Good day, ladies and gentlemen. Welcome to the RioCan Real Estate Investment Trust first quarter 2023 conference call and webcast. As a reminder, this conference call is being recorded. I'd now like to turn the co-conference call over to Ms. Jennifer Suess, Senior Vice President, General Counsel, ESG, and Corporate Secretary. Ms. Suess, you may begin.
Thank you and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, ESG, 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 principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows, and profitability. RioCan's management uses these measures to aid in assessing the trust's underlying core performance and provides these additional measures so that investors may do the same.
Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures, can be found in the financial statements for the period ended 31 March 2023, 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 CEO and President, Jonathan Gitlin.
Thanks so much, Jennifer, thank you to everyone that's joined RioCan's senior management team today. I'm gonna start the call today the same way that I'm gonna end the call, with an acknowledgment that the market continues to be volatile. Fear of recession, interest rates, inflation, access to capital, regional banking vulnerabilities, these thoughts are top of mind for all of us. To suggest otherwise would be unrealistic. That said, even in the face of these macro-level gyrations, RioCan continues to perform exceptionally well. We've strategically and responsibly managed every facet of our business over which we have control. Despite the market volatility, I'm proud to reiterate our commitment to the guidance we presented at our February 2022 Investor Day and the FFO guidance we provided in our last call.
With each successive quarter since our Investor Day, our operating results reflect the precision with which we execute our strategy. Let's dive into our Q1 operating results. Simply said, these results speak for themselves. They support our confidence in achieving the ambitious growth targets that we set out in our five-year plan. Just like the quarters that preceded it, the first quarter of 2023 demonstrated our portfolio's quality, our tenants' resilience, and our team's extraordinary depth and capability. By every measure, RioCan's well-positioned assets, stable tenant mix, and development progression drove strong results that translate into predictable outcomes. These results reflect our focus on the pillars that support our five-year plan: resilient retail, customer centrism, intelligent diversification, and responsible growth. Our commitment to these pillars continues to yield results.
Our assets are in Canada's major markets in densely populated areas with high average household incomes of $ 135,000 and an average population of 250,000 people within a 5-kilometer radius of your average RioCan property. RioCan's portfolio has never been more defensive. The percentage of our net rent generated from strong and stable tenants increased to 86.8% this quarter. Same-property NOI for the quarter grew by 3.4%. FFO per unit was $ 0.44. This reinforces our confidence in our FFO per unit target of $ 1.77-$ 1.80 per unit for the entire year. Healthy new and renewal leasing spreads results created a strong blended leasing spread of 12.3%.
Retail committed occupancy was 98%, and rent per square foot for new leasing in the quarter was $ 28.57, well above the average net rent for the portfolio, which is $ 21.13. These exceptional occupancy levels, retention rates, and leasing spreads continue to be driven by intense demand for RioCan's quality retail space. The sort of retail space that's, well, simply put, in short supply. Your management team will continue to operate with excellence and find strategies that mitigate the impact of current concerns such as interest rates and anticipated recession and more limited access to capital. It's worth taking a moment to unpack these issues in the context of RioCan's business.
In seeking an explanation of how we've maintained and will continue to extract such strong operating results with such a volatile backdrop, I'm gonna start with the bigger picture, namely the country within which we operate. Yeah. I'm starting broad, but it matters. In today's global context, numerous attributes distinguish Canada as an incredible place to conduct business, and even more specifically, to own and to operate retail property. Consider our banking sector. Canada has a regulated and relatively stable banking system where reputation and relationships matter. RioCan has access to capital and substantial liquidity. We consistently demonstrate the ability to utilize our established network and track record to access the most efficient forms of financing. The retail landscape in Canada is also vastly different than in much of the world. Compared to the U.S., Canada has far fewer competing tenants per retail category.
We also have approximately 40% less square footage of retail per capita than the U.S. A few factors will continue to temper the supply of retail space, including Canada's tight zoning regulations. The vast gulf between replacement costs and market values makes building new retail a very unlikely proposition. There's our commitment to immigration. Canada is the fastest-growing country in the G7, and it's projected to welcome approximately 500,000 qualified, productive newcomers each year. These new Canadians naturally gravitate to transit-oriented major market locations to live and subsequently to shop. These are the same markets in which retail space is supply constrained. These factors converge to drive demand and create positive tension in lease negotiations for precisely the kind of well-located brick-and-mortar spaces that RioCan offers. This was clearly evidenced by the immediate and pronounced demand for our Bed Bath & Beyond location.
While these locations contributed towards less than 1% of RioCan's revenue, I'm highlighting this example as it underscores the demand for the limited available retail space in Canada. Upon the retailer's CCAA filing in February, RioCan commenced negotiations with numerous box tenants who expressed interest in all 13 of our locations. Despite the positive progression of these negotiations, several strong retailers chose to take a more secure route, and they purchased locations directly from the receiver who was running the process. In total, 10 of RioCan's locations were snapped up in the auction process run by the receiver. Retailers were unwilling to risk losing these sites. For RioCan, the process resulted in the ability to fill the spaces with strong tenants, zero downtime, and no outlay of capital.
Regarding our three locations that weren't sold through the CCAA process, we finalized one lease and we're in final stage negotiations for the remaining two. The current supply-demand dynamic is expected to continue for the foreseeable future. This dynamic is one of numerous factors that bolster our confidence. It's also worth noting that as the real estate transaction market starts to pick up, we're seeing an increase in the number of data points that suggest that high-quality assets are holding their value. Specifically, in spite of interest rate fluctuations, we're seeing limited impact on cap rates from major market open-air retail centers. The type of retail that comprise our portfolio is also very relevant. Our properties generate resilient and growing income from a strong and stable base of tenants anchored by necessity uses like grocery stores, pharmacy, and value retailers.
While these are precisely the uses that perform well and generate organic growth even in turbulent economic conditions. Simply put, high-quality properties plus high-quality tenants result in high-quality cash flows. These factors, in turn, support strong valuations. As you know, RioCan complements organic growth with intelligent diversification. Despite market conditions, our success in this area further supports our confidence. There is considerable detail regarding our development program in our disclosure. However, I'm gonna provide a few highlights for you. We've leased approximately 94% of the total commercial space at The Well, which, as you hopefully all know by now, is our flagship mixed-use development in Toronto. 82% of the retail component is leased, which represents a 10 percentage point increase over the previous quarter.
We have an additional 6% in advanced negotiations for a total of 88% of the retail space either leased or in advanced negotiations. Our six condo townhouse projects under construction are 86% presold, achieving 96% of pro forma gross revenue. We've got significant deposits for these units, which provide security against the unlikely but always possible scenario of homebuyer defaults. Between 2023 and 2026, RioCan will realize approximately $ 860 million in sales revenue from these projects. Our residential rental revenue also continues to increase. This rental revenue diversifies our cash flows and offers high embedded growth potential. RioCan Living now has 10 purpose-built residential buildings in operation. Demand for these units continues to be excellent.
The NOI generated from our residential rental operations in the first quarter was $ 4.3 million, an increase of $ 1.9 million over the same period last year. There is, however, no question that interest rates are creating unwanted pressure. RioCan has taken meaningful steps to keep that expense as low as possible. We've proactively employed various financial tactics, including staggering the maturities of long-term debt and limiting the use of floating rate debt to minimize exposure to interest rate fluctuations. As Dennis will explain to you shortly, we've benefited from hedging activity where we took advantage of significant dips in the bond market and locked in favorable Government of Canada bond rates for both future planned and prior financing activity. These measures are all part of our commitment to responsible growth, which again, Dennis will speak about in a moment.
The last factor that supports my conviction in RioCan's ability to deliver long-term value cannot be underestimated. It's the team. This team has weathered pandemics, tenant departures, recessions, financial meltdowns, and more. This team, like our portfolio, has demonstrated resiliency and the ability to deliver in any kind of condition. Each day, their talent, creativity, and commitment drive our strategy forward. I'm grateful for them, and I confidently say that your trust is in very good hands. As always, we're prudently managing risks, maintaining a healthy balance sheet with strong liquidity and access to various financing channels. Our high-quality portfolio and operational excellence provide respite against the volatile macroeconomic environment and give us the confidence to reaffirm our guidance for the year. The objective in our five-year plan were established with purpose and conviction, and they're achievable in almost any environment.
There are many words we can use to describe the economic environment: tumultuous, volatile, unstable. I'm going to say it more informally. I mean, it's pretty nuts out there. What I want to leave you with is the words that describe RioCan's performance in the same environment: predictable, solid, stable, sustainable. This foundation, strength of vision, and demonstrated commitment to responsible growth will continue to serve our unitholders well and at the same time, position the trust for continued success as market stability returns. With that, I'll turn the call over to Dennis, who will take you through our balance sheet and provide insight into how it continues to support RioCan's quality and growth. Dennis, over to you.
Thanks, Jonathan, good morning to everyone on the call. RioCan's strong results this quarter were driven by continued operating strength as seen across a number of KPIs, from occupancy to retention ratio to leasing spreads. Over the last number of quarters, RioCan has consistently delivered operating results that are among the strongest in its history. This is a testament to the quality of the portfolio as it stands today, which continues to benefit from the long-term macro tailwinds that have created a supply-demand dynamic that is favorable for our business. FFO for the quarter was $ 0.44 per unit, $ 0.02, or 4.8% higher than the same period last year. Same-property NOI growth of 3.4% in our commercial real estate, which was driven by our strong operating performance, increased FFO by $ 0.02 per unit.
An additional $ 0.02 per unit increase was driven by the ramp-up of development in our residential rental operations. We also had lease files for the quarter, pro-predominantly related to a single tenant in Alberta that has already been backfilled, which provided another $ 0.01 per unit. These increases were partially offset by higher interest expense, which net of higher interest income reduced FFO by $ 0.01 per unit. Finally, assets sold over the course of last year, net of the benefit of prior year share buybacks, reduced FFO per unit by $ 0.02. This short-term drag on FFO per unit due to asset sales occurred because a large portion of the capital generated from these sales was recycled into development projects that have yet to stabilize.
Despite this short-term impact, we firmly believe that recycling capital from the sale of lower quality assets into high-quality development assets with greater growth potential will further enhance our portfolio and create substantial value in the medium to long term. Turning to our balance sheet, net asset value per unit at the end of the quarter was $ 25.83 per unit, an increase of $ 0.10 per unit from Q4 2022. The NAV increase was driven by retained income after distribution, adding to our equity. Our FFO payout ratio of 59.3%, the lowest among our peers, allows us to retain earnings on our balance sheet and reinvest in our business, which we expect will compound value over the long term.
This was partially muted by a modest fair value write-down in the quarter of $ 17 million, which left our investment property values essentially flat at $ 14 billion. Net debt to EBITDA trended downward slightly, ending the quarter at 9.48x . EBITDA contributions from development deliveries are the primary driver in decreasing net debt to EBITDA, with 66,000 sq ft of net leasable area delivered in the first quarter out of approximately 600,000 sq ft expected to be delivered this year. As development deliveries accelerate over the balance of the year, we expect our net debt to EBITDA to continue its downward trend through this year and into the next.
Increased EBITDA was partially offset by an increase in proportionate net debt of $68 million as we continue to invest in our development properties, including related assembly acquisitions, partially offset by $42 million of funds raised through completed dispositions. For financing activities, we completed a number in the quarter, evidencing the continued availability of capital in the Canadian market, especially for high-quality borrowers like RioCan. In January, we refinanced $ 200 million of bank term debt with 3-year bank term debt at 4.93%. In March, we issued $ 200 million of 4.6 years unsecured debentures at a rate of 5.18%, including the benefit of hedges, a rate that was 43 basis points below the market at that time. Proceeds of the issuance were used to repay existing debentures upon maturity in April.
In March, we secured $ 126 million of CMHC financing for our Queen and Ashbridge residential rental project. The debt has a 10-year term and will be drawn over the construction period, converted to a term loan upon project completion. The interest rate is fixed at 3.07% and the amortization period is 50 years. This is an example of what RioCan can achieve by incorporating affordability, energy efficiency, and accessibility into its projects. Subsequent to quarter end, we extended our $ 1.25 billion corporate credit line by one year to 2028. This extension was on existing terms. We continue to use interest rate hedging to reduce risk in our plan.
During the quarter, we entered into a $ 300 million bond forward hedge for planned financing activity later in the year, fixing the seven-year Government of Canada bond rate at 2.63%. We also swapped certain construction loans to fix, bringing our floating rate exposure down to 5.4% of total debt. Our hedging activity, combined with our liquidity of $ 1.7 billion and our uncovered asset pool of $ 8.3 billion, mitigates risk and provides us with the financial flexibility in the current market conditions. In summary, the strong results in the first quarter are a testament to RioCan's high-quality portfolio, operational excellence, leasing prowess, and development expertise, while our necessity-based tenants and strong balance sheet insulate us from risk. With that, I will pass the call to the operator for questions.
Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask a question, please ensure your device is unmuted locally. First question comes from Sam Damiani with TD Cowen. Your line is open.
Thank you. Good morning, everyone.
Morning
On the capital markets, Good morning. Are you all finding it much harder to dispose properties today in the current environment, and how would that impact your capital deployment plans over the next few years?
I think it's an interesting time. I think that there's this view that no one is buying properties these days, and at the same time, no one is looking to sell properties that much these days because no one is certain as to where appropriate cap rates are. I think that is starting to dissipate, and you're seeing a few more transactions take place, which sets the market as to where properties should be valued. I think that's opening up a little bit of a channel in terms of commercial transaction activity. We're not...
I mean, look, first of all, as you know, it's not a significant part of our plan this year to sell a lot of assets. To the extent we are looking to sell assets, whether it's from a qualitative perspective or a quantitative perspective, we have a reasonable amount of buyers who are counterparties that we're dealing with in all regards. They come from different stripes and colors, but they're there. I don't think that it is a very strained investment environment, and certainly, there's a little more clarity that's been provided by these data points. I'm happy to turn it over to Andrew Duncan, our CIO, just to reflect on that if there's any more reflections. Andrew.
No, I think, Jon, you're absolutely correct. We're seeing not nearly as much activity as past years, but we're definitely seeing an increase in activity.
To your point, I think the buyer pool is very diversified. You're seeing privates, you're seeing family offices take advantage of some of the opportunity where they may not have been players previously.
Sam, I do think that is right. I do think it's important to reiterate, though, that our base case plan does not require us to sell assets to fund our development program. Our retained cash flow plus project-level debt covers off our commitments from a development perspective. That part of the plan is covered. If opportunistically, we can sell assets and recycle into other assets, for example, like you've seen in some of our disclosure recently, we'll do that, but it's not a requirement for us at this point. That's a testament to our low payout ratio.
That's great. I guess a big part of the capital inflow for RioCan over the next few years is the completion of the condos underway, over $ 1,800 million coming back to the REIT. When you look at those sites specifically, those locations specifically, do, you know, the market, I guess, do the market sales in those neighborhoods give you confidence that that revenue is gonna come in for sure?
Yes. Keeping in mind, Sam, that the vast majority of that revenue is already, call it, locked, and that they are subject to binding purchase agreements with robust deposits in place. We feel very confident in the vast majority of that. With respect to the units that are under development but haven't yet been purchased, we're starting to, I mean, I think there was a lull in the market at the end of 2022, and it's starting to pick up now, as buyers are starting to reconcile with the realities of the new interest rate paradigm. We do feel confident in that number materializing.
What I would add as well, and Jonathan hit this in his comments, is that we're seeing the rates are higher than pro forma on a per square foot or a per unit basis. The Jonathan had called it, we sold, I think it was about 86% of the units, but that represents 96% of the gross profit being locked in. That delta, obviously, is the fact that we've been selling at a higher rate per square foot than the original pro formas.
Okay, great. Last one for me. Just on the leasing discussions, are you seeing it, you know, take any longer or to get tenants to sign on the dotted line? Any change in the leases discussions over the last few months, that you've seen?
I'm gonna hand that one over to Oliver Harrison, our head of leasing and tenant experience. Oliver, any commentary for Sam?
It seems that we seem to be moving forward at a velocity that's been consistent with the last 12 months, so nothing's changed.
Yeah. Very strong, really good momentum, which echoes what I said about the market in general. Good retail, the, like the kind that RioCan owns is in short supply right now, Sam, and I think there's no better soundbite than our Bed Bath situation, where like, we didn't even have an opportunity really to deal with them because they're in such high demand.
Yeah. No, that's a great outcome, and congratulations there. Before signing off, I'll just say that I walked The Well on Monday, and it looks fantastic. Congratulations.
Thanks so much, Sam. Always appreciate your views on The Well. I know that, you've been paying close attention to it, and we're as excited or I'd have to say more excited than you are for that one to be completed.
Okay.
As a reminder, to ask any further questions, please press star 1 on your telephone keypad now. We now turn to Lorne Kalmar with Desjardins . Your line is open.
Thanks. Good morning.
Good morning.
Congrats on a nice start to 2023. Good morning. Just on the leasing spreads, nice little jump, from 4Q. Just wondering, was there some nuances to that number, or is that sort of the new normal going forward?
I mean, look, leasing spreads are a pretty volatile metric because, like, they're, you know, it's a pretty small sample size that is utilized each quarter to come up with it. You will get swings based on like a large lease renewal or a large new lease that was done. This quarter was quite favorable. I think that we said in our five-year plan that our objective is to be in the high single digits, and based on market conditions, we fully intend to adhere to that objective. Sometimes you're gonna see things like this, you know, above 12% combined, and sometimes you might see single digits, but we think that the run rate, Lorne, is in that high single digits, and we're very confident behind that guidance. Jonathan, any further insight?
No, the only thing I'd add, Lorne, is that, you know, with our occupancy on the, on the retail side being at 98%, we now have the luxury to really revisit some of our transitional tenants. You know, tenants that we don't deem as strong and probably aren't as high rent payers. You will see, you know, some positive bumpiness over time, where we're taking out some of these deals, which will be lower than market rents and sometimes at points at, you know, more fully net offerings. We're not gonna change our guidance, but we will see a bunch of that over the next one or two, provided our occupancy, you know, is maintained at 98%, which we expect it to.
Okay. Would it be fair to say kind of 98% is sort of like fully stabilized occupancy? It'd be kind of tough to push it anywhere beyond that and materially higher, I guess.
Yeah. From a retail perspective, Lorne, I would say that that is, to us, stabilized. From an office perspective, I mean, our headline occupancy overall is lower than that 98%. There's definitely, let's call it opportunity on the office segment.
There is definitely a lot of opportunity on the office segment. On development spend, you maintained the guidance. Just wondering if there was if you were thinking of starting any new developments of significance this year?
Well, we've got a lot on the go in the ground, and that's what the guidance for this year speaks to. In terms of green lighting, it's a tricky environment. Interest rates have obviously, I would say, distorted pro formas a little bit. What we're gonna do is, as always, take a disciplined approach to assessing each of these opportunities, and we have IRR hurdles. Should some new opportunities meet or exceed those hurdles, we're gonna consider them, but we also have to consider them in the context of some other uses of capital, meaning paying down debt, doing, you know, acquisitions in some cases, which have higher outcomes or better outcomes and more immediate outcomes.
It's a bit of a wishy-washy answer to your question, but the bottom line is we're gonna assess these one at a time, and we're gonna take into consideration a number of factors that will lend to that, to the conclusion of whether we green light or not. It's, you know, a bit more of a risky environment to commence development with this kind of backdrop. You know, it's probably not gonna be as aggressive if we had had this conversation six months ago or one year ago. As we've always said, the beauty of RioCan is that should we decide to pause on green lighting any of our construction, we have very capable, very high functioning shopping centers that are producing income.
We're not necessarily losing out by delaying any development starts.
The other thing that happens, Lorne, as you know, it doesn't take a lot of capital to invest in advancing the ball on the pipeline. Moving as many of these projects to shovel-ready, getting zoning, dealing with, you know, cleaning up, any kind of constraints on the projects. Our team continues to advance the ball on that, which does add value, without, you know, putting a the kind of burden that you have on the balance sheet when you start getting into construction. Construction costs have been inflating for a while. The other thing we've seen, though, and, you know, you guys, many people on this call cover the residential REITs. Rents are also moving pretty dramatically upward as well. We have to take all of these into consideration.
Fair enough. Last quick one from me. Can you guys give any more color on the Montreal multifamily acquisition you guys announced?
Sure. It's an asset that we acquired, right on the Isle of Montreal, very good demographics, good area, close to transit, close to a very strong community, and we feel it fits very well within the RioCan Living constructs of what we wanna provide to our constituents. It's not a very large transaction, but it has very good economic attributes to it. Namely, we see good rental growth, particularly once we take over the management of it, and we also see a very favorable debt of a very favorable existing debt scenario there, where we inherited tenured debt that's at a very favorable rate. Between the two of those elements, we feel that this will have a very good IRR out or a very good IRR outcome for us.
As I said, in our five-year plan that we put out in our investor day, we were always looking to augment our development program with, we call them singles and doubles, a few acquisitions from time to time, which we demonstated last year in our acquisition of Market at Laval. This just represents one of those great opportunities to allow us to get up to that objective of between $ 55 million-$60 million of residential NOI. We're quite pleased with it.
Okay. Are the 124 units, are they stabilized or still in lease up?
They are stabilized.
Majority are stabilized.
Yeah.
Yeah.
Okay, perfect. Thank you so much.
Thank you.
Our next question comes from Punit Pataria with RBC Capital Markets. Your line is open.
Hey, Punit.
Thanks. Good morning.
Morning.
Just in terms of the additional retail leasing that was done at The Well, can you provide maybe just some color on some of the new tenants and as well thoughts on leasing up the balance?
Yeah, sure. I'm gonna hand that over to Oliver, who's been overseeing a lot of the retail leasing there. Oliver?
Sure. I guess to answer your first question, we had some large users in the furniture space that took over some of the available units. The second question in terms of continued momentum, I mean, we're basically, if we conclude the 6% of deals that are actively under negotiation, we're essentially where we wanna be for grand opening, at which point we will then open up the site, even though the site I guess technically is already open, and be able to maximize full value on the space that is remaining. I think we made the comment a while back that, you know, we were taking reservations on space.
I think we're basically at a point now at 90, close to 90%, that we will be taking reservations until we open up en masse in the 4Q of the year. We're very confident that there will be a significant amount of demand for the limited amount of space that remains.
Yeah. I think that the opening up physically of the site creates a lot of momentum there. I think just the enthusiasm the tenants are now, or prospective tenants have towards the prospects has increased dramatically when they can actually walk the site, see the space, see the, I mean, the texture of it, and also see some of these other tenants that are opening up. I mean, success begets success, and that's what we're seeing here.
You know, Punit, I think the evidence there is that's a 10% increase in leased space in a single quarter, and that's a very big jump, and that really comes down to people being able to physically walk around and being ready to sign when they see that it's this close to completion.
Got it. I guess fair to assume then by, at some point in 2024, this should be, I guess, fully leased and income producing on the retail side.
Yeah.
Yeah, that's right. I think we'll be, well, as Oliver said, 80% open and rent paying by our official grand opening. It'll open in phases over the next few quarters and then, the official grand opening. By the end of the year, the commercial NOI will be north of 90% stabilized. That when we get into 2024, that's when you get the first full year of effectively run rate Well income from the commercial side. The residential side will ramp up over the course of the back half of this year and into 2024.
Right. Okay. Then just on the, I guess the one, Bed Bath, and store that you leased, and, I guess the two remaining that are in discussions, what can you share in terms of the types of tenants that are in discussions there or leased or have already leased the space?
Predictable. They're very much like strong existing incumbent users within the Canadian retail landscape. They covet that sort of 20,000 sq ft box and they won't be of a surprise to you when we can announce them. Great, you know.
last one.
Really quick draw. Yeah.
Okay.
Go ahead.
Sorry, yeah. Just lastly, on the ERP-related costs that you incurred in the quarter, can you provide maybe just some color around that? Also just how much further spending do you anticipate over the year?
Sure. An ERP system is like, you know, the implementation of a new accounting system, which you typically have to do in any company every 10 years or so. You put this new system in, it'll probably cost, you know, typically cost between $ 10 million-$ 15 million. You have the benefit of that for the next 10 years. We'll see a bit more spending there. You know, it is an interesting kind of point around there was a change in IFRS accounting that happened about last year, where these costs used to be capitalized and amortized in the P&L over the course of, you know, the life of the asset, which is still the economic reality of the situation.
From an FFO perspective, we actually adjust that out, and we'll amortize that in through GA over the course of the next 10 years. The other reason why it's important to address it that way from an FFO perspective is comparability with our U.S. peers. U.S. GAAP did not make the same change that IFRS made. When we talk to U.S. investors and, you know, U.S. rating agencies, et cetera, it's important to have that comparability. Economic reality and comparability, you know, make us do the accounting the way we've done it.
Yeah. Thanks for that color. That helps. I guess there are some differences across some of the peers, maybe even in Canada. Last question for me, just on the NCIB was obviously quiet in the quarter. I think in the past you've said it, you know, if anything, it'll be tied to sort of the disposition program. Is it fair to say then, you're not expecting to be active at these levels, or just any color you can shed on that?
I think that's a fair characterization. I mean, we're really focused on our balance sheet more than anything. If there's opportunity and excess funds from dispositions, at this point, our favorable use would be to pay down debt or to recycle through our existing development program or some acquisitions. You know, that could change if the stock price. It depends on how the stock price behaves. At this current time, it's not something that you should, it's not something that you're gonna see a lot of in the next few quarters.
I think the other thing, Punit, that's sort of different between when we did our past NCIB is with the cost of debt where it is, the benefit of NCIB is not as high as, frankly, as it used to be. You just don't have as big of a gap between implied cap rates in the stock and your cost of debt. It's, you know, in terms of balance sheet, also from an FFO per unit perspective, there's a good advantage to actually utilizing capital to pay down debt.
Thanks very much. I'll turn it back.
Thanks, Punit.
Our final question comes from Tal Woolley with National Bank. Your line is open.
Hi. Good morning.
Morning, Tal.
last day here in Toronto, the city council, effectively you know, it's gonna allow for building of multiplexes across areas zoned for single-family rental. I'm just wondering what, if, what, if any, knock-on effects there might be for land pricing for residential projects as a result of some of these zoning type changes?
I mean, at this point, we don't really assess it to be any meaningful look to have any meaningful impact.
Okay. That's fair. Just on Bill 23, it's still early days, but have you seen sort of any increased motion among sort of the different regulatory bodies that were targeted under this act?
Andrew, what are your thoughts there?
I think, Tal, your first point is the right one, is that it's early days. I think, the municipalities that are being asked by the province to speed up their approval timelines at the risk of losing fees are still adjusting to the environment. There's still a lot of discussion back and forth between the municipalities and the province. From my purview, the province is not changing their position, so the municipalities are going to have to adjust. I wouldn't say we've seen a market increase in municipalities' willingness and speed to approve projects.
Okay. You know, when you look at your pipeline on the residential side, you've got a fair number of condo projects. Obviously, the, you know, a lot of the major cities in Canada are short apartments. What are the things that you think need to change right now for you to get comfortable to be positioned to green light more apartment projects?
Well, right now, based on interest rates, even with regular CMHC financing, it's still. You know, the numbers don't pencil particularly well. The things that are going in, you know, our favor is, one, there is a heightened rental environment, which of course, makes the pro forma a little bit more acceptable for us and our unit holders. Two, to your point, like time, the time that it takes and the cost of these municipal levies is, it's very harsh. It, you know. Hopefully, Bill 23 and other such measures, we'll bring those in a little bit and make these more viable.
listen, we as a distributor of recurring income, very much favor the model of building apartment buildings, but, like it really it is difficult in this environment with interest rates going the way they are. CMHC is doing what they can to utilize programs like the RCFI program, which we disclosed the utilization of for one of our projects in the eastern part of downtown Toronto. If they have the ability to utilize those on a more, you know, in a more dramatic fashion, that would really help us.
Of course, you know, some of the things that we've been talking about for a while, or some deferral mechanism for HST on apartment buildings would be a really good, I think a very good impetus for allowing a little bit more building. I think there's a few different factors that go into us and developers like us building more purpose-built rental. It is absolutely our objective to do that. I mean, we really have all of the ingredients to make a difference for what I think or what I perceive to be a pretty acute housing crisis. We're trying our best to make the numbers work so that we can add to our existing portfolio of great assets in that regard.
It's, you know, we can use some help for sure from various governments, banks, et cetera.
Yeah. I think it comes down to, Tal, one of the things we keep saying to people is you've got short-term macro volatility, then you've got long-term macro demographic trends. The long-term trends for this asset class are a huge tailwind. You know, if there's tactical moves that we do in the short term, to, you know, manage the balance sheet, et cetera, maybe we do that. The long-term outlook is very, very strong.
Also that there's a ton of discussion in the industry at large about how to try to make these projects work and how to solve the housing crisis with increased purposeful rental supply. There's tons of discussions with the province. There's an active or more receptive discussion I believe occurring at the federal level now. I remain hopeful that all levels of government can align on trying to incentivize this asset class, so organizations like ours can remain committed to building it, which we are.
Okay. Just on the balance sheet, you know, you've been able to sort of extend your weighted average term, you know, from the depths of the pandemic to now. I think it's about four years at this point. Just given the shape of the curve and maybe your own internal views on interest rates, like, are you looking to extend term right now? Are you looking to sort of keep things where they are, in case rates maybe start to pull back? Like what's your sort of thought about how to structure the balance sheet for the next five years kind of thing?
I think if you take a five-year view, our objectives are to extend the latter. I mean, that's important for us, that's an objective that we have. In the short term, there's just been, as you know, Tal, the tremendous amount of volatility, both on the underlying, you know, Bank of Canada rates, but also with spreads. To give you an example, we issued our last piece of debt at it was GOCs plus 200. Actually traded in by basis points after that. Then this U.S. banking crisis, U.S. banking issue came along. I struggle to call it a crisis, but I'll... That's an opinion, I guess.
Then spreads blew out in the secondaries on those same bonds, you know, by 50, 60 basis points, and then since then have come back in, you know, about halfway. You know, there's just been a lot of volatility that in the unsecured debt market that we're trying to manage, which we're, you know, partially dealing with hedges. Whereas we've seen a lot of stability in the secured debt and secured mortgage market, where that kind of gap between secured and unsecured has narrowed and now, you know, has widened back out a little bit. A long way to say that when you start talking about a five-year objective and longer term, absolutely extend the curve, and that is one of our core objectives.
In the short term, it's managing the best within the context of what is quite large amounts of volatility, both within types of debt and across different types of debt.
Okay. Just lastly, this is your second apartment purchase in Montreal. Is it part of sort of a bigger strategy there to build, you know, a significant, residential operation in Montreal?
We just want a balanced approach, Tal. We are not really developing any apartments in Montreal, which distinguishes it from Toronto, Ottawa, Calgary, Vancouver. You know, 'cause it is a bit of a unique and, in some cases difficult environment to build in. I wouldn't say that it is a strategy that is different than what we've already proposed, which is just, again, a balanced approach throughout the [uncertain] markets. We're just gonna do it a little bit differently in Montreal by buying instead of building.
Okay. That's great. Thanks very much, gentlemen.
Thanks.
I'm showing no further questions at this time. I'd now like to turn the conference back to President and CEO, Jonathan Gitlin.
Well, thanks everyone for joining our conference call today. I know it's a very busy earnings day for you all, for the analyst community, and for anyone else absorbing the information. We appreciate you spending the time with us, and we will look forward to connecting again in the near future. Thanks, everyone.
Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.