Good day, and welcome to the SmartCenters 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 SmartCenters Q2 2019 conference call. I'm Peter Ford, President and CEO of SmartCentres REIT. Joining me on the call today are Mitch Goldhart, 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.
And then we will take your questions. Our comments will mostly refer to the first ten pages and Pages 24 to 25 of our supplemental information package and the outlook section of our MD and 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. SmartCenters REIT is a stable portfolio in excess of 34,000,000 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 storey residential rental tower adjacent to the 5 sold out condominium towers. In BMC, 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 center 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 2 30 units, as shown in the rendering on Page 11 of the supplemental information package. Construction of this $150,000,000 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 Outlet expansion, which opened in November last year. Average tenant sales for the center are at $11.50 per square foot. Our high 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.
And then going forward for 2020 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. And in that respect, Bombay and Bowring Canada closed all our locations before March 12.
We had 12 term leases with Bombay and Bowering in our portfolio along with a few temp deals, representing less than 1 third percent of our portfolio. And all those locations are in shopping centers that are anchored by a Walmart Supercenter. Payless Shoes closed all locations in Canada, including its 46 locations with us early in the Q2. All but one of these locations are in the center anchored by a Walmart store. We anticipate executing new deals for all of these locations within the next 12 to 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 6 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 4 years ranging from 2020 to 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 Square Feet opened last November is virtually fully leased and exceeding expectations.
The expansion in high caliber tenant mix makes this center 1 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 PGX with its 3 banners, Winners, Marshalls and HomeSense, Dollar Stores, Quick Service Restaurants and Fitness. And several new retailers are coming to Canada, and we are working with them on several locations, Jollibee, F-forty 5, Walburgers 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 NEV 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. And we use our in house development team to drive the initiatives, all contributing to enhanced yields and profits over the long term. With 34,500,000 square feet 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 100,000,000 square feet of land to accommodate mixed use growth throughout the country. And this doesn't count the additional 3 40 acres or nearly 14,000,000 square feet 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 uses, 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. And I will point out that virtually none of the additional value of the density we are creating is reflected in our IFRS values. We reflected only when we sell of 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. And now I'll turn it over to Peter Sweeney.
Thank you, Peter, and good evening, everyone. Our financial results for the Q2 of 2019 reflect the continued strength, stability and security of our 34,000,000 square foot predominantly Walmart anchored shopping center portfolio. During the Q2, this portfolio generated the following strong results. Number 1, rental revenue from investment properties of $194,400,000 was marginally higher than $193,800,000 recorded in the comparable quarter last year. And 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 2, FFO with one time adjustment increased by $5,100,000 to $96,100,000 representing a 5.6% increase over the comparable quarter, and this increase can be primarily attributed to increased NOI, reductions in interest costs and lower net G and A expense. Number 3, FFO with onetime adjustment per unit was maintained at $0.56 per unit, which was predominantly caused again by the dilutive Number 4, ACFO with onetime adjustment increased by Number 4, ACFO with one time adjustment increased by $7,200,000 or 8.2 percent to $95,600,000 as compared to the same period last year. Number 5, ACFO exceeded distributions declared and distributions paid by $18,600,000 $35,700,000 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%. And then lastly, number 7, we renewed or we are near completion of renewing over 2,900,000 square feet of retail tenancies, which represent approximately 80% of our 2019 lease maturities at average rental rate increases of 3.9% and after excluding anchor tenants, this metric increases to 4.8%, both of which are substantively improved over the comparable quarter. For the Q2, these improved results can be attributed to the following primary factors. Number 1, the incremental NOI is now being generated from both the 144,000 square foot expansion at TPO and recent earnouts and developments number 2, the incremental NOI now being generated from new tenants at both the KPMG and PWC YMCA office towers. And 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 diluted impact arising from the issuance of the $230,000,000 equity issuance in January and also from the bankruptcy of Payless, which resulted in 107,000 square feet of additional vacancy during the quarter. I think as 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 to 18 months. From a financing perspective, with the assistance of our syndicate of banking partners, we began the year with a very successful issuance of $230,000,000 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. Also during the quarter, we completed the early redemption of $150,000,000 of Series L debentures and replaced them with $170,000,000 7 year, 3.26 percent fixed rate bank loan, and the balance of these proceeds have been used to repay other maturing mortgages.
As compared to the Q2 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 2, our debt to adjusted EBITDA ratio has been reduced to 7.8x from 8.5x number 3, our interest coverage ratio has improved now to 3.3 times from 3.2 times Number 4, our unencumbered pool of assets continues to grow and has increased now by over $600,000,000 to exceed $4,500,000,000 at the end of the quarter. And then lastly, our secured to unsecured debt ratio has now improved to 46% to 54% from 53% to 47%, furthering our strategic pursuit of increasing SmartCenters' overall unsecured debt and unencumbered asset levels. This is a key strategic initiative that we've been working on now for the last 2 years. And you may recall that when we first embarked upon this strategic initiative, twothree 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%, and 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 $18,600,000 and distributions paid. When factoring in our highly successful DRIP program, the surplus of ACFO over distributions actually paid during the quarter totaled $35,700,000 Our financial and operating results for the Q2 reflect our strong and stable business model that we believe positions us to continue to provide our unitholders with stable and growing distributions as evidenced by our Board's decision now for the 6th consecutive year to approve an increase of $0.05 per unit in annual distributions to 1 point 85 dollars effective October 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 an FFO per unit, and 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.
Our Sewers Residence partnership with Rivera and our self storage partnership with Smokes Summers will be developing and constructing the buildings and our fifty-fifty partners will operate the facilities once complete. We expect each of these relationships to produce 5 new projects per year. In the Q1, together with our partner Rivera, we announced 3 specific seniors residence projects on REIT owned sites, 2 in Bonn and 1 in Oakville. And 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 Select Group for a seniors complex in Ottawa.
For our large 120,000 square foot plus self storage initiatives, we are under construction now in Leaside and soon to be approved and under construction in Brampton, Oshawa and Barn. And we recently announced 2 additional projects, Scarborough and a second location in Brampton. And 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 Smartstone. Now a quick update on the Vaughan Metropolitan Centre project.
Things are advancing quickly. With the subway commuters and the more than 1300 employees working out of the KPN 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 office. 2nd, we completed the mixed use tower in which the PWC will open for business this fall. The recently leased we've recently leased to Scotiabank, one floor and a ground a ground floor retail will open in early 2020.
And the YMCA in the first half of twenty twenty, an additional 600 employees and an estimated 1200 daily visits to the YMCA. 3rd, the previously sold out 3 55 storey Transit City condo towers scheduled for delivery in 20202021, 1741 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 3rd tower early in the New Year. And 4th, the execution of yet another new partnership with CentreCourt for 2 additional residential condo towers, 11 I'm sorry, 1015 units, 145- and 150 storey condo towers. And we are thrilled to report that these two towers sold out in essentially 2 weeks.
The 45 storey tower at an average price of $8.35 per square foot and the 50 storey tower at $8.65 a square foot, well above the $7.10 square foot average of the first three towers. Construction of an 1100 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 45 when construction starts later this year. Lastly, we are also we also announced a 35 storey rental residential tower and podium rental units under the condo towers, totaling 451 apartment units. We expect this to be built concurrently with the 2 new condo towers. Our rendering of these 3 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 square foot office tower and additional residential towers. Overall, we now see 9,000,000 to 11,000,000 square feet being developed on the approximately 50 acres of VMC Lands, The REIT Arms, with my company as partnered. 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 BMC project is slated for intensification with a potential 2,500,000 square feet of redevelopment, including residential, office and retail. The site is just east of the 34 storey sold out and occupied condo tower at the corner of West 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 2,000,000 square feet of density. Today, our Board approved the first two residential rental towers expected to be complete in 20222023.
South Oakville Center. This center is this center in the south side of the QEW in Oakville was anchored by a Target store, 1 of our 2. 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 square foot retail center anchored by Metro, Shoppers, LCBO and Good Life, Winners and other strong retailers with an adjoining new Rivera 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 land and a pedestrian bridge connecting a new GO train stop adjacent to our lands. This site is now designated for just over 2,000,000 square feet of mixed use development. The Laudato Center, this 43 acre site is anchored by 150,000 foot Walmart store. Construction of our first two 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 in 401, a 167,000 square feet pet smart center share 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 in 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 in Brock Hamilton Stoney Creek off the QEW Hamilton Mountain Plaza several Mississauga locations Markham at Highway 7 in Woodbine, Maribel, Laval East, Vaudroy, Mesquouche 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 and development program continues to grow as we further review our portfolio for opportunities. The number of potential projects in 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 $9,000,000,000 on completion, with Smart Center REIT's estimated share being over 3,000,000,000 dollars In addition, another 86 projects or towers have been identified on which we will commence rezoning, design and site plan approvals and marketing during the same 5 years, with construction commencing after that.
And the review continues. We expect that the budget process currently underway within our business groups will bring forward many additional opportunities from around the same time frame. 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 1,000,000 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. And we'll go first to Brendan Abrams with Canaccord Genuity.
Let's take 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? Or do you feel that you have the people, the resources, the team to handle it? And I guess the projects are staggered enough in terms of time line that you don't see it as an issue in terms of execution?
No. We don't see it as taking on too much. We will obviously, we will monitor everything every day. I mean, so we're aware of the risks associated with development. We understand the workload.
It's our core it is our main traditionally our main core skill, and we're very comfortable in that world and arena. But we have been a development company for over 30 years. Every type of development we're doing here, we have done. So but 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. So we are not proceeding blithely.
But if you listen closely to all the things that we just talked about here, They're well past, for all intents, they're well past the danger zone. There's virtually no spec. And it's not just in development, it's not just what you do, it's what you don't do. And maybe we should also list what we're not doing and choosing not to do. So it's a fair question, and we will continue to be vigilant in all respects of those potential risks.
And 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, I guess, 3 questions. First, meaning the VON 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 rate reason was for those the decline in those projects?
Where are you seeing that, Sam?
I believe the number of apartments and the dollar invested in those projects, is it down about 30% from the Q1 disclosure?
Okay. Yes. The Van 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. But what we're going to do instead and have not reflected in the numbers in the table is the there's about 6 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, but and it will phase nicely into what we're going to do on the quarter, which is much more density on the corner of Major Mac and Western Road. So we'll go from the townhomes perhaps to something 6 stories to what's going to be on the corner, which will be much higher.
And that's because the area is changing rapidly. You know, I guess, about the new laws. In terms of stick construction. And so we feel that there's more opportunity to do 6 story ish potentially rental than the townhomes. So that's the reason for that.
Is it point
And I think Pointe Claire is just we're reflecting this table Phase 1 and basically what got approved at our board today. As we said, there are we intend to do 7 or 8 towers on that site, But 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. And then with the premium outlets, the Toronto premium outlets, it's helpful that you disclosed the sales per square foot every quarter, and they have declined about 3% over the last 6 months. And I'm just wondering if there's a reason there and how you see that progressing in the coming quarters.
My mother
when my mother was out of town, I think,
during the Q2.
But there might be another reason, Marl.
That's a productivity number, Sags. You have to appreciate that. We expanded the GLA at the center by 40%. And normally, what you would see is significant sort of dilution as the market share builds of the new retail that we added. And this instance, we're very close to the original productivity, which I think is exceptional, but we actually expanded our we preserved our market share.
In other words, we expanded our total sales by almost 40% to remain at the same productivity.
Oh, I see. So the new number includes the expanded area?
It does. So 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 and A, Peter, there was about a penny, give or take, of savings in Q2 relative to kind of the run rate. Do you see that reversing in Q3 and going forward?
Yes. We see sort of returning back in Q3 and Q4 back to our conventional run rate of approximately $20,000,000 a year, Sam, on average. So that will be $5,000,000 a quarter, so to speak.
Great. That's it for me. Thank you.
Okay.
And we'll go next to Jenny Ma with BMO Capital 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 smart centers 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, do you want to
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. So 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. So I'm just wondering on a go forward basis, is that sort of the approach SmartCenters is going to use when you think about your density value?
I mean, I think
it's a prudent thing that we're doing so far, and we may alter them. And obviously, zoning is key. But 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. So but that's currently what we have been doing and currently the plan, but we may alter it going forward.
Especially with places like Westside, where it's designated, I mean, 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, I mean, you would achieve a price that would reflect the very close to the full value of the property when it's completely cleared for development. So yes, in certain situations, we may feel comfortable starting to reflect the true value of the site in the marketplace today like that one.
So 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? Or is there quite some way rearranging the tenants as well as having the mixed use plan in place?
The zoning is a big part of it for sure. I mean, providing you're zoning it for the right thing, for what the market wants, but that's assumed and implicit in your question. Yes, there's a lot of value created at zonings. But if you pro form a 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.
And the
reality is, it's not and 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. So but there are 3 important steps to the process.
And we'll go next to Pammi Bir with RBC Capital Markets.
Thanks and hi everyone. Can you 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, give 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, Penny. It has been a robust quarter. We've seen a lot of activity this quarter and a big pickup since the Q1, in fact. A lot of the tenants that we have and you've seen it from our occupancy and maintaining the occupancy at the 98%. A lot of our tenants are coming back to us.
And I think that I'm going to call it the things that happen in the Q1 of every year where the restructuring happens and we had to pay less than the Bombay Bowering things that are behind us. And 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 3,500,000 square feet that we're incurring this year, and we're over 80% renewed in that category and that's only halfway through the year. So that speaks volumes in terms of what's going on in the market. We are value oriented national tenant centers.
So the kinds of tenants that are also refilling and calling us up and looking for those And you might have mentioned or 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. So very good interest from supermarkets, fitness, cosmetics, the day cares, some discounters are and we're even looking at just some of the bigger spaces, we are looking at industrial uses. We're looking at office uses, by the way, so because they coexist in our shopping centers. So 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, 5 years, there's the lease maturity start to ramp up and then they slow down again a bit after that. But 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 5 years. So that's what the chart looks like now. So if a lease is expiring next year, 5 years from then, it will be expiring again. So don't look at the 10 year outlook and assume that, that stays the same because you will have 2 sets of expiries from the same tenants within that 10 year period.
But we're seeing strong interest. And again, we're 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. And again, it's the daycares, the pet stores, the learning centers, the daycares, fitness, cosmetics and have all shown up knocking on our doors wanting to be in the very high traffic Walmart anchored sites. So that hasn't slowed down, and I don't see how it could over the next many years. So
I would add also just to say that, look, obviously, you're indirectly asking about online shopping and e commerce. And we see no for all intents, there is no new retail being built. We see population growth and we see a reduction in retail, but not just no new retail being built, but existing retail being converted, including ourselves. So 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. So it seems and we're in the value sector.
So and Walmart, of course, does not have a direct discount general merchandiser competitor in Canada. So you put all those things together, and we think we're pretty well positioned for those, whatever you're talking about the next 5 years.
And we'll go next to Mike 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 5 years. I think it's more than 50% of your square footage and not to sound alarmist
or anything like that. I mean,
you guys have a very skilled portfolio, but it's interesting to note that Walmart will actually likely be a net slight net subtraction in their store count this year. So 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 that we're as far as we're aware. And we're in regular and constant discussions with Walmart, as you can imagine. So we're pretty we're feeling in terms of Walmart renewals, we're feeling confident that we're we don't expect any of the store our stores to not be renewed. There were some stores that weren't renewed for other reasons.
I don't want to get into it and I don't want to speak for Walmart. But yes, there were some, but those were, in a sense, unique. I don't want to speak for them, so I'd say I believe they were unique situations.
Okay. That's fair. And just there was some commentary about just sort of the realignment of how the use of the sites evolves, introduction of more daycares and office into the etcetera. And sort of that, 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 smart centers and 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 as well, but I don't think we're going to predict now for we're not happy with 98%, by the way. So we want to be over 99%. We can't predict exactly what's going to happen in the X number of years from now. And it's not daycares and dollar stores, per se that are we're not relying on daycares and dollar stores to occupancy levels, but just part of it. There's many, I mean, components to it.
And right now, the retailers we have and retailers have a lot more visibility on what's going on out there. There was a lack of visibility a couple of years ago. So they're feeling a little bit less uncertainty about what's going on. So they're feeling better again about their physical retail. And so we feel that.
Somebody else asked that, what the move is like. There's less of a feeling of uncertainty now by most retailers? And don't forget, most of the retailers that we have are the retailers that are on the forefront of e commerce. So it's not like there's a BEM and the S. They are the BEM and the S.
And so they have more clarity on that. And so we feel that for all intents and purposes, I don't want you to call me up in 2 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.
We're quite comfortable comfortable with being sustainable and it being reflective of the foreseeable future.
I appreciate that insight. And then just last one for me here. So on the master planning services agreement, it looks like the agreement
looks I
think it was originally supposed to end 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 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?
No. Well, 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. And that's why we that's part of the reason why we've started discussions and suspect it will be those will be ending certainly before the end of this year. We'll be going to have that wrapped up.
So yes, it does make a lot of sense. There is, as I guess, Brendan said earlier, there's a huge amount that we have to do. And 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. And 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 or from a, I guess, a quantity of resource or quality of expertise? I mean, I understand the unique situation in terms of the expertise you have access to. I'm just going to get a sense of kind of very deep platform, just sort of the sense of the utilization rate or if you'd have to scale that going forward?
We may have to add some people, sure. That's the intention actually. We will be adding some people as these programs ramp up and we have to build things that we have been talking about that we've got planning approvals for. But remember that Penguin for the most part and the biggest resource that we get with Penguin is Mitch. And Mitch is key to many of our development projects going forward.
And so 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. Good evening.
I just wanted to start on Page 9 of your MD and A, you outlined, you sort of broke down your current GLA into different types of markets. You've quantified those primary, large secondary and medium secondary. And I'm just wondering if you could sort of define what those category what those categories are. I know a lot of times we're looking more at like areas, the country and just how do you define those relative categories?
Yes. The when we looked 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 growth population and population growth were I don't remember exactly what the number was, but it was in excess of, I think, 250 or I think it's up to chart 250,000 within a certain kilometer radius. So it picked up all the big cities. Obviously, the Vancouver, the Ottawa, obviously, Toronto, GTA and so on.
And when we looked at all of that, that picked up about 60% to 65% of our properties. Then you get to other markets where there are what we call large secondary markets, but we are so dominant in the secondary markets. And when you look at centers like Hamilton or Burlington or Halifax or Winnipeg, Guelph, London, St. Catharine's, those are major markets as well where you have, again, large population. So again, the large secondary markets picked up those and that's, again, 20%.
And then I'm going to follow-up the last category. When we looked at what the last category was and we call 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 and draws from far away such that pick up them as medium secondary. So 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 look at it. Okay.
No, no, no, no. And I'll
just add, Kyle, to that. The numbers Rudy was writing me off there, the percentages, the number of centers. But in terms of NOI and so on, the primary is even a larger percentage. And 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 they're almost all of them have a Walmart as an anchor and driving the traffic to the center.
So
Well, and I think it's fair to say the other reality for us at least, Hal, is that each of these properties have large parking lots or parking fields with opportunities to build at least the 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. But 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.
Yes. Okay. And then just going picking back to retail, your sort of tenant watch list right now, if you compare it to how it's been like the last couple of years, like is it growing? Is it shrinking? How do you sort of feel about some of the you know you're going to have some tougher tenant fees to deal with?
Does it feel roughly the same
as it's been with them in
the last couple of years?
Yes, maybe even a little better. But of course, as soon as I say that, tomorrow, there will be an announcement. But I mean, it does feel a little bit better. There's always retail casualties going way back. But 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.
So it just seems to have more voltage. So just keep that in mind when you hear whatever, whoever might fall into that category over the next, whatever, 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 kind of could have predicted at some point in the foreseeable future. But I wouldn't say that there's anything like that.
Maybe there's 1 or 2 not like that that we would say would be watch list, but nothing I'd say even less on our watch list than in previous years.
Okay. And also just is there anything in the acquisition market right now for you guys that looks interesting at all? Like, I'm just curious because there's been so much product put into 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. Not like there's lots of things interesting, but not at the price like, no, no, the retail that's on the market, like pure retail with no other, but we would see interesting potential, probably not. And then but we still look, just in case. And of course, the other opportunities, yes, I mean, they just seem to be very fully valued. We've got land of our own in a sense and value locked up in our already owned lands that it has to be pretty interesting and pretty compelling.
But we will find some. We have a beat on a few properties that we think are interesting. So but we have to buy right. You wear a purchase price forever, and it's a great thing to announce. It's very exciting.
But you wear it and the pricing right now across the country, for all intents and purposes, is there's not a lot of meat left on the bone. So we're scouring, we're looking, we're motivated, but we're disciplined. We don't have a we don't have something on the verge of an answer, but we are looking very actively.
Okay. And my last question is for Mr. Sweeney. You outlined how much the credit metrics have improved over the last sort of 12 months.
I think it's been about 6 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, and 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.
And at the same time, DBRS has let us know that they expect us to be able to demonstrate growth in EBITDA. So we think crossing our fingers we're there. However, the big challenge will be debt to EBITDA. And the EBRS has let us know that, that debt to EBITDA multiple has to be something less than 7.8%, which is where we are today. And 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.
And so it's now, I guess, up to he there as 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 Nana Yang with Scotiabank.
Hi, Nana.
Hello, Nana. Your line is open. Please check your mute function. Hi, sorry. You previously guided to low end of 0.5% to 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 and we're pursuing a couple of opportunities.
Unfortunately, however, we have not been able, as you know, to close on it to date. And as a result, the growth that we were hoping that would accrete to the REIT from some potential acquisitions at least so far has now taken place. So that 0.5% to 1.5% FFO per unit growth rate that we were anticipating, at least so far, has not happened.
So 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. And 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. So we're just going to apply discipline to our acquisitions, but I wouldn't give up we're not giving up on closing something or some things this year. How much impact it will have? It's hard to say at the moment because we could still meet that.
But obviously, the longer we it will be harder and harder to meet that. But we wouldn't completely give up on the possibility. There's still a chance we could meet the whole thing right now. So it will be a little bit premature to make a prediction on that. Not much changes in the quarter generally in terms of development, but with acquisitions, things can change pretty quickly.
That is one area that can change a lot in a quarter.
That's all. Thank you. And at 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 and investing in our lease. Good day.
That does conclude today's conference. We thank you for your participation.