Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q3 2021 conference call. I would like to introduce Mitchell Goldhar. Please go ahead.
Thank you. Good afternoon, and thank you for joining us. I am Mitchell Goldhar, Executive Chairman and CEO, and I am joined by Peter Sweeney, Chief Financial Officer, and Rudy Gobin, EVP, Portfolio Management and Investments. This is the first analyst call since the passing of Peter Forde. Peter was a true gentleman and a wonderful partner in the running of the SmartCentres business. We were not just colleagues, but good friends, where we spoke to each other many times a day over the past 23 years. I think of Peter daily, and we all miss him dearly. Today's commentary will refer mostly to the outlook and mixed-use development initiative section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language on pages three and four of the MD&A materials, which also applies to the comments any of the speakers make this afternoon.
Our results this quarter are a combination of improving conditions in every aspect of the business and continues to reflect the strength and resilience of our tenants and of our strategic real estate here in Canada. Our strategy to grow through mixed-use intensification continues to gain momentum and bear fruit. This strategy unlocks deeply embedded NAV value to our unitholders on lands they already own. Here are a few highlights of the quarter. Operationally, with 75% of our open air format shopping centers are anchored by a Walmart Supercenters and virtually all anchored by a full grocer. Consumer traffic has begun to return in a significant way. This is driving new tenant interest and is also improving occupancy to 97.6% and cash flow to above 97% already.
Both metrics are expected to improve throughout the holiday shopping season as the death of retail is greatly exaggerated. This year alone, we have advanced zoning applications for nearly 22 million sq ft of additional density. For those of you not as conversant, that's not a small amount. This is in addition to our current permissions in place, such as SmartVMC. What is it worth? I will not get into the details of that right now, but I will say it is more than zero. We currently have over 3 million sq ft under construction, which includes six rental apartment buildings, two in Mississauga, one in Laval, two in Ottawa, and one in our flagship, SmartVMC. I expect volume of construction activity to continue to grow in the coming months and years.
Also, in SmartVMC, we completed the remaining 192 condo unit closings in the Transit City Three tower this quarter. This brings the total to 1,741 units closed in the first three Transit City towers, delivering over CAD 60 million in FFO to the REIT. With five sold-out condominium towers, 55, 50, and 45 stories, SmartVMC has become one of the fastest-growing communities in Canada, which says something since there are a lot of communities in Canada that are growing. The next phase of SmartVMC, called Artwalk, will be launched imminently under our wholly owned residential banner, SmartLiving. Artwalk is a 12-acre mixed-use district in the heart of SmartVMC. It's located on the former Walmart parcel.
When fully completed, Artwalk will consist of approximately 5 million sq ft of density, including 5,000 residential units and up to 150,000 sq ft of non-residential buildings. Phase I of Artwalk includes over 370 condo units, 190 rental apartments, tech office, and event space. It is worthy of noting that SmartCentres REIT owns 50% of the Artwalk condos, twice as much as the 25% it owned of the Transit City condos. While SmartVMC represents our vision of the future, it is only one of 94 REIT properties currently slated for intensification. We are literally growing a new portfolio out of our existing one.
Pages 21 to 23 of the MD&A highlights over 20 mixed-use projects, totaling in excess of 55 million sq ft of net incremental density to be built, some with our partners and mostly on undeveloped lands within our existing portfolio upon approval of all. Keeping in mind we do this
While simultaneously maintaining our conservative balance sheet with an unencumbered pool of assets in excess of CAD 6 billion and significant liquidity, which Peter will speak to shortly. We only move forward with capital-intensive construction initiatives as market conditions warrant. Sufficient presales occur in the case of condos, and only when financing is fully available and in place on terms that we are happy. Reshaping and intensifying our lands takes us back to our roots. Our mindset of embracing change through forward-looking strategic land use amendments and timely real estate developments. Our third quarter results are a clear indication of strong growth to come. I will now turn it over to Rudy Gobin for some operational review.
Thank you, Mitch, and good afternoon, everyone. Throughout the quarter, we saw the reopening of the balance of our retailers, coupled with the improving leading entrants from the likes of dollar store expansion, medical uses, personal services, home decor, grocery, all of the TJX banners, QSRs, fast foods, pet stores, financial institutions, and a host of services, all driving more traffic and improving our tenant mix and occupancy throughout the quarter. While nearly 100% of the REIT's properties include a full-line grocery store as an anchor or shadow anchor, and 60% of the REIT's tenant base is comprised of essential services. Our essential service tenant percentage increases to 70% in markets outside the Greater [guess] Area, where our occupancy rates are very near to 100%.
Our tenants continue to work with us to adapt by expanding their e-commerce, their product lines, their product delivery models, pickup, and space utilization, all while striving to maintain customer loyalty and sales. We are there to support them every step of the way. Recently, we've had some larger tenants approach us wanting to expand their stores to allow for development of an e-commerce platform and distribution network. This demonstrates that the demand for physical space continues as retail continues to adapt to changing customer preferences. As we have highlighted previously, Walmart Canada plans to spend CAD 3.5 billion to make their online and in-store shopping center experience simpler, faster, and more convenient. This continued commitment to its retail operations in Canada speaks to the ongoing strength of Walmart and its growing ability to drive traffic to our centers.
For Q3, we completed nearly 270,000 sq ft of new leasing and therefore improving our leased occupancy to 97.6%. Now regarding our premium outlets in Toronto and Montreal, both are now open and are at near full occupancy. While sales were severely impacted during the prior quarters, traffic counts are now approaching the pre-pandemic levels and sales have shown great resiliency with higher conversion rates. With the pent-up demand, accumulated savings, and the reopening of the Canada-U.S. border, we expect a strong fourth quarter into the Christmas season and an even better performance in 2022. By the end of the third quarter, we had completed nearly 3.5 million or 83% sq ft of our 2021 lease maturities. COVID-19 was a real-life test of our portfolio's resilience.
Our high-quality tenants and portfolio continue to adapt, intensifying with residential and other real estate asset classes, strengthening with the expanding tenant base, improving customer traffic, and with a leading occupancy rate and of course, reliable and growing cash flows. With that, I will now turn it over to Peter.
Thanks very much, Rudy, and good afternoon, everyone. The financial results for the third quarter reflect the substantive improvement in our core business that Mitch and Rudy have mentioned earlier. For the three months ended September 30, 2021, FFO per unit with adjustments after removing the influence of ECL provisions and condominium profits grew by 4.4% or CAD 0.02 per unit over the comparable quarter last year. This 4.4% increase is principally a reflection of incremental tenancies and interest cost savings. In addition, our third quarter results include CAD 0.03 of FFO from the closings of the remaining 192 units at Transit City Three. ECL provisions were CAD 700,000 in the third quarter as compared to CAD 9.7 billion in the comparable quarter.
This is consistent with the theme that we've experienced year-to-date on continuously improving tenant collection levels. In addition, the IFRS fair value of our investment portfolio improved by CAD 79 million or 0.9% to CAD 8.98 billion at the end of the quarter. Lastly, note that our annual distribution level continues to be maintained at CAD 1.85 per unit, resulting in an 87.8% AFFO - ACFO payout ratio after adjusting for the nine months ending September 30th, as compared to 88.7% for the comparable prior year period. All of these financial metrics represent a common theme of continuous improvement to our core business. We have also continued our focus on further fortifying the strength of our balance sheet.
In this regard, we note the following strong debt metrics for the third quarter of 2021 as compared to the comparable quarter in 2020. Number one, in keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, our unsecured debt in relation to total debt increased to 70% from 67%, and our unencumbered pool of assets continues to grow, increasing by approximately CAD 239 million to CAD 6 billion. We continue to employ this strategy to repay most maturing mortgages. Accordingly, we expect these metrics to improve further in the future. Please note that this strategy permits us further agility when considering opportunities and alternatives for a portfolio of mixed-use developments.
Number two, our current triple B high credit rating from DBRS permits us to continue to attract debt capital at lower interest rates for longer terms. In keeping with our strategy to take advantage of lower interest rate environments, pursuant to our refinancing activity over the last 12 months, our weighted average interest rate for all debt continued to decrease, and at the end of the quarter was 3.25% as compared to 3.37% for the prior year. While concurrently, we have extended our weighted average term of debt to five years. Excluding construction financing, substantively all of the trust's current outstanding debt is fixed-rate debt.
This continued focus on both increasing the weighted average term of our debt and fixing interest rates is deliberate and is yet another example of the risk mitigation strategy that we have employed to insulate the trust from interest rate volatility. Lastly, number three, our interest coverage ratio, net of capitalized interest, was maintained at a very strong 3.7x level. This, in spite of the impact that COVID-19 has had on our operating results over the last 18 months and further confirms the foundational strength and stability of our core business.
From a liquidity perspective, as we look to the immediate future and continue to manage through the current uncertain capital markets environment, in addition to the conservative debt metrics that have been noted previously, consider also that when factoring in our cash on hand together with our new CAD 150 million operating line that was completed during the third quarter and the CAD 250 million accordion feature associated with our existing undrawn CAD 500 million operating line, our liquidity position approximated CAD 1 billion at the end of the quarter. Recall also that the next series of debentures in our debt ladder does not mature until May 2023. However, as we have previously noted, we are continuously considering opportunities to early redeem debentures and mortgages when appropriate.
Notwithstanding the challenges associated with COVID over the last 18 months, our business has continued to demonstrate its ability to generate sufficient cash flow to fund our operating needs. Accordingly, we anticipate our requirement for additional funding over the next 20 months to be limited to construction financing and any potential acquisition financing requirements that may arise. With that, I'll now turn it back over to Mitchell.
Thanks, Peter. As you can see, it has been an encouraging quarter, but with much work to do. With that, I will now turn it back to the operator to coordinate us in addressing your questions. Thanks.
For people on the phone, if you'd like to queue up to ask a question, please dial star one on your phone's keypad. An operator will pull you aside to ask you your name. If ever you wish to withdraw from the questions queue, please press star two. Again, if you want to queue up to ask a question, please press star one now. We have one, maybe more people, and as soon as we have a name, they'll be able to ask their question. All right. The first question is from Jenny Ma from BMO Capital Markets. Please go ahead, Jenny.
Hi, good afternoon.
Hi, Jenny. Good afternoon.
Peter, I'm just picking up on a comment you just made about your funding needs and the reference to acquisitions. I'm wondering if that is just part and parcel with the general strategy and there's not much to read into that? Or, are you starting to look at possibly buying some properties at this point?
Are you asking about Peter's comment about in the last part of his presentation?
Yeah.
About potential acquisitions that may arise. Is that what you were referring to?
Well, I'm just wondering if that statement was just, you know, potentially acquisitions in the normal course or if that's something that you're turning increased focus to now that we've put COVID mostly behind us. And whether or not you're seeing any opportunities in the market.
I mean, we're gonna be pretty strategic with any purchase. Yes, we will, of course, have always been, you know, have our eyes peeled for strategic acquisitions. Yeah, I mean, I guess with improvements to, you know, the general environment climate might be, you know, like more likely. Acquisitions might be a little bit more likely than just, say, you know, a year ago.
I guess on balance, just given some of the current prices for essential anchored assets, like how should we think about balancing the net investment between acquisitions and dispositions? Because I know you've been selling some assets here and there. Is there, you know, on balance, do they kind of net each other out, or are you seeing more opportunities on the buy side?
It's a difficult question to answer. I mean, obviously, we are both strategic, you know. If we have an opportunity to sell something that is not strategic, and not to overuse the term, but for me, you know, where we don't see any long-term potential for intensification, doesn't mean it isn't an outstanding asset and, you know, the price is right, et cetera, et cetera. It might be something that we would consider selling. I mean, the ones that we have sold recently are clearly on the margins of not strategic, the outside margins. You know, they're very specific. You know, there's a very specific agenda with those. Acquisitions, again, they're going to be strategic.
I don't know that I would sort of describe them as canceling each other out because, you know, acquisitions are gonna be. I mean, you know, they're not gonna be the same type of assets that we'll be acquiring if we buy, than the ones we'd be disposing of. In terms of volume, you know, I don't think, you know, there'll be an overall, you know, strategy in terms of structure and financing on our balance sheet, but they're not, you know. There's not gonna be an absolute symmetry between the type of assets and the cap rates we sell at and the assets that we buy. They'll both be going on, I think, you know, maybe even with greater there'll be greater activity in probably both areas over the next, you know, couple of years.
Okay, that's helpful. I should have been more clear on that cancel each other only in terms of dollars, but not, definitely not cap rates or asset type. My second question is, you talk about an office component in Artwalk. When we think about the strategy for mixed use, I know everything that's office is a very small part of what you guys do. Coming out of COVID, are you thinking about an office component in mixed use projects any differently, or, you know, do you see them as being a core part of it, or is it specific to Artwalk given the transit orientation of that site specifically?
It's a great question. I love that question. Very thoughtful question. We first of all, the mentioning of office in Artwalk is not to be interpreted as some taking some position on the future of and, you know, the changing, you know, use of office. But more that it is a really cool, it's a super cool office building that's quite small, but will, you know, as it is small in square footage, it will be, you know, add a lot to Artwalk phase one. You'll see that in the plan maybe some other time. I'd be happy to show you that. But it's a large floor plate office building, low rise, and it's being spec, but it's just animating that first phase.
It is also, with, you know, also you can, yes, read into that and that we will be wanting and looking for mixed-use, including office, at VMC. I should say that we have other interest in office at VMC in a significant, like, you know, significant square footage interest. I would say if 10 was an executed deal, it's probably a three or a four, but it was a one, and now it's a three or four . There's a lot of, you know, they qualify for sure. There's activity. We wouldn't spec a large office, that's for sure, nor would we have five years ago, for that matter. We will never spec an office building, most likely, of any size. We definitely want office and other non-residential uses to complete the full, you know, vision of VMC.
Okay. That's also helpful. It probably is a little bit too early to get into the details, but would there be any significant changes in how you approach office development in a post-COVID world? Or was it really more so like internal configurations that are part of that, you know, the end design process that doesn't necessarily affect development or construction?
I mean, we're going to build office for our tenants when we build an office other than that little building in the ArtWalk Phase One. You know, like yourself, we're all in the trenches on all these different forms of real estate. We are pretty, I think, tuned into what's going on with office. Obviously we're learning all the time from the tenants that we're talking to, potential tenants. We'll be building to what they think, you know, what they want and what they need. The architects that we use are kind of, you know, cutting edge in terms of office architects. They're hearing what everybody's thinking and saying with respect to the offices of the future.
Of course, we're not going to get into all those details now, but it's really interesting. As I say, we're not going to go ahead and spec office. VMC is probably one of the only places we'll be building, you know, very much office across the country of our intensification program. It is definitely, you know. By the way, Jenny, it's also part of the momentum from the movement, not suggesting that there's necessarily a lack of activity downtown because there's not. There is increased interest outside the core for, you know, all kinds of lifestyle reasons. We're seeing inquiries we think are kind of driven by that, too.
Yeah, that definitely makes sense. That was very insightful. Thank you.
Thank you, Jenny. As a reminder, if you'd like to queue up to ask a question, please dial star one on your phone's keypad. We have a few questions queued up. The next question is from Tal Woolley from National Bank Financial. Please go ahead, Tal.
Hi, good afternoon, everyone.
Good afternoon.
Good afternoon, Tal.
Let's start with the new condo announcements at VMC. Mitch, I'm wondering if you could put like sort of, you know, the pricing in context with respect to the prior projects that have been completed now, so we have an idea of, you know, what you think the appreciation ultimately has been over time in that market?
You're taking away our, you know, the drama around the price list. Yeah, I mean, let's just say it's gone up from our last, you know, release at TC5, which averaged I think CAD 868 or something a foot. So I mean, obviously I can't say what the pricing is going to be because we're about to kind of launch it and we're just fine-tuning it. Across the road, and again, don't take this as an absolute accurate number, but I understand that they sold across the road from us at I don't know CAD 1,050, maybe CAD 1,075 average. Yeah, so we'll see.
Definitely stronger indications from our last launch. Keep in mind, Tal, I mean, we're not releasing that many units in this particular phase for condo. You can see, relatively small. I mean, it's very deliberate, obviously, and the rental unit is also very manageable. So, you know, this pricing should be okay considering, you know, there's a lot of market demand and we're not releasing that many units at the moment.
You think that, like, the margin profile, given everything that's gone on in the world, is still manageable?
You know, we have a bit of an advantage that we have an ongoing program at VMC. In terms of construction prices, that's not to say that we're not affected and that we're immune to the increases. We're able to, I think, leverage the fact that we have an ongoing program at VMC, one owner who knows they're going to be building at least one, if not two or three buildings continuously for the next 10 years. It helps us in negotiating some of the larger items or the longer term items. That's one of the reasons we're just fine-tuning our pricing right now, is because we're just buttoning down as much as possible some of the larger items that have increased.
That's a big issue. It's a concern. In some cases in the future we'll potentially even tender the project before we go to market. You know, to kind of try to mitigate the risk. In this case, we don't think it's warranted here. I should have mentioned on the previous answer to you as well that we may, you know, we're gonna lease this building, but, you know, if things go well, we hope to lease another building on the coattails of this ArtWalk Phase One.
Okay.
It's not that we're gonna, you know, release this and that'll be it for a bit. I anticipate that if it goes well, we may on the coattails have another building ready to go.
Can you just talk to me a bit about the decision on something like ArtWalk, the choice to go for sale versus rental? I would have thought maybe with the one building going up and progressing well, that, you know, you would might have aimed to add more rental into the vicinity.
We have so much square footage, so much density at Smart VMC that, I mean, we're not gonna be lacking in rental up there. We just wanna go carefully, be cautious, obviously. I mean, when it comes to condo, we pre-sell and we have deposits and et cetera, et cetera. Whereas with rental, you know, we don't really, you know, generally, stabilize until a few years after construction is complete. Of course, it requires borrowings, and term financing. It really is just an exercise in managing the overall balance sheet conservatively. There'll be some years where it'll look, you know, overly conservative. There'll be other years where we'll be, you know, very happy that we played it that conservatively. Yeah, we could do more rental, but it's really a case of belt and suspenders.
Okay. You know, some of your other uses that you've been building up, self-storage, you know, the retirement homes, can you just talk a bit about how those have been performing? Like self-storage, the publicly traded guys across North America have just been on fire. I'm just wondering how you're thinking about the progression of that business going forward too.
I'll start the answer and I'll turn it over to Rudy. We've been very lucky to have teamed up with who we teamed up with. We're free to team up with anybody, but you know, just the SmartStop relationship has been going really well. They're pros. There's just a good simpatico in terms of the real estate. You know, the real estate minds over there, together with their operational expertise, has just been a really good fit. And so we've got a number of those going. It's going. The momentum is strong. We've got a bunch more in the pipeline, and they've been leasing up very well. I'll let Rudy talk to that.
I wanna just acknowledge Allan Scully, who's done a great job with SmartStop right from the beginning. Of course, Peter Forde was very involved and instrumental in the relationship with SmartStop. It's a relationship that has long legs. Rudy, do you wanna maybe chime in?
Sure. Sure, Mitch. Thanks. You know, the relationship Mitch talked about with these guys is something that we can't say enough of. They are great partners. We share information with each other openly, freely. We talk about, you know, how to market. These guys know how to market the properties. They know how to bring it to market after it's open. They know how to compete in each market. There's a lot of diligence that's done in advance, market studies done in advance. You know, that advantage made us great partners with the lands that we have and the locations we have. As you know, we've got five locations open, four developed out of our lands and doing well.
I will tell you that we expect them to do better than pro forma once they're up and running. They're not all stabilized yet, but there's time for them to stabilize, but they're performing better than we had thought. These are large multi-story units, and there are, I think, three or four more under construction as we speak. We can't say enough about this, and there will be more to come in this area.
Okay. Then, Mitch, just lastly, like, you know, like your closest peers in the public markets, you know, their development efforts have been, you know, I guess I characterize them predominantly focused on urban mixed use. Your strategy's been somewhat different. You're including these other types of asset classes, and making a real push on them. In your head, is there like a perfect mix of these asset classes that you wanna be at, like in 10 years time? Or is it just, hey, this is what I think I can get out of this particular piece of land that I bought, and I'm focused on what I can do best for that one site?
Yeah, you know, the way, I mean. Okay, no, there isn't a like a number that we're seeking per se, and then that sort of then dictates that. I think if we were to sit down and look at any one of our properties that are sort of on the list of intensification and redevelopment, and we went there and we drove around and we looked at the, you know, the site plan and all the options and so on and so forth, we probably come to, like, after, you know, going back and forth and thinking through, we probably would come up with, you know, logically a lot of the same uses and densities.
So that is to say that, you know, in each site, if you think in the future, if you can extend the trajectory of what's going on in any one of these communities and what's going on in terms of, you know, family structure and, you know, household incomes and so on, you layer it all in, you can pretty much, you know, you should be able to predict, you know, what’s going to be needed there in, you know, two to 10 years. That's organic. Now, what that ends up totaling at the end of, you know, analyzing every site, I would say that, you know, in 10 years from now, it's going to be hard to get to 50/50, but it's quite possible that we will be 50% or more non-retail income.
It goes back to something you had asked earlier, partly, and that is, depends on how much condo versus rental we do. In terms of pure square footage, it'll be substantially more than that. I would say that a benchmark, a thumbnail would be that in 10 years from now, we'll be, you know, 50%, maybe more than 50% non-retail income.
Okay. That's helpful. Thanks, gentlemen.
Thank you, Tal. The next question is from Michael Marquez from Desjardins Capital Markets. Please go ahead, Michael.
Hi, everybody. Thank you. My first question is just with respect to the establishment of SmartLiving. I know at VMC, you've now made a point of taking down a greater proportion, increasing to 50%, on the non-residential component. Going forward on future projects where the REIT owns 100% of the land with SmartLiving, will the residential be fully at 100% at Smart's interest, the way you look to be bringing passive partners for a source of capital?
Yeah, I mean, for sure we're gonna be bringing in partners in lots of deals, you know, when we find the right fit. Yeah, we're not trying to be heroes to do everything ourselves. I mean, it's a great way, you know, to raise equity after we make some land use, you know, get land use and then approvals. We do want as much as possible to, you know, be at the forefront of the development to, you know, build our brand. You know, I think that that's probably something we will probably more often than not be the lead, you know, kind of in terms of the development manager and you know, and brand.
You know, it might happen that we will even sell a parcel of land to a third-party developer who has their own, you know, brand equity. Or there might be cases where, you know, we just got too much on our plate and we want to hand off some of that, you know, some of that horsepower to somebody else. I think more often than not, we will be the lead developer, when we bring in a partner.
Okay. That's helpful. Thank you. Just on Cambridge, I know you guys are progressing with the first phase of that. Maybe you could just give us a little bit of color on what that entails, what parcel of the site would be the first part of that question. Secondly, I don't think it's going to be disclosure necessarily, but I think you guys made a point of pointing out that, it's actually subject to a leasehold. I'm just wondering if you could also explain if that at all will impact, Smart's, economics on the site going forward.
Yeah. I mean, first of all, Cambridge, as you know, is now zoned for close to 12 million sq ft. We have 700,000 sq ft on there right now. We've got a long, you know, it's a significant up zoning. Phase one is looking really good. It's really, you know, a lot of towns. Towns, by the way, is the lingo for townhomes in the residential world. A lot of towns and some mid-rise and then one initial high-rise. In a part of the project that, you know, is kind of the most affected by, maybe in all of our centers even, one of the most affected by just the amount of retail in that market, supply-demand.
It's a good place to start. We're excited to do that. I don't know how well you know Cambridge and the whole Tri-Cities area there, but it's definitely a whole world unto itself. We think our timing is good there, when it comes to demand for housing just outside on the edge of the city. In terms of the leasehold, yeah, there is a leasehold. It's a land lease, goes back to one of the early projects that I had sold into the REIT on different terms. Most more straight up sales. There were some leasehold sales, which at the time was quite common or not uncommon, that's for sure.
You look at some of the other REITs. As it relates to the development or redevelopment of Cambridge, it does require us to work out some, you know, tweaking of the structure there. I don't wanna say too much about it. I mean, you obviously know if we don't work something out, but, you know, I'm kind of assuming like everything else over the last, you know, whatever number of years, you know, that'll work itself out.
Okay. Thank you for that. Just the last question from me before I turn it back. You know, with respect to the JVs, that's where a lot of the active development is going on right now, and some of it's completed income stuff such as the KPMG tower. If we look at that NOI coming from the equity in Canada investments and just given that there are now properties that have been completed in lease-up, is there any way you could give us some help in terms of how you expect the amount that's there in Q3 will progress over the next, call it 12-24 months?
The amount of which?
NOI coming from the JV. Just because a lot of the stuff that's active or recently completed is in a number, and I just suspect that there's good growth in that component. Just trying to get some way to try and-
You mean in that particular JV?
Oh, no, sorry. Just within all of the JVs, like a storage, there's
Oh, I see. Yeah.
There's a lot of stuff that's not stabilized yet. I'm just trying to get a sense of-
Yeah. I would just say I'm gonna turn that over to Peter, but Peter, give me a second to get ready. I think, you know, I was happy that Rudy was conservative in his description of the lease-up with our SmartStop, actually, because they're going, you know, they are going better than plan, and plan was kind of, you know, conservative. You know, so it's good to see that, you know, they are outperforming our plan, and we base things based on our conservative plans. We're pleasantly surprised. I also wanted to add to that whole SmartStop thing.
I don't know whether everybody appreciates how great it is to be able to wedge a storage facility on lands that you wouldn't necessarily be able to build anything else. So it's a great, actually, vehicle for us to create, you know, additional income where we probably wouldn't be able to. Because they use so little parking and the buildings are somewhat flexible. So yeah, with that, Peter Sweeney, do you want to illuminate a little bit on-
Sure. Mike, I mean, we tried on pages 31 and 32 of the MD&A to give you at least at a high level the NOI and income generating results for anything that's equity accounted. Maybe what we can do just to provide some additional information going forward, we can have a chat after this call and you can give us sort of a broader perspective on expectations. What we'll try to do going forward therefore is augment this information to accommodate your needs and those of your counterparts.
That would be good.
Okay.
Thank you. Thanks very much.
All right. Thank you, Michael. As a reminder, if you'd like to queue up to ask a question, please dial star one on your phone's keypad. Should you wish to withdraw, dial star two. The next question is from Sam Damiani from TD Securities. Please go ahead, Sam.
Thanks, and good afternoon, everyone. Just on the VMC, there's been a lot of units that SmartCentres completed and others as well absorbed in the market. Do you have a sense now with many of those units closed? Like, are they physically occupied? Are they offered for rent? What's the actual market like for, you know, occupied units in that node at the moment? You mean renting out? You mean the actual rental rate for some of the rented condos in there? Not the rate. Just wondering if I assume a good portion of the buyers were investors, and just wanted to know if, you know, if those rental units have been successfully, I guess, leased. Yeah, I mean, I don't think we know exactly the numbers.
Again, don't go by this. Sam, this is very disappointing because I can see that you haven't been up to VMC lately. We're gonna have to do something about that. I'm actually trying to find an apartment up there right now. Well, you've come to the right place. That's why I'm here. Yeah, you know, it's busy. I mean, it just feels like it's not. You know, it's funny because obviously they've got occupied sort of throughout COVID. There's just people everywhere up at VMC now.
I don't know the percentage, but I would say that the vast majority of, you know, when I spoke to Andrew Hawken, I don't know, a number of months ago, we were talking about the rental, you know, component on the TC5, on the transit city projects. We were talking about the rental rates and so on. I mean, he was talking, you know, from what they could tell, that everything is, that was to be rented is rented. If you go up there, you sort of get the sense, and if you're there at night, you see the lights on, up and down, you know, the three towers. I don't know the answer, but it's gotta be substantial, Sam.
I mean, I don't think there's anything peculiar going on there, like a whole bunch of investors who are unable to lease. I mean, it's on the subway. The buses are rocking and rolling. I mean, you gotta go up there. It's just, you know, if there's any, it's gotta be a very small percentage. A lot of people up there now. Obviously, you got 1,700 units. You got, you know, anywhere between 2,000 and 3,000 people coming and going out of those buildings every day. That's good to hear. The other question I had was just on the inclusionary zoning, which I guess is a reality in the city of Toronto. How does that affect your, the entitlement applications that you're processing at the moment? It will, but it's not.
Well, first of all, you know, getting into the whole politics of it's not going forward as imminently as originally thought. If and when it does, yeah, it'll be part of our pro forma, and it will be part of our decision to proceed. For the most part, I mean, we were baking it in, like, in the last number of months, and most overwhelmingly, it will not, you know, alter our decision to go or no go. Luckily, we don't have to go anywhere. We don't have to do any of this, actually. You know, now we'll be baking in some of those requirements if in fact they get legislated. Okay, that's great.
I'll turn it back. Thanks very much.
Thank you, Sam. The next question is from Pammi Bir from RBC Capital Markets. Please go ahead, Pammi.
Thanks, and hi, everyone. Just looking at the in-place occupancy, you know, it is ticking up nicely here. Based on what you're seeing in the pipeline, what's your sense of how long it may take to get back to the pre-pandemic levels? I think if I go back to 2019, you were running at just over 98%. Just curious, any thoughts you can share there.
Rudy, you want to take a shot at that?
For sure. Pammi, I would have thought given that the lockdown hasn't completely lifted, as you know, they've delayed it a little bit again now, for restaurants and so on, and clubs and so on. For the restaurants part of our business, it's a little bit slower, the sit-down restaurants. What we're seeing is so much other interest coming in. You know, from last quarter to this quarter, it was 0.3%, taking us up to 97.3% and 97.6%, by the way, with executed deals. I think it will still take a couple more quarters to get there.
Again, assuming the market stays as it's doing now and remains vibrant and the interest continues to hold, it's moving up faster than we had thought and very pleasantly surprised about what's happening and who's coming. I don't think it's going to be long before we get back to that 98%.
Good to hear. Just maybe coming back to the leasing spreads, you know, we've talked about it on past calls, and frankly, I guess, look, you know, the flat spreads you telegraphed and were pretty much expected. You know, on the deals that you are doing today, do you feel that you'll be getting back to some stronger growth in 2022, or is that more of a 2023 scenario, in terms of the renewal leasing spreads?
You know, Mitch and I talk a lot.
Um.
Yeah, go ahead, Mitch. Sorry.
Yeah. Well, yeah, you can go ahead, Rudy.
Yeah, I was just going to say, Mitch and I talk a lot, obviously, about leasing, the tenants, the rates, the spreads. Obviously, we want to, you know, keep the lights on, the space rented, collecting the rent, and driving the NOI growth in these properties. Tenants are, you know, still feeling their way. This, we're not out of the woods yet with this pandemic. I think until we are out of the woods, we're not going to see that complete return to what I'm going to call full market rent. So right now we're, you know, we're probably being a little bit conservative and being careful, and tenants who are opening stores are being a little bit more careful.
We will also probably find that we will have a little bit more growth rate in the rents as opposed to, you know, doing these 10-year deals where you have bumps every five years, and we'll have greater bumps every year or two, as you see in the Toronto Premium Outlet. It's getting there, but it's not back to that norm yet.
Thanks for that. Maybe just one last one for me. You know, I think last quarter, there was indications of, call it, roughly CAD 200 million of potential dispositions in the pipeline. You know, I think you've got CAD 90 million out for sale. Some of that did transact, I guess, after the quarter. Can you just comment on, you know, whether there's more to come, like, is from a disposition standpoint, you know, closer to that CAD 200 million dollar figure? Secondly, just on the income producing assets that are in that, call it CAD 90 million, where's pricing coming in from a cap rate standpoint?
Mitch, do you want me to go ahead with that?
Yeah, go ahead. Yeah.
Yeah. The, Pammi , two parts to that. The first part of that is, you know, we're obviously not selling assets where we have intensification potential. These are non-core assets. We don't have a list of assets listed for sale or held for disposition, by the way. A lot of our smaller markets, as you know, and even our non-core are 100% leased and Walmart anchored, so generating, you know, pretty decent cash flow. With that said, there are those who are knocking on our doors and looking for that great cash flow and that Walmart anchored income, and not as much concerned with intensification from their organization's perspective. We've looked at that.
In our portfolio where we have some of that non-core, maybe smaller weaker markets. We have been looking at that. But again, the pricing is coming in better than our current IFRS, which has been amazing for what we're experiencing. We expect that to continue in that way, and we don't have a target number that we're trying to achieve. We will continue to just, you know, collecting the rents, managing the properties as well as we can. To the extent that those opportunities come up, we will take advantage of them. Again, only where we can have some NAV appreciation in those transactions.
I wanted to just add something there. We've received offers for some centers in, you know, our mid-markets. They're interesting. You know, they're sub six. I'm not talking 5.99. I mean, a good solid sub six. But we do have very strong market share and dominate. We really have great tenants. You know, very strong tenants. I mean, you know, think about it. Like, the weaker tenants, generally speaking, don't go to, you know, some of those markets because that's not where fashion goes, for example. But it is where LCBO goes and The Beer Store goes and of course, all the banks. So if you look at our profile in those markets, it's very good.
I don't really know that there's too many weak markets in Canada. I don't know where that notion comes up. First of all, we're not in any weak markets. I mean, Walmart and yourselves, your own institutions, you know, look for the healthiest markets. That's where Walmart thrives. That's where we are. We may be smaller in population, but our relative market share is exponential and higher, and hence our occupancy. You know, to let go of those, and e-commerce is not as big a factor and, you know, there's much less retail per capita. I mean, it's not, you know. If you think about it and you're really understanding, you know, what's going on there, you know, you're not looking to bail there. There are some centers that you'd want to bail in some of those smaller markets.
I don't want to get into them, but not the ones we have. We do want to manage our balance sheet. We do want to manage our energy allocation. There may be a price and a time when, you know, disposing of those assets might make sense, given everything else that's going on. Not because those centers are by any means, you know, problematic.
That's great, color. Thanks very much. I'll hand it back.
Okay. Thank you. We have one more question. Do we have time for that?
Sure. One more question.
Okay. Very well. This question is from Dean Wilkinson from CIBC World Markets. Please go ahead.
Thanks. Afternoon, everyone. One question, two parts. Just given the spend that you've got ahead of you with all the development over the next couple of years, how comfortable are you taking the balance sheet up in terms of leverage? Like, to what point? The second part of the question is, given that the units you're trading are now at above a book value or consensus NAV view, what would the thought to be equitizing some of that spend, as you look out over the next six, 12 months? Thanks.
It's very much one of the levers. You mean selling the land versus developing it out, you mean, to raise equity?
Either that or just going out to the market to raise equity given that the
Oh, I see.
The pre-pandemic levels.
Yeah. Well, I mean, lookit, in terms of selling, like, the units don't reflect the value of the lands that we own. So, you know, raising equity by issuing units, you know, may not be the right way to raise equity compared to selling off some of the lands. We are exploring, you know, raising equity by bringing in partners through some of the lands at market. That would be obviously much more, that could be more accretive, more effec-
Mm-hmm.
More efficient than issuing units. Yeah, at some point, when our units get to, you know, what we think is our appropriate NAV, which is up for discussion or up for debate, it certainly isn't, you know, where we are now, however better we are now than we were six months ago, we will, I mean, look at that as an option. You know, we've got lots of levers. I mean, we don't have to do anything, which is the good news. You know, it's gonna be the safe thing. We're gonna play it safe all along the way, and we're not gonna stress our balance sheet just to say we're building another building. It's just not gonna happen. We have so many levers. I don't see any limits to us executing what we've got approval for, you know, at the moment.
Perfect. Thanks.
Thank you, Dean. We do have one more. Is there time for one more?
Sure.
All right. This question is from, Mario Saric from Scotiabank . Please go ahead, Mario.
Hi. Good evening. Just maybe a question for Rudy on the operational side. If we sit back 'cause we're really going through your strategic reviews and budgeting and whatnot at this point. If we sit back and think about 2022, and if you had to identify one or maybe two, like, primary objectives operationally in 2022 for the organization, what would those be?
Operational objectives of 2022? Well, I know that with my boss on the line, it'll get to 100% leased. We have a strong tenant base, Mario, and obviously we want to bring a lot of discipline to keeping our tenants not just happy about being in the center, but keeping our centers operating at full efficiency and capacity, and also ensuring that it is primed, ready for intensification, given that's our growth mode. Everything we do with every tenant, we do it with, whether it's in renewals or new tenants, it's always with a view of how do we keep the NAV growth in the property from an overall perspective growing. It is balancing the growth in the occupancy, in the rents, in the NOI, and managing that with keeping space and land use available for future growth.
Do you think there's been any impact to the recent spread as a result of wanting to maintain that flexibility for intensification going forward?
I'll jump in. No, because you know where we're leasing for the most part. We do pretty much insist on getting rights to redevelop when we do a new deal. Most of the major sophisticated tenants understand that even if we have to give some relocation provisions or you know on-site relocation provisions, I wouldn't say it's affecting our rental rates. There are going to be anomalous situations where you know maybe the speed at which we lease up might be affected as we sort through those things. Most tenants don't decide to come, you know, because they're getting a little bit lower rent and, you know, they don't like that provision. I would say it's not really a rental rate issue. Rudy, do you have any further thoughts?
Yeah. No, I was gonna say you know, our land use for doing what we're doing in terms of condo development, apartment, storage is not a significant amount of land, which is why the density is gonna be as significant as it is. As you know, there are lots of our projects where we have capacity to build within a built out shopping center without impacting our tenants. In fact, it's complementing our tenants to have this residential and other uses sitting right beside them. Exactly what Mitch said, it's not in our minds, in my mind anyway, affecting the rental rate other than because the people who choose to come wanna come because it's the right place to be. It's the right center to be in.
Walmart's there. They're coming. Now, it's a question of negotiating a market rent for that, for them being in that space and making sure we can accommodate the future use that we're going to do. You know, these things don't develop. Mitch talks about it all the time. The length of time it takes to get everything rezoned and built and occupied, it doesn't happen very quickly. It gives tenants a chance to de-develop their business and develop their brand and develop their own customer allegiances within that center. We're gonna just keep building it out for them as we go. Yeah.
Got it. Maybe just one follow-up from on the operational side. In some of the other asset classes, like residential, some of the shorter duration asset classes, there's a positive correlation between these spreads in occupancy, perhaps a little less so in retail. Do you foresee on your march to the 100% occupancy that you mentioned, is that something that could be a catalyst in terms of improving leasing spreads going forward?
Do you want me to-
Do you mean taking space off the market because we're redeveloping, improving leasing spreads?
No. I mean, like as you're occupying the portfolio into that back to pre-pandemic levels and you just have less space to lease. Does that conviction or that confidence into having less space to lease result in perhaps maybe being more aggressive in terms of the rent that you charge? If that makes sense.
Yeah. Naturally it will. We're, you know, we just come out of COVID. I mean, we're happy leasing at the rate we're leasing at. We're not being greedy, and tenants are being fair. I mean, I think it's been, I don't know. It's brought retailers and retail landlords closer together, by the way, this whole exercise. I feel like everyone's treating each other, you know, really fairly. I guess as things tighten up a little bit and things get back to the normal rhythm, you know, I think there'll be a lot less needing total square footage, but a little bit less per square feet per capita, and it will result in improved rents.
I have no doubt new space and redeveloped centers that have retail in them will generate higher rents than the pure, you know, sort of larger retail centers without any mixed use. Over the next number of years, I think you'll see some of the higher rents in those mixed-use projects as people are living on the site and shopping on site.
Okay. Maybe two more quick ones for you just on capital allocation. All right. If you want to look out over the next three to four years, can you give us a sense of kind of the ballpark estimate development spend per year and development completions? I know you've provided great detail in terms of individual properties, but if we think of it holistically, you know, over the next five years, how should we think about the spend and completion rate?
Peter Sweeney, you wanna take a shot at that?
Yeah. I'm sorry, Mario. Just so we understand the question, are you asking for our capital spend expectations for the next few years? Is that the question?
If we look over the next five years in terms of your expected development spend per year and then the amount of development completion that you're looking for high level, how should we think about that in the
Yeah.
going forward?
Yeah. Again, I think the caveat here or the key item to always remember, and Mitch mentioned this earlier, is that we don't have to do any of this. We do have the opportunity to put the brakes on any project before it begins. Notwithstanding that, I think it's fair to say, given our current thinking, capital spending for next year at least is somewhere between CAD 100-CAD 150 million net. The year thereafter, so 2023, we would be, again, based on current projections, up around the CAD 300 million level. Again, those could change, but at least for now, that's our preliminary thinking for the next two years.
Once we go out beyond 2023, you have to keep in mind Transit City 4 and 5 will have closed, or we expect them to have closed, number one. Number two, the Townhouse project in Vaughan, again, units would've closed. With the recovery of all of that initial capital and the expected profits from those various phases, the actual cash spend or cash capital requirements for these projects for 2024 and going forward may rise. It may increase from the CAD 300 million level that we expect for 2023. If it does, again, it'll only rise in the event that our balance sheet and the metrics associated with our balance sheet tell us that, you know, we're not putting the balance sheet at risk.
Otherwise, as Mitch said, you know, we have the opportunity to hold back on things. For now, it's still the conservative approach to spending on these projects. We can say with some level of expectation that next year will be in the sort of CAD 150 million range, and perhaps all other things being equal in the 2023 year, doubling up on that.
Thank you very much for the color, Peter.
Okay.
Thank you, Mario. That brings an end to our Q&A. I will pass it back to Mitchell Goldhar for final remarks.
Thank you. Again, thank you all for taking the time to participate in our third quarter call. Of course, please reach out to any of us for any further questions. Continue to be safe and have a good evening. Thank you.
Ladies and gentlemen, this concludes the SmartCentres REIT Q3 2021 conference call. Thank you for your participation. Have a nice day.