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 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, you may press the pound key. Thank you. Mr. Edward Sonshine, 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. Good morning, everyone. The presentation materials that we refer to in today's call were posted together with the MD&A and financials on RioCan's website earlier this morning. Before turning the call over to Qi, I'm required to read the following cautionary statement. In talking about our financial and operating performance, 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, 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, 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, they're all available on our website and at sedar.com. Qi.
Thanks, Christian, and good morning, everyone. For the third quarter, I'm pleased to report that we once again deliver 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 30th, 2018, we have had approximately CAD 1.3 billion of dispositions in place relating to our strategic disposition program, including closed, firm, conditional, or letter of intent deals for 65 properties. This represents approximately 63% of our disposition target by sales proceeds. The weighted average capitalization rate for these CAD 1.3 billion 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 grown from 40% in Q3 2017 to 45.5% 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 97%, 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 third quarter 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 first nine 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 strong same property NOI performance, coupled with 501,000 sq ft of development completions 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 CAD 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 CAD 900 million of dispositions closed since October 2017 and CAD 4.8 million of severance costs on a year-to-date basis. Even though the realized gains from the sale of marketable securities were CAD 1.8 million higher this quarter than the same quarter in Q2017, we also had CAD 1.4 million lower dividend income from such marketable securities over the same comparable period. 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 investment in our development program.
As a result of the FFO per unit growth, our FFO payout ratio improved from 80.5% for the comparable period in 2017 to 78% in Q3 2018, stable from the last quarter and remaining below our 80% target. It is worth noting that for the nine months ended September 30th, 2018, our actual maintenance CapEx was CAD 5.3 million lower than our normalized maintenance CapEx. Looking ahead at the coming quarters, we have major mixed-use residential project coming to the earnings stream in the next two to three quarters, including gains from the condominium units, i.e. condo portion of our Yonge-Eglinton Northeast Corner project, and Kingly Condos at our King Portland Centre project.
We will start marketing the rental units soon at both eCentral, the rental building at Yonge and Eglinton Northeast Corner in Toronto, and Frontier Apartments at Gloucester in Ottawa, which will start to generate rental income in the first half of 2019. 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 six major markets and intensify them into new mixed-use properties. As of September 30th, 2018, RioCan has recognized CAD 99.8 million IFRS fair value for our substantial 26.5 million sq ft 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 CAD 72.7 million of the CAD 99.8 million fair value that has been recognized to date is based on the discounted present value of air right sales that have been secured at the Well in Toronto and 5th & Third project in Calgary. As projects reach anticipated milestones, 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. Next, let's take a look at our balance sheet strength. In our view, the most important measure of a 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 proportionally share basis as of this quarter end, which remains below our target eight times and one of the lowest among our peers in Canada. This was accomplished despite our strategic disposition program and approximately CAD 1.3 billion development on the balance sheet. Excluding the CAD 1.3 billion development on the book, our debt to adjusted EBITDA would have been approximately six times. In anticipation of receiving substantial disposition proceeds in the fourth quarter of 2018, we again maximized our NCIB purchases prior to entering the blackout period in late September due to quarter end reporting. For this same reason, our leverage was unchanged from last quarter at 42.4% as of September 30th, 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 30th, RioCan's debt was 59.1% unsecured and 40.9% secured. This provides benefits to our overall cost of capital and provides ample flexibility should 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 respect to our strategic disposition and development program. We look forward to 2019, when we will begin to receive the 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. Thanks for dialing in. Excuse me. I'm pleased to provide the operational update for the third quarter 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. RioCan's operating performance remained 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 market properties, and RioCan's outlook for the remainder of 2018 continues to be positive. Our expectation for same property growth for the full year 2018 remains in the range of between 2% and 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 third quarter at an average rent per square foot of CAD 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 third quarter 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 million square feet of space were completed during the third quarter of 2018 at an average rent of CAD 20.77. The average rent per square foot on tenant renewals decreased by CAD 0.29 per square foot, or 1.4% 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, six 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.
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-priced, 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 Centre 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 Centre showcases our deep commitment to being an integral community pillar. Burlington Centre 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. 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 CAD 32.06, further highlighting the value and demand of these urban spaces. Site excavation continues at our flagship mixed-use development, 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 1.1 million square foot office space already pre-leased to an impressive roster, including Shopify, Index Exchange, and Spaces, a subsidiary of Regus. 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 second quarter of 2019. Bathurst College Centre in Toronto is substantially completed and fully leased to strong and high-profile retail and office tenants, including Sobeys, Winners, Scotiabank, as well as an international leading technology company. Since 2011, we've worked closely with the city and community on this property, 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'll 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 units in Frontier in Ottawa, another high-quality RioCan Living project located in a prime area adjacent to main transit lines and steps from RioCan's SilverCity Gloucester shopping centre. These two projects combined will deliver approximately 700 income-producing units by the end of 2019. I should just add that the Frontier project is with our partners, Killam REIT. From Q4 2018 to the end of 2020, we're expecting development completions of approximately 1.3 million square feet at RioCan's interest, net of air rights sales.
The value created through the completion of our development projects is significant, with the annualized stabilized NOI expected to be approximately CAD 46 million 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 11.9 million sq ft zoned, and another 20.3%, or 5.4 million sq ft 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 first 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. 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 six 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 six 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 CAD 1.5 billion of dispositions either closed or under contract or about 75% of our total target. 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 % over the course of this year alone.
The fact that all of our newly constructed office space at Bathurst College and at King & Portland is 100% leased at rates above pro forma, and that The Well's office component is over 70% pre-leased with delivery 2 years away, certainly confirms and tells that tale. With respect to our about to become reality residential assets, rent growth has been equally significant. Rents of CAD 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 stream. We believe that we have coming to the leasing market this fall, the best-located and best-designed buildings in the country.
We are quite optimistic that the rents we will achieve will be well above our pro formas 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. 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 ever more 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. 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. 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 RioCan. While I hope that that will eventually rectify itself, I've also learned that hope is not the best strategy.
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. We will continue to explore new initiatives. That's all I got to say right now. I'm happy to open it up for questions. We have our entire senior executive team here, actually. Please go ahead.
Thank you. As a reminder, if you would like to ask a question at this time, please press star followed by 1 on your telephone keypad. Once again, that's star, then 1 if you would like to ask a question. Your first question here comes from Dean Wilkinson with CIBC. Please go ahead. Your line is open.
Thanks, Casey. Morning, everybody.
Morning.
Ed, I guess as RioCan Living is about to become RioCan Live, as it were.
Yes
do you have a sense of what kind of gains we could be looking at in the very near term, just on the turnover of ePlace and King & Portland and perhaps to a lesser extent, Windfields Farm?
You know what? Qi could probably, if she wants to, give you numbers. I hate to forecast numbers like that. 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 buildings. To put out those numbers today, I think I'd be loathe to do that. Do you agree, Qi?
Mm-hmm. Yes.
Okay.
Loathe or low?
Loathe.
They're not low.
They're not low. They're pretty good.
I guess dovetailing into that, I think this is something that we've batted around a fair bit in the past, just on the issue of the air rights. You've got about CAD 72 million booked in your IFRS valuation, largely related to The Well and 5th & Third.
Those are already sold, effectively.
Those are sold, right?
Yeah.
That's sort of the discounted present value.
Exactly.
That's probably less than 10% of the potential air rights that exist within the entire development.
Actually, I think the non-Well component is more like Well, go ahead and ask 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 Qi can sort of start recognizing that and people can sort of tangibly see, okay, yeah, 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 Qi and her team over time. As best as I understand it, and I'll stand to be corrected here by Qi, you basically need a triggering event. A triggering event, quite simply, is starting construction of a new building, where we then move 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. 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, et cetera.
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. 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 pro formas is at the time we start construction. Happily, the way rents have gone in virtually every market we're operating in, I expect we will do a lot better than pro forma. Again, we are loathe, and that's L-O-A-T-H-E- to amend those pro formas significantly until we actually have evidence by actual lease-up. We're going to start seeing that happening in the next couple of quarters.
Yeah
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 & Third.
Right.
It's bringing in a partner like we previously did in a few transactions, like Sunnybrook, where we brought in Concert Properties. That's probably the most notable one. I would expect to see both sides of 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, again, I think unrecognized just in the density itself, we have in the neighborhood of close to CAD 1 billion of unrecognized value. I think I've probably given an accounting lecture here, which I did not mean to do. 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, Qi?
Yes, you got it right.
Okay, good. Thank you.
Yeah. The short answer is that it will recognize the further gradually, right?
Yeah.
Even starting.
Well, not necessarily. If you do transactions, this could actually be fast.
Yeah, that makes sense. Totally makes sense. Last one from me, Qi. Just normalized CapEx for 2019. Should we be using sort of around that CAD 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 guidance.
Yeah, per square foot. Yeah.
We will provide further guidance in our Q4 earnings release.
Okay, great. We'll look forward to that.
Yeah, right now-
We're still working on it, quite frankly. We're about a week away from finalizing our 2019 budget. 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. Good morning. Just to follow 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. 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 half a billion dollars of money returned to our unit holders through that NCIB.
Yep.
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. I think we can put better use of those funds with the value creation we have undergoing here at RioCan.
Yeah, makes sense. Just back to the residential strategy. Just given the market the way it's evolving, higher construction costs and whatnot, do you see air right sales potentially as a better way of surfacing 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 unit holders. We do that by recurring income. We do that by building rental buildings rather than selling off air rights. 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 Eglinton and Laird or at Shoppers World Brampton, or it's even something like Hurontario Street and Sandalwood Parkway, which very few people even know where that is. It's in Mississauga, and there'll be a transit stop right at that corner. We'll call for a mix. Nobody wants to develop all at one shot 1 million sq ft of residential at one site.
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 million sq ft in air rights, generate gains, generate capital, reduce the capital requirements on RioCan, then build the other 500,000 sq ft as a couple of rental buildings." It'll be a constant mix of those two with our prime goal really being to create rental income, though.
Right.
Rather than gains on sale of air rights.
Right. At the Investor Day last spring, I think that you made the comment that rental residential would likely never become more than 10% of total NOI at RioCan. First of all, did I get that right? Secondly, is that something you'd reiterate today?
Well, first of all, you're asking me to remember something from eight months ago, that's hard. 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'll start going again as we finish our primary market developments. I think realistically, and I try, particularly at my age, not to look more than five to seven years down the road. I think that's doing pretty good. I think within that five to seven years, we're not going to get over 10%. I would still stick with that.
Fair enough. Okay. Thanks very much.
Your next question is from Pammi Bir with Scotia Capital. Please go ahead, your line is open.
Thanks. Good morning.
Good morning.
Ed, just to clarify your comments on the disposition program, do you expect to be at a billion and a half by the end of this year or the end of next year? Just maybe, if you could expand on your comments around the market forces slowing down the pace.
Sure. First of all, 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. I think he's getting worn down a little bit. The billion and a half is a number that I'd like to see us be at. 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 two 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.
With those cautions, I'm feeling pretty good that we'll be at that billion and a half this year, which will leave us, call it CAD 500 million to undertake over the course of 2019, which was sort of the time we gave ourselves. 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 three. First 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. That holds back either a purchaser altogether, or it leads him to look to give us a slightly lower price. Quite frankly, we're not conducting a fire sale. 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.
Right
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 a billion and a half in just over a year in the secondary markets of this country, that's a lot of assets. I think that's the second reason. 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 third-quarter numbers, even though they were probably a little bit, it's better than that shows because we had some anchor renegotiations or renewals rather, as Jonathan mentioned.
I think that's sort of becoming apparent, which maybe further narrows the buyer base a little for those who say, "Okay, I want the stability, and I don't really care about the growth." That's fine, but that's started to be a narrower buyer base. I would say those are the three 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, 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 eight 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 in power centers. Now, having said that, the bulk of our power centers, with one or two small exceptions, are located in the major markets. 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, about as suburban as you can get. Yet, I think, Mr. Ballantyne, it's pretty well full.
Mm-hmm. Yep.
We're seeing good rent growth. Anybody knows looking at that property that one day, and it may be a generation away, that's going to get redeveloped. In fact, but in the meantime, you're still getting great growth. They're building 1,500 homes in the property immediately adjacent to the north on that property today. We haven't seen any Jon Gitlin, you want to maybe comment on that?
Yeah.
We haven't seen any deterioration.
No, I'd also add to that to say there haven't been many data points recently. CBRE's report, they have to put one out each quarter, but I don't think there have been many trades in the major markets that include power centers. The ones that we have seen have actually been fairly lucrative deals. I don't necessarily agree with the comment, and I also agree with Ed's comment.
Okay. Thank you.
All right. Just a 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, but we have very little exposure. I don't recall any of them being in the top 30 even. I'm not aware of any of our sites at all that are at risk with them. John?
No.
No.
No. None of them are.
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. Good morning.
Good morning, Michael.
We have a new government in Ontario, from what I understand, they may be considering rethinking rent control, may be given a holiday, for rent control for new buildings for five or 10 years. I wonder if you have any comments on that, and should 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 the 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.
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 this rent control legislation." 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 would encourage units, apartment units that are already built, being brought more quickly to the rental market. Whether it would change our strategy? Probably not.
We did change one building from rental to condominium, being the Kingly, that was probably more out of just being mad at the previous government than any other reason. It would certainly encourage us to move ahead more quickly on some of the rental buildings.
Okay. Thank you. Just on the topic of rents, I think you said that you're seeing strong rents rate across everywhere. Is that fair to say the Frontier as well?
Absolutely. It's not just a Toronto story. It's primarily a Toronto and Vancouver story. We're seeing it in Ottawa. Our partners in Calgary are telling us the same thing. We've got the building, well underway there in partnership with Boardwalk. It's right across the board.
eCentral, that, I think when we first started talking about that a couple of years ago, you were talking mid CAD threes, if I remember correctly. Now we're over CAD four.
Right.
This is ahead of your expectations, but costs were up. In terms of, like, say your
Let me correct you, Michael.
Okay
I'm sorry 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 eCentral are really by the beginning of construction. They're locked in. In that case, you're talking two years ago. That's the case, that's just something we do as prudent developers. The costs on eCentral really are not up from two years ago. The only thing that's up is the expected income.
Your pro forma will be over?
We will well exceed the return expectations we had when we started this project 3 years ago.
Okay, great. Just switching gears, going to The Well. I think you're going to start leasing the retail, I guess, in 2019.
Yeah.
I wonder if you could just update us on your vision, if there's been any changes. Are you talking to What types of tenants are you thinking of?
Well, look, there really hasn't been any significant changes. It's going to be obviously a very unusual, for RioCan, retail facility. 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. It's 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 sq ft, 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. I think this will be quite an experience.
With that as the anchor, I think what you'll find in the rest of it, 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. There will probably be a drugstore that will also sell some of the staples that people also need that they aren't going to get in a food hall, as boring as toilet paper. Guess what? People still need toilet paper and Kleenex and all those other staples, 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.
Our vision is to actually have it almost be part of the street. 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, then continue on what will seem like a street, except it'll have grass instead of paving. Although there'll be some elements of stone in 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 tracks. If John 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, 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, I think when Toronto sees it in about two and a half to three years, they will be equally excited by it.
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.
Eataly is supposed to be open sometime next year, but elements of an Eataly 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 halal butchers. There'll be all kinds of fresh produce. That kind of thing, I don't think is part of Eataly. I've been in Eataly in Italy and in New York. I don't know exactly what it's going to look like here. I know it's primarily driven, I think, by Loblaw/Weston together with Terroni, if I'm not mistaken. I'm sure it's going to be great.
It's primarily Italian.
Pardon?
It's primarily.
Obviously, by Eataly, it's primarily Italian. Ours is going to be much more international in scope. I am looking forward to Eataly because I live in the neighborhood.
Okay. Well, that's it for me. Thank you.
Thank you, Michael.
Once again, as a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Your next question is from Matt Kornack with National Bank Financial. Please go ahead. Your line is open.
Good morning, Matt.
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. Gitlin.
Yeah. Some of them are under contract, and some of them have, in fact, already been sold. 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.
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. Presumably, that's why you still have some confidence in the 2%-3% same-property NOI growth-
Exactly
going forward.
Those are one-offs.
Okay. Just the last question for me. You mentioned some interesting comments with regards to affordable housing.
Yes.
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. 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, John Tory and the City of Toronto are quite committed, and they certainly have an ambitious program. They're going to have to do something, whether it's with development charges. 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. 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. 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.
I've heard your voice before, too.
Yes. Okay. 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 CAD 1.1 million of growth year-over-year. What was the reason for that?
I'm putting Qi on the spot here.
It's definitely partly timing, right? The secondary market assets are still dragging down that overall to quite an extent. For example, the renewal spread this quarter, including the 10 leases with one anchor tenant, is negative, as you know. That impacted the SPNOI for the quarter.
Yeah. 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. You're going to get anomalies because of just timing, and I think this is one of them.
Okay. 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, we're quite satisfied with where the pre-leasing is on the office space. 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.
Yeah.
I think we're just waiting for construction to proceed a little further. Right now, I think we're prognosticating Andrew Duncan, our head of development, is who I'm calling here. That we're going to not be able to deliver retail spaces to tenants till like 2021.
Yeah.
To ask tenants to commit more than two years ahead is, we think, difficult. 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. That lets us do our necessary calculations. We think as The Well comes closer to being a physical reality, which as we roll into 2019, there's going to be a lot of concrete being poured into this giant hole. It'll start moving back up too. Also, if anything, we're probably waiting for the sales efforts of our buyer of most of the residential air rights, Tridel, which we think will be starting, I mean, it's in their hands, but by spring of next year, so six months from now.
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 Sonshine for closing remarks.
Okay. Well, I would like to really thank and congratulate all the analysts on the call because you ended your questions precisely at 11 o'clock, which is what we timed it for. I don't know if there's another conference call happening at 11 o'clock, so you all got to get off. Whatever the reason, thank you for fitting it right into the hour we had allocated. I look forward to talking to you after the end of the next quarter. Bye-bye.
This concludes today's conference call. You may now disconnect.