Good day, and welcome to the SmartCenters REIT Q4 2018 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.
Good evening, and welcome to SmartCenters' Q4 2018 conference call. I'm Peter Ford, President and CEO of SmartCentre's REIT. And joining us on the call today are Mitchell Goldhar, Executive Chairman Peter Sweeney, Chief Financial Officer Mauro Pandianchi, Chief Development Officer Rudy Goeblin, EVP, Portfolio Management and Investments and Steven Champion, EVP Development. Peter Sweeney will talk about our results for the quarter and our financing activities, followed by me and Mitch. And then we will take your questions.
Our comments will mostly refer to the first nine pages and Pages 22 23 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, an overall comment about the last few months, which have been jam packed and very exciting. Mitch and I have spent considerable time this past quarter meeting with sectors in both Canada and the United States. The general theme of SmartCentres REIT being a stable portfolio of well located value oriented shopping centers with the tremendous mixed use intensification opportunities was well received.
As we have said before, real estate development takes time and it will be a couple of years before the many new mixed use initiatives start yielding positive results. But when it starts, it's expected to continue for years to come. We accomplished many things in the last quarter that sets us up nicely for the future. For Guang Metropolitan Centre, BMC, we announced execution of partnership agreements for the 2019 launch of Transit City 4 and 5 condo towers and that we are also moving forward with an adjoining purpose built residential rental tower. We executed an overall agreement with Rivera to build and operate many retirement living residences together on SmartCentre's owned land, including the first three projects, 2 in Vaughan and 1 in Oakville.
Good progress was made on a deal with another senior's operator with 2 towers on one of our sites in Ottawa. We executed agreements with SmartSoft for 2 self storage facilities bringing the total so far to 6, all in the GTA. And we executed more lease deals and renewals through the period of November to January than the rest of the year combined. And with a very successful opening of the new 144,000 Square Foot expansion of Toronto Premium Outlet Centre and all of this to be supported by our strong balance sheet, which was enhanced with the successful $230,000,000 issue of Trust Union in January. And now I'll turn it over to Peter Sweeney.
Thank you, Peter, and good evening, everyone. It is important to remember that the development initiatives that Mitch and Peter Ford will speak to in a few moments are heavily dependent upon having a strong and stable cash flow generating operating platform. In this regard, our financial results for the Q4 of 2018 reflect the continued strength, stability and security of our 34,000,000 square foot predominantly Walmart anchored shopping center portfolio. During the Q4, this portfolio generated the following improved results. Number 1, rental revenue from investment properties was $200,500,000 representing a 2% increase over the comparable quarter.
Number 2, NOI as a percentage of net base rent was 100.4%, representing a 1% increase over the comparable quarter. Number 3, FFO per unit increased by $0.01 to $0.57 representing a 1.8% increase over the comparable order. Number 4, ACFO exceeded both distributions declared and distributions paid by $12,800,000 $28,000,000 respectively. And finally, number 5, our same property NOI growth rate increased by 0.5% over the comparable quarter. For the Q4, these improved results can be attributed to 5 primary factors: Number 1, the 12 properties that were purchased as part of the One REIT transaction, which was completed in Q4 of 2017, continue to provide tremendous operational and FFO growth, which is consistent with our expectations and further reaffirms the appropriateness of the purchase decision made to buy these assets.
Number 2, our portfolio of maturing mortgages continues to provide refinancing opportunities at lower rates than the outgoing maturing rates. Number 3, the office space in the KPMG tower, which is now 100% occupied, continues to experience the commencement of new tenancies, which are providing incremental NOI and FFO. Number 4, our lease renewal program is beginning to reflect some modest improvement, whereby in 2018, lease renewal increases, excluding anchor tenants, reflected a 3.2% increase in average net rental rates. This is substantively improved
over the prior year.
And finally, number 5, net operating income from completed earnouts and developments of $2,000,000 for the 4th quarter was 1 point higher than its comparative in the prior year's quarter. From a financing perspective, our goals with respect to our funding strategy remain. Firstly, to ensure that we have ready access to funding for our extensive proposed development pipeline. Our approach is to maintain as flexible a balance sheet as possible well within our relevant debt covenants. Each development project typically carries construction level debt provided
by a
syndicate of financial institutions for the construction period. Our experience to date has been that our syndicate members have been both supportive in terms of providing financing and also very competitive in terms of the rates we are being provided. Once the projects are finalized, they will then be turned out with funding as appropriate. With the inclusion of multiple well capitalized joint venture partners in our program that now include CenterCourt, Rivera and SmartStop, this mitigates a significant portion of both our funding needs and also exposure to project risk secondly, to lower the cost of our future funding requirements by achieving a ratings upgrade to BBB High. Our conversations with DBRS have indicated that we need to both, A, balance our secured and unsecured funding portfolios and b, demonstrate a plan that will result in an increased EBITDA level.
We believe that we have now achieved the first objective and we are well on our way to achieving the second. Based on our year end debt balances, we have now achieved a balance of borrowing from secured and unsecured sources. And based on our expectations for 2019, provided that spreads on unsecured sources of financing continue to compress, we expect this ratio to approach sixty-forty in favor of unsecured debt by the end of 2019. This is a significant change from just over 2 years ago when 2 thirds of our debt was sourced from secured lenders. During 2018, we repaid over $400,000,000 in mortgages and convertible debentures that carried a weighted average interest rate of 5.1 percent and we replaced these maturing facilities with substantially lower cost financing alternatives despite a rising interest rate environment.
As a result, our unencumbered asset pool has now grown to approximately $4,300,000,000 supported by income from many of our high quality assets and with continued focus on repaying maturing mortgages, we expect this pool of unencumbered properties to approximately $5,000,000,000 by the end of 2019. Also, we recently completed the following financing initiatives. Number 1, in January of 2019, with the assistance of our syndicate of banking partners, we launched a very successful equity bought deal that resulted in gross proceeds of $230,000,000 in new equity being raised. These proceeds have been applied against some of our credit facilities to reduce our overall debt levels and related debt metrics to appropriately and conservatively accommodate future levels of expected development financing. On a pro form a basis, after factoring in the impact of the recent bought deal, our debt to aggregate assets ratio reduces to 41.5%.
Our debt to adjusted EBITDA multiple declines to 8.0x and our interest coverage multiple improves to 3.5 times, all of which should assist in our future growth plans. Secondly, last week, we announced the early redemption of our 150,000,000 Series H 4.05 percent convertible sorry, 4.05 percent debentures. We will be redeeming these debentures in early March with a new 7 year 3.59 percent unsecured bank loan. Similar to the recent equity bought deal, this refinancing initiative should be perceived as a preemptive opportunity to reduce risk associated with increases in interest rates and extend both our debt ladder and weighted average term metrics. Finally, number 3, during the quarter, we completed a $95,000,000 first mortgage on an investment property at a favorable interest rate with varying maturity dates ranging from 3 to 7 years.
Unique term was selected to accommodate expected intensification needs for the subject property over the coming years and the various terms of this mortgage represent a significant departure from conventional secured lending. For our payout ratio distributions, we saw slightly lower maintenance CapEx, tenant improvement allowances and leasing commissions during 2018. Our overall ACFO payout ratio was 83% in 2018, which is well within the 75% to 85% range. For the 4th quarter, our surplus of ACFO over distribution declared $12,800,000 shows a continued healthy level of cash generation, reflecting the unique strength and core stability of our business model. When factoring in our highly successful DRIP program, the surplus of ACFO or distributions actually paid during the quarter totaled 28 $1,000,000 And for the 5th consecutive year, in 2018, we announced a $0.05 per unit increase in our distributions to $1.80 per unit.
As a result, SmartCenters REIT has now become a member of the venerable TSX Canadian Dividend Aristocrats Index. Our financial results for the 4th quarter reflect a strong and very stable business model that we believe positions us to continue to provide our unitholders with stable and growing distributions, while concurrently, 1, supporting our business our existing business number 2, funding our growing development pipeline of retail and mixed use initiatives and lastly, number 3, permitting us to consider appropriate acquisition opportunities as they become available. We ended 2018 with an FFO per unit growth rate before transactional FFO of 3.6%. At this time last year, we had forecasted growth in FFO per unit before transactional FFO for 2019 of approximately 4%. As many of you know, the recent bought deal will however dilute this growth expectation by approximately 3%, thus resulting in expected FFO per unit growth for 2019 of 1% to 1.5%.
And we look forward to next year in 2020 when we expect growth in FFO per unit to exceed 10%. And with that, I will turn the call back over to Peter Ford.
All in all, our strong and stable year's performance from our existing retail portfolio as the development pipeline continues to fill and prepares to deliver results from the Toronto Premium Outlet expansion, which opened in next quarter last year, the completion of the BMC PWC tower and the full occupancy of the remaining office space in the KPMG tower. 2020 2021, the first of many future regular residential development condos are completed and on a go forward basis from a 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, with the strongest adapting their offering and delivery is well suited to the changes taking place in the retail marketplace. Our shopping centers are 98% occupied, 98.1% including executed leases, with occupancy at an average of 98.8% during the last 14 years.
We continue to hear from tenants that Walmart's strategy for selecting and being in locations where the community can come to a larger center with convenient and easy access and find everything it needs works for most other retailers as well. All our retailers, including food, clothing, off price brand names, dollar stores, pharmacy, fitness, financial, liquor and beer continue to seek co location with Walmart in our centers. With the demise or departure of all other large discount general merchandisers in Canada and the continued expansion of Walmart's food offering and the resulting Walmart store customer traffic increase, our portfolio remains strong and uniquely positioned. We have 115 Walmart stores in our shopping centers, and our centers are often the only significant value oriented center in the market, and therefore, it dominates. Through our affiliation with Penguin Pickup, we offer convenient e commerce pickup locations for any retailer, now with 108 locations and several of them being co branded with Walmart in key downtown Toronto locations.
Bricks and mortar retailers that utilize their well established locations can offer consumers convenient e commerce options that pure play online retailers cannot, things like convenient pickup, showcasing of products, shorter home delivery times from stores, convenient returns, etcetera. And all but 7 of our top 50 tenants, excluding restaurants and fitness, have complementary e commerce businesses. Bombay and Bowing Canada recently closed all its locations. We had 12 leases with Bombay and Bowing in our portfolio, along with 9, 10 deals. All locations are in shopping centers that are anchored by a Walmart Supercenter.
And because each of these locations are about 5,000 square feet in size, they represent units that are highly desirable by a large number of prospective tenants. Accordingly, we anticipate executing new deals for all of these locations within the current year. The Toronto premium outlet expansion of 144,000 Square Feet opened in November and was virtually fully leased at that time. The expansion includes the addition of several new exciting luxury brands, including G Prada, Montblanc, Saint Laurent, Aritzio. Most tenancy expansion areas are significantly exceeding their expectations of sales.
The expansion will allow the center to continue being one of the top performing premium outlet centers in the world. And our acquisition group will continue to look for accretive and or strategic retail properties to purchase, most with intensification opportunities. Our strong and stable retail portfolio provides a solid base on which we can grow income and NAV through mixed use intensification. Again, we need to be patient until next year when these new initiatives really begin to produce FFO. 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 density. Our development teams are planning for expanded land use permissions on our centers, allowing for greater flexibility down the road. And we are unique in that we are developing a diverse selection of new real estate types, not just 1 or 2, taking advantage of the opportunity while dispersing the risk and driving customer traffic to our shopping centers. We have very strong JV and consultant relationships, but more importantly, a large in house team of development specialists. This is a team that has over the past years executed the development of 200 plus shopping centers.
These transferable skills are now also delivering results in these new development types. Mitch has been very active as Executive Chairman in all aspects of the REIT's business, but in particular, our new development initiatives. I will now turn things over to Mitch for him to tell you more about some of these. Thanks, Peter.
In our seniors' role in its partnership with Revera and our self storage partnership with SmartStop, SmartCenters will be developing and conducting and constructing the buildings and fifty-fifty and our fifty-fifty partners will operate the facilities once they're complete. We expect each of these relationships to produce 5 new projects per year. For seniors residences, we recently announced 3 specific projects on LEED owned sites, 2 in Bali and 1 in Oakville, with an additional 5 in the planning stages for 2019 in the GTA. For self storage, we are under construction in Leeside and soon to be approved and under construction in Brampton, Oshawa and Vaughan. And we recently announced 2 additional projects, Scarborough and a second location in Brampton.
We are in the planning stages for several additional REIT owned sites in Ontario in the Greater Montreal area as well as in cities in Western Canada with SmartStop. I point out that with respect to our partners and predating even the REIT itself, we've never done just one deal with a partner. And we are still partners with every partner that we ever partnered with. And I think that that is unique to SmartCenters' brand. And that includes, of course, Walmart.
And now a quick update on Vaughan Metropolitan on the Vaughan Metropolitan project, which is, of course, our burgeoning Downtown North. Things are advancing quickly. The subway line extension, which is 45 minutes directly from the station, opened on-site in December 2017. With the subway commuters and the more than 1300 employees working out of the KPMG building, our project is quickly becoming a metropolitan area, not just in physical presence, but in feel and mentality. If you haven't been up here to observe this emerging city center, For many reasons, you should.
This look and feel will only increase in intensity as we have now completed the office leasing of the KPMG Tower, as Peter Sweeney had mentioned. Most recently, we leased the 8th floor to Marc Anthony Cosmetics and expanded an area on the 3rd floor for the Bank of Montreal. Secondly, completed the mixed use tower to be occupied by PWC in the fall of 2019 and the YMCA in early 2020. An additional 500 PwC employees and an estimated 1200 daily visits to the YMCA. We are in final negotiations with a significant tenant for the 1 unleased floor, which floor was built as a possible future expansion for PWC someday up the road, which is way up the road.
But in this new lease, it also has relocation provisions in case and when PWC wants to expand. Thirdly, we completed thirdly, the third, complete the we are completing the 3 sold out 55 storey Transit City condo towers in 2020. There are 17 16 units. All three towers are under construction, are on schedule or ahead of schedule and of budget. If you visit the site, you'll see 4 large cranes, soon to be 5 working on these towers and related parking.
It is expected that we will top off the 3 towers by the end of this year, which means we will be going up on all three towers approximately 1 for a week. Lastly, the recently announced execution of a new partnership with CentreCourt for the 2 additional residential condo towers, 1015 units, 45 stories and 50 stories each respectively. Also announced is a 35 story rental residential tower and podium rental units under the condo towers, totaling 550 apartment units. An artist's rendering of these 3 new towers is in the supplementary information package. Overall, we now see 9,000,000 to 11,000,000 square feet being developed on the approximate 50 acres of BMC lands The REIT owns with my company as partner.
We are reviewing and planning for potential residential, rental, condos and or townhouses on all our sites over time. Redevelopment plans for the following shopping centers are well underway as of this time. Our retail site of 20 acres on the west side of Highway 400 in Bonn is slated for intensification with a potential 2,500,000 square feet of redevelopment, including residential, office and retail. The site is a primary site under the bond official plan and is just east of 2 34 storeys sold out and East of 2 34 storeys sold out and occupied condo towers at Weston Road and Highway 7. This site can be best understood as simply 20 additional acres of land in the VMC.
Pointe Claire, Quebec on the island of Montreal, a 385 1,000 Square Foot Walmart and Home Depot anchored center. We have been working closely with the city of Pointe and have obtained zoning for 1,500,000 to 2,000,000 square feet of density. Detailed planning is underway for the 1st residential tower expected to be complete in 2022. South Oakville Center, this center in South Oakville was anchored by Target and is also anchored by a Metro. We have now initiated discussions with the municipality, with tenants and with potential partners.
If things go according to plan, this site will become a reconfigured 180,000 square foot traffic center instead of 300 and somewhat 1000 square feet. And it provides simply a metro shoppers, LCBO and Good Life Fitness and Winners, and a few other strong retailers with an adjoining Rivera Seniors Residence building and a townhouse development. Westside Mall in Toronto, our 12 acre property on Eglinton West, will benefit from the LRT station being built and disrupting the entire city along Eglinton Avenue and a pedestrian bridge connecting it to the New Ghost train stop. So this site is at the convergence of Eglinton Avenue, a new LRT and a new Ghost train stop going north south. We've indicated city and provincial government support.
This site is now designated for over 2,000,000 square feet of mixed use development and ideal for rental residential. The process to obtain full approvals for the site is well underway. Laval Centre. This 43 acre site is anchored by 160,000 Square Foot Walmart store. Construction of the first two apartment towers we will own on-site with our partner, JADCO, is underway.
We expect to develop the remaining lands with primarily rental residential apartments, condominiums and retail. Weston Road and 401, 167 1,000 Square Feet and That's the REIT's Share Retail Center is under review for a major reconfiguration and re tenanting of the retail on-site and longer term rental residential. This site has great visibility and access from the 401, the busiest highway in North America. Chilliwack Mall, 173,000 good shopping center purchased as part of the 2017 One REIT transaction is in advanced planning stages for a demalling of the existing enclosed portion, plus the addition of residential on-site. Other sites for which residential plans are evolving include Oakville North at Chicago and Dundas, which is a 50 acre site which is already designated for mixed use Vaughan Northwest at Major Mack and Weston Road Hamilton Stoney Creek Hamilton Mountain Plaza Mississauga on Bernthorpe Markham at Highway 7 in Woodbine Mirabelle, next to the outlet center excuse me, Laval East, Beaujeuil and Brampton at Kings Point, another site purchased in the OneReap transaction has an infill just north of downtown Brampton.
We have been in discussions with potential residential partners for many of our sites and will likely be developing some on our own as well. We are also in discussions with hotel operators who are 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. From this ongoing review, the number of potential projects and towers to commence construction in addition to our retail development pipeline within the next 5 years is up from our estimate last quarter of 76 to 82.
This mixed use and retail development will have an estimated value of $9,000,000,000 on completion with SmartCentre's REIT's estimated share being over $3,000,000,000 In addition, another 86 projects 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. And the review continues. We estimate that 10 years from now, we will be generating recurring NOI from these new rental businesses, seniors homes, apartments, offices, self storage, essentially planned leases, which is expected to make up in excess of 20% of our total NOI of our total rental NOI emphasis on excess, plus an additional $20,000,000 to $40,000,000 of profit per year starting in 2020 from the sale of condominiums and townhouses. With that, I will turn it back to the operator to coordinate us in addressing your questions. Thank you.
Thank you. And we'll go first to Mike Markidis with Desjardins.
Hi, thanks and good evening, I guess.
Couple of questions for me. Peter, can
you just help me out a little bit? I think I can get reconciled to your 2019 FFO outlook, which I think you said called for 1% to 1.5% growth per unit factoring in all items. But the acceleration of the growth rate due in excess of 10% the following year, I presume the majority of that is transactional income, but could you just help us out in terms of what those drivers are in getting to that number?
Yes. The primary driver, Mike, for the 2020 expectation is the closings and completions of the first at least two phases and maybe even part of the third phase of Transit City. So I think as we've mentioned in the past, we don't consider those closings to be being considered to be transactional FFO. Transactional FFO, you'll recall, is recorded by us when we move or sell a partial interest in a property into a joint venture. But the proceeds from the sale of condominiums and townhouses, because as Mitch mentioned, is becoming and has become a big part and will continue to be a big part of our business moving forward on a habitual basis.
So we're including the proceeds from these condo and townhouse sales in FFO. Certainly, we'll intend and we will be identifying it, but it will be part of FFO and that's how we're able to identify that come 2020, the growth rate in FFO per unit will exceed 10%.
Okay. And it sounds like you said the 3rd tower transitory might come on stream, but would the first two towers be the bulk of that? Is there any other contributors to that?
No, it's expected, Mike, that it will be primarily the first two towers and if we're lucky, maybe part of the third.
Okay. And then just changing over to the very expansive pipeline of opportunities that you guys have. And if I understand this correctly, in addition to what's already underway, there's another $3,300,000,000 at SmartREITs SmartCenters REIT share that will commence over the next 5 years. On that pool, is there a sense or do you guys have a measure of the amount of the existing retail that's generating income for you today that might be rationalized or demolished as part of that endeavor?
Yes. There's very actually very little of during that period or of that amount will be eliminating any existing retail income. It's generally making use of existing undeveloped land as part of those shopping centers or in some cases, it's making use of parking lots or parking areas that are deemed to be by us and the retailers in excess of
their needs so
that we're able to add some density in the parking areas. So there's very, very little income that's being displaced from that program.
Okay. That's it for me. Sorry, go ahead.
I would like to add that there'll be some retail on the ground floor of some of these buildings as well, which we haven't factored in. And it wouldn't be completely inconceivable that rents after these buildings are built will, in fact, be set in a sort of positive reset in some cases.
Okay. That's a great point. Thanks very much. I'll cheer back.
And we'll go next to Michael Smith with RBC Capital Markets.
Thank you and good evening. Just wondering when you for SmartStops, Rivera, incentive court, those joint ventures, the ones you've announced, when do you close the land? Like presumably you're selling them 50% and then you take that in. Is it when you announce them or when you start construction or?
Generally, they'll be closing once the site is zoned. So the deal we've signed deals. All the ones we've announced. We have signed executed agreements, contribution agreements or agreements of purchase and sale. But the transaction closes once we have zoning and severances in place.
Okay. And then that will be taken in as transactional FFO?
The 50% the gain from selling that land into the joint venture, the 50%, yes, goes through transactional FFO at that time.
Okay, great. And I wonder if you could just give us a little color on the leasing market. I mean, I guess, lease renewal rates are sort of ticking seem like they're ticking up and going in a positive direction. Wondering if you could just give us a little bit more color on that?
For sure, Mike. We recently finished off the year very strong. We had our ICSC in January, which really capped off a strong November, December January, talking to all of our tenants, all of our major tenants, in fact, all of our tenants, King and Tire winners, Loblaws, Lois, Reitmans, Sobeys, everybody. And all of them have been talking about having more stores rationalizing weaker markets, not those were not with Walmart anchored sites. They were a little bit bragging about the fact that they want to be in Walmart anchored sites because the traffic continues to be tremendous.
Renewal rates continue to be strong and similar to prior years. The 1 or 2 sort of independent tab tenants and the weaker tenants will continue to turn as they always have every year, which we expect and we watch for these in terms of what's going on in the market. But really paying attention to those retailers who are looking for how they grow their business, both physical and through e commerce and distributing through their stores and through our centers. So we saw a very an unusually high interest in wanting to do renewals, wanting to do new deals, open up new stores from almost everyone. It was quite an amazing closing off of the year, which we hadn't seen for the earlier part
of the year.
That seems like quite a turnaround from the last couple of years. Yes.
I think everybody has had some time to absorb the ZelleR space, the Best Buy, closing some locations, Sears and so on. And we do a lot of deals with the CGX banners of HomeSense winners and so on. And what they're finding is the same thing. They're finding that in those places where there were anchor tenants and now there is no anchor, going into a previously anchored box that is cut up in 2 or 3 smaller boxes, but the smaller tenants are now making that space.
Where are the drivers? Where are
the traffic drivers? And so a lot of them are now finding out that when they look at their sales in places where they have done that and looking at their sales where they are in a Walmart anchored site that they want to continue being where the traffic is and we are continuing growing that business and evolving. Because as you can imagine, Walmart is doing the same thing with evolving their offering as well. So all in all, the co tenancy with Walmart is proving to be unstoppable.
And do you measure foot traffic for your, let's say, Walmart's like traffic is up as you mentioned. Do you have any metrics around that?
We don't do that ourselves, but we do I mean Walmart shares that information publicly actually when they announced their results that talk about traffic being up in their business in Canada. And of course, in our conversations with them, we talk about individual shopping centers and stores and understand have some understanding of the situation. But for sure, traffic is up for them.
Okay. Makes sense. And then just finally, Mitch, I wonder if you could just give us an update on Penguin pickup, particularly in the Smart Centers properties. I mean, you it's a big rollout. You've got, I think, 108 locations now?
Yes. It continues to roll out. I mean, it will roll out both in smart centers sites and in 3rd party sites. Traffic is up from last year or year over year versus open sites. Significantly, when I think significantly, I don't mean like 10%, 15%.
I mean like multiples of like I'm not going to quote it, it's obviously a private company, but traffic is very, very good in the urban locations where we actually don't have shopping centers. Yes, Walmart have continue to emphasize payment pickup to their customers, particularly busy are the urban locations, and we will continue to be opening Penguin Pickups in Ontario, and we are now pursuing single pickup locations in Montreal and Vancouver are the next 2, and pursuing single pickups in every major city in the country. It's growing very well. But as you know, it's still a private company and so we don't report the detailed results.
Great. Thank you. That's it for me.
We'll take our next question from Pammi Bir with Scotia Capital.
Thanks. Just maybe an open question. We've seen private market retail cap rates move up in some select markets just from some of the survey data coming out and I guess across some retail formats as well. And there's still a fair amount of retail out there being marketed. Your IFRS cap rate has held firm.
But I'm just curious, what are you seeing in terms of transaction pricing on portfolios or properties similar to yours?
Yes, Pammi. Just we've been looking at all of the product that comes to the market. Obviously, we are on an acquisition play. And as part of that, we are seeing that in some of the weaker markets where you have centers that are not dominated by a strong anchor, not dominated by Walmart, those who have been selling in those weaker secondary markets are selling for cap rates probably higher than they expected. And in fact, what we're seeing is in those centers, whether it's not a Walmart Anchorage site, those aren't centers that dominate those particular markets as ours do even in those nonprimary markets.
Also though, what's happening with ours is we are looking at the cap rates in some of those markets, and we have increased slightly those cap rates in those markets in our portfolio. However, some of our urban sites and some of our major markets, GTA sites, GMA, GBA sites have also compressed a little bit. So while you're not seeing a marketed shift in the overall cap rate, we are adjusting a little bit based on what we're seeing in the marketplace where for some of the, I guess, Eastern Canada out there in the far out Montreal markets, the increase in cap rates are being offset by what's happening in Montreal, what's happening in Toronto, GTA, Vancouver, Calgary, Edmonton and so on. So and we have a lot of product in those markets, like it's somewhere between 70%, 75% of our product is in those markets. So that's why you're not seeing it in the overall cap rate.
I'd like to just add something, if you don't mind as well. Just that there's this movement, somebody said small markets or medium markets whatever you want to call them, secondary markets are a problem or whatnot. I mean, I don't know if somebody said it and somebody else said it and somebody else said it. I mean, this is like I don't know what it's based on. It's like there always has to be something that just easy to digest or not.
I don't know what it's based on. I mean our centers in those, what do you want to call secondary markets, are dominant. And I don't even want to use words stronger than that. But in most of those markets, there used to be a Kmart or a Zeller's and a Walmart or we'll call it
Linda, depending on how far back you want
to go or Target for that matter. And there isn't any of those. There's just a Walmart store. When you think in terms of e commerce, these are not places as in terms of usage, as familiar with or are likely to use e commerce. And the transportation costs and delivery costs, in many cases is higher.
So we are there's no traffic in it. There's not traffic as we know it in any of these places. And we have very, very, very good experience in those so called secondary markets. I wouldn't want to be an old, unanchored outdated center, maybe full price center in a medium sized market because there's just not enough necessarily tenants to go around. But our centers are busy.
Rent is being paid On time, we have the strongest covenants in the country, if not in some cases the world, driving in those places. And so it's just this stuff needs to be differentiated between what we're talking about in the secondary markets. We love any of these secondary markets, but there's this pocket and there's some secondary markets, cap rates are up. Yes, I guess so. There's some centers in there that have some trouble in the new truck to lease.
And yes, I mean, there's no buyers at the moment. It's being oversteered and maybe overpriced a little bit as well even in the market.
So I guess, fair to say that between your, say, more urban properties versus your secondary market properties, you wouldn't expect any material difference in the NOI growth rate of those particular properties of those regions?
No, not necessarily. Yes. I wouldn't say there's really any difference. When LCBO and Dollarama and Walmart and are occupying space in I don't know what you want to call secondary market, but if you're in Sudbury or a Berry or there's a lot of people up there. And they do all they need clothes and they're on a budget.
And believe it or not, they shop for shop at LCBO and they go to Dollarama. And it's not just desperately needing to go there, that's their shopping pattern. So Dollarama
and those
are not looking to relocate out of a Walmart anchor center in those markets. I mean, you don't it makes no sense. The price just makes no sense. It's a folly to do it. I mean, everybody is coming to the Walmart.
The Walmart is it in those markets. So and by the way, that's not that's a I don't know if you shop at a Walmart or not, but it's a phenomenal environment as well. But when you live in a place, you get all your stuff from Walmart. Walmart knows how to operate in those medium they're starting in those medium sized markets. Their history is in medium sized markets.
They know how to deliver and those over deliver in those markets. So yes, I would say our NOI growth in those places for the most part is no different other than if we want to juice it up in the urban markets. And make no mistake, we'll be doing some intensification in some of the midsized markets. There's been very little done in those midsized markets in the way of rental, residential. And in some cases, there is a market for it.
And where it makes sense, we will do it there, too. And we won't. I guess Peter earlier was saying, we don't foresee having to knock down any of the NOI that's already there. And by the way, one of the reasons we have and we're able to preserve our NOI at this stage has a lot to do with the fact that another thing that may not be visible to the naked eye, and that is that we have lower coverage than probably any other REIT. I'll go on a limb and say we do have the lowest coverage of any REEF.
In other words, we have more parking per square foot, per 1,000 square feet than it would be. And so when these were developed, they were developed intentionally, potentially because we wanted the extra parking, because we wanted the market to never have a reason not to come, but also because Walmart has always wanted that additional parking. So it's easier for us to add density without using NOI because the 75% of the site as an at grade surface parking lot.
Right. That's actually very helpful. Just Rudy, I think going back to your comments about the leasing demand, at what point do you see this stronger leasing activity or demand or releasing velocity, however you want to frame it, to start translating into stronger renewal leasing spreads? And should we view maybe 2017 as the low point? We saw an uptick last year.
So just curious, can we get up to 5% or even 7% or how you see that playing out over the next couple of years?
Yes. I think
that sort of the worst part, I agree, is probably behind us. What we've been seeing is the vacant space that came out of all of those other tenants that and retailers that left the market or downsized or decided not to carry on in certain markets, that space has been rationalized and where people are doing well and wanting to co locate is actually helping. When we talk to whether we talk to Canadian Tire and we have 83 locations with them or we talk to Winners and we have 57 locations with them or we talked to a lot of these retailers Dollarama, we have over 50 locations with them. It's a national relationship. It's a national program.
We talk about how to grow their business. We talk about us wanting to help them
grow their business. So all in
all, we're always talking to them about their whole business. Yes, it's one location at a time and we've got to do that, but I do think that that's worst behind us. And as the few remaining retailers are still sorting out whether they want to be in an enclosed mall in a box that's been empty for 3 years or 4 years and go to a lower rent than risk being the anchor, they're sorting that out and that will be some mistakes and then we'll help that. So we may be on the tail end of that. It's not done yet, but I think the worst is behind us.
Just last one for me in terms of going back to Michael's question about traffic. Just with all this technology out there, have you considered adding the ability to track traffic at your properties? It just seems like it would be quite helpful and certainly in terms of continue to attract tenants and be a good sort of selling point if just or even just to see how those stats are trending for yourselves?
It is something we've looked at. We don't have a definite plan of attack or our techs seem to be doing that right at the moment, but it is something that we have been exploring as part of some of the other things that we are working on, like digital signs in our shopping centers and cell towers and so on that we've been working on. There may be opportunities to capture be capturing traffic through some of those same initiatives, but there's nothing definite that we have underway yet.
Thanks very much, Peter.
Our next question will come from Tal Woolley with National Bank Financial.
Hi, good evening. Just wanted to start by asking about your joint ventures on seniors and storage. You mentioned, I think, in your earlier commentary that you're working with a partner other than Rivera on something in Ottawa. And I was just wondering, as we think about how you'll grow those businesses going forward, should we expect you to use multiple partners? And is it really just a function of trying to find the right partner for the market?
Can you maybe offer some comment about that?
Yes. I think it's all those things. I mean, we do it will be a small number of partners, I think, in each line of business. But we have enough sites in enough different markets that it will make sense to be teaming up with more than 1, particular in particular in the seniors business. So it's too early to name the second one yet, but we will be soon.
And it will make sense because of the market and so on. It will be it will make sense to you when we do announce that it would be a logical extension or a logical thing to be doing. And as big as these parties are that we're teaming up with, they too have they have to grow and expand their business and be able to do as many
as we anticipate wanting to do each year
on our sites of these. The storage. That hasn't been an issue at this point, but it could be. It could be a particular part of the country where it's more logical to be teaming up with somebody else. But at this stage, storage where it's the 1 party smart stop that we're doing things with.
Okay. And if I could just ask quickly on Walmart, if I
think back to the history
of how it rolled out, buying Woolco and having expanded with its own sort of more discretionary merchandise boxes and then adding grocery, which allows those stores to expand even more. Given that they're now rolling out even more service offerings, whether it's offerings, whether click and collect or home delivery in select markets, like are you seeing any sort of new prototype box for Walmart and sort of emerging in your conversations with them? And what impacts if there is something like that ahead? What impact do you see for the business in the future?
So you guys probably don't realize it, but the Walmart prototype has changed every I mean, honestly, it's changed every 3 months for 30 years since I've dealt with them. And you don't know it because you end up seeing the store and you know but so yes, yes, yes, exclamation mark. The prototype is changing all the time. And you will see soon a couple of new ground up built Walmart stores reflecting the new prototype with all the things that you're saying and flying soon. And think about Walmart, I mean, they aren't where they are because they don't stagnate, they don't sit around.
So that's not just the new prototypes, but existing stores will continue to be remodeled and changed and whatnot. So but yes, stay tuned. There'll be a couple to see in the next, I guess, 18 months in the GTA. It'll be really cool to see because there are some changes. But there's still size wise I don't know if I'm just I guess we're they're not it's not something you don't expect some thing you don't recognize as a Walmart store.
Their bread and butter are all these departments that make the place work together. So that will in many ways, it will have all the same departments and square footage wise. It won't be a boutique,
let's say.
Okay. And then I guess my last question is probably for Peter Sweeney. Just you're talking about the credit ratings upgrade again and that the profitability or the EBITDA level is sort of the check mark to achieve. Given the guidance for this year, is that something that you think you can hit within the next 12 months? Or is that more of a probably 24 month time horizon?
That's a good question, Tal. I think realistically, we will not be generating a sub-eight debt to EBITDA metric in 2019 with our expected and intended results. However, our discussion so far with DBRS have suggested that they are much more forward looking. So they're not going to necessarily have to wait for us to get to that metric until they provide a ratings upgrade, but they'll certainly dig into our budget and forecast information. So we're going to continue meeting and speaking with them over the next 6 months or so, and we'll give them as much information as perhaps they need to see how we think
at least we'll be able
to get the sub-eight debt to EBITDA level over the next 24 months. And you don't know, we might be in the privileged position before the end of 2019 with DBRS where they will give us the sort of NOG approval for ratings enhancement. But it's entirely, I think, in their report at this time. We are doing more than is expected at least in providing them with detailed documentation and forecast information to help them
with their decision.
Okay, that's great. Thanks very much, gentlemen.
We'll go next to Sam Damiani with TD Securities.
Thank you. Just a couple of quick questions, I know it's getting late. But just on the 2020 guidance, Peter, I wonder if you could just tell us what the growth expectation would be without the Transit City condo province?
Yes. Bear
with me, Sam. You know what, I didn't bring that information, Sam, with me, unfortunately. It would obviously would be muted, it wouldn't be 10% or above, but it wouldn't be a negative level of growth either. So unfortunately, we just don't have that guidance in terms of Sam. I mean, we can
get that for you.
Sure. And just on the development spend, which is expected to be over $3,000,000 in the next 5 years, what's the spend you expect in 2019 and in 2020?
'nineteen will be somewhere between $200,000,000 $300,000,000 And in 2020 I mean, these are net numbers. So the 2020 guidance is net of the proceeds being received from the condominium closing. That spend will be in the $2,250,000,000 range as well.
So that's about, call it, dollars 600,000,000 or so for the next 2 years, which leaves quite a big number for the remaining 3 years. So I guess it's really going to ramp up.
Well, keep in mind, when we talk about the $3,000,000,000 or $3,300,000,000 in development spending, it's not our intent and it's important that everybody understand this. It's not our intent over the next 5 years to spend $3,300,000,000 It is, however, our intent to commence projects that will over the next perhaps 10 years or so require us to spend $3,300,000,000 So we'll commence projects that over their life cycle will require us to spend $3,300,000,000 and that life cycle will commence at some point within the next 5 years and will be completed perhaps over the next 5 to 10 years.
Okay. Thank you. And Tammy, it's important the word commensal is start construction. I mean, because at the same time or sad, sorry, at the same time, we're actually starting working on many, many other projects, which won't actually start construction in the 5 years, but we'll be working on the zoning and the planning and the marketing of those things so that they're ready to go in year 6 and beyond in terms of starting construction.
And maybe just one last one. On the Westside Plaza, is that sort of ready to go as soon as the LRT opens? Or are you still going to be a couple of years afterwards based on approvals and plans and whatnot? Does anyone know when the thing is going to be finished? Maybe.
What was the last year? Before they finished. I don't know. The thing about these intensifications, they don't really take up much room. So if you go there, you'll see some outparcels there.
And on those outparcels, we see we could build fairly we could get going fairly quickly. So I mean, a Phase 1, like it's going to be a phased project. So I don't it's hard to say just because we don't know when they're going to be finished, but we're doing drawings and we're planning for it. And so it's hard to say, but not plus or minus. I mean, plus or minus.
Very good. Thank you.
Thank you, gentlemen. As we have no further questions, I would like to turn the conference back over to our speakers for any additional or closing remarks.
Okay. All I would say is, again, thank you for all being part of our Q4 call and thank you for your continued interest in investing in our REIT. Good evening.
And that does conclude today's conference. Thank you for your participation. You may