Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Third Quarter 2022 Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Jennifer Suess, Senior Vice President, General Counsel, and Corporate Secretary. Ms. Suess, you may begin.
Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, and Corporate Secretary of RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over, I am required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance, or expectations that are not historical facts.
These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principles measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows, and profitability. RioCan's management uses these measures to aid in assessing the trust's underlying core performance and provides these additional measures so that investors may do the same.
Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures, can be found in the financial statements for the period ended September thirtieth, two thousand twenty-two, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information forms that are all available on our website and at www.sedar.com. I will now turn the call over to our President and CEO, Jonathan Gitlin.
Thanks so much, Jen, and thank you to everyone for taking the time to join us today. As usual, I'm here today with my great colleagues on the senior management team. Together with the entire 600-person RioCan team, we delivered strong results through the third quarter. The strength of our quarter reflects our acute focus on the pillars that support our five-year plan, reimagined retail, customer centrism, intelligent diversification, and responsible growth. Our results validate that our portfolio and team continue to thrive. The power of this combination and the strength of our balance sheet are competitive advantages that will provide the resiliency to perform through all economic cycles. The RioCan team is mindful that we're operating in an environment of volatility, and we continue to seek to mitigate risks. I'm gonna address this in a moment, but first let me get to our results.
Operationally, this was another successful quarter for RioCan. Our major market necessity-based portfolio demonstrated its quality and its growth potential. Occupancy is 97.3%, bolstered by our retail occupancy, which ended the quarter at 97.8%. FFO per unit is CAD 0.44. Leasing results, which I would say are the purest indicator of the overall health of a commercial portfolio, well, they're strong. We completed 1.4 million sq ft of new and renewal leases, providing an opportunity to mark our rents to market. This opportunity has resulted in new and blended leasing spreads of 15.9% and 7.9% respectively. Rent per square foot is CAD 20.80, representing seven consecutive quarters of increases. Same property NOI grew by 5.1%, and we've also continued to fortify our balance sheet.
Our liquidity stands at CAD 1.6 billion, and our CAD 9 billion unencumbered pool of assets provides additional financial capacity and flexibility, both of which are critical in uncertain times like these. We're proud to deliver results in line with, and in certain respects, superior to pre-pandemic metrics. This is because, simply stated, our portfolio is better now than it's ever been before. The quality of our income continues to be enhanced through the prudent disposition of lower growth assets. We have either firm or have closed approximately CAD 400 million in dispositions so far this year. In doing this, we've improved the profile of our portfolio and at the same time raised capital that's gonna be used for accretive NCIB investments or to pay down debt.
The quality of our revenue is further enhanced through our development program, which has established a cadence of consistent income generation. Since 2020, we've delivered a combined total of 1.4 million sq ft of predominantly residential developments in Canada's most coveted markets. With projects nearing completion, this number is on track to increase to 2.5 million sq ft by the end of next year. This represents over 2,500 homes and communities that critically need the supply. In 2022, the trust expects the value of development deliveries, including properties under development and residential inventory, to be between CAD 700 million and CAD 750 million, the largest annual volume since the inception of our development program. Year-to-date, the value of development deliveries is CAD 450 million.
It's important to note that fixed costs for our 2023 development projects are already contracted, which provides a level of insulation from inflationary pressures, and I'm gonna speak more about this in a moment. First, I wanna acknowledge the advancements we've made with our ESG program. Our ESG initiatives are a significant component of our commitment to responsible growth and enhancement of long-term value. Our standing as an ESG leader in the commercial real estate sector continues to improve. RioCan is proud to lead the way in integrating ESG best practices in everything we do. We continue to progress, and it's an honor to be recognized for our ESG achievements. We've been awarded sector leader status in the 2022 GRESB Real Estate Assessment, and we also received an A rating and top ranking amongst our Canadian peers for public disclosure.
Our operational, development, and ESG efforts over the years yield results now and will continue to bolster RioCan's success. Let's take a minute now to explore the current backdrop. As I've mentioned, the environment has numerous headwinds. Year-to-date, the Canadian economy has shown modest growth. However, there's now little doubt of a pending slowdown due to interest rate hikes and elevated inflation. While a recessionary environment elevates the risk of tenant failure, RioCan's defensive portfolio provides insulation with more than 86% of our net rent generated from strong and stable tenants. These businesses have stable rent-paying ability, strong covenants, and reliable foot traffic. They provide the day-to-day essentials consumers require in any economic climate. Of course, there's gonna be tenants that experience distress in this environment. However, the scarcity of quality retail space in areas that have strong demographic profiles further protects our operational health.
Let's dive into the supply dynamic now, as this dynamic supports both operational growth and NAV stability. RioCan's assets are located in Canada's major markets, in densely populated areas with high average household incomes. Tenants perform well in these areas due to a high volume of daily foot traffic and also the facilitation of last-kilometer delivery. The population in these neighborhoods is steadily increasing, which further drives demand, so there's little doubt that demand is increasing. However, from a retail perspective, these areas are also supply-constrained, and here's why. Replacement costs for well-located retail are well in excess of market values. The implied value of our income-producing properties at our current unit price is about CAD 335 per sq ft. The cost of constructing new retail in the GTA, for example, is in the range of the mid-600 CAD per sq ft.
These numbers illuminate two realities. One, there's a clear gap between valuations and replacement costs, and two, it is virtually impossible to buy land and construct new retail without a substantial increase in market rents. Very little high-quality retail has been built in the past decade, and it's only feasible to build new retail on land that is already owned or as part of a high-density mixed-use development. Simply put, with replacement costs where they are, we're quite certain that very little, if any, supply of new open-air retail centers will be added to the already limited inventory. This means that quality retail space, the kind that RioCan offers, is and will continue to be in short supply. There's no better indicator of the supply-demand constraints than RioCan's leasing results, which I've just highlighted.
This point is further accentuated by our 91% retention rate, which indicates tenants' positive view of the space and level of service that we at RioCan provide. Retailers are keenly aware that our consumers are creatures of habit. Our tenants are reluctant to change locations and disrupt established shopping patterns. Moreover, the cost to move to a new space, if it is in fact available, has increased dramatically. These conditions result in what we like to call sticky tenants that don't wish to leave RioCan shopping centers, which of course is a favorable condition for the trust. Now, I can't promise that every tenant will breeze through these headwinds. However, most of ours are constructed to withstand stormy weather. Now, I'm gonna address concerns about rising interest rates. We're acutely aware that a prolonged high interest rate environment will negatively impact our FFO.
We're adapting to the circumstances, pivoting to utilize our large unencumbered asset pool and refinancing with secured mortgages for the lowest cost of debt currently available. As we previously shared, we'll benefit from our CAD 500 million hedge of the underlying GOC bonds, which significantly drives down the cost of financing, and Dennis is gonna address this further. Now we're not gonna have the benefit of those hedges on new financings in 2023, which of course will impact our FFO results. This FFO impact will be weighted more towards the end of the year in the second half. Even if rates continue to increase, the overall impact will be partially offset by numerous positive FFO drivers, including gains from the scheduled sale of condo units, increasing NOI from development deliveries, and organic growth from our existing income-producing portfolio.
Rising interest rates do pose a potential risk to our valuation. We're operating in a distorted market that is short of transactions. However, our valuations are supported by third-party appraisals and substantiated with available, albeit fluid, market data points. It's important to note that the impact of interest rates on capitalization rates is not the only factor that dictates property values. There are numerous factors supporting RioCan's net asset value, including solid fundamentals and the favorable supply-demand dynamics that I mentioned earlier. Canada's relative stability, the strength of its growing major markets, and the protective attributes of hard assets in general, will further enhance the value and demand for assets like ours. These factors are further complemented by the delivery of our highly valued mixed-use developments. Now, understandably, we're asked with increasing frequency about the impact of record inflation on our development growth engine.
Now, as I mentioned, our five-year development targets have a level of downside protection with fixed pricing in place for projects that are already underway. RioCan also has a competitive advantage in our ability to be highly agile when it comes to new project starts. Our future development sites are typically active retail sites that generate high-quality income. RioCan will adjust the timing of new projects according to the market environment. If the economics are unfavorable, we can afford to postpone breaking ground on new projects and still benefit from the in-place income. We've responsibly slowed the commencement of new development starts, and we'll continue to exercise a high degree of discretion as we always do, a high degree of scrutiny and judgment in assessing whether cost and revenue conditions are suitable before proceeding with new development.
Now, I'm not downplaying the obvious volatility in the macro level environment, but we face these conditions confident that we have strategically and responsibly managed every aspect of our business over which we have control. Our efforts over the years have set RioCan up for success, and our focus remains on the long term. We remain confident in our growth trajectory and the ongoing demand for our scarce and high-quality real estate. The objectives in our five-year plan were established with purpose and the conviction that in concert with RioCan's many differentiating attributes, they are achievable in almost any environment. Underpinned by our strategic pillars, we will continue to leverage opportunities and manage risks to mitigate the impacts of macro conditions. At the same time, we're going to grow responsibly and sustainably.
We will continue to support this growth by investing in talent and structuring our team to maximize alignment with our objectives. With that, I'm delighted to turn the call to Dennis, who's going to take you through our balance sheet and provide insight into how it continues to support our quality and growth. Dennis, over to you.
Thank you, Jonathan, and good morning to everyone on the call. From an operating and financial results perspective, our business continues to perform well against the backdrop of macroeconomic volatility. We believe that the current macro volatility will pass, as it always does, while the supply and demand trends that Jonathan mentioned will endure and provide long-term tailwinds for our business. Because we take a long-term view on our business, we have not changed our strategy that we announced at our Investor Day earlier this year. While we may make some tactical adjustments in this environment, we continue to execute on our strategy with a view to creating long-term value for unitholders. When rolling out our strategy, we focused on the key themes of quality and growth. The quality of RioCan's portfolio today, based on any objective measure, is better than it has ever been.
The portfolio has evolved over the last number of years through a combination of asset sales and development deliveries. Today, 93% of the portfolio is in Canada's major markets, with the vast majority of assets being open air, necessity-based centers or urban transit-oriented mixed-use properties. This portfolio is set up to thrive in any environment. RioCan's current period growth and future growth prospects are also better than they have ever been. This is attributed to the portfolio quality providing higher same-property NOI growth, as well as our near-term development deliveries. Our projects under construction continue to advance, with development deliveries between CAD 700 million and CAD 750 million this year and a similar amount next year. We expect the associated FFO to ramp up through 2023 and 2024. While we always take a disciplined approach to greenlighting construction starts, we're being more measured in the current environment.
At the same time, our team continues to proactively advance our 16.7 million sq ft of zoned density to shovel-ready status so that we will be positioned to drive growth and value creation for many years to come. I must highlight that our development program is fully funded. Our conservative FFO payout ratio of 57% for the quarter is well within our target range of 55%-65% and allows us to retain capital to fund growth. In addition, we expect to receive over CAD 800 million in proceeds from currently under-construction condo projects over the next four years. With these cash flows, combined with project-level construction financing, we have no requirements to sell assets or issue equity to fund our development program. As Jonathan mentioned, our results for the quarter are very strong.
We are reaffirming our FFO per-unit guidance of CAD 1.68-CAD 1.71 per unit and expect to finish the year towards the higher end of that range. Our guidance is supported by strong same-property NOI growth of 5% year to date, or 3% adjusted for the impact of the provision and other items, as well as 1.2% growth from development deliveries. The contribution from development deliveries is noteworthy as it highlights the near-term nature of our pipeline, and as part of our five-year targets, are expected to provide 2%-4% of our NOI growth in future years.
With respect to our development spending guidance of CAD 425 million-CAD 475 million, we expect to be at the low end of that range due to timing of expenditures that will be shifted slightly into early 2023. Regarding our five-year plan, which includes the years from 2022 to 2026, we continue to stand by the metrics that we laid out at our Investor Day, given the strength of our business fundamentals. At the same time, we acknowledge that there is greater risk to those metrics over the next year or two, given the higher interest rate environment and warnings of an impending recession. We will provide formal 2023 guidance next quarter with our Q4 results. Our net income for the quarter was CAD 3.2 million, compared to a CAD 137.6 million in the prior quarter.
This decrease was mainly due to a fair value loss in investment properties of CAD 118.8 million, driven by higher weighted average cap rate, partially offset by higher NOI, which brings us to valuations. While transactional evidence is sparse, we continue to take a conservative approach to our balance sheet values. Year to date, we have reversed fair value gains that we took in 2021 with cap rate increases focused on the lower end of the quality spectrum of our portfolio. At this point, our cumulative write-downs of over CAD 500 million are in line with where we were at the depths of the pandemic. Our weighted average cap rate at the end of the quarter was 5.37%, expanding 4 basis points and 8 basis points versus the last quarter and year-end 2021 respectively.
The impact of higher cap rate assumption in our model was partially offset by the sale of higher cap rate assets as part of our strategy to continuously improve portfolio quality. One way to highlight the impact of this improved portfolio is to look back at our portfolio in Q3 of 2018. At that time, our weighted average cap rate was 5.51, while our percentage of major market assets was only 84% of our annualized rent. Today, our major market assets stand at 93%, and we have completed nine residential rental buildings throughout our development program. When we compare this to our weighted average cap rate today of 5.37%, it would appear on the surface that we have simply tightened cap rate assumptions.
However, our cap rate reduction over these years was the result of portfolio enhancement through a combination of asset dispositions and development deliveries. Holding our 2018 portfolio constant, our cap rate today would be 5.75%, 38 basis points higher than our reported cap rate. We continue to see real-time transactional evidence within our portfolio, given that we have sold or are under contract to sell CAD 394.4 million worth of assets this year. These sales are at values that are aligned to our IFRS values on average. A good example of trades we are seeing is our Abbotsford Power Centre in BC, an asset that went firm this quarter. This Lowe's anchor center without near-term development potential that will be sold at a cap rate of 5.02% to a private buyer.
This is just one transaction, but it highlights the value that is being ascribed to quality assets by buyers who are taking a long-term view. This sale also underscores a significant area of focus these days, which is the gap between private and public market values. Let me provide you our views on the private market side of the equation. In private transactions that we underwrite or see through our negotiations, cap rates are an output of the valuation model, not an input, as buyers typically utilize an IRR model that incorporates long-term views on cash flows, often 10 years or more. In these cash flow models, interest expense is one line item, which is certainly under pressure today, but revenue is the largest line item. Consequently, growth in revenue driven by fundamentals can have a very significant impact on value.
With a value determined through an IRR model, buyers can then calculate a cap rate as a check against comparable assets or portfolios of assets, which is a segue to discuss RioCan value at a unit price level. Given the current macro uncertainty, investors have turned their attention to implied cap rates compared to historic spread versus a benchmark, such as the ten-year Canadian bond rate. While these spreads provide a useful tool for comparison, they do not provide a full picture of RioCan today. This comes back to quality and growth. As noted, RioCan has evolved over time. The quality of our portfolio, the growth we have delivered, and our future growth trajectory are the best they have ever been. All else being equal, improvements in quality and growth should result in tighter spreads going forward.
I'll conclude my remarks with some comments on our balance sheet strength and flexibility. As mentioned, we have CAD 1.6 billion of available liquidity at the end of the quarter. We continue to prioritize this strong liquidity position, even more so during these uncertain times. Our debt to EBITDA for the quarter was 9.3 times, a further decrease compared to the last quarter. As we report debt to EBITDA on a trailing four-quarter basis, we expect this metric to increase slightly in the fourth quarter as a large number of condo gains from Q4 2021 are rolling out of the calculation. We expect this metric to improve in 2023 as EBITDA from developments continues to ramp up over the course of that year. In October, we repaid our CAD 300 million Series Y debentures upon maturity.
These were refinanced using CAD 296 million of seven-year secured mortgages with an all-in rate of 3.67%, including the benefit of CAD 250 million of GOC hedges. For the balance of 2022, we have minimal financing activities remaining. Looking ahead, we are working to finalize CMHC financing for two of our recently stabilized residential rental properties and are currently planning for 2023 financing activities. Finally, as at quarter end, our mortgage and loan receivables totaled CAD 243 million. While our mortgage and loan portfolio balance has remained relatively stable in 2022, the weighted average interest rate on our loan book has increased to 8.09% from 5.74% as at year-end 2021.
The increase in related interest income has served as a partial hedge, offsetting higher interest costs on our debt. With that, I will conclude my remarks and pass to the operator for questions.
Thank you. If you would like to ask a question, then please press star followed by one on your telephone keypads. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. As a reminder, that is star followed by one to ask a question. Our first question comes from Mark Rothschild from Canaccord Genuity. Mark, please go ahead.
Thanks, and good morning, everyone. Maybe starting with the same property guidance, I assume that it includes the pandemic-related items, and maybe you could just talk about how that relates to the Q4 number, which it appears to me to be a material slowdown from what you've done earlier in the year. Is that just being conservative, or is there something maybe I'm missing?
No, I think it's just more the way we presented it. In our scorecard in the front of our MD&A, we talk about 3%-4% same property NOI, and we gave ourselves a green circle for that. That green circle means it's on track, and in fact, should be slightly higher than that. It'll be higher than the range, including the provision change.
Okay, great. Then just on that, looking into 2023, the leasing spreads seem to be, you know, pretty consistent within the range. Would it be fair to assume that, you know, comparable internal growth is likely in the next year as well?
Yeah, I think that's what we're seeing from a same property NOI perspective. We, you know, at least today, we do see things performing quite well and expect to remain in that longer term target range that we've looked out. We're not seeing any changes on the ground today, and leasing remains strong, demand remains strong. Mark, as you know, we did give some cautionary language given this environment. It's a difficult time to do a budget right now given the range of potential outcomes with the recession, et cetera. At this point, everything remains strong on the ground and, you know, our portfolio is set up to perform.
Okay, great. Just on development, and this relates to your comments on IRRs and how the rents have moved as well, not just, you know, interest expense or cost, but, how have returns on development projects moved with inflationary pressures and rising interest expense, you know, factoring in that you can probably get better rents than maybe a year ago as well?
Yeah. Mark, it's Jonathan. The returns have generally stayed fairly stable in that, as much as, costs have gone up over the years, and this isn't just a sort of post-COVID inflationary phenomenon. Costs have been going up fairly significantly in construction, particularly in the GTA now for a number of years. Thankfully, revenues have been going up in reasonable lockstep. So I'd say that the output and the going in yield has stayed fairly consistent throughout the course of the last few years. What obviously we look at, as we've stated, is not necessarily just the going in yield, but rather an IRR output.
You know, with the, I think t he improving outlook for multi-res as well as commercial properties that we're building, you know, even though interest rates have gone up, there are other factors that will still allow us to surpass some of the hurdles that we've set internally. Of course, it becomes a little more difficult with interest rates being where they are.
The only thing I would add there, Mark, is that just based on where we are in our development cycle, as Jonathan mentioned earlier, our current projects are, you know, costs are locked in and we're moving forward there. Our next wave of major projects really kicks in and, you know, starts off in earnest in the second half of 2023, or at least that's how we laid it out in our Investor Day.
As we mentioned, we have the ability to hold off on those projects and assess whether the market rents have continued to move, you know, in the direction required to offset the rising other costs, whether it be interest expense or capital. We continue to advance the ball, get those to shovel-ready. At some point in the middle of 2023, we'll have decisions to make on some of our next wave of large projects.
None of which really impact our five-year plan.
None of which impact our five. We have holding income. This is not, you know, as we've said many times, this is not land that we've bought that we have a drag of costs. We have productive retail centers on those sites, so if we have to take the disciplined approach to wait, we have the ability to do so.
Okay, great. Thanks so much, guys.
Thanks, Mark.
Thank you. Our next question comes from Mario Saric from Scotiabank. Mario, please go ahead.
Hi, good morning. I wanted to start on the operational side. The 50 basis point quarter-over-quarter increase in occupancy was pretty impressive. Can you provide any color on specific tenants or at the very least kind of tenant category that's driving that expansion?
I can start and then hand it over to John Ballantyne to provide any further commentary. I think it really is just the continuation of the growth of those strong and stable tenants. We're seeing it from various different elements within our tenant base that already exists within our tenant base. We're certainly seeing growth in grocery, pharma, and discounts, including the TJX banners, Dollarama, et cetera. We're also seeing in this kind of environment a significant return to service providers, whether they are nail salons, hair salons, or medical uses. They are definitely net growers of space and certainly looking to acquire more and more of our existing space. John , any further color to add?
Yeah. The only thing I'd add, and you spoke to it in your comments earlier, Jonathan, is there is an apparent lack of supply right now in the market. We had the Toronto ICSC almost a month ago, and really the theme from the retailers was they are, you know, many are looking to expand store counts. There's not a ton of space. I would say it's both on the box side, the 20,000-25,000 sq ft side, but also on the smaller space, the 1,500-2,000 sq ft units. There is a real hunger for these, and there's not a lot of new supply out there. As far as actual categories, I think Jonathan spoke to them all.
Essential personal services, I think, is where we saw a real bump over the quarter and looking to continue to do deals.
Got it. Okay. Just in terms of disclosure of methodology, can you just remind us of the 16% new lease spread. Would the tenants that comprise the 50 basis point uptick in-place occupancy, would the rent that they're paying in relation to where the vacant rent was before, would that be included in the 16%? If you can just maybe kind of clarify that for us.
Yeah. No, it's part of it.
Maybe shifting gears to The Well. In your opinion, how important do you think it is for the physical occupancy within the office component? The physical office occupancy reaching leased office occupancy, how important do you think that is in terms of completing the retail aspect?
I think The Well represents a beacon of Downtown West. It's gonna be drawing from so many different components of the City of Toronto, as well as some tourist visitors to Toronto. Of course, the built-in occupants in either the office or residential components are gonna add to the list of visitors there, but certainly there's not a significant amount of reliance on those occupants. We really do believe that given its scale, given its dynamic setup, and given the lack of other offerings in the Downtown West corridor, and just given how great this asset is coming together, that we will be drawing from far and wide, not just the constituents within the 8 acres that constitutes The Well.
Okay. Just in sticking to The Well, in terms of IFRS values, and I'm not gonna ask for specific numbers, but, what would you say is the percentage of the total expected NAV accretion from the development that you've already booked into your IFRS valuation today?
It's a tougher question right now, and it probably was six months ago. We've taken a pretty cautious approach there. We have not increased the value other than capital spent since year-end. I would say at last year end, and when I say year-end, I mean year-end 2021, you know, we did have some buffer in the discount rate and some risk buffer in there that I would've expected to unwind this year. At this point, we've held the value as is. It's very difficult to prognosticate, you know, how that kind of plays out over the next coming months, Mario, to be honest, in this environment.
Yeah. Okay. I mean, my last one for Dennis. Assuming the assets under contract close, how would you rank reallocation priorities, taking into consideration the current unit price, the balance sheet, and your kind of six-month development needs?
The way we've thought about it is we have, you know, we do have development obligations that we have to meet, and we do have targets with respect to the balance sheet. We prioritize those. We think those are highly important for our long-term objectives. Where we have utilized our NCIB program to buy back stock has been when we've had outperformance from an asset sale perspective. You saw us do that in Q4 last year and Q2 this year. The incremental dollar that's coming in from asset sales today, the highest and best use appears to be to buy back our stock at these prices.
Just to reiterate, that's only if we outperform on the asset sales. Otherwise, again, it is a combination of fulfilling our obligations in our development pipeline, which as we've stated before, are largely taken care of through retained earnings and project-level financing. Of course, paying down debt is another priority that we're very much focused on. If there is incremental, like sort of bonus dollars over and above our business plan from sales, then yeah, it's hard to ignore the accretive nature of the NCIB program.
Got it. The definition of outperformance on asset sales, that is dollar volume in terms of total asset sales or the valuations achieved on those assets?
Dollar value. Yeah. It's really its dollar value. I mean, we had in our business plan the sale of, you know. I mean, I'm not gonna give you precise numbers, but it seems that if we end up closing on all of the assets that or transactions where there are contracts in place, firm or still conditional, we will outperform on that dollar value.
Perfect. Thanks, guys.
Thanks, Mario. Have a good day.
Thank you. Our next question comes from Sam Damiani from TD Securities. Sam, please go ahead.
Thank you. Good morning, everyone. Just to clarify one of the questions from about maybe five, 10 minutes ago. You have some projects that teed up to potentially commence next year, late next year. If they were pushed back or postponed or delayed or whatever, you said it wouldn't impact your five-year plan. Is that because those were long-term projects that were never gonna get completed before 2026, or was there some other reason why those delays wouldn't impact the five-year plan?
Yeah. Sadly, even with the enhancements of the sort of zoning regime that were just introduced in the last couple of weeks, Sam, building anything of substance in the communities where we build is taking somewhere between, you know, three to five years, so largely outside of the scope of that five-year plan that we had set out in our Investor Day. That's exactly the right answer.
Okay, and just a point of clarification . I just wanna make sure I didn't misinterpret what you might have said. 2023, I know guidance is coming out in February, but did you say that FFO would increase because of what you know so far, or was your commentary just more that, you know, things underway would help increase FFO in 2023?
Well, what I would say, I won't go so far as to provide any guidance, but we do have development deliveries that will ramp up over the course of this year and next. That will contribute to increased FFO. We do have you know, even if we just take today's leasing spreads or tomorrow's NOI, looking at what we have in place today at a pretty conservative view on that, roll forward would also increase FFO. We have to acknowledge that there are headwinds. Headwinds being interest expense and headwinds being a recession which, as Jonathan alluded to, you know, there are always you know, or there could be some tenants that have issues in that period of time.
We have to be a bit cautious, but we certainly have, in terms of our building blocks of growth, same property NOI growth and development deliveries. Those remain intact.
Okay. That's great. Just on the CAD 800 million or in excess of CAD 800 million figure that you mentioned would come back in four years' time from condo projects. Is that net of the remaining cost to complete on those projects? Is that a net benefit to the balance sheet based on today's invested capital?
It's a gross number. Yeah. If we think about, we talked about spending CAD 400 million-CAD 500 million a year on development over the coming years, assuming that all projects proceed as we laid out in Investor Day, which, again, is a bit to be determined right now. We would spend that money, but we would also have CAD 800 million coming back over that period of time as well. When we think about how we lay out our financing plan for the development program, we have CAD 150 million and growing per year in retained cash flow, given our distribution policy. Gross that up for project-level financing, puts us at about CAD 400 million.
We require say about CAD 100 million of incremental capital from asset sales or condo proceeds over the course of that period of time as well. What we're messaging is, given the size of the condo proceeds coming back to us, we don't need to sell assets unless we feel that, you know, valuations are attractive and there's other uses for that capital. Just to fund our development program, we're fully funded on this basis.
Okay. Understood. Thank you, and I'll turn it back. Thank you.
Thanks, Sam.
Thank you. Our next question comes from Jenny Ma from BMO Capital Markets. Jenny, please go ahead.
Thanks, good morning. I wanted to ask about the decapitalization of interest coming off your near-term development projects, and how to think about the capitalized interest cadence for the next couple of years as The Well comes online, netted against any incremental developments you have. Like, for The Well in particular, is that more of a phased sort of building-by-building approach? Directionally and maybe perhaps, percentage-wise, maybe give some guidance on how the decapitalization of interest flows through the next couple of years.
Yeah, Jenny. I'll start with just a bit of the methodology for The Well because you're right, it is a phased approach. You know, with some of our smaller development projects, we may bring the project online in kind of one time from pod to IBP. In this case, we are phasing it. In the office side, we're actually phasing it tenant by tenant. As they have rent commencement, we'll transfer the particular block of floors. On the residential side, it will be basically in thirds given the size of that building. The retail will come on in phases as well, although the phasing there is pretty tight given the build-out starts long. That's from a methodology perspective. It is phased.
The decapitalization is spread over the course of 2023. When we look at 2023, it's, you know, on an overall basis, given our spending profile and that phased sort of transfer, capitalized interest should be relatively flat to 2022. 2024, I'm going to defer the answer to that question a little bit, and I apologize. We're in the midst of our business planning right now. The impact of that will come back to, you know, how much do we actually spend on development in 2024 with those projects that we'd be looking to launch in kind of mid to late 2023. Depending on the timing of those launches, it would impact the 2024 capital expenditure.
That would obviously impact this debt. With that said, if we're not spending on those capital developments, we'll have more capital to pay down debt, and we'll be taking on less construction financings, so there's a bit of a natural offset there as well.
For 2024, I mean, even if you do spend the full amount on development that you expect to, I think with the well continuing to stabilize, net probably capitalized interest is still net declines in 2024 versus 2023. Is that fair to say?
Yeah, I'd say that's fair. Yeah, with the offset being obviously.
Okay.
That the NOI from those projects will be delivering and, you know, full bore at that point as well.
Of course. Okay. When you're looking at your, let's say, medium-term development pipeline, I'm just wondering, you know, you talked about a lot of your current costs being fixed. But when you're talking about contracting or potentially starting new projects, are contractors willing to give you a fixed price contract these days? Or, you know, are they hedging themselves more? Are they even willing to put a number down on paper? You know, what are you seeing when you're thinking about some of your near-term projects that haven't started yet?
I'm gonna hand that one over to Andrew Duncan, Jenny, who's closer to that than all of us.
Hi, Jenny. Thanks for your question. Yes. Short answer is yes. As you're undertaking a project, prior to you starting it, whether it's predicated on asset or condo sales or leases in place, on the retail side, prior to putting a shovel in the ground, typically the goal is to get at least 70% of your cost on the hard cost side contracted. That will include all your trades you're dealing with. These trades are used to that requirement. There are some supply-only trades that might provide escalators in for materials costs, but that's a small portion of the contract. As you move through the project, you'll contract that last 30% over the next year or two of the project.
Again, those items are less subject to inflation, and are more commodity-based items. Typically, we wanna see at least 60%-70% cost certainty on a hard cost total prior to proceeding with the project. Those heavy negotiations start before you put a shovel in the ground, because obviously that's where we have the most leverage.
Okay. You're saying that the contractors are still willing to put-
Absolutely.
Numbers down on paper for you?
Yeah, they have to.
Are they coming in within range of what you're expecting?
Listen, that's an ongoing debate back and forth in terms of where escalation lies and what the market is. It's a very fluid market right now in terms of construction costs. There's a combination of a couple factors. The later trades, like the drywall guys and the mechanical electrical guys, the folks that are all the way through the project, those individuals might still be very busy. Whereas we're seeing the front-end trades, like the demo contractors and the excavation contractors and some of the form workers, are starting to get their book not as busy over the next couple of years, so we're seeing a little more flexibility in that pricing.
Our finger's on the pulse in terms of what's going on in the market, and we're very cognizant of what those trades are doing. Jenny, to your point, absolutely, prior to starting jobs, subtrade contractors have to provide fixed prices and are doing so.
Okay, great. Moving on to valuation, the cap rate's nudged up a little bit. I apologize in advance if I miss this, but did you disclose the range of what the cap rate adjustments for the assets that were adjusted was? Could you provide that information?
We did not, Jenny. We did focus our write-downs in the secondary market and enclosed mall kind of end of the spectrum as we have been over the last while. That's where we've been pretty focused.
Okay. Then maybe it's a bit early for this, but when you think about potential tenant tenants running into trouble sort of in that January post-holiday period, I know 2021 and 2022 have been a bit quieter on that front, being that they were flushed out in 2020. Are you seeing anything on the ground now that might inform what we could expect for 2022, or what's the house view on that?
I mean, right now this is the problem. Everyone expects me to say, "Yeah, absolutely, we're seeing some cracks." Right now, to be honest with you, across the portfolio, we are not seeing any. I mean, there's obviously gonna be. We've got 6,000 or somewhere around 6,000 tenancies, and not all of them are gonna be exceptionally successful at this point. We're certainly, on balance, seeing strength in the vast majority of sectors that we have in our shopping environments. Oliver, do you see any change in or any reason to dispute that conclusion?
No.
No. Okay. There you have it from the expert himself. Yeah, Jenny, and look, it's a weird time in which we're going into, and so it's hard to predict. Right now, on the ground, and as John Ballantyne had alluded to earlier, certainly is the indication from ICSC, which is, I would say, the largest leasing conference that we attend. All signs point to growth or and/or stability. Of course, there's always gonna be some small shops that will feel the pain of drawn-in spending. Also keeping in mind, like demographic profiles of RioCan's shopping centers and its environments, it's high. I mean, it's higher than it's ever been, both in population in a five-kilometer radius as well as household income.
Even if some service providers and some small restaurants are gonna feel the pain of the constraints of a recessionary environment, I think the ones in RioCan shopping centers, by and large, are gonna have a bit of a protection against them because the demographics are generally quite high in the constituents that shop there.
Okay. I'm just wondering specifically, are cannabis retailers something that you worry about? Maybe remind us, roughly how many stores you have in your network?
There are cannabis retailers, Jen. They were a concern for us for sure. I mean, we knew that the market was, let's call it oversold when it was introduced in Ontario and other parts of Canada earlier this decade. We sort of protected ourselves in two regards. One, we got significant security deposits, and we also didn't put in any capital into the stores. We made the tenants pay for their store fit out. Two, by and large, we dealt with sort of the national cannabis providers or the larger cannabis providers. There has been some fallout already from the store count that we had. I expect going into 2023, there'll probably be some more.
We've all seen in neighborhoods that there's a saturation of this use, and I suspect that's not sustainable. In terms of RioCan's overall balance sheet and tenant profile, it's a rounding error. I would say, John, anything to add to that?
No, I agree. It's, you know, probably less than 75,000 sq ft across our entire portfolio. It is a very small shop space, which there's demand for. We're not concerned about it, Jenny.
Okay, great. Thank you very much. I'll turn it back.
Thanks, Jenny.
Thank you. Our next question comes from Tal Woolley from National Bank Financial. Tal, please go ahead.
Hi, good morning, everybody.
Hey, Tal.
Just wondering if we could start with just your thoughts and comments on the Ontario housing plan rolled out last week?
Well, I think it was a huge step in the right direction, and I think, you know, I'm quite proud to say that it was a collaborative effort among industry and government. We participated quite substantially, and I know Andrew and his, and the development team have a lot to add to their, you know, within their conversations through various industry lobby organizations, as well as direct conversations with the government. I think the outcome is really favorable because, like, it doesn't take an absolute genius to determine that there is a supply crisis, particularly in markets like Toronto. I think what they're doing is giving developers the ability to build more and fairly quickly.
Look, it's been a frustrating process for RioCan as a willing and able provider of housing, both affordable and market in the last five years, to go through all the hoops and hurdles that we've gone through to get limited products in the ground. I can only imagine how difficult it is for, you know, for groups that are less sophisticated and less well-capitalized than RioCan. I think what the government has done is a very good step in the right direction to enhance the ability to build. Andrew, I just said a mouthful. I don't know if you have anything to add to that.
No, Jonathan. I think I'm not going to repeat anything you said. I wholeheartedly agree. I think, I'm very complimentary. I'll be very complimentary to the current provincial government in terms of their willingness to work with industry and accept feedback. A lot of the policies, and there's a lot of them in the new Bill 23, come from direct discussions and consultation with the industry, which I'm very complimentary of. I think I'll add that, what we're doing as a result of this is digging into the interpretation of the legislation that we've had all our municipal lawyers look at, and then having our development group relook at all our performance that we're running continually to understand the impact of these changes.
Also looking at some of the projects that are earlier in the development cycle in terms of our entitlements on square footage and zoning to understand if it's worth revisiting those and trying to maximize the amount of density we can achieve. Overall, agree with John's comments. It's a great step in the right direction, and I'm hopeful there's more to come.
Okay. Just on the RioCan Living platform, you've got 2,000 units constructed. You know, I think three buildings got stabilized this past quarter. It looks like the last two that are, you know, in actively set for probably take maybe one or two more quarters to get there as well. What do you sort of see from the, you know, from this first 10 buildings, like what's the run rate and resi NOI that we should be expecting to see once you're fully leased up?
I mean, it's a rolling pipeline, right? That we get new additions, kind of delivered over the next
Yeah.
I mean, constantly over the next five years. The run rate is going to continue to change because we're going to continue to add product to it. I don't think I have anything scientific. I mean, I don't know if Dennis or John, you have any better answers for Tal. I feel like I'm not giving him what he needs.
Yeah. I think existing developments will ramp up into the mid to high thirties. I'm actually looking at Andrew a little bit as well.
And then, uh, we have-
In the drive, CAD 30 million.
CAD 30 million. Yeah.
Yeah.
Right. At a stabilized basis, which probably comes in by end 2024.
Yeah.
Yeah. That would be kind of on our existing asset base and near-term developments ramping up.
Yeah.
We did lay out the target of CAD 55 million-CAD 60 million by the end of our five-year plan.
Right. A better answer than mine.
Tal, what I'd add to that is we also set a target acquiring CAD 20 million of residential NOI. We've done one of those acquisitions and secured a forward purchase attached to that acquisition in Laval. We continue to underwrite opportunities in the market to continue to achieve that goal the next three to four years.
Okay. Just on debt strategy, you know, what's your thinking in terms of like, do you try and lengthen term in this market? Or do you keep, maybe keep it shorter, you know, banking on, you know, the fact that maybe rates start to pull back, you know, if we do sort of enter into some kind of downturn here? What's the thinking around just longer term with the debt strategy?
Well, it's a balance and always with one eye on our debt ladder. So, you know, even if we, you know, whether we like to go short or long, we always want to slot in the appropriate amount so we have a balanced renewal schedule each year. But right now, we're kind of hedging in the middle. You know, we're not doing a lot of tenor debt in this market, and we're not doing, I mean, we are looking at some short-term bank debt, but by and large, we're kind of looking in the middle ground here of about five years. But as I said, always keeping one eye on our debt ladder.
Yeah. I think it depends on the type of debt as well.
Yeah.
To Jonathan's point. I mean
Yeah.
You know, if you look at, you know, some of what we did in the summer. We did, you know, seven-year mortgages, which was lengthening our debt ladder. We had typically, you know, before this last six months, I would say looking in the seven to 10 range. We do have room in our ladder to fit in kind of in years, you know, three, four, five, six, some incremental debt, as well without kind of, you know, over having too much going due, as John said. I think at this point, we're looking at our funding plan for next year. Like I said in my comments, we're done for 2022. We're trying to understand all the different options.
What I would say is that the spread of different pricing by different type of debt is, you know, significantly wider than it was obviously at this time last year, where you'd say, you know, all the different forms of debt we would look at were probably clustered in a 25 basis point spread kind of difference. Today, that's probably as wide as 200 basis points, depending if you go all the way from CMHC financing out to, you know, unsecured debenture financing. We are trying to keep our options open. You know, tactically, we would consider shorter term at this time. Our long-term strategy of extending our maturity ladder remains.
Okay. Just lastly, thinking about tenant risk, you know, if I've done my math correctly here, I think you guys tend, you know, there tends to be maybe about CAD 1 million, a little bit more than that every year, you know, of revenue that, you know, you have to deal with in terms of tenant failures. Can you give me an idea of like what has there been like a bad year, and what would a bad year look like in terms of the hit on revenue if there were tenant failures?
Target. Remember that one?
Yeah.
That was a bad year.
Yeah.
That was an anomaly. That was definitely an anomaly, but that was, I mean, that was 4% of our revenue at that given time. I mean, look, the bad year was also 2020, which was also anomalous. I think the normal run rate that we see in, let's say, a stabilized year or a reasonably normal environment, I think, you know, CAD 1 million-CAD 1.5 million is kind of the-
About CAD 800,000-CAD 1 million a year. When we look at the five years before the pandemic, it was about CAD 800,000-CAD 1 million a year of write-offs, which, against CAD 1 billion of revenue, is a pretty low number.
Yeah. Again, keeping in mind that our portfolio has improved and the resiliency of our tenants, of our tenant list has also improved. I think that's a good run rate to use. That also includes Alberta, Tal, which again, if you look at recessionary environments, I think they've had their share of it. I think that run rate is kind of like pro rata. It's been pretty stable for even our Alberta portfolio, which I think is largely indicative of the rest of our portfolio.
Okay. That's great. Thanks, gentlemen.
No problem. Take care, Tal.
Thank you. Our next question comes from Pammi Bir from RBC Capital. Pammi, please go ahead.
Thanks and good morning. Just coming back to capital allocation. I'm just curious how, you know, perhaps distribution increases would fit into the equation. You know, you talked about debt reduction developments, and possibly the NCIB. I'm just curious how are you thinking about that, perhaps for next year?
Hello, Pammi. Good to see you, or speak to you. I think what we said at our Investor Day and what we continue to stand by is, of course, this is a board decision, but management does view this as a direct correlation to where our payout ratio is. As long as we can maintain our target range of 55%-65%, we would like to give back to our unitholders a sustainable increase in dividends year over year. You know, it's not in the scheme of things a substantial amount of cash in order to do that.
As long as we could do it without being perilous to the other objectives we have, which is of course bringing down our net debt to EBITDA numbers as well as, of course, you know, FFO growth, then that is something we would like to continue to do on a sustainable basis going forward.
Got it. Then just in terms of what's actually in the properties that are, I guess, held for sale or in the pipeline as of yesterday, what can you share just in terms of the mix there? You know, the appetite seems fairly healthy, but I'm just curious what you can say about maybe how the investor appetite might be shifting, maybe in the recent weeks or last month or so.
Sure. I could break it down into two categories, land and income-producing retail assets. With respect to land, I would have to say that the land market has slowed substantially. There's not a lot of demand as there was last year or even earlier this year for density and land plays right now, which is fine. We didn't really have any reliance on selling any of our density over the next couple of years. With respect to income-producing properties, well, that's the interesting one. I do think there's a disconnect right now between public and private valuation. From what we're seeing for the types of assets RioCan owns, there's still a significant interest from high net worth local and sometimes regional buyers.
We've been approached in many occasions on an off market basis to acquire some of our assets, some of which we'll engage, some of which we won't. We've been quite surprised that even in this, let's say, tricky environment, there is still a fairly sizable interest in acquiring assets of the type that RioCan owns.
Got it. Jonathan, just your comment on land, when you say that the appetite has really slowed, is that the land that you do have in that bucket, is it already zoned for residential density or is it not zoned yet?
I think it's zoned, yeah.
Yeah. Predominantly, what we're talking about would be zoned land that could be condo developments, for example. This would be, you know, when we look at some of the sales we've done over the last couple of years, we got paid, you know, substantially for this excess density. The reality is the condo market has slowed with the interest rate environment. It'll be interesting to see how quickly that rebounds. In terms of selling zoned residential land right now, it's not a great time.
Okay. Just given your comments on the whole development program, thinking about next year, you know, how do you see, you know, the impact on perhaps that CAD 500 million annual target for development spending and just, you know, which projects would you consider perhaps shelving?
First of all, what we do is simply pause on certain projects. I think shelving seems a little harsh and permanent. Next year, most of that committed capital is on projects that are already underway. I would say some of it is discretionary, but not a significant amount of it. The ones that we're pausing on are, again, really, we have 14 million sq ft of zoned density in our pipeline, and it grows day by day, which means we can sort of pick off of a large shelf of potential assets to commence on. We go through this process constantly as to which ones we would wanna commence. In this environment, Pammi, as we said, we're just gonna be.
I mean, not that we're always judicious, but we're gonna be. I would say there's a higher degree of scrutiny around green lighting a project. Really that scrutiny is around whether or not we hurdle from an IRR basis, which given the enhanced cost of debt is more difficult now than it was before. I think in terms of that CAD 400 million, give or take, spend. But not a lot of that is representing new projects. It's mostly committed projects.
What I would say, Jonathan's absolutely right. 2023, expect us to spend in the range. 2024 is when the spending could come down. What I would just add is that those decisions to slow down projects, they haven't been made. We have a number of projects that are zoned. Of course, as you know, zoning is just one step in the process. We have tenants to deal with, we have site plan approvals, and we have all the other construction drawings, et cetera. Our team continues to advance the ball on that.
Really what we're looking at is, you know, at decision points in sort of the middle of 2023 to kick off projects that in our five-year plan that we had at Investor Day would have had some spending starting in sort of late 2023 and into 2024. We can continue to monitor the market, as Andrew mentioned on the construction cost side, what we see there. What we see, you know, continuously study the rental market for both residential rental and condo and make those decisions at that point in time. We have a lot of flexibility and a lot of optionality as we head into the middle of 2023. In the meantime, we create value by advancing those projects to shovel-ready status.
Great. Thanks for the color. Just last one. Coming back to the tenant discussion. Any update at all with respect to any possible closures from Bed Bath & Beyond? I didn't see any on any Canadian sites on the list initially, but just curious if there's any update there.
No update at this point.
Yeah. None in our portfolio.
Great. Thanks very much. I'll turn it back.
Thanks, Pammi.
Thank you. Our final question comes from Dean Wilkinson from CIBC. Dean, please go ahead.
Thank you. Good morning, everyone. Out of respect for everyone's time, I'll just keep this to one question. On the issue of replacement cost, you know, you're building at CAD 650 per sq ft ex land. So you put land in there, you might be pushing towards CAD 800. That would suggest, you know, a new build might be a three cap. Jonathan, have you ever seen the economics that tight? Do you think that this is a permanent impairment to the new supply of retail real estate in Canada as far as we can see?
Well, permanent is a long time. I have not seen them this tight in my brief 20-some-odd-year career in the real estate space.
Oh, it's closer to 30.
Thanks . I think that in terms of permanence, well, I don't know. Like, I don't know what the catalyst is to dramatically reduce those costs. Remember, those are in the GTA, not everywhere.
As Andrew alluded to, we're starting to see some softness in the trades. I think, you know, a good, healthy recession, not that any recession is good, but a healthy recession might alleviate the pressures on the cost side. That might bring things a little more of an equilibrium into the equation. Right now, I'm not sure that catalyst is immediate. For at least the medium term, I don't think there's much of a change in those dynamics, which simply means that our existing portfolio continues to gain value and continues to be a very, very coveted asset class and space for tenants to be at.
Scarcity premium. All right, that's it. Thanks, guys.
Thanks a lot, Dean. Have a great day.
I'm showing no further questions at this time. I would now like to turn the conference back to our President and CEO, Jonathan Gitlin.
Thanks very much, Lauren. Thank you everyone for coming to our call today, and we look forward to more great quarters ahead. Thanks.
This concludes today's call. Thank you for joining. You may now disconnect your line.