Please stand by. Good day, and welcome to the SmartCentres REIT Q2 2019 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Ford. Please go ahead, sir.
Thank you, and good evening. Welcome to the SmartCentres Q2 2019 conference call. I'm Peter Ford, President and CEO of SmartCentres REIT. Joining me on the call today are Mitch Goldhar, our Executive Chairman, Peter Sweeney, Chief Financial Officer, Mauro Pambianchi, Chief Development Officer, Rudy Gobin, EVP, Portfolio Management and Investments. The agenda for the call today will be a few overall comments by me, followed by Peter Sweeney, who will talk about our results for the quarter and our financing activities, followed by Mitch about some of our developments. Then we will take your questions. Our comments will mostly refer to the first 10 pages and pages 24 to 25 of our supplemental information package and the outlook section of our MD&A, which are posted on our website.
I refer you specifically to the cautionary language at the front of the supplemental material, which also applies to any comments any of the speakers make this evening. First, some overall comments. SmartCentres REIT is a stable portfolio in excess of 34 million square feet of well-located, value-oriented shopping centers with tremendous mixed-use intensification opportunities. Regular and growing positive results from our new mixed-use initiatives are about to commence next year. Towards this end, we added the following to our already long list of initiatives. For Vaughan Metropolitan Center, VMC, we finalized the design of our purpose-built 34-story residential rental tower adjacent to the five sold-out condominium towers. In VMC, the KPMG Tower office space is fully occupied, and the PwC YMCA Tower is now fully leased.
We announced the execution of an agreement with Selection Group to develop a mixed-use complex at our Laurentian Place Shopping Centre at the corner of Clyde and Baseline in Ottawa. The development will consist of a 13-story apartment building with 180 units and a 14-story independent supportive living tower with 230 units, as shown in the rendering on page 11 of the supplemental information package. Construction of this CAD 150 million project is expected to commence in spring 2020. As you will hear from Peter Sweeney, we had a strong and stable quarterly performance from our existing retail portfolio, with notable mention going to the strong results from Toronto Premium Outlets expansion, which opened in November last year. Average tenant sales for the centre are at CAD 1,150 per square foot.
Our highest tenant retention with over 80% of maturing tenants already renewing, and the completion of the VMC PwC Tower and the full occupancy of the remaining office space in the KPMG Tower. Then going forward for 2020 and 2021, as the profits from the first of many recurring residential developments are completed and from the variety of new business initiatives and developments, some of which are described this evening and in our quarterly report. Our core retail portfolio remains strong and with its value-oriented, nationally-focused tenant base is well suited to the changes taking place in the retail marketplace. On executed leases, our shopping centers are 98% leased. As has always been the case in our business, retailers do come and go. In that respect, Bombay and Bowring Canada closed all their locations before March 12th.
We had 12 term leases with Bombay and Bowring in our portfolio, along with a few temp deals, representing less than one-third of 1% of our portfolio. All those locations are in shopping centers that are anchored by a Walmart Supercentre. Payless Shoes closed all locations in Canada, including its 46 locations with us early in the second quarter. All but one of these locations are in a center anchored by a Walmart store. We anticipate executing new deals for all of these locations within the next 12-18 months and are well along the way in doing so. We are in advanced discussions and/or have executed deals for approximately 60% of the Payless locations and approximately 40% of the Bombay/Bowring locations with rents at or at a higher than the previous rents.
Home Outfitters has closed their six locations with us and across the country with everyone else as well. They have continued to pay rent for the remaining terms, which extend over the next four years, ranging from 2020-2023. We are already working on backfill opportunities, including a food store and in a few cases, a seniors residence and/or a self-storage building. The Toronto Premium Outlet Center expansion of 144,000 sq ft opened last November. It is virtually fully leased and exceeding expectations. The expansion and high-caliber tenant mix makes this center one of the top-performing premium outlet centers in the world. Several successful retailers in Canada are taking advantage of the opportunities to expand their platform across the country.
Retailers such as TJX with its three banners, Winners, Marshalls, and HomeSense, dollar stores, quick-service restaurants, and fitness. Several new retailers are coming to Canada, and we are working with them on several locations. Jollibee, F45, Wahlburgers, and others yet to publicly announce their arrival. Our strong and stable retail portfolio provides a solid base upon which we will grow income and NAV through mixed-use intensification. A few general reminders about our development pipeline and capabilities. Virtually all of the development initiatives we are planning are on land we already own, unlocking value and not requiring us to buy very expensive land to develop this density. We use our in-house development team to drive the initiatives, all contributing to enhanced yields and profits over the long term.
With 34.5 million sq ft built on approximately 3,500 acres of land, with less than 24% utilization of that land, and primarily all at ground level, we have over 100 million sq ft of land to accommodate mixed use growth throughout the country. This doesn't count the additional 340 acres or nearly 14 million sq ft of undeveloped lands, for much of which we have plans for building out mixed use and specialty retail. Retailers and the new users we are bringing to the centers, residential condos and apartments, seniors residences, office, and self-storage are aware of the synergistic benefits of bringing this all together in one location. The new users, of course, benefit from the great locations, access, and visibility of our centers, while progressive retailers in the centers recognize the benefit of having these additional customers at their front door.
I will point out that virtually none of the additional value of the density we are creating is reflected in our IFRS values. We reflect it only when we sell an interest in the land to a JV partner once it is zoned, at which time we recognize the uplift on our retained portion as well, or for retained properties, when zoning is obtained, tenant permissions are in place, and we have an overall mixed-use plan ready for implementation. Now I'll turn it over to Peter Sweeney.
Thank you, Peter, good evening, everyone. Our financial results for the second quarter of 2019 reflect the continued strength, stability, and security of our 34 million sq ft predominantly Walmart-anchored shopping center portfolio. During the second quarter, this portfolio generated the following strong results. Number one, rental revenue from investment properties of CAD 194.4 million was marginally higher than CAD 193.8 million recorded in the comparable quarter last year. NOI as a percentage of net base rent was 100%, which is consistent with the comparable quarter last year. The strong metrics were realized notwithstanding the impact of the 2019 bankruptcies as previously announced by Peter. Number two, FFO with one-time adjustment increased by CAD 5.1 million to CAD 96.1 million, representing a 5.6% increase over the comparable quarter. This increase can be primarily attributed to increased NOI, reductions in interest costs, and lower net G&A expense.
Number 3, FFO with one-time adjustment per unit was maintained at CAD 0.56 per unit, which was predominantly caused again by the dilutive impact of our CAD 230 million equity issuance in January of this year that we have spoken about in the last quarter. Number 4, ACFO with one-time adjustment increased by CAD 7.2 million or 8.2% to CAD 95.6 million as compared to the same period last year. Number 5, ACFO exceeded distributions declared and distributions paid by CAD 18.6 million and CAD 35.7 million, respectively. Number 6, same-property NOI growth declined by 0.3%, which was principally caused by the 2019 bankruptcies previously announced. When we exclude the impact of these bankruptcies, same-property growth for the quarter would have been approximately 1%.
Lastly, number 7, we renewed or we are near completion of renewing over 2.9 million sq ft of retail tenancies, which represent approximately 80% of our 2019 lease maturities at average rental rate increases of 3.9%. After excluding anchor tenants, this metric increases to 4.8%, both of which are substantively improved over the comparable quarter. For the second quarter, these improved results can be attributed to the following primary factors. Number 1, the incremental NOI now being generated from both the 144,000 sq ft expansion at TPO and recent earn-outs and developments. Number 2, the incremental NOI now being generated from new tenants at both the KPMG and PwC YMCA office towers.
Lastly, number 3, our portfolio of maturing mortgages and unsecured debt continues to provide unsecured fixed-rate financing opportunities at lower rates than the outgoing maturing rates. However, these results were impacted by both the dilutive impact arising from the issuance of the CAD 230 million equity issuance in January, and also from the bankruptcy of Payless, which resulted in 107,000 sq ft of additional vacancy during the quarter. Because Peter also mentioned earlier, we are presently in discussions with prospective tenants for over 60% of these locations and expect to have all of these locations backfilled over the next 12-18 months. From a financing perspective, with the assistance of our syndicated banking partners, we began the year with a very successful issuance of CAD 230 million of equity.
These proceeds were applied against some of our credit facilities to reduce our overall debt levels and related debt metrics to appropriately and also conservatively accommodate future levels of expected development financing, and the impact of these debt reductions is reflected in all of our debt and financial metrics being substantively improved over the comparable quarter. During the quarter, we completed the early redemption of CAD 150 million of Series L debentures and replaced them with CAD 170 million 7-year, 3.26% fixed-rate bank loan, and the balance of these proceeds have been used to repay other maturing mortgages. Compared to the second quarter last year, these capital initiatives have now resulted in the following substantively improved credit metrics. Number 1, our adjusted debt to adjusted aggregate assets ratio has now improved to 41.8% from 44.7%.
Number two, our debt to adjusted EBITDA ratio has been reduced to 7.8x from 8.5x. Number three, our interest coverage ratio has improved now to 3.3x from 3.2x. Number four, our unencumbered pool of assets continues to grow and has increased now by over CAD 600 million to exceed CAD 4.5 billion at the end of the quarter. Lastly, our secured to unsecured debt ratio has now improved to 46%-54%, from 53%-47%, furthering our strategic pursuit of increasing SmartCentres' overall unsecured debt and unencumbered asset levels. This is a key strategic initiative that we've been working on now for the last two years, and you may recall that when we first embarked upon this strategic initiative, two-thirds of our debt was sourced from secured lenders.
For our payout ratio and distributions, our ACFO payout ratio increased slightly to 80.5% from the comparable year's ratio of 79.9%. Our payout ratio reflects the continued healthy level of cash flow generated by the retail portfolio, which is also reflected in our surplus of ACFO over both distributions declared of CAD 18.6 million and distributions paid. When factoring in our highly successful DRIP program, that surplus of ACFO over distributions actually paid during the quarter totaled CAD 35.7 million. Our financial and operating results for the second quarter reflect our strong and stable business model that we believe positions us to continue to provide our unit holders with stable and growing distributions, as evidenced by our board's decision now for the sixth consecutive year to approve an increase of CAD 0.05 per unit in annual distributions to CAD 1.85, effective October of 2019.
As we have previously noted, the very successful bought deal that was completed in January of this year will dilute our growth expectations in 2019 by approximately 3%, thus resulting in limited FFO per unit growth in 2019. We are looking forward to 2020, when we expect to grow in FFO per unit. That growth is expected to exceed 10%. I will now turn things over to Mitchell Goldhar, our Executive Chairman, who will provide you with an update on some of our upcoming development initiatives. Mitch.
Thanks, Peter. For our seniors' residence partnership with Revera and our self-storage partnership with SmartStop, SmartCentres, we'll be developing and constructing the buildings, and our 50/50 partners will operate the facilities once complete. We expect each of these relationships to produce five new projects per year. In the first quarter, together with our partner, Revera, we announced three specific seniors' residence projects on REIT-owned sites, two in Vaughan and one in Oakville. We are in the very final stages of documentation on another REIT-owned site and another on a site owned by my company. In addition, we also have entered into a partnership with Selection Group for a seniors complex in Ottawa. For our large 120,000 sq ft-plus self-storage initiatives, we are under construction now in Leaside, and soon to be approved and under construction in Brampton, Oshawa, and Vaughan.
We recently announced two additional projects, Scarborough and a second location in Brampton. Our board today approved a soon-to-be-announced additional GTA project. We are in the planning stages for many additional REIT-owned sites in Ontario and Greater Montreal area. As well as in cities in Western Canada with SmartCentres. Now a quick update on the Vaughan Metropolitan Centre project. Things are advancing quickly. With the subway commuters and the more than 1,300 employees working out of the KPMG building alone, our project is quickly becoming and feeling like a metropolitan area. This will only increase in intensity as we have now completed the office leasing of the KPMG building, and there's 100% leased the office. Second, we've completed the mixed-use tower in which the PwC will open for business this fall. We've recently leased to Scotiabank one floor, and the ground floor retail will open in early 2020.
The YMCA in the first half of 2020. An additional 600 employees and an estimated 1,200 daily visits to the YMCA. Third, the previously sold-out three 55-story Transit City condo towers scheduled for delivery in 2020 and 2021, 1,741 units are under construction and are below budget. It is expected that we will top off the first two towers by the end of this year and the third tower early in the new year. Fourth, the execution of yet another new partnership with CentreCourt for two additional residential condo towers, 1,015 units. One 45 and one 50-story condo towers. We are thrilled to report that these two towers sold out in essentially two weeks.
The 45-story tower at an average price of CAD 835 per square foot, and the 50-story tower at CAD 865 a square foot, well above the CAD 710 a square foot average of the first three towers. Construction of an 1,100-unit multi-level parking facility adjacent to the first three Transit City towers for the residents and for commercial use in the VMC. Also constructing an additional 500 surface parking spots immediately to the east of the subway station to supplement the parking once we lose some current availability to accommodate the condo towers four and five, when construction starts later this year. Lastly, we also announced a 35-story rental residential tower and podium rental units under the condo towers, totaling 451 apartment units. We expect this to be built concurrently with the two new condo towers. A rendering of these three towers is in the supplemental information package.
We are already designing the next phase of the VMC to include, among other things, a 600,000 sq ft office tower and additional residential towers. Overall, we now see 9 million-11 million sq ft being developed on the approximately 50 acres of VMC lands the REIT owns with my company as partner. We are reviewing and planning for residential, rental, condos, and/or townhouses on all our sites over time. Master planning and active participation with the various municipalities are underway on most of these sites. Redevelopment plans for the following shopping centers are well underway. A retail site of 20 acres directly across from the VMC project is slated for intensification with a potential 2.5 million sq ft of redevelopment, including residential, office, and retail. The site is just east of the 34-story sold-out and occupied condo tower at the corner of Weston Road and Highway 7.
This site is essentially an extension of the VMC and owned 100% by the REIT. Pointe-Claire, Quebec, on the island of Montreal, we have obtained zoning for up to 2 million sq ft of density. Today, our board approved the first two residential rental towers expected to be complete in 2022 and 2023. South Oakville Centre. This center on the south side of the QEW in Oakville was anchored by a Target store, one of our two. We have now initiated discussions with the municipality, with tenants, and with potential partners. As we continue to execute our plan, this site will become a reconfigured 180,000 sq ft retail center anchored by Metro, Shoppers, LCBO and GoodLife, Winners, and other strong retailers with an adjoining new Revera seniors residence building and a townhouse development.
A sketch of the plan for this project is included on page 13 of the supplemental package. Westside Mall in Toronto. Our 12-acre property on Eglinton Avenue West will benefit from the LRT station currently being built on our lands and a pedestrian bridge connecting a new GO train stop adjacent to our lands. This site is now designated for just over 2 million sq ft of mixed-use development. Lanaudière Centre . This 43-acre site is anchored by 160,000 sq ft Walmart store. Construction of our first 2 apartment towers we own on-site with our partner Jadco is underway. We expect to develop the remaining lands with primarily residential rental apartments, condominiums, and retail. Weston Road and 401. A 167,000 sq ft SmartCentres retail center is under review for a major reconfiguration and re-tenanting of the retail on-site and longer term for residential rental.
This site has great visibility and access from the 401, the busiest highway in North America and the busiest intersection at the 401. Other sites for which residential plans are evolving quickly include Oakville North at Trafalgar and Dundas, Vaughan Northwest at Major Mac and Weston Road, just west of the new hospital, which is under construction. Pickering at 401 and Brock, Hamilton Stoney Creek off the QEW, Hamilton Mountain Plaza, several Mississauga locations, Markham at Highway 7 and Woodbine, Mirabel, Laval East, Vaudreuil, Mascouche in Quebec, and Langley, Maple Ridge, Chilliwack, and New Westminster in British Columbia. As you can see, our significant development plans extend across the country in all types of markets, where we are already owners of the real estate and where we are generally already the dominant center in the market.
We have been in discussions with potential residential partners for many of our sites and will likely be developing some on our own. We are also in discussions with hotel operators about partnering on various sites. More news to come on these in future quarters. The potential intensification development program continues to grow as we further review our portfolio for opportunities. The number of potential projects and towers to commence construction in addition to our retail development pipeline within the next 5 years is currently estimated at 82. This mixed use and retail development will have an estimated value of CAD 9 billion on completion, with SmartCentres REIT's estimated share being over CAD 3 billion. In addition, another 86 projects or towers have been identified on which we will commence rezoning, design, and site plan approval, and marketing during the same 5 years, with construction commencing after that. The review continues.
We expect that the budget process currently underway within our business groups will bring forward many additional opportunities around the same timeframe. We estimate that 10 years from now, we will be generating recurring NOI from these new rental businesses, seniors' homes, apartments, office, and storage, in excess of 20% of our rental NOI, plus significant profits in the tens of millions every year, starting in 2020, from the sale of condominiums and townhouses. With that, we will turn it back to the operator to coordinate us in addressing your questions. Thank you.
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll go first to Brendan Abrams with Canaccord Genuity.
Thanks. Good evening, everyone. That's quite the rundown in terms of projects and development pipeline that you went through in the opening remarks. I'm just curious from your perspective, do you have any concerns, or what do you foresee the challenges with respect to maybe, do you see yourself taking on too much at one time? Do you feel that you have the people, the resources, the team to handle it? I guess the projects are staggered enough in terms of timeline that you don't see it as an issue in terms of execution?
No. We don't see it as taking on too much. Obviously, we will monitor everything every day. We're aware of the risks associated with development. We understand the workload. It is traditionally our main core skill, and we're very comfortable in that world and arena. We have been a development company for over 30 years. Every type of development we're doing here, we have done. We are acutely aware of the various issues that you've raised and along with debt levels and other financial metrics, all of which will regulate, will influence the program. We are not proceeding blithely. If you listen closely to all the things that we just talked about here, for all intents and purposes, they're well past the danger zone. There's virtually no spec. In development, it's not just what you do, it's what you don't do.
Maybe we should also list what we're not doing and choosing not to do. It's a fair question, and we will continue to be vigilant in all respects of those potential risks.
Great. That's very helpful. I'll turn it over. Thanks.
We'll go next to Sam Damiani with TD Securities.
Thanks. Good evening. That was a great, very comprehensive overview. Much appreciated. I just wanted to touch on just three questions. First being the Vaughan Northwest and the Pointe Claire apartments, the scope of those two projects dropped versus the Q1 disclosure each by around a third. Just wondering what the real reason was for the decline in the scope of those projects.
Where are you seeing that, Sam?
I believe the number of apartments and the CAD invested in those projects is down about 30% from the Q1 disclosure.
Okay. Yes. The Vaughan Northwest, actually, we can explain that. We have reduced the amount of townhomes that we're going to build on the land that was sort of designated originally for townhomes. What we're going to do instead, and have not reflected in the numbers in the table, there's about six acres of what was originally allocated for townhomes that we're now going to do something higher density. Something more density. Not exactly sure how many stories yet, and it'll phase nicely into what we're going to do on the corner, which is much more density on the corner of Major Mac and Western Road. We'll go from the townhomes, perhaps to something six stories to what's going to be on the corner, which will be much higher.
That's because the area is changing rapidly. You know, I guess, about the new laws in terms of stick construction, we feel that there's more opportunity to do six-story-ish, potentially rental than the townhomes. That's the reason for Vaughan. Is it Pointe Claire?
Yeah, I think Pointe Claire is just, we're reflecting in this table phase 1 and basically what got approved at our board today, as we said. We intend to do seven or eight towers on that site. What we're reflecting in this table is what got approved today, which is just the first two towers in phase 1.
Okay. That's helpful. With the premium outlets, the Toronto Premium Outlets, it's helpful that you disclose the sales per square foot every quarter, and they have declined above 3% over the last six months. I'm just wondering if there's a reason there, and how you see that progressing in the coming quarters.
Well, my mother was out of town, I think, during the second quarter. There might be another reason, Mauro.
That's a productivity number, Sam, you have to appreciate that. We expanded the GLA of the center by 40%, normally what you would see is a significant sort of dilution as the market share builds of the new retail that we added. In this instance, we're very close to the original productivity, which I think is exceptional, that we actually preserved our market share. In other words, we expanded our total sales by almost 40% to remain at the same productivity.
Oh, I see. The new number includes the expanded area.
It does. If you multiply it by a denominator that is 40% larger, that's how much extra sales we're taking out of the marketplace.
Understood. Thank you. Absolutely. Just finally on the G&A, Peter, there was about CAD 0.01, give or take, of savings in Q2 relative to kind of the run rate. Do you see that reversing in Q3 going forward?
Yeah, we see sort of returning back in Q3 and 4 back to our conventional run rate of approximately CAD 20 million a year, Sam, on average. That would be CAD 5 million a quarter, so to speak.
Great. That's it for me. Thank you.
Okay.
We'll go next to Jenny Ma with BMO Capital Markets.
Thanks. Good evening. Just had a question about, Peter Ford, one of your comments about recognizing value of density in IFRS. You had mentioned that you're waiting for density to be zoned. You have a tenant use in place, and then when you have a mixed-use plan in place before you recognize that. Does that inform how SmartCentres would look at recognizing density value going forward, or is that really a reflection of what you've been doing to date?
That's certainly what we've been doing to date. Peter, I mean.
Sorry, Jenny, just maybe take a step back. Just ask the question again, if you don't mind.
I guess what I'm getting at is that some of your retail peers have been going out recently talking about valuation of density with zoning really being that milestone that we need to cross before value is being recognized. I thought it was interesting that you mentioned that not only do you need zoning in place, but you have a couple more steps before you recognize it. I'm just wondering on a go-forward basis, if that's sort of the approach SmartCentres is going to use when you think about your density value.
I think it's a prudent thing that we're doing so far. We may alter them. Obviously zoning is key. So is dealing with any existing tenants on site and having, obviously, a master plan for the whole site that ties in with the tenants and so on that are there. That's currently what we have been doing and currently the plan. We may alter it going forward.
Especially with places like West Side, where it's designated. If we were to sell that property, notwithstanding the fact that we haven't implemented the zoning by-law and there's some relocations involved, you would achieve a price that would reflect very close to the full value of the property when it's completely cleared for development. Yeah, in certain situations, we may feel comfortable starting to reflect the true value of the site in the marketplace today, like that one.
If you think about those three steps that you mentioned, is it fair to say that the bulk of the value recognition happens at zoning? Is there quite some weight to rearranging the tenants as well as having the mixed-use plan in place?
The zoning's a big part of it, for sure. Providing you're zoning it for the right thing, for what the market wants. That's assumed, implicit in your question. Yeah, there's a lot of value created at zoning. If you pro forma some of the costs for dealing with some of the tenant issues, if there are any, or other things like you mentioned, then you deduct some of that stuff. If you're conservative, it's probably the bulk of the value, actually.
The reality is, Jenny, that we're doing all of those things at the same time. It's not like we're getting zoning and then moving on to the next step. They're all happening at the same time. They are three important steps to the process.
Okay. That's great color. Thanks. I'll turn it back.
We'll go next to Pammi Bir with RBC Capital Markets.
Thanks. Hi, everyone. Can we maybe just switch gears to retail for a minute and just maybe talk about what you're seeing in terms of the health or the mood of retailers at the moment? You gave us some color on some of the tenants that are expanding. Just curious if you can shed some more light on the leasing velocity and outlook.
Absolutely, Pammi. It has been a robust quarter. We've seen a lot of activity this quarter and a big pickup since the first quarter, in fact. A lot of the tenants that we have, and you've seen it from our occupancy, in maintaining the occupancy at the 98%, a lot of our tenants are coming back to us. I think that I'm going to call it the things that happen in the first quarter of every year where the restructuring happens, you have the Payless and the Bombay/ Bowring things are behind us. We're looking at all of our existing tenants, the Winners, the Best Buy, all the Canadian Tire banners, the banks, the dollar stores, they're all coming to us and renewing.
We mentioned we have over three and a half million square feet that was maturing this year, and we're over 80% renewed in that category, and that's only halfway through the year. That speaks volumes in terms of what's going on in the market. We're a value-oriented national tenant centers. The kinds of tenants that are also refilling and calling us up, looking for those, and you might have heard Peter mention that even with the Payless, we've got over 60% of those spaces in advanced discussions or executed deals because of the activity and the interest in those spaces. Very good interest from supermarkets, fitness, cosmetics, the daycares, some discounters. We've been looking at, for some of the bigger spaces, we are looking at industrial uses. We're looking at office uses, by the way. They coexist in our shopping centers.
A lot of activity, and we're a little bit excited about what we're seeing in the market right now.
That's helpful. I guess just if we look out over the next, I guess five years, there's the lease maturities start to ramp up. They slow down again a bit after that. I take it the tone sounds like you're fairly confident, let's say at least over the next couple of years, in the renewal outlook.
Well, absolutely. Keep in mind, it looks like it's ramping down, but leases renew every five years. That's what the chart looks like now. If a lease is expiring next year, five years from then, it will be expiring again. Don't look at the 10-year outlook and assume that stays the same because you will have two sets of expiry from the same tenant within that 10-year period. We're seeing, yeah, strong interest. Again, the realignment of how we use our space and what we're bringing to the center and sort of catering to that community with the services we're bringing. Again, it's the daycares, the pet stores, the learning centers, the daycares fitness, cosmetics, have all shown up knocking on our doors wanting to be in the very high traffic, Walmart anchored sites.
That hasn't slowed down, and I don't see how it could over the next many years.
I would add also just to say that, obviously you're indirectly asking about online shopping and e-commerce. We see for all intents and purposes, no new retail being built. We see population growth, and we see a reduction in retail. Not just no new retail being built, but existing retail being converted, including ourselves. In terms on a per capita basis, the retail sector seems to be moving lockstep with some of the changes that you may be indirectly asking about. We're in the value sector, so in Walmart, of course, does not have a direct discount general merchandiser competitor in Canada. You put all those things together, and we think we're pretty well positioned for those, whatever you're talking about the next five years.
Thanks. That's a very good color. Thank you.
We'll go next to Michael Markidis with Desjardins Capital Markets.
Hey there. Just following up on Pammi's question with regard to the lease maturities. I guess there's a good chunk of your Walmart space over the next five years. I think it's more than 50% of your square footage. Not to sound alarmist or anything like that, you guys have a very stable portfolio. It's interesting to note that Walmart will actually likely have a slight net subtraction in their store count this year. I was just curious if you had any insights into how their overall store base might evolve over the next several years, and if there are any properties in your portfolio in particular that might be a cause of concern going forward.
No. We anticipate at the moment that Walmart will be renewing in all the sites that we have and as far as we're aware. We're in regular and constant discussions with Walmart as you can imagine. We're feeling in terms of Walmart renewals, we're feeling confident that we don't expect any of our stores to not be renewed. There were some stores that weren't renewed for other reasons that I don't want to get into, and I don't want to speak for Walmart. Yes, there were some, but those were in a sense unique. I don't want to speak for them, I'd say I believe they were unique situations.
Okay. That's fair. Just there was some commentary about just sort of the realignment of how the use of the sites evolved, introduction of more daycares and office into the centers, et cetera. I guess that would be outside of the mixed-use development story. If that activity sort of accelerates going forward, you guys have been holding the line at 98%, but is it conceivable that maybe the new sort of stabilized occupancy level for SmartCentres, an accelerated pace of change declines a little bit, or do you see it hanging in at 98% for the long run?
Well, I'll let Rudy answer as well. I don't think we're going to predict now. We're not happy with 98%, by the way. We want to be at over 99%. We can't predict exactly what's going to happen in the X number of years from now. It's not daycares and dollar stores per se that we're not relying on daycares and dollar stores to occupancy levels. They're just part of it. There's many components to it. Right now, the retailers that we have. Retailers have a lot more visibility on what's going on out there. There was a lack of visibility a couple of years ago. They're feeling a little bit less uncertainty about what's going on. They're feeling better again about their physical retail. We feel that. Somebody else asked that what the mood is like.
There's less of a feeling of uncertainty now by most of the retailers. Don't forget, most of the retailers that we have are the retailers that are on the forefront of e-commerce. It's not like there's a them and an us. They are the them and the us. They have more clarity on that. We feel that for all intents and purposes, I don't want you to call me up in two years from now and say, I said we were going to be at something, but we do feel that we're fairly comfortable with our occupancy level, if that helps you at all.
I know that-
We're quite comfortable with it being sustainable and it being reflective of the foreseeable future.
I appreciate that insight. Just last one for me here. On the master planning services agreement, I think it was originally supposed to end in, or the original term was 2020, and it's now being renegotiated for an extended term. With the REIT having its own in-house development capabilities, and then obviously being a partner with Penguin on a lot of things, just curious on the sort of the give and takes there in terms of having the REIT being able to take on more development activity versus having Penguin sort of do more of it through that arrangement.
You're right about the timing of that agreement, and you're right that we're in the middle of discussions and negotiations of extending that. I think with everything we do have going on, and the extent of Mitch's and Penguin's involvement with all of our developments, I think it would for sure make sense to be extending that. That's part of the reason why we've started discussions and suspect those will be ending, certainly before the end of this year, we'll have that wrapped up. Yes, it does make a lot of sense. As I guess Brendan said earlier, there's a huge amount that we have to do. With Mitch's expertise and development history and experience, it makes a lot of sense for us to be using Penguin to help us with all of what we have to do going forward.
Okay. I guess, would the option or the alternate be that the REIT just doesn't have enough resources to do all the stuff that's being contemplated from a quantity of resource or quality of expertise? I understand the unique situation in terms of the expertise you have access to. I'm just going to get a sense of, you've got a very deep platform, just sort of the sense of the utilization rate, or if you'd have to scale it up going forward.
We may have to add some people for sure. That's the intention actually. We will be adding some people as these programs ramp up and we have to build the things that we have been talking about, that we've got planning approvals for. Remember that Penguin, for the most part, and the biggest resource that we get with Penguin is Mitch. Mitch is key to many of our development projects going forward. We need all hands on deck, and his expertise and his wisdom.
I appreciate your time. Thank you.
We'll go next to Tal Woolley with National Bank Financial.
Hi, good evening.
Evening.
I just wanted to start. On page nine of your MD&A, you outlined, you sort of broke down your current GLA into different types of markets. You've qualified them as primary, large secondary and medium secondary. I'm just wondering if you could sort of define what those categories are. I know a lot of times we're looking more at areas of the country. Just how do you define those relative categories?
Yeah. When we look at all the markets that we're in, the primary markets are obviously all the big cities across the country, the large cities. We look with population and population growth who are, I don't remember exactly what the number was, it was in excess of, I think, 250, I think it's on the chart, 250,000 within a certain kilometer radius. It picks up all the big cities, obviously, the Vancouver, the Ottawa, obviously Toronto, GTA and so on. When we looked at all of that picked up about 60%-65% of our properties. You get to other markets where they're what we call large secondary markets, we are so dominant in the secondary markets.
When you look at centers like Hamilton or Burlington or Halifax or Winnipeg, Guelph, London, St. Catharines, those are major markets as well where you have, again, large populations. Again, the large secondary markets picked up those, and that's, again, 20%. Then I want to call it the last category. When we looked at what the last category was, and we called them medium secondary, was simply because we're so dominant in those markets and such a draw that our center with the trade area within which it exists is the dominant center. Draws from far away such that we thought of them as medium secondary. That's the category, general, if you will. I don't have the specific allocation in front of me, but generally that's how we looked at them.
Okay. No, that's fine.
I'll just add, Tal, to that, the numbers Rudy was running off there, the percentages, that's the number of centers. In terms of NOI and so on, the primary is even a larger percentage. I think the other interesting thing we always like to point out in these tables is what Rudy said about the markets that those medium secondary and large secondary centers are in. They're 99%-plus occupied, and almost all of them have a Walmart as an anchor and driving the traffic to the center.
Well, I think it's fair to say the other reality for us at least, Tal, is that each of these properties have large parking lots or parking fields with opportunities to build at least a modicum of either rental residential or a hotel or some other mixed-use opportunity on that site over time. You know, I think we've said in the outlook section that these centers are virtually fully leased
The growth for the future on these sites, and this is one of the reasons why we're reluctant to dispose of them, is because of the growth that's inherent on the sites from future intensification of some of the surplus land.
Yeah. Okay. Just pivoting back to retail, your sort of tenant watch list right now, if you compare it to how it's been the last couple of years, is it growing? Is it shrinking? How do you feel about some of them? You know you're going to have some tougher tenancies to deal with. Does it feel roughly the same as it's been within the last couple of years?
Yeah, maybe even a little better. Of course, as soon as I say that, tomorrow there'll be an announcement. It does feel a little bit better. There's always retail casualties going way back. Now, of course, when there is one, it just plays into everybody's love for the radically and oversimplified version of what's happening in retail. It just seems to have more voltage. Just keep that in mind when you hear whoever might fall into that category over the next 12 months. We don't have somebody per se. The ones that happened in the last 12 months, we sort of, I don't know, say we could have predicted at some point in the foreseeable future. I wouldn't say that there's anything like that. Maybe there's one or two, not like that we would say would be on our watch list.
I'd say a little less on our watch list than in previous years.
Is there anything in the acquisition market right now for you guys that looks interesting at all? I'm just curious because there's been so much product put into the market over the last little while, and it seems to be slowing down now. I'm just wondering if you're seeing anything interesting out there.
No. There's lots of things interesting, but not at the price. The retail that's on the market, pure retail with no other what we would see interesting potential, probably not. We still look just in case. Of course, the other opportunities, yeah, they just seem to be very fully valued. We've got so much land of our own, in a sense, and value locked up in our already-owned land. It has to be pretty interesting and pretty compelling. We will find some. We have a beat on a few properties that we think are interesting. We have to buy right. You wear a purchase price forever, and it's a great thing to announce. It's very exciting. You wear it, and the pricing right now across the country, for all intents and purposes, there's not a lot of meat left on the bone.
We're scouring, we're looking, we're motivated, but we're disciplined. We don't have something on the verge of announcement. We are looking very actively.
Okay. My last question is for Mr. Sweeney. You outlined how much the credit metrics have improved over the last 12 months. I think it's been about six months since I asked the question. How are you ranking your prospects for an upgrade on the credit side right now?
It's interesting. It's a great question, Tal. Thanks for asking. We have not had any further discussions since our Q1 call with DBRS. We will be having a discussion early in September, I believe, with them. The reality is, as we've mentioned before, we have to continue to grow our unencumbered pool of assets. At the same time, DBRS has let us know that they expect us to be able to demonstrate growth in EBITDA. We think, crossing our fingers, we're there. However, the big challenge will be debt to EBITDA. DBRS has let us know that that debt to EBITDA multiple has to be something less than 7.8, which is where we are today.
I think as I mentioned on the last call, we believe by 2020 and going forward thereafter, that we will be well below 7.8 with the EBITDA being generated from the closing of condominiums and townhouses on a recurring basis. It's now, I guess, up to DBRS to look at those projections and agree that they are recurring items that will allow us to have that multiple or that metric stay at a lower level on a continuous basis.
Okay. That's great. Thank you very much, gentlemen.
Okay.
We'll go next to Jenny Ma with Scotiabank.
Hi, Nana.
Hello, Nana, your line is open. Please check your mute function.
Oh, hi. Sorry. You previously guided to a low end of 0.5%-1.5% for 2019 for SPNOI. Now that we're another quarter in, how do you feel about that guidance and trajectory for 2020?
Nana, it's Peter Sweeney. You're right, we have been guiding that way. We were hoping by this point in the year to have been able to announce some acquisitions that would have assisted with that growth level. As Mitch mentioned, we're continuing to look, we're pursuing a couple of opportunities. Unfortunately, however, we have not been able, as you know, to close on to date. As a result, the growth that we were hoping that would accrete to the REIT from some potential acquisitions, at least so far, has not taken place. That 0.5%-1.5% FFO per unit growth rate that we were anticipating, at least so far, has not happened.
Would you have new guidance numbers?
I think for now, I think I mentioned in my script. For now, unless something that's substantial comes forward between now and the end of Q3, it may be difficult to hit that 1.5% growth rate, Nana. We're certainly going to continue to generate results that are equivalent to last year's, that's because, as you know, because of the dilution associated with the equity raise back in January that's diluting us by 3%. If you're modeling, it's probably maybe a safe assumption for you to model on that basis without any acquisitions, at least the consequence for Q3. Mitch?
Well, we're not giving up on being able to acquire something before the end of the year, whether it kicks in or how much it kicks in in this year. We're not going to acquire anything for the sake of the short-term accretion that may come with certain acquisitions. We're just going to apply discipline to our acquisitions, but we're not giving up on closing something or some things this year. How much impact it'll have, it's hard to say at the moment because we could still meet that. Obviously, the longer we go, it'll be harder and harder to meet that. I wouldn't completely give up on the possibility. There's still a chance we could meet the whole thing right now. It'd be a little bit premature to make a prediction on that.
Not much changes in a quarter, generally, in terms of development. With acquisitions, things can change pretty quickly. That is one area that it can change a lot in a quarter.
That's all. Thank you.
That's this time. I would like to hand the call back over to Mr. Peter Ford for any additional or closing remarks.
Well, I just wanted to say again, thank you for all being part of our second quarter call, and thank you for your continuing interest in investing in our REIT. Good night.
That does conclude today's conference. We thank you for your participation.