Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the RioCan Real Estate Investment Trust first 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 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Edward Sonshine, you may begin your conference.
Thank you, Lindsay. Good morning to everyone, and thank you for calling in. I know we have some competition this morning. It seems that everybody's earnings are all coming out over the same two days. Without further ado, I'm going to turn it over to Christian Green to provide the introductions and the appropriate warnings.
Thank you, Ed, and good morning, everyone. I'm Christian Green, AVP Investor Relations for RioCan. Before we begin, I'd like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website earlier this morning. Before turning the call over to Qi, I'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. Also, in discussing our financial and operating performance and in responding to your questions, we will be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows, and profitability. RioCan's management uses these measures to aid in assessing the trust's underlying core performance and provides these 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 apply to making these forward-looking statements, together with details on our use of non-GAAP financial measures, can be found on the financial statements for the period ended March 31st, 2018, and management's discussion and analysis related thereto, as applicable with RioCan's current annual information form that are all available on our website and at www.sedar.com. Qi.
Thanks, Christian, good morning, everyone. We are pleased to reveal RioCan's first quarter results that were released earlier this morning. It was another strong quarter for RioCan to get 2018 off to a great start. Our same property NOI grew by 2.6% in the first quarter, which is net of the negative impact of Sears closure. Our major markets same property NOI grew even stronger at 3.3%. Committed occupancy for major markets properties grew by 30 basis points from the last quarter to 97.9% at March 31st, 2018. For the entire portfolio, our committed occupancy and in-place occupancy remained high at 96.6% and 95.7%, respectively, and grew by 40 basis points and 130 basis points from a year ago. Rags will speak shortly about the strong momentum in our key operational performance metrics.
Despite of the ongoing strategic dispositions, our FFO per unit grew from CAD 0.44 in Q1 2017 to CAD 0.46 in Q1 2018, a 6.1% increase. FFO, excluding gains from the sale of marketable securities, grew from CAD 0.40 to CAD 0.42, a 4.3% increase over the same comparable period. This strong growth was primarily driven by CAD 4.3 million same property NOI growth and CAD 0.8 million of incremental NOI from development completions, as well as the acquisitions from our NCIB program. The CAD 2.1 million higher lease cancellation fees in the quarter were offset by the CAD 1.1 million lower streamline rent and CAD 1.5 million lower dividend income from marketable securities, given that we have been selling such investments since last year.
As a result of the FFO growth, our FFO payout ratio improved from 83.9% for the comparable period in 2017 to 78% in Q1 2018, improved by 5.9% and outperforming our 80% target. Our Q1 2018 FFO payout ratio also improved by 80 basis points compared to the last quarter. This is with the annual CAD 0.03 or 2.1% increase to our unitholder distribution effective January 1st, 2018. Looking more closely at our same property NOI performance in the quarter. Approximately CAD 2.7 million or 63% of the CAD 4.3 million same property NOI increase is related to higher occupancy, renew rent growth, and contractual rent increases. CAD 1.5 million is due to target backfills and other expansion and redevelopment projects completed in 2017 and in Q1 2018, which was net of CAD 0.7 million negative impact of Sears closures on same property NOI.
Our same property NOI from properties located in Canada's six major markets increased by 3.3% over the same period in 2017, while same property NOI growth from properties located in secondary markets remained flat for the first quarter. This further validates and highlights the strategic rationale behind our ongoing disposition program. Speaking of our disposition program, as of yesterday, May 8th, 2018, the Trust has either completed or entered into firm agreement to sell CAD 583 million of properties in secondary markets at a weighted average cap rate of 6.14% based on in-place NOI. There are additional CAD 225 million of assets that are under conditional contract, which if completed as currently contemplated, will bring total sales to 40 properties with gross sales proceeds of CAD 808 million, or 40% of our overall disposition target at a weighted average cap rate of 6.4% based on in-place NOI.
The aggregate sales price are in line with the Trust IFRS valuation. Giving our ongoing CAD 2 billion disposition program over the next two to three years, we expect our normalized CapEx will decrease in 2018 and going forward. This is because our major market assets tend to be younger and have lower tenant turnover and require less CapEx on a per square foot basis. Our income-producing properties' net leasable area is also expected to decrease as we sell assets. As a result, the Trust estimates its normalized capital expenditures for 2018 to be about CAD 45 million based on CAD 1.16 per square foot and approximately CAD 38.8 million average NOA for the year after taking into consideration the ongoing property disposition. For Q1 2018, our actual maintenance CapEx was CAD 3.9 million lower than our normalized CapEx, about CAD 11.3 million for the quarter due to lower cost and timing of maintenance capital expenditures.
Next, let's take a look at our development program, which is an important element of our growth strategy. As at March 31st, 2018, our development pipeline remained high at 26.2 million square feet at RioCan's interest. 47% of our pipeline, or 12.2 million square feet, are zoned, plus another 21% of the pipeline, or 5.5 million square feet with zoning application submitted. The extent of zoning approvals that we have for our development pipeline provides us with a significant competitive advantage considering the uncertainties associated with Ontario's transition to the Local Planning Appeal Tribunal or LPAT structure for municipal zoning approvals due to its unclear mandate at the current stage.
After years of a development and housing boom in Canada's major markets, there are a number of emerging factors that are affecting development risks that the Trust faces, such as rising construction costs and development charges, as well as a shortage of experienced labor in certain construction-related trades. RioCan's disciplined approach to development and our five to seven-year head start over our peers in the residential mixed-use development enable us to achieve major residential project deliveries in late 2018 and early 2019 while managing development risk prudently. We remain committed to self-funding our development with the main source of funding coming from disposition net proceeds. We will continue to manage our leverage in the 38%-42% range and ensure our total development exposure remain no more than 10% of gross assets.
We may exceed the internal target temporarily on a quarterly basis, but will be well within debt covenant and Declaration of Trust permitted levels due to the timing of NCIB purchases and disposition proceeds and before several large residential development projects are completed in late 2018 and early 2019. Looking briefly now at our capital structure and key leverage matrix. At the end of the quarter, our debt to adjusted EBITDA was at 7.63 times on a proportionally shared basis, slightly above the 7.57 times as of last year-end, but below our target of 8 times and was one of the lowest among our peers. Our leverage ratio on a proportionally shared basis at the end of the quarter was 42.4%, slightly above the upper end of our 38%-42% target range.
This was because we maximized our NCIB purchases prior to entering the blackout period in late March due to quarter-end reporting and in anticipation of receiving substantial disposition proceeds in April 2018. This was also the reason why our debt to EBITDA ratio was slightly higher this quarter. Since the renewal of our NCIB in October 2017, we have purchased and canceled 9.8 million units at a total cost of CAD 240 million. Our pool of unencumbered assets has further grown to CAD 8.1 billion as of the first quarter and generates 58.4% of our annualized NOI, above our target of 50% and further improved from last quarter. Our unsecured versus secured debt ratio has reached 59.3% unsecured debt and 40.7% secured debt. Subsequent to March 31st, 2018, the Trust extended the maturity date on its CAD 1 billion revolving unsecured operating line of credit to May 31st, 2023.
All other terms and conditions remain the same. Overall, we are very pleased with our results for Q1 2018. As reflected in strong FFO per unit and same property NOI growth, good progress on our strategic disposition and disposition prices achieved, ongoing smooth execution of our development program, and continuous success in our capital management. With that, I would like to turn the call over to Rags for update on RioCan operations this past quarter.
Thank you, Qi, and good morning, everyone. I am pleased to provide the operational highlights for the first quarter of 2018. Our Q1 results continue to show improvements in the operating performance of the portfolio. We are making excellent progress with regards to our secondary market disposition strategy, which will allow us to increasingly focus on Canada's six major markets. In reviewing our Q1 results, I will focus the discussion on our primary market portfolio to provide you with better visibility on the portfolio, excluding the properties which are expected to be sold. As Qi highlighted, our Q1 2018 same property growth was 2.6%. These results show that the overall health of our existing portfolio is strong. Our outlook for the remainder of 2018 continues to be positive, and our expectations for same property growth for the full year 2018 are in the range of 2%-3%.
Same property growth in the primary market portfolio was very strong at 3.3% in the first quarter. With respect to the leasing environment, grocery and certain large format retailers are continuing with their expansion and repositioning strategies. Numerous categories, including food, entertainment, beauty, health, and value, continue to expand, and overall, there is high demand for space in the 6 major markets where population growth is highest. RioCan's committed portfolio occupancy rate remained steady at 96.6% in Q1 2018 versus 96.6% in Q4 '17. Retail occupancy increased from 96.6% in Q4 '17 to 96.7% in Q1 '18, despite the completion in the first quarter of 2 lease buyouts with anchor tenants where the space was dark.
These buyouts were completed in the first case to allow us to redevelop and intensify an existing site in Ottawa, and in the second case, to allow us to re-tenant the space and add value before disposing the secondary market site. The increase in retail occupancy was offset by a decrease in office vacancy from 96% in Q4 '17 to 94.1% in Q1 '18, caused by 2 vacancies totaling 51,000 sq ft at RioCan's interest this quarter, which we expect to lease in the ordinary course. Committed occupancy in the primary market portfolio increased from 97.6% as of 12/31/17 to 97.9% as of March 31, '18. The portfolio in-place occupancy increased from 95.6% in Q4 '17 to 95.7% in Q1 '18. In-place occupancy in the primary market portfolio increased from 96.5% at December 31, '17, to 97% as of March 31, '18.
We continue to make advancements with our former Sears premises. To date, RioCan has either completed deals, conditional deals, or in advanced lease negotiations for 85% of the GLA. These deals represent 133% of the net revenue loss on 100% of the former Sears locations at RioCan's proportionate ownership percentage. The first of the replacement tenants will take possession in Q3 2018 and commence paying rent in Q4 2018. The majority of the replacement tenants are forecast to be operated and paying rent in early 2019 and will contribute to same property growth next year. Our quarterly leasing and renewal results continued to be strong in Q1 2018. RioCan completed 417,000 sq ft of new leasing in the first quarter at an average rent of CAD 23.28 per sq ft.
179 renewals totaling 1.1 million sq ft of space was completed during the first quarter of 2018 at an average rental rate increase of CAD 0.70 per sq ft, or 4.3%. The average growth rate on renewals was negatively impacted this quarter due to decreases in rent upon renewal of several fashion tenants. The average rental rate increases of renewals completed in the primary market portfolio was CAD 1.04 per sq ft or 5.8%. Our retention ratio for the quarter remains strong at 87%. With regards to our major market expansion and redevelopment, urban intensification, and greenfield development programs, an additional 118,000 sq ft of space at RioCan's interest was completed and became income-producing in Q1. Highlights include 491 College Street in Toronto, where LCBO took possession of their new premises in January 2018 and are scheduled to commence operations in June '18.
LCBO's relocation from the 555 College site allows us to proceed with the 54,000 square foot rental residential redevelopment on the former site. Construction on this project will commence in 2018 and is expected to be completed in early 2021. At 642 King Street in Toronto, construction is nearing completion on this four-floor urban mixed-use redevelopment. The deal was completed in Q1 2018, with a software company to take all of the office space at the property, and the property is now 100% leased. Two restaurant tenants took possession in Q1 2018, and the office space will be in occupancy in Q3 2018. At East Hills Shopping Centre in Calgary, development is also steadily advancing. A 30,000 square foot Cineplex commenced operations in April 2018.
Construction on two additional buildings totaling 10,000 square feet will be completed in Q3 '18. Construction is scheduled to begin on one additional building totaling 7,000 square feet in Q3 '18. Construction at King Portland Centre in Toronto is nearing completion. Spotify and Indigo have leased all 14 floors of the office tower, and both are expected to take possession in Q3 '18. All 132 condominiums have been sold and are expected to be occupied in March 2019. Construction at Sheppard Centre continues to progress. The two retail anchors, LA Fitness and Longo's, are expected to take possession in Q2 2018 and Q3 2018 respectively. Above-ground construction will commence on the phase two residential building in Q3 2018. Upon completion in 2020, this 36-story residential tower will feature 361 rental units.
Construction is advancing at a number of our projects, including 740 Dupont, Bathurst College Centre, and The Well, all in Toronto, and Brentwood Residential and 5th & Third East Village in Calgary. 2018 will also see completion of two of our residential rental projects, being eCentral at Yonge and Eglinton in Toronto and Frontier in Ottawa. Both are high-quality projects located in prime areas adjacent to main transit lines that well represent our vision of our future residential portfolio. We are forecasting that completions from our expansion and redevelopment, greenfield, and urban intensification development programs will deliver an additional 853,000 square feet, or 546,000 square feet at RioCan's interest in the remainder of 2018. From Q2 2018 to the end of 2020, we're expecting to complete approximately 2.8 million square feet at 100%, or 1.7 million square feet at RioCan's interest, net of air right sales.
These new development completions will make significant contributions to our growth going forward. The value created through the completion of our development projects is significant, as the annualized stabilized NOI is expected to be in the CAD 50 million-CAD 55 million range at RioCan's interest. In conclusion, our Q1 results were strong and continue to show improvements. Our Q1 primary market results were even better and support our strategic decision to focus primarily on major market assets. Our primary market portfolio is currently nearly 78% leased and produced same property growth as well in excess of 3% in Q1. We currently generate approximately 80% of our revenue from our six major markets, with 43% of our revenue coming from the GTA. These percentages and our results will steadily improve as we complete our planned dispositions.
In the meantime, we will continue to unlock the tremendous amount of value that exists in the portfolio through our urban intensification and residential development programs. Those are the operational highlights. I'll now turn the call over to Ed.
Rags, thank you, and Qi, thank you. Often, people greet me with, "How is business, Eddie?" Often accompanied with a concerned look on their face. My usual answer is, "A lot better than most people think." Reason for my response is the constant media theme of the retail apocalypse being either on us or on the horizon. No doubt that the retail environment has been undergoing tremendous change. These changes are driven by growth in e-commerce, changing consumption habits, and accelerating urbanization, resulting in many more people living and shopping in a much smaller geographical footprint. However, the operating results for Q1 of RioCan simply confirm what we have been telling those who will listen for quite some time. Notwithstanding the vacancies created by Sears finally shuttering its doors at the end of 2017, RioCan's occupancy rates and same-property growth rates are in the neighborhood of historic highs.
We are optimistic about the balance of 2018, and that this theme will be continued. In fact, as we complete the leasing of the Sears space and get the tenants and occupancy at open, we expect to perhaps even better our current growth rates as we move into 2019, as the focus of our portfolio becomes almost exclusively, better than 90%, major markets. Tremendous strength of our portfolio and the skill and reach of our leasing team is even more impressive when one focuses exclusively on the major market components thereof and the occupancy and growth rates indicated. We have begun to highlight this as we fully expect it to be over 90% of our overall holdings by sometime in 2019 from the 80% level, which we quickly reached at the end of Q1.
I believe that our strategies to ensure growth and solidity for the next 25 years of RioCan are clear and fairly well understood. First, an almost complete focus on Canada's six major markets. Two, accelerating our longstanding disposition program with secondary market assets and using the proceeds to fund our development program and an aggressive NCIB program. Third, as part of the intensification of our existing properties, creating Canada's best multi-residential rental portfolio. All new, all in major markets, and all transit-oriented. Fourth, and certainly last but not least, maintaining the strongest balance sheet amongst our peers, as best evidenced by our most important debt metrics. A wise man once told me that many people can come up with good strategies. What separates the winners from the also-rans is the execution of those strategies.
I think RioCan's success in executing our strategies has been proven over our long history, most recently by our well-timed entry and exit into and from the United States. Our execution of creating a residential portfolio is becoming apparent as our first buildings in Toronto, Ottawa, and Calgary near completion, with many others following closely behind. Certainly, our sale of our secondary market portfolio is proceeding according to plan. It's been a long haul. As a tidal wave of development completions becomes income producing over the next few years, our portfolio strategy of owning iconic properties in Canada's best locations will become clearer and more complete. As I've said to many, our strategies, and perhaps imitation is the best form of flattery, are being echoed by many. Ours are well into the execution phase.
We're way beyond talking, over the course of this year and the next few, you will see them being completed. With that, I'm going to end my very short remarks so that we have lots of time for questions, if there are any, and turn it back to Lindsay to narrate them. Lindsay?
At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Dean Wilkinson with CIBC World Markets. Your line is now open.
Thanks, Lindsay. Morning, everybody.
Morning.
Ed, or maybe to John Gitlin, on the development side of things, we're seeing a lot of cost inflation through structural steel, glazing, labor, et cetera. Are you finding that the rents are keeping up, or is the inflation running ahead of that, or would you say they're roughly even?
There certainly is cost inflation in parts of the construction cycle. Happily, they are restricted to certain trades, probably rebar, concrete, and a few others, glazing being a big one. However, we're finding it's very Toronto-centric. Our budgets for Ottawa and Calgary, quite frankly, are coming in on the buildings we have under construction and the ones we're going out to tender on, are coming in basically where we expected. We're not seeing that same quite inflation, although glass is a problem everywhere in Canada, as far as we can determine. The good news is, I think the media for once are getting this one right, rental rates are, quite frankly, going in the right direction and moving even more quickly than costs.
We haven't seen any change in our bottom line of the performance, notwithstanding the increased costs that we're bringing in as we go to tender on various projects, including projects like The Well, which is, quite frankly, enormous. Not to say there haven't been increases. The bottom line is that in our new builds across the country, we're still hitting, when you just isolate that part of our development and redevelopment program, pretty close to or above 6% yield on new money that we're putting into the projects. Quite frankly, we're comfortable. That doesn't mean that as we roll forward on our development program, if this cost escalation continues, we're in a wonderful position. Our properties are income producing. If that means that we have to sit and wait till costs come down a bit, we'll probably do so on selected properties.
We don't have that time clock running against us, like somebody who just goes out and buys a piece of land and has to build it because the clock is ticking. We have income coming in. I think we're best suited to handle it, but so far so good.
Great. I guess the other element of cost, and I'm going to risk wading into the political side of things here, is development charges and fees. There was a report out from Build Toronto earlier this month that said, an average apartment condo, you're looking at charges in the area of north of CAD 120,000 a door now. That's like a tenfold increase over the past 20 years. You layer on top of that the buildable rights are pushing towards CAD 200 a foot. You're in through half of your construction budget before you've sort of laid down the first piece of rebar and poured some concrete.
The-
Do you think at some point this is going to break? Like at the front end, you're getting hit with the development charges going up tenfold, and on the back end, there's rent control. Is this going to wind up, absent the fact that you've got very low cost base on the land, is it going to take other builders and just blow them right up? How are you looking at that?
Again, we are wading into the political here. Our own view, my own view, I'll restrict to myself, is that between the cost escalations that are happening, rising interest rates, stress tests that the feds put in on the banks, and the increased development charges, I would not be surprised to see a significant slowdown over the next year or two. Certainly, prices of land, I don't expect them to go down because land in the desirable locations is scarce. Certainly, the value of zoned land with the changes of the OMB, lest we forget, has gone up, quite frankly, dramatically, and the gap between zoned and unzoned land values has widened to one that we haven't seen in a few years. All those things are going to mitigate against the speculative condominium builders.
They're going to mitigate against the people who are less well capitalized than us, and people who, quite frankly, don't already own the land and are positioned to wait this out a little. I think when you do see a slowdown, and I really do expect to see it in the next couple of years, I wouldn't be surprised to see more cancellations of buildings that are already pre-sold, for example, like we've already seen.
Yeah.
Interestingly enough, we probably won't see them in the highly desirable locations. You'll see those more on the peripheries of the city and spots where somebody says, "Oh, here's a spot, let's put up a building." That's very unlike what we've got. Ultimately, I think a slowdown like that will, quite frankly, be to RioCan's advantage. Again, I can't overemphasize it because we already own lots of zoned sites. We're in a position to wait out any bad stuff because of the income coming in. We have the balance sheet to go forward and just move it along. Yeah, the industry's getting tougher. There's no doubt. At some point, government's going to realize that the construction and development industry are a significant driver of the economy, and as it slows down, so will the economy.
Perfect
We've both given speeches, Dean.
With that, I'll hand it back for it to become a little less political. Thanks, Ed.
Thank you.
Our next question comes from the line of Sammy Damiani with TD Securities. Your line is open.
Thank you. Good morning.
Morning, Sam.
Just on the balance sheet, the leverage did tick up, and you gave the reasons why. What should we expect for Q2 with the disposition proceeds coming in post Q1?
Well, first of all, what you should expect is a much greater focus on debt metrics rather than the percentage. In other words, you should expect a greater focus on numbers that really don't contain any discretion on the part of management. I always find it interesting that everybody's focus is on that percentage, while the denominator of that percentage calculation is one that has a large element of discretion, and quite frankly, has a lot of disparity between what I see as similar portfolios in some cases. Leaving that aside, I think you'll see us possibly. It really depends on what opportunities we get in the NCIB and the timing of the disposition program. Those are sort of the variables that may see it pop either side of 42. But certainly, over the course of the year, we expect to be well within that 42% number.
You mean below the 42% ceiling?
Correct.
Okay. Just on the cap rates on the dispositions, I guess you've been selling a little bit more of the sort of smaller tertiary properties over the last month or two.
Right.
The cap rates have started to move a little higher. What is your outlook today for cap rates or the depth of demand for secondary retail assets today versus six months ago when you started selling?
You know what? It's surprisingly good. I probably can give you a better idea of that in a couple of months from now. When we go through the next quarter, we have quite a few CAD 100 million worth of assets that are just hitting the market as we speak. There's one portfolio that I think is out there already, which contains, I think, five or six Walmart-anchored shopping centers with long-term leases in the smaller markets. We have basically our entire London portfolio on the market. All I can base it on right now is the demand for how many people have signed confidentiality agreements. Easy for me to say. You know what? A surprisingly large number in both cases, to me. Right now, I think the demand is pretty good. These are great properties we're selling.
They're just slower growth than what we want to have at RioCan. I expect the demand's pretty good. I think the only impediment, Sam, that again, interestingly enough, that we're running into, is not one of demand or even not one of cap rate, it's the ability of buyers to secure the financing in the amount that they want. That's, again, it's part of this retail apocalypse story. Bank risk committees read the same media that we all do. I think there's some small reluctance on the part of banks and insurance companies to finance the acquisitions for our buyers at the levels that they wish. Other than that impediment then, certainly it hasn't killed any deals, but it may slow down some purchases. Other than that, it's pretty good.
Great.
There really hasn't been much movement in cap rates beyond what we show in that. We're still confident that our disposition program will not be negative to our IFRS.
Great. Thanks. Good progress so far. I'll turn it back. Thank you.
Thank you.
Our next question comes from the line of Michael Markidis with RBC Capital Markets. Your line is now open.
Thank you, good morning.
Morning.
You must be pretty happy with the 3.3% same property NOI growth in major markets. Do you think it'll stay north of three for the balance of 2018?
You know what? That's hard to say. It obviously varies quarter to quarter. It'll pick up a little bit. We'll get some pickup from the Sears spaces, the ones that are in the major markets, Calgary, the one in Oakville, as those tenants start to move in. That may be a variable. Look, our long-term goal, which I know a lot of people were cynical about, was that as we reduce our portfolio to primarily major markets, better than 90%, to have a 3% same property growth rate. We're quite confident in that, and I think this quarter was just the first indicator that that is an achievable number for us. What it will be quarter to quarter over 2018, I don't even want to hazard a guess, and I don't quite frankly think it matters that much.
It'll be 3% for the year in the major markets, if not a little bit better. That's one that we think will continue for quite some time.
Great. Just picking up on the last series of questions. Are you still committed to stretching out your disposition program over the next couple of years? Is there any thought of giving the dynamics of speeding it up a bit?
Well, you know what? Listen, our timing in the dispositions is driven by a whole bunch of reasons, and good reasons. I won't bore you with reading them all. Having said that, right now, I would say that if we continue to enjoy the success that we're having, and I see no reason that we wouldn't, we'll have the bulk of it done. When I say the bulk, 80, 90% done within a year from now.
Mm-hmm. Okay.
Is that a speed-up? Considering we announced in October of 2017, I guess, we really got going then, to have this kind of thing, the bulk of CAD 2 billion sold or under contract in a year and a half, I think that is pretty good execution. I think it will be a little bit faster than we may have. Listen, the original estimates are always done with a hint of caution in the mix. Right now, while still being cautious in predicting, I am feeling pretty good about it going a little bit faster.
Great. Thank you. Lastly, last question. I wonder if you could just give us some color of what it is like to deal with the Local Planning Appeal Tribunal compared to the OMB.
Well, we have not had the situation yet. Most of our properties, because we are so well advanced, quite frankly, even the ones that are in the zoning process. Quite honestly, like I guess many other developers, we have already filed before the changeover. We have sort of outstanding appeals to the OMB. We do not expect to actually go to the OMB on any of those, because we are quite confident in our ability to work out a mutually agreeable solution to each property with the planning staff and the political masters of that particular area. Having said that, we have adopted a policy as far as going forward on new properties. We try to be very sensitive to what the residents want in an area, which is not always what we want, but we try to reach an accommodation.
The big advantage we have, Michael, which not a lot of people do, is keep in mind the province has made areas that are in the neighborhood of a transit hub and a transit stop areas of special consideration when it comes to intensification. Almost without exception, all of the properties that we're looking at rezoning are in those kind of specially designated areas. I expect if we do run into issues, and we've got to deal with some of those local planning authorities, we'll be fine. Having said that, municipal councils by and large are pretty responsible. They understand the demand for housing. Quite frankly, as people who are walking in looking to build primarily rental housing, of which there is such a huge shortage in our major markets right now, we're finding that everybody is pretty reasonable.
We've got a big pack of zoning already completed. With the ones that are in process and to be started, I'll give you an example of how excited and how big the opportunities are for us. The more difficult it is for everybody else, quite frankly, the better it is for us. Shoppers World, Brampton, which is one of the properties we talked about, I sat in a meeting yesterday, and we're already designated under the OP for 4.5 million square feet of density on that 60-odd acre property. The city, I think, would quite frankly be open to even more if we could figure out how to fit it all in.
We're effectively the transportation hub for South Brampton, or quite frankly, for Brampton and much of the region of Peel, because the terminus of the LRT that's going right from the lake to Brampton happens to be, guess where? Right at our property. It's also the main station for the bus transportation system and the rest of Peel. That's just one example. I just happened to be sitting in a meeting looking at that. I wouldn't expect the changes in the OMB to cause us any difficulties. It's a very long-winded answer to your question.
That's great. Thank you. That's it for me.
Our next question comes from the line of Pammi Bir with Scotia Capital. Your line is now open.
Thanks. Good morning.
Hi, Pammi.
Hey, Ed. Just maybe going back to your comments, and again, the discussion around zoning. If you look at the 12 million square feet that is zoned today, and if you compare the value of that versus, say, two to three years ago versus where it is today, how would that compare? Do you have a sense of what that value could be on a per buildable square foot basis?
Yeah. Look, I'm not going to give you a value for each square foot because we haven't really calculated it that way. First of all, every site is very different. There's no doubt that value of zoned land, even over the last year, particularly in Toronto and the GTA, where the bulk of ours, quite frankly is, has probably doubled. To me, and I was quite almost shocked by it, but if you look at our RioCan Hall property, which is not one that people look at too often, it's a great property. We're just in the process of getting a zoning application ready, so it's not in that 12 million sq ft, and it hasn't even been applied for yet. Nor do we even take into account in our valuations what can be done there.
Yet we know that depending on how it all works out, 750,000-1 million sq ft are possible on that site, while still retaining much of the retail that we have there. Obviously, in a different format, and there'll be some major work needs to be done, and it's a long-term project. Directly to the west of that property, on the other side of a tiny little side street called Widmer, somebody got the zoning for, I don't know, I guess one tower, and I can't tell you exactly how many square feet. Instead of building it, they sold the property to Concord. I think Concord Adex bought it, in fact, immediately started construction. My information, which I think is accurate, was they paid CAD 240 a foot for that property, which a year or two ago, it would've been half that. For the available density.
The price, the more difficult zoning is, the more valuable our existing zoning is. I think we've said before, and I know I'm throwing around big numbers now. Right now, we think it's in the neighborhood of CAD 1 billion of really unaccounted-for value, at least as far as you analysts are concerned.
Great. That's helpful. Maybe just, given where the unit price is relative to NAV, can you comment on whether any initiatives or any other initiatives have been considered in terms of trying to demonstrate the embedded value in the portfolio, be it bringing in some new partners on projects or even something more transformational than that?
Yeah. Listen, we're constantly thinking about things. We don't sit on our laurels. The price of our units, and the rewards to our unit holders are what job number 1 is for us. We're constantly looking at different ways of doing things. I'm not going to tell you what they are, because for every four things we look at, three of them end up not making any sense, we've got to find the one that does, we are constantly looking at different alternatives. We've got some pretty inventive brains around here.
Okay. Just last one for me.
I think in the meantime, Pammi-
Yeah
I think what people are missing is while we're doing all these wondrous things, there's a lot of wondrous things that are going on here, including, a year from now, there'll be people living in our first residential buildings, including at spots like Yonge and Eglinton at rents that I think will achieve well above our own pro formas, is that our retail portfolio, which today is still obviously the vast majority of our income, is doing extremely well. I'm not sure we get the credit for that either, but be that as it may.
Yep. That's pretty fair. Just, I guess last one. With respect to the joint venture with HBC, any updates there on the properties that are in the JV and perhaps the other sale process on the Vancouver property?
Nope. No updates. The media seem to be running ahead of anything I want to say. I'm not going to say anything.
Okay. Yeah
You know what? Stay tuned. There's a lot of interesting stuff going on.
Okay, thanks very much. I'll turn it back.
Our next question comes from the line of Matt Kornack with National Bank Financial. Your line is now open.
Good morning, guys.
Good morning.
You touched on residential rents beating your pro formas.
Oh, yeah
if you're seeing the same type of outperformance on some of the retail space that you're leasing. Obviously, well, it's early days, but in your property tour earlier this year, it was interesting to hear some of those rents and where they're coming in. I'm wondering if that's similar across the board from a retail standpoint in urban areas.
I wouldn't say it's across the board. I do think in our best locations, we're outperforming. The increases we're getting from tenants in places like the building we're sitting in here at Yonge and Eglinton. The rents we're going to be achieving at our other new developments in the downtown area are probably going to exceed our pro formas when we built.
Okay.
That's why I threw around that number of 6% on new money going in on our developments. We're actually quite pleased.
In pursuing these type projects, have you had to expand the type of tenants that you typically would've spoken to historically, or would you be looking to put these tenants into some of your existing non-development assets as well?
Yeah, it's a mix. Jeff Ross and his really skillful team. As Rags mentioned, there's a lot of our, what I'll call our existing stable of tenants in the value field, in the food field. Then there's new ones. We've done an interesting deal with Farm Boy on the ground floor of our building on Dupont. Farm Boy wasn't on our radar screen two years ago. We did, I think, a fantastic deal, both for the property and for us, and for the tenant, with Nations. Whoever heard of Nations three years ago? Then, of course, restaurants. Restaurants continue to expand both in the quick service and the sit-down service. We took Milestones out of Beacon Hall, and we've replaced it with a Brazilian steakhouse whose name escapes me at the moment. I think they should be opening this year.
Yes.
At pretty good numbers. It's not their first location. I don't want you to think we're doing startups. Although, we're open to doing startups, too, if we believe in the concept. So yeah, I'm pretty optimistic. I know this is contrary to the Media story and even some of the analyst story. I think some of the early analyst views I saw, and I'm not focusing on your good self, Matt, was almost surprised in not just our results, because I hadn't seen much on our results yet, but some of our peers. You know what? Business is pretty good if you've got properties in the right places, and that is the key. RioCan, I think, is really already well-positioned. It's going to be even better positioned as we complete our disposition program and our development program, both of which we got going on simultaneously.
Fair enough. A little bit counter to that point, you've been successful in selling probably fully maximized assets in core locations at some pretty attractive cap rates. Is that going to be a meaningful source of capital going forward, or is the idea to keep those assets within RioCan and focus on redeveloping them longer term?
You know what? It really depends on the asset. Clearly, I used the word iconic in my little prepared remarks. We're not going to sell a Yonge-Eglinton Centre. When Yonge Sheppard is finished, we're not going to sell that. When The Well is done in a few years from now, we're not going to sell that. We're not going to sell a King & Portland. When you have one-off properties that we don't see over a five to 10-year period, significant growth that's in line with the kind of targets and goals we set for ourselves, nor do we see any redevelopment potential, and we can use the money for something else, yeah. We're not married to anything except for the few that I mentioned.
Makes sense. Thank you.
Our next question comes from the line of Jenny Ma with BMO Capital Markets. Your line is now open.
Thanks. Good morning, everyone.
Morning, Jenny.
Ed, when we had the earlier discussion about rising costs and rents. I'm just wondering, because you are doing high-quality, premium rental apartments, from a zoning, legal, sales, or just a physical configuration standpoint, how easy is it to swap between condos and apartments further down the line if there is a change in market conditions that would favor one over the other?
It's pretty easy. I think we showed that in our Kingly development, that King & Portland, where we just decided to move back. The qualitative difference from what we build for rental and what we would build for condos is almost nonexistent. Quite frankly, in some ways, the rental buildings are built to a higher standard than the condos for obvious reasons. You're going to own it for the next 25, 50 years, and you have to release them on a pretty constant basis. You want a building that's not only going to show well on day one. Which is, again, the big difference is condo buyers tend to buy it looking at a piece of paper. Renters actually walk into the apartment and look at it. You've got to be better. It's pretty easy to shift back and forth, quite frankly, between the two formats.
Okay. That's helpful to know. My last question is with regards to looking at your debt maturity schedule.
Yep.
With the rated average interest rate of 3.4% and a relatively short term of about four years, given where rates are going, is your preference to sort of stay shorter and manage the interest expense costs? Or just given that rates are rising, would you prefer to sort of term it out longer and pay a higher cost to lock in more preferred rates?
I'm not sure we've chosen one strategy over the other. We're doing a little of both. Where we're looking at a property that's going to be sitting there for the long term, we're quite prepared to go seven or 10 years, and in fact, are doing that. Right now, I just don't see a problem. Ourselves, I think rates are just returning to, I won't even say historic levels, because they're still about the lowest they've been in. If you take the last 25 years, these are low rates. They don't have much impact on our business. Qi, do you want to add anything to that?
Sure. Thanks, Ed. Jenny, as you know, we also manage our exposure on variable rates very carefully. We have very limited variable rates, that kind of allow us to manage the rising interest environment better. As Ed said, we really evaluate on sort of property by property. On the secured debt side, we tend to go longer.
Right.
On the unsecured side, because of the spread difference, we may stay relative on the shorter end, under the seven-year. You never know. We kind of manage sort of closely, and we basically limit our variable rate debt.
Right. Thank you, Jenny.
Okay. Just a quick follow-up. On your unsecured, unencumbered assets, it's sitting just under about 60% or so.
Yes.
If the conditions dictate it, would you be willing to bring that down to take advantage of lower cost unsecured debt?
By getting it up to 60%, we've committed to the rating agencies, quite frankly, that we want to keep it over 50%. The difference between 50% and 60% is quite material and gives us, I think, a lot of flexibility. We're not married to any one type of debt or another. Yes, flexibility is our middle name when it comes to that.
Okay, great. Thank you very much.
Thank you, Jenny. Lindsay, are there any other questions? I think we have time for one more.
We do have one final question in queue from Sam Damiani with TD Securities. Your line is open.
Thanks. Just one last one.
Sure.
Actually, I have a couple. I'll pick this one. As you look at the sort of rollout of e-commerce expanding into the grocery field-
Yeah
Loblaw announced a pretty major expansion of its e-commerce strategy last week with, I think, planning to add 500 locations. Are you monitoring your properties for changes in traffic or anything like that to sort of see how the impact of e-commerce is, I guess, playing out at this early stage?
Yeah, I wouldn't say we're actually monitoring our properties for traffic in that sense. What we do is stay very close to the food retailers and meet with them, quite frankly, at multiple levels. We'll try to spend time with the very senior officers of the companies, and others here, Jeff and Rags, will spend time with the actual guys who run the place on a day-to-day basis on the operating side. At the end of the day, everybody is making moves to address e-commerce because of Amazon. Nobody's really figured out how to make money at it. In fact, I had a CEO of one of our major grocery chains say to me, "Look, we're investing a lot of money in grocery pickup, order through e-commerce and come pick it up, because it's really expensive to deliver the stuff." You know what?
Once most people actually come to the supermarket, they prefer to come in and pick their own food, is what we're finding. I think in the food business where e-commerce represents, I don't know, somewhere between 1% and 2% of the market, I think you're going to see a very long, drawn-out change, if any, in any material way. All we see is that while there's much media talk and much company talk about e-commerce, I think that's almost defensive talk. They're all expanding their physical footprints.
Okay. Thank you very much.
Thank you, Sam. Okay. Lindsay, thank you very much. I want to thank everybody for dialing in and listening to us. With that, I will bid you all a fond adieu until the next quarterly call. Bye-bye.
This concludes today's conference call. You may now disconnect.