Please stand by. We are about to begin. Good day, and welcome to the SmartCentres 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 Forde. Please go ahead, sir.
Good evening. Welcome to SmartCentres Q4 2018 conference call. I am Peter Forde, President and CEO of SmartCentres REIT. Joining me on the call today are Mitchell Goldhar, Executive Chairman, Peter Sweeney, Chief Financial Officer, Mauro Pambianchi, Chief Development Officer, Rudy Gobin, EVP Portfolio Management and Investments, and Stephen Champion, EVP Development. Peter Sweeney will talk about our results for the quarter and our financing activities, followed by me and Mitch. Then we will take your questions. Our comments will mostly refer to the first nine pages and pages 22 and 23 of our supplemental information package and the outlook section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language at the front of the supplemental material, which also applies to any comments any of the speakers make this evening.
First, 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 investors 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. When it starts, it is expected to continue for years to come. We accomplished many things in the last quarter that sets us up nicely for the future.
For Vaughan Metropolitan Centre, VMC, we announced execution of partnership agreements for the 2019 launch of Transit City four and five condo towers. Then we are also moving forward with an adjoining purpose-built residential rental tower. We executed an overall agreement with Revera to build and operate many retirement living residences together on SmartCentres' own land, including the first three projects, two in Vaughan and one in Oakville. Good progress was made on a deal with another seniors operator for two towers on one of our sites in Ottawa. We executed agreements with SmartStop for two self-storage facilities, bringing the total so far to six, all in the GTA. We executed more lease deals and renewals through the period of November to January than the rest of the year combined. With a very successful opening of the new 144,000 sq f t expansion of Toronto Premium Outlet Centre.
All of this to be supported by our strong balance sheet, which was enhanced with the successful CAD 230 million issue of trust units in January. 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 Forde 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 fourth quarter of 2018 reflect the continued strength, stability, and security of our 34 million sq ft, predominantly Walmart-anchored shopping center portfolio. During the fourth quarter, this portfolio generated the following improved results. Number one, rental revenue from investment properties was CAD 200.5 million, representing a 2% increase over the comparable quarter. Number two, NOI as a percentage of net base rent was 100.4%, representing a 1% increase over the comparable quarter. Number three, FFO per unit increased by CAD 0.01 to CAD 0.57, representing a 1.8% increase over the comparable quarter.
Number four, ACFO exceeded both distributions declared and distributions paid by CAD 12.8 million and CAD 28 million, respectively. Finally, number five, our same property NOI growth rate increased by 0.5% over the comparable quarter. For the fourth quarter, these improved results can be attributed to five primary factors. Number one, the 12 properties that were purchased as part of the OneREIT transaction, which was completed in the fourth quarter 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 two, our portfolio of maturing mortgages continues to provide refinancing opportunities at lower rates than the outgoing maturing rates.
Number three, 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 four, 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. Finally, number five, net operating income from completed earn-outs and developments of CAD 2 million for the fourth quarter was CAD 1.6 million 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 CentreCourt, Revera, 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 60/40 in favor of unsecured debt by the end of 2019. This is a significant change from just over two years ago, when two-thirds of our debt was sourced from secured lenders.
During 2018, we repaid over CAD 400 million in mortgages and convertible debentures that carried a weighted average interest rate of 5.1%, 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 CAD 4.3 billion, 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 CAD 5 billion by the end of 2019. Also, we recently completed the following financing initiatives. Number one, 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 CAD 230 million 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 forma 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 8.0 x, and our interest coverage multiple improves to 3.5 x. All of which should assist in our future growth plans. Secondly, last week, we announced the early redemption of our CAD 150 million Series H 4.05% debentures. We will be redeeming these debentures in early March with a new seven-year, 3.59% 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 three, during the quarter, we completed a CAD 95 million first mortgage on an investment property at a favorable interest rate with varying maturity dates ranging from three to seven years. The 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 and 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%-85% range.
For the fourth quarter, our surplus of ACFO over distributions declared of CAD 12.8 million 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 over distributions actually paid during the quarter totaled CAD 28 million. For the fifth consecutive year, in 2018, we announced a CAD 0.05 per unit increase in our distributions to CAD 1.80 per unit. As a result, SmartCentres REIT has now become a member of the venerable S&P/TSX Canadian Dividend Aristocrats Index. Our financial results for the fourth 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, one, supporting our existing business. Number two, funding our growing development pipeline of retail and mixed-use initiatives.
Lastly, number three, 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%-1.5%. We look forward to next year, in 2020, when we expect growth in FFO per unit to exceed 10%. With that, I will turn the call back over to Peter Forde.
All in all, a 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 November last year, the completion of the PwC-YMCA Tower, and the full occupancy of the remaining office space in the KPMG tower. 2020 and 2021, the first of many future regular residential development condos are completed. On a go-forward basis 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, 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. Our centers are often the only significant value-oriented center in the market, and therefore it dominates. Through our affiliation with Penguin Pick-Up, 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, et cetera. All but seven of our top 50 tenants, excluding restaurants and fitness, have complementary e-commerce businesses. Bombay and Bowring Canada recently closed all its locations. We had 12 leases with Bombay and Bowring in our portfolio, along with nine tent deals. All locations are in shopping centers that are anchored by a Walmart Supercenter.
Because each of these locations are about 5,000 sq ft 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 sq ft opened in November and was virtually fully leased at that time. The expansion includes the addition of several new exciting luxury brands, including Gucci, Prada, Balenciaga, Saint Laurent, Aritzia. Most tenants in the expansion 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. 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. We are unique in that we are developing a diverse selection of new real estate types, not just one or two, 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 residence partnership with Revera and our self-storage partnership with SmartStop, SmartCentres will be developing and constructing the buildings, and our 50/50 partners will operate the facilities once they're complete. We expect each of these relationships to produce five new projects per year. For seniors residences, we recently announced three specific projects on REIT-owned sites, two in Vaughan and one in Oakville, with an additional five in the planning stages for 2019 in the GTA. For self-storage, we are under construction in Leaside, and soon to be approved and under construction in Brampton, Oshawa, and Vaughan. We recently announced two additional projects, Scarborough and a second location in Brampton. We are in the planning stages for several additional REIT-owned sites in Ontario and 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. We are still partners with every partner that we ever partnered with. I think that that is unique to SmartCentres REIT. That includes, of course, Walmart. Now a quick update 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 Union Station, opened on-site in December 2017. With the subway commuters and the more than 1,300 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 eighth floor to Marc Anthony Cosmetics and expanded an area on the third 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 1,200 daily visits to the YMCA. We are in final negotiations with a significant tenant for the one unleased floor. Which floor was built as a possible future expansion for PwC someday up the road, which is way up the road. In this new lease, it also has relocation provisions in case and when PwC wants to expand.
Thirdly, we are completing the three sold-out 55-story Transit City condo towers in 2020. There are 1,716 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 four large cranes, soon to be five, working on these towers and related parking. It is expected that we will top off the three towers by the end of this year, which means we will be going up on all three towers approximately one floor a week. Lastly, the recently announced execution of a new partnership with CentreCourt for the two additional residential condo towers, 1,015 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 three new towers is in the supplementary information package.
Overall, we now see 9 million sq ft-11 million sq ft being developed on the approximate 50 acres of VMC 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 Vaughan is slated for intensification, with a potential 2.5 million sq ft of redevelopment, including residential, office, and retail. The site is a primary site under the Vaughan Official Plan and is just east of two 34-story 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 385,000 sq ft Walmart and Home Depot anchored center. We have been working closely with the city of Pointe-Claire and have obtained zoning for 1.5 million to 2 million sq ft of density. Detailed planning is underway for the first residential tower, expected to be complete in 2022. South Oakville Centre. 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 sq ft shopping center instead of 300 and some odd thousand square feet. Anchored by simply a Metro, Shoppers, LCBO, and a GoodLife Fitness, and a Winners, and a few other strong retailers with an adjoining Revera 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 GO train stop. This site is at the convergence of Eglinton Avenue, the new LRT, and a new GO train stop going north-south. With indicated city and provincial government support, this site is now designated for over 2 million sq ft of mixed-use development and ideal for rental residential. The process to obtain full approvals for the site is well underway. Laval Center. This 42-acre site is anchored by 160,000 sq ft 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, 167,000 sq ft, 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 sq ft shopping center purchased as part of the 2017 OneREIT transaction, is in advanced planning stages for a de-malling of the existing enclosed portion, plus the addition of residential on-site. Other sites for which residential plans are evolving include Oakville North at Trafalgar 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 Burnhamthorpe, Markham at Highway 7 and Woodbine, Mirabel, next to the outlet center. Excuse me.
Laval East, Vaudreuil, and Brampton at Kings Point, another site purchased in the OneREIT transaction, as an infill just north of downtown Brampton. We have been in discussions with potential residential partners for many of our sites, and we'll likely be developing some on our own as well. We are also in discussions with hotel operators on 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 five years is up from our estimate last quarter of 76 to 82. This mixed use and retail development will have an estimated value of CAD 9 billion on completion, with SmartCentres REIT's estimated share being over CAD 3 billion.
In addition, another 86 projects or towers have been identified on which we will commence rezoning, design, and site plan approval, and marketing during the same five years, with construction commencing after that. 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, potentially land leases, which is expected to make up in excess of 20% of our total rental NOI, emphasis on excess. Plus an additional CAD 20 million-CAD 40 million 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. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one for questions. We'll pause for a moment to allow everyone an opportunity to signal. We'll go first to Mike Markidis with Desjardins.
Hi. Thanks, and good evening, I guess. Couple questions from 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%-1.5% growth per unit, factoring in all items. The acceleration of the growth rate to in excess of 10% the following year, I presume the majority of that is transactional income. Could you just help us out in terms of what those drivers are in getting to that number?
Yeah. 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. 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. 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. 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 our FFO, and that's how we're able to identify that come 2020, the growth rate in FFO per unit will exceed 10%.
Okay. It sounded like you said the third tower of Transit City might come on stream, but would the first two towers be the bulk of that? Is there any other contributors to that in addition to the towers one and two?
In 2020, it's expected, Mike, that it will be primarily the first two towers and if we're lucky, maybe part of the third.
Okay. Just changing over to the very expansive pipeline of opportunities that you guys have. If I understand this correctly, in addition to what's already underway, there's another CAD 3.3 billion at SmartCentres REIT's share that will commence over the next five years. On that pool, is there a sense, or do you guys have a measure of the amount of existing retail that's generating income for you today that might be rationalized or demolished as part of that endeavor?
There's actually very little during that period or of that amount will be eliminating any existing retail income. We're 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 o f their needs, that we're able to add some density in the parking areas. There's very, very little income that's being displaced from that program.
Okay. That's it for me. Oh, 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. It wouldn't be completely inconceivable that rents after these buildings are built will in fact reset in a sort of positive reset, in some cases.
Okay. No, that's a great point. Thanks very much. I'll turn it back.
We'll go next to Michael Smith with RBC Capital Markets.
Thank you, and good evening. Just wondering, for SmartStop, Revera, and CentreCourt, those joint ventures, the ones you've announced, when do you close the land? 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. We've signed deals. All the ones we've announced, we have signed, executed agreements-
contribution agreements or agreements of purchase and sale.
The transaction closes once we have zoning and severance is in place.
Okay. Then that'll be taking in as transactional FFO?
I see. The 50%, the gain from selling that land, into the joint venture, the 50%, yes, goes through transactional FFO at that time.
Okay. Great. I wonder if you could just give us a little color on the leasing market. I guess, lease renewal rates seem like they're ticking up and going in a positive direction. I'm 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, and January. Talking to all of our tenants, all of our major tenants, in fact, all of our tenants, Canadian Tire, Winners, Loblaws, Lowe's, Reitmans, Sobeys, everybody. All of them have been talking about having more stores, rationalizing weaker markets. 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 one or two 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.
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. 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.
Yeah, I think everybody's had some time to absorb the Zellers space, the Best Buy closing some locations, Sears, and so on. We do a lot of deals with the TJX banners, the HomeSense, Winners, and so on. 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 two or three smaller boxes, but the smaller tenants are now making that space. Where are the drivers? Where are the traffic drivers?
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 just continuing growing that business and evolving. Because as you can imagine, Walmart is doing the same thing with evolving their offering as well. All in all, the co-tenancy with Walmart is just proving to be unstoppable.
Do you measure foot traffic for your, let's say, Walmarts, like traffic is up as you mentioned. Do you have any metrics around that?
We don't do that ourselves, Walmart shares that information publicly actually, when they announce their results that talk about traffic being up in their business in Canada. Of course, in our conversations with them, we talk about individual shopping centers and stores and have some understanding of the situation, for sure, traffic is up for them.
Okay, makes sense. Just finally, Mitch, I wonder if you could just give us an update on Penguin Pick-Up, particularly in the SmartCentres properties. It is a big rollout. You've got, I think, 108 locations now.
Yep. Continues to roll out, it will roll out both in SmartCentres sites and in third-party sites. Traffic is up from last year, or YoY, for open sites, significantly. When I think significantly, I don't mean 10%, 15%. I mean multiples of I'm not going to quote it. It's obviously a private company. Traffic is very good in the urban locations where we actually don't have shopping centers. Yeah, Walmarts have continued to emphasize Penguin Pick-Up to their customers, particularly busy are the urban locations. We will continue to be opening Penguin Pick-Ups in Ontario. We are now pursuing Penguin Pick-Up locations in Montreal and Vancouver are the next two, we're pursuing Penguin Pick-Ups in every major city in the country. It's growing very well. As you know, it's still a private company, 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. There's still a fair amount of retail out there being marketed. Your IFRS cap rate has held firm. I'm just curious, what are you seeing in terms of transaction pricing on portfolios or properties similar to yours?
Yeah, Pammi. We've been looking at all of the product that comes to the market. Obviously, we are on an acquisition play. 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. In fact, what we're seeing is in those centers where there's not a Walmart anchored site, those aren't centers that dominate those particular markets, as ours do, even in those non-primary markets. 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, Greater Montreal Area, GVA sites, have also compressed a little bit. 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. We have a lot of product in those markets. It's somewhere between 70%-75% of our product is in those markets. That's why you're not seeing it in the overall cap rates.
I would 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 or whatever you want to call them, secondary markets, are a problem or whatnot. I don't know if somebody said it, then somebody else said it, and then somebody else said it. I don't know what it's based on. It's like there always has to be something that just, to digest or whatnot. I don't know what it's based on. Our centers in those, what you want to call secondary markets, are dominant, and I don't even want to use words stronger than that. In most of those markets, there used to be a Kmart or a Zellers and a Walmart or a Loblaws, depending on how far back you want to go, or Target for that matter.
There isn't any of those. There's just a Walmart store. When you think in terms of e-commerce, these are not places, in terms of usage, as familiar with or likely to use e-commerce. The transportation costs and delivery costs, in many cases, is higher. There's no traffic in many. There's not traffic as we know it in any of these places. We have 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.
Right.
Our centers are busy. The 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. This stuff needs to be differentiated between what we're talking about in these secondary markets. We love many of these secondary markets, there's this talk, there's some secondary markets, cap rates are up. Yeah. I guess there's some centers in there that have some trouble, and a new truck to lease, and yeah. There's no buyers at the moment. It's been over-steered and maybe overplayed a little bit as well, even for that case.
I guess it's 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 or those regions?
No, not necessarily.
Okay. Got it.
I wouldn't say there's really any difference when LCBO and Dollarama and Walmart are occupying space in I don't know what you want to call a secondary market, but if you're in a Sudbury or a Barrie. There's a lot of people out there, and they need clothes, and they're on a budget, and believe it or not, they shop at LCBO, and they go to Dollarama. It's not just desperately needing some. They go there, and that's their shopping pattern. Dollarama and those are not looking to relocate out of a Walmart anchor center in those markets. It makes no sense. It just makes no sense. It's a folly to do it. Everybody's coming to the Walmart. The Walmart is it in those markets.
Right.
By the way, I don't know if you shop at a Walmart very often, it's a phenomenal environment as well. When you live in a place, you get all your stuff from Walmart. Walmart knows how to operate in those medium. They started in those medium-sized markets. Their history is in medium-sized markets. They know how to over-deliver in those markets. Yeah, 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. Make no mistake, we'll be doing some intensification in some of the mid-size markets. There's been very little done in those mid-size markets in the way of rental, residential, and in some cases, there is a market for it. Where it makes sense, we will do it there, too.
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.
Right.
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. Another thing that may not be visible to the naked eye, that is that we have lower coverage than probably any other REIT. I would go out on a limb and say we do have the lowest coverage of any REITs. In other words, we have more parking per square foot, per 1,000 sq ft. When these were developed, they were developed intentionally. Intentionally because we wanted the extra parking, because we wanted the market to never have a reason not to come. Also because Walmart has always wanted that additional parking. It's easier for us to add density without losing NOI because we have 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 leasing velocity, however you want to frame it, start translating into stronger renewal leasing spreads? 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% there? How you see that playing out over the next couple of years?
Yeah. 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. 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 talk 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.
All in all, we're always talking to them about their whole business. Yeah, it's one location at a time, and we got to do that. I do think that the worst is behind us. 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 three years or four years and go to a lower rent and risk being the anchor. They're sorting that out, and that'll be some mistakes, and then we'll help that. 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? Just seems like it would be quite helpful and certainly in terms of continuing to attract tenants and be a good sort of selling point if 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 a definite plan 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 be capturing traffic through some of those same initiatives. 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. I just wanted to start out 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 Revera on something in Ottawa. 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. It will be a small number of partners, I think, in each line of business. We have enough sites in enough different markets that it will make sense to be teaming up with more than one, and particular in the seniors business. It's too early to name the second one yet. We will be soon. It will make sense because of the market and so on. It will make sense to you when we do announce it, that it would be a logical extension or a logical thing to be doing. As big as these parties are that we're teaming up with, 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 types of business.
I don't see that necessarily with the storage. That hasn't been an issue at this point. It could be. There could be a particular part of the country where it's more logical to be teaming up with somebody else. At this stage, storage where it's the one party, SmartStop, that we're doing things with.
Okay. 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, then adding grocery, which allowed those stores to expand even more. Given that they're now rolling out even more service offerings, whether click and collect or home delivery in select markets, are you seeing any sort of new prototype box for Walmart and sort of emerging in your conversations with them? If there is something like that ahead, what impact do you sort of see for the business in the future?
You guys probably don't realize it, the Walmart prototype has changed every, honestly, it's changed every three months for 30 years since I've dealt with them. You don't know it because you end up seeing the store and you know. Yes, exclamation mark. The prototype is changing all the time. You will see soon a couple new ground-up built Walmart stores reflecting the new prototype with all the things that you're saying and implying, soon. The thing about Walmart, they aren't where they are because they don't stagnate. They don't sit around. That's not just the new prototypes, but existing stores will continue to be remodeled and changed and whatnot. Yeah, stay tuned. There will be a couple to see in the next, I guess, 18 months, in the GTA. It will be really cool to see, because there are some changes.
They're still, size-wise, don't expect something you don't recognize as a Walmart store. Their bread and butter are all these departments that make the place work together. Yeah, in many ways it'll have all the same departments and square footage-wise, it won't be a boutique, let's say.
Okay. 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 checkmark you got 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 discussions so far with DBRS have suggested that they are much more forward-looking. 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. We're going to continue meeting and speaking with them over the next six 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. You never know.
We might be in the privileged position before the end of 2019 with DBRS, where they will give us the sort of nod of approval for a ratings enhancement. It's entirely, I think, in their court at this time. We are doing more than is expected, at least, in providing them with the detailed documentation and forecast information to help them with their decision-making.
Okay. That's great. Thanks very much, gentlemen.
We'll go next to Sam Damiani with TD Securities.
Thank you. Just a couple quick questions. I know it's getting late. 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 profits.
Yeah. Bear with me, Sam. You know what? I didn't bring that information, Sam, with me, unfortunately. It obviously would be muted. It wouldn't be 10% or above. It wouldn't be a negative level of growth either. Unfortunately, just don't have that guidance in front of us, Sam. Maybe we can get that for you.
Sure. Just on the development spend, which is expected to be over CAD 3 billion in the next five years, what's the spend you're expecting in 2019 and in 2020?
2019 will be somewhere between CAD 200 million and CAD 300 million. In 2020, I think these are net numbers, so the 2020 guidance is net of the proceeds being received from the condominium closings. That spend net will be in the CAD 200 million-CAD 250 million range as well.
That's about, call it CAD 600 million or so for the next two years, which leaves quite a big number for the remaining three years. I guess it's really going to ramp up.
Well, keep in mind, when we talk about the CAD 3 billion or CAD 3.3 billion in development spending, it's not our intent, and it's important that everybody understand this, it's not our intent over the next five years to spend CAD 3.3 billion. It is, however, our intent to commence projects that will, over the next perhaps 10 years or so, require us to spend CAD 3.3 billion. We'll commence projects that over their lifecycle will require us to spend CAD 3.3 billion, and that lifecycle will commence at some point within the next five years and will be completed perhaps over the next five to 10 years.
Okay. Thank you.
Sam, it is important the word commence, though, is start construction. At the same time,
Sorry.
For Sam, sorry. At the same time, we are actually starting working on many other projects which will not actually start construction in the five years, but we will be working on the zoning and the planning and the marketing of those things so that they are ready to go in year six and beyond, in terms of starting construction.
Thank you. Maybe just one last one. On the Westside Mall, 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?
Wasn't it supposed to be last year?
Before they finish. I don't know. The thing about these intensifications, they don't really take up much room. If you go there, you'll see some outparcels there. On those outparcels, we see we could get going fairly quickly. A phase I, it's going to be a phased project. It's hard to say just because we don't know when they're going to be finished. We're doing drawings, and we're planning for it. It's hard to say.
Very good. Thank you.
Ladies and 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 fourth quarter call. Thank you for your continued interest in investing in our REIT. Good evening.
That does conclude today's conference. Thank you for your participation. You may now disconnect.