of new affordable rental housing. But is that regime in its current state enough to get you guys interested in doing it or will it need to be something incremental from the government?
You know what, it probably needs to be more incremental. I suspect that it will need ultimately and we're prepared to really work with them. It'll need some input from all three levels of government. I know again the Mayor Tory and the City of Toronto are quite committed and they both have they certainly have an ambitious program. They're going to have to do something whether it's with development charges and keep in mind that when you look at a newly built residential unit, particularly here in Toronto or in the GTA generally, 25% of the cost roughly is governmental charges of one form or another.
So we're not really looking for anybody to give us any money to build affordable housing. We're looking for them maybe to take a little less on the way through and something they can probably afford to do to achieve this social good. It's something we're very focused on and we'd like to produce a fair amount of it, but it will I think need all three levels of government to participate.
Fair enough. Thanks. That's it for me.
Thank you.
Your next question is from Sam Damiani with TD Securities. Please go ahead. Your line is open.
Sam, I've heard your voice before.
Hi, I've heard your voice before too.
Yes. Okay. So go ahead.
Just quickly on the same property NOI growth in the quarter, the same store portion, in other words, the portion excluding expansions and redevelopments, was one of the lowest levels we've seen in a few quarters at $1,100,000 of growth year over year. What was the reason for that?
I think I'm
pretty chi on the spot here.
It's definitely partly timing, right, because the secondary market assets is still dragging down that overall to quite an extent. Like for example, the renewal spread this quarter, including the 10 leases with 1 anchor tenant is negative as you know. So that impacted the SPNOI
for the quarter.
Yes. We think again this is not anything that's recurring. It's a one time thing. Listen, like many people have said in the past, reporting real estate on a quarter by quarter basis is difficult and you're going to get anomalies because of just timing and I think this is one of them.
Okay. And just to clarify on the well with the retail leasing expected to start next year, It sounded like from the commentary that you're waiting for maybe a little bit more pre leasing of the office space. Is that correct?
No, no. We're quite satisfied with where the pre leasing is on the office space and our wonderful partner Allied, actually I think now that they've sort of broken the back of it with these large tenancies they've entered into are actually taking their time. I think we're just waiting for construction to proceed a little further, because right now we're I think we're prognosticating Andrew Duncan, our Head of Development is who I'm calling here, that we're going to be not be able to deliver retail spaces to tenants to like 2021. So to ask tenants to commit more than 2 years ahead is we think difficult. So we're really waiting for concern and we think we'd probably be doing a disservice to ourselves by leasing space at this point.
We're at the point where our costs are getting nailed down pretty good. So that lets us do our necessary calculations. And we think as the well comes closer to being a physical reality, which as we roll into 2019, there'll be a lot of concrete being poured into this giant hole and it'll start moving back up to also the if anything, we're probably waiting for the sales efforts of our buyer of most of the residential air rights, Driedel, which we think will be starting, I mean, it's in their hands, by spring of next year, so 6 months from now. And we think that will really make people understand in a much bigger way what's happening here at the well and that will be the time we start going to signing deals with all of the various retailers that are interested in this project.
Great. That's very helpful. Thank you.
Thank you.
We have no further questions in queue. I'll turn the call back to Edward Sunshine for closing remarks.
Okay. Well, I would like to really thank and congratulate all the analysts on the call because you entered your questions precisely at 11 o'clock, which is what we timed it for. Now I don't know if there's another conference call happening at 11 o'clock, so you all got to get off, but whatever the reason, thank you for fitting it right into the hour we had allocated. And I look forward