Good day, and welcome to the SmartCenters REIT Q2 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, everyone. Welcome to SmartCentres' Q2 2018 conference call. I'm Peter Ford, President and CEO of SmartCentres. Joining me on the call today are Mitch Gold, our Executive Chairman Peter Sweeney, Chief Financial Officer Mauro Pambianchi, Chief Development Officer and Rudy Gobin, EVP, Portfolio Management and Investments. After my comments, Mitch will speak further about some of our exciting project developments.
Peter Sweeney will then talk about our results for the quarter and our funding activities, and then we will take your questions. Our comments will mostly refer to the first seven pages and Pages 22 and 23 of our supplemental information package and the outlook section of our MD and A, which are posted on our website. And 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. So let me begin with a few highlights. FFO with onetime adjustment and transactional FFO increased by $6,100,000 or 6.8 percent to $95,000,000 and by $0.02 or 3.5 percent to $0.59 on a per unit basis.
You will recall that the transactional FFO is the gain on sale of a partial interest in our lands to 3rd party co owners, I. E, to our partners, something that we expect to be 1% to 2% of our annual FFO on an ongoing basis as we will regularly be transferring land we own into our intensification and mixed use development programs, realizing on the inherent value in our land holdings. Net rental income was compared to CAD116.1 million for the same quarter last year, representing an increase of CAD8.6 million or 7.4 much of that from the OneReid property acquisition late last year. Same property's NOI increased by CAD 1 point $3,000,000 or 1.1 percent compared to the same quarter of 2017. Continued high occupancy of our portfolio, 98.2%, including executed leases as compared to 98.3% at December 31, 2017, and slightly higher than Q1 of this year.
All in all, a strong and stable quarter's performance from our existing retail portfolio. As the development pipeline fills and prepares to deliver results in many areas, namely late this year in all of 2019 as the Toronto Premium Outlet expansion opens. In 2019 as the PWC tower is completed and the lease up of the remaining space in the KPMG office tower at BMC. 2020 2021 as our first residential developments are completed and then on a go forward basis from the new business initiatives and developments described this evening and in our quarterly report. For the 5th year in a row, I'm very pleased that we've been able to announce a further increase in our distributions from the current $1.75 per unit up to $1.80 per unit on an annualized basis, a 2.9% increase, which will be effective for the November distribution payment.
This increase reflects the Board and management's continued confidence in our future growth and cash generation ability. Our core retail portfolio remains strong and with its value oriented, nationally focused tenant base is well suited to the changes taking place in the retail market. Studies in the U. S. And Canada show the gap between household incomes of the well off and the not as well off is widening.
This is reflected in many retailers performing well with both the luxury brands and the discount brands outperforming the retailers catering to the middle. The middle class in Canada always want to shop for good value does so even more now and our value that online retail and bricks and mortar retail need each other. Those that can do both very well will clearly outperform. 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 and convenient returns. We have 115 Walmart stores in our shopping centers.
Walmart store traffic in Canada continues to grow with the value focus I mentioned. And with the departure of Target, Sears and Zelle's, it has become the only large discount general merchandiser in the country. In addition, Walmart's focus on expanding its food business continues and its market share in this area grows. Many of our value oriented retailers continue to expand. Dollar Stores, Dollarama and Dollar Tree, TJX Brands with its winners, Marshalls and HomeSense, Canadian Tire with its many store, Sport Chex, Mark's and other sporting good banners, Indigo, food stores, restaurants, beer and wine along with a host of other service uses such as pet stores.
Our 98.2 percent occupancy continues to outperform. And I might remind you that we had no Sears stores in our portfolio and only 2 Target locations. In addition, there are a number of new international retailers coming to Canada. While many of them are of the luxury brand nature, a few are planning to tap in on the value oriented end of the market, and we are in discussions with them. More news to come during the next 12 months.
All of this reflecting a strong and stable base for our extensive development pipeline. There was an official planned change in leadership that we announced last quarter that is now in effect. Mitch Goldhar is very active as our Executive Chairman, obviously in development and leasing, but also with strategy, financing, management and HR matters. And as the new CEO, I continue to be very involved with driving the development strategy and initiatives, strengthening and growing our many JV relationships and building a strong executive and leadership team. Mitch and I each individually have over 35 years in the real estate development, retail and mixed to supplement, upgrade and promote from within our hands on development and support teams as reflected in our recent changes with Stephen Champion at EVP Development having most recently headed up real estate at Sirius Canada, a new development leader for Eastern Canada and 3 new development leaders in Ontario.
New leadership in each of our property management, marketing and corporate accounting functions, all hired with a development focus in mind and with plans to hire additional leaders in the development area. Development, new business development, new business initiatives and intensification are clearly the focus of this new team, for the most part, utilizing our existing well located shopping centers and land holdings. In this way, we are not only unlocking value in our existing sites but also drawing customer traffic to our existing centers. We are entrepreneurs operating within the government parameters and discipline required of a public REIT, the best of both worlds, a private company culture within a public entity vehicle. First, a few retail developments I'll mention.
Walmart has recently confirmed that we can proceed with the development of a 220,000 square foot shopping center anchored by Walmart in the Leslie and York Mills area. This is a site co owned by Penguin and Walmart, but to be developed by SmartCentres. The centre is expected to be opened in the first half of twenty twenty. The Toronto Premium Outlet Center expansion of 145,000 square feet is on schedule to open on November 15 this year and is expected to be virtually fully leased at that time. The new 1800 car parking garage has been open for most of this year and expect an announcement in a few weeks of the coming tenants, some high end, very exciting brands.
We continue to work with Simon Properties on 2 specific sites in Canada for new premium outlet centers. We expect to be in a position to announce at least one of these before the end of the year. Now a quick update on some of our previously announced new business initiatives. Seniors Residences partnering with Rivera and Self Storage partnering with SmartSoft, both relationships where SmartCenters will develop and construct the buildings and our fifty-fifty partners will operate the facilities once complete. We expect each of these relationships will produce 3 to 5 new projects per year.
For seniors residences, we expect to be announcing 4 specific projects on REIT owned sites before the end of the year, all in the GTA, with an additional 5 in early planning stages for 2019 in the GTA and Western Canada. For self storage, we are moving forward with projects in Leaside, Brampton and Vaughan. And today at our Board meeting, we approved
an additional project in Oshawa. And we
are in early planning stages for 8 additional REIT owned sites in Ontario and recently toured the Greater Montreal area and cities in Western Canada with SmartStep in the search for additional locations. Decisions on sites in those markets are expected in the next 2 to 4 months. Now I'm going to turn things over to Mitch, who will tell you more about some of our other development initiatives.
Mitch? Thanks, Peter. Not sure where to start. We have so much development in the works. We are planning and reviewing for intensification and mixed use on virtually all our centers and sites.
I'll start with the Long Metropolitan Center project, which is the jewel in the crown. Things were advancing quickly. If you have not been up here in the last 6 months, you really need to come up and look for yourself. The VMC, as it's known, is really starting to feel like a downtown. The subway line extension is only 45 minutes from Union Station.
It opened last December. We understand from the TTC that the VMC station is the busiest station on the extension, ahead leaving York University. We added 900 surface parking stalls on our lands near the subway station to facilitate a smooth commute for new TTC patrons and to, of course, simultaneously get the commuters accustomed to coming to the BMC, to use the BMC as the center of their world in this in the northern part of the city. And these 900 spots are full before 9 before 8 a. M, I'm sorry, each weekday.
When you add that to the very busy pickup and drop off area around the subway, the bus commuters who are transferring to and from the subway and to the more than 1300 employees working out of the KPMG building, including the most recent tenant to open for business, FM Global Insurance. Our project is quickly becoming a metropolis. This will only increase in intensity as we complete the leasing of the 8th floor of the KPMG building. And I am pleased to announce that just this week, we executed a lease for 13,000 of the 20,000 square feet on the 8th floor, And we have discussions underway with a very
good tenant
for the remainder of that floor. So also intensified as we complete the internal and surrounding road networks. It will also intensify as and when the York Regional Bus Terminal, which is opens, which is expected to be at the end of this year. With the completion of the mixed use tower to be occupied by PWC and the YMCA in the fall of 2019, It will bring an additional 500 PWC employees and an estimated 1200 people a day to the YMCA. That building has taken shape.
It's fully enclosed and will be also be a jewel and representative of what we're going
to be doing up here.
We will also intensify with the completion of the 3 sold out 55 storey Transit City Condor Towers in 2020. That's 1716 units. All three towers are under construction on schedule and on or ahead
of budget.
This will equate to between 300 3,500 and 4,000 people living in very close proximity to the bus terminal and the subway. Design work is progressing on the next phase with additional condo and rental residential components. We refer to it as the East Block. It's east of the bus terminal in the northeast corner of our site. An artist rendering is included on Page 10 of the supplemental information package.
I am also pleased to announce that the 350 employees from SmartCenters REIT and My Private Company are currently working at a 700 afterward. We'll be moving to the SmartCenters Place project before the end of this year. We will occupy a retrofitted building 20 steps away from the subway station. This is an interim move as we will ultimately end up in one of the new towers we build on the site. This will be exciting for our current and future associates to be at the center of our major project and to be so close to the subway and other transit.
Overall, we now see 9,000,000 to 11,000,000 square feet to be developed on the DMC Lands, The REIT owns with my company as partner. In addition, the REIT owns a retail site of 20 acres on the west side of budding Highway 400 slated for intensification. This site has the potential for another 2,500,000 square feet of redevelopment, including residential, office and retail. The site is a primary site under the Bonn official plan and is just east above it. The 2 34 storeys sold out towers, which are occupied along with a fully occupied office tower.
And then just west of that, across Weston Road, had a joint signalized intersection on Highway 7 and Westin Road. The REIT owns another 430,000 square feet of retail with the potential for significant residential intensification over time. This Vaughan retail and intensification node is by itself enough to keep most companies busy for a long time. We are reviewing and planning for potential residential, rental, condo and or townhouses on all our sites redevelopment plans for the following shopping centers: are underway. Pointe Claire in Quebec, on the island of Montreal, a 385,000 Square Foot Walmart and Home Depot anchored shopping center we purchased in 2016.
We have been working closely with the City of Point Claire on a new master plan and have now obtained zoning for 1.5 to 2,000,000 square feet of density. Detailed planning is underway for the 1st residential tower expected to be completed in 2021, 20 22. South Oakville Center. This center in Oakville was anchored by the Target, 1 of our 2. We have now initiated discussions with municipality, with tenants and with potential partners.
If things go according to plan, this site will become a reconfigured 180,000 square foot shopping center anchored by a Metro Food Store, which exists, Shoppers, Shuttermark, LCBO and Good Life that exist along with other strong retailers. With an adjoining seniors' residence building rental and a very attractive townhouse development. Westside Mall on Eglinton, Toronto. It's a 12 acre site that we own that the REIT owns, which will benefit from an LRT station being built on our land and a pedestrian bridge connection to a new GO train stop. So this is at the intersection of Edmonton, a LRT station and a GO transit station.
With indicative city and provincial government support, this site is now designated for over 2,000,000 square feet of mixed use development and surrounded by new construction, new condo construction and many applications. Laval Center. This is our 43 acre site, which is currently anchored by Walmart store in the center of the city of Laval. Construction of an office building, hotel and seniors buildings on the lands we have sold on the site and apartments we will own on the site will soon commence. We expect to develop the remaining 15 acres with primarily residential condominiums and rental apartments and retail.
Weston Road in 401. Smart Center's share is 167 1,000 square feet of retail, and we are currently reviewing it for a major reconfiguration and re tenanting of the retail on-site and a long term development for residential rental. This site has great visibility and access from the 401. As a matter of fact, it is the or very close to the busiest intersection on the 401 corridor. Chilliwack Mall in British Columbia, a 173,000 square foot shopping center purchased as part of last year's 1 REIT transaction, is in advanced planning stages for a demalling of the existing enclosed portion plus the addition of seniors home as a seniors home on-site.
Other sites for which residential plans are evolving include Oakville North at Trafalgar and Dundas Vaughan Northwest at Major Mac and Weston Road down the street from the new Vaughan Hospital, which is under construction Hamilton Stoney Creek, across the road from East Cape Mall Hamilton Mountain Mall, Markham at Highway 7 and Woodbine with the Viva Transit line stop in front. Maribel, La Valle East, Laudreuil, Brampton, Kings Point, just south of downtown Brampton, which was also purchased as part of the OneReach transaction, and the list goes on. We have been in discussions with potential partners for many of these sites, and we are also exploring developing a few or if not more than a few on our own. In the residential space to date, we have partnered with CentreCourt for condos in Vaune, JADCO for apartments in Laval and Fieldgate for townhomes in Vaughan, for example. We are careful in the selection of our partners.
We look for the right fit, culture and work ethic. Until recently, we have not had that many partners. But the ones we have have evolved into many partnerships on many properties, the largest relationship, of course, being Walmart, with which we developed over 100 properties together. We have great relationships with our existing partners and expect to do more with them and with others. Last quarter, Peter indicated that over the 5 years, we expect over the next 5 years, we expect to commence development either alone or with various partners on in excess of 50 projects, valued on completion between $7,000,000,000 $8,000,000,000 This was based on our budget planning completed at the beginning of the year.
Our share of this investment is nearly $3,000,000,000 And different from others, we'll be very diversified in terms of type, residential, office, rentals, purpose built rentals, condos, retirement residences, retail and self storage. And in terms of geography, a mix of urban and suburban and some mixed midsized markets. Without factoring in any other initiatives, we estimate that 10 years from now, we will be generating recurring NOI from these lean specific and currently identified new rental businesses in excess of $75,000,000 annually or equal to 15% of our total rental NOI plus an additional $20,000,000 to $40,000,000 of profit per year starting in 2020 from the sale of condominiums and townhomes. I have no doubt that as we embark on our next budget cycle, we will identify significantly more sites with residential and other mixed use opportunities, and we'll be telling you about that later this year. With that, I will turn it over to Peter Sweeney.
Thanks very much, Mitch, and good evening, everyone. The development initiatives that both Mitch and Peter Ford have spoken about are dependent upon strong and stable operating platform. And in this regard, our financial results for the Q2 of 2018 reflect the continued strength, stability and growth of our shopping center portfolio. During the quarter, this portfolio generated the following improved results: A, net rental income was $124,700,000 representing a 7.4% increase over the comparable quarter. B, cash flow provided by our operating activities was $101,100,000 representing a 36% increase, again over the comparable quarter.
C, net income before fair value and similar adjustments was $93,000,000 representing a 13.2% increase again over the comparable quarter. DFFO per unit, including onetime adjustments, increased to $0.57 per unit, representing a 3.6% increase again over the comparable quarter. E, ACFO, exceeded both distributions declared and distributions paid by $17,700,000 $31,600,000 respectively. And finally, as Peter had previously noted, our same property NOI increased by 1.1% over the comparable quarter. These improved results can be attributed to 4 primary factors.
Firstly, the 12 properties that were purchased as part of the One REIT transaction last year continue to provide tremendous operational and FFO growth, which are consistent with our expectations and further reaffirms the appropriateness of our purchase decision for these assets. Secondly, our portfolio of maturing mortgages continues to provide refinancing opportunities at lower rates than the outgoing maturing rates. Thirdly, the KPMG Tower continues to experience the commencement of new tenant fees, which continue to provide incremental NOI and FFO. And lastly, our lease renewal program reflects further improvement whereby year to date lease renewal initiatives, including or sorry, excluding anchor tenants, reflects a 3.7% increase in average net rental rates, which has substantially improved over the prior year. 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 extended 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 that
Ladies and gentlemen, please standby. The conference will resume shortly.
It's Peter Sweeney. Sorry to our audience. Obviously, there were some technical difficulties that caused us to lose our connection. Hopefully, everyone has stayed on the line, and we look forward to completing the call. I was chatting when we were cut off about our funding strategy.
So I'm just going to sort of start again from where we left off when we were disconnected. So our experience to date has been that our syndicate members have been both very supportive in terms providing financing and also very competitive in terms of the rates that they're providing us. Once each of these projects are completed, we then turn them out with appropriate funding. And with the inclusion of multiple well capitalized joint venture partners, as Mitch mentioned earlier, This mitigates a significant portion of our funding needs and our funding risk. Secondly, to lower the cost of our future funding requirements by achieving a ratings upgrade to BBB High.
So this, again, is a strategic objective. Our conversations with PBRS have indicated that we need to both balance our secured and unsecured funding portfolios and also demonstrate a plan that will result in increased EBITDA levels. We are well on our way to achieving both of these objectives. And based on our funding plans for 2018, we expect by year end to have over 50% of our debt funded in the unsecured market, which is a significant change from just over 2 years ago. For the year to date, we've repaid approximately $300,000,000 in maturing mortgages with a weighted average interest rate of approximately 5.4% and achieving substantively lower cost of financing with the alternative sources despite a rising rate interest a rising interest rate environment.
Also, we recently completed the early redemption of $36,000,000 in 5.5 percent convertible debentures that were assumed by SmartCenters as part of the OneReit transaction last fall. These initiatives contribute positively to FFO growth. Also as a result, our unencumbered asset pool, we're delighted to say, has now grown to an excess of $3,900,000,000 which is supported by income from many of our high quality assets. For our payout ratio in distributions, we saw slightly higher lease allowances and leasing commissions in the 1st 6 months of 2018, which are expected to normalize over the balance of the year. As noted in our financial disclosure going forward, we'll be using the ACFO metric as our benchmark cash flow measure and reporting our payout ratio on this basis.
For 2018 'nineteen, we do expect to be somewhat higher because of tenant allowances and related leasing commissions based on the commencement of new tenancies and the need to rework space to maintain occupancy levels. Our expectations are that our payout ratio will trend toward the 75% to 85% range over time. For the quarter, our surplus of ACFO over distributions declared $17,700,000 shows a continued healthy level of cash generation, reflecting the unique strength and core characteristics of our business model. When factoring in our highly successful DRIP program, the surplus of ACFO over distribution actually paid during the quarter totaled $31,600,000 And now for the 5th consecutive year, we're pleased to announce a $0.05 per unit increase to $1.80 per unit in our annual unit distribution. Our financial results for the quarter reflect our strong and stable business model that we believe positions us well to continue to provide our unitholders with stable and growing distributions while concurrently supporting our existing business, funding our growing development pipeline of retail and mixed use initiatives and lastly, permitting us to consider appropriate acquisition opportunities as they become available.
And with that, I'll now turn the call back over to Peter Ford.
Thanks, Peter. It's impossible really for us to cover everything we have underway. So hopefully, with our quarterly reporting and with this call, you now have a better sense of what this leadership team with all of its employees, consultants and partners has planned for the REIT. With that, I will turn it back to the operator to coordinate us addressing your questions.
Thank you so much. We'll take our first question from Brandon Abrams with Canaccord Genuity. Please go ahead, Brandon.
Hi, good afternoon. In the yellow section, when you quote or reference the return expectation, can you just remind us what basis you're using for the land? Like is it cost, fair market value, expenditure of the site?
Sorry, Francis, are you referring to the supplementary package and the returns?
In the LO section when you referenced the return expectations for some of the projects? Yes.
Sorry, Brandon, can you hear us?
Yes, I can hear you.
Sorry, we can hardly hear you. That's one of the challenges we're having this afternoon. The simple answer, Brandon, when we quote those returns, we are quoting those returns based on the market values that the lands that we're rolling into the joint ventures are priced at on those roll dates.
Okay. That's great.
And in terms of the premium outlets, you mentioned potential for expansion across Canada. Like how much growth potential do you see this product having? Can you envision one being in potentially every major city in Canada?
No. We don't see 1 in every major city. In the most appropriate cities. I mean, we obviously, competitive sector, so we don't at the moment announce per se exactly where we're working. But we're only interested in the centers where we think there has a lot of sustainable they're very specific things, their form, their built form.
So we are only interested in the markets that we think have very long legs. So obviously, major markets. We just haven't announced yet the ones that we are working on.
Okay. That's great. That's okay. Thank you.
We'll take our next question from Pammi Bir. Please go ahead.
Thanks. Good evening. Just on the distribution increase, certainly sending a confidence signal, so that's great to see. But when you think about balancing the funding needs between your developments, which are obviously quite substantial and managing leverage, Just curious how that factors into the decision.
Pammi, it's Peter, and it's a great question. We see our distribution increases being driven off the success, as I think I mentioned earlier, of our core platform of predominantly, at least for now, Walmart anchored shopping centers. And beginning in 2020, we expect to be able to generate a substantial amount of incremental cash flow and FFO from the initial closings of the townhouses in Bonn Northwest and the condominiums here at BMC. And so we see the opportunity to repatriate some of that cash back to our unitholders, perhaps in the form of a special distribution to our unitholders, again, subject to discussion and approval of our Board. But one of the other alternatives that we would consider at least is routing some of those incremental proceeds back into the business to assist in perhaps reducing debt or assisting in financing some of the new initiatives.
The other thing that perhaps is important to remember is over the last 2 years since we announced each of these initiatives, as we've been completing these initial joint ventures with the partners that both Peter and Mitch mentioned earlier, we've been finding that we've been able to trigger a substantial amount of what was previously unrecognized equity in the lands that are being sold into these joint ventures. And so that unrecognized or previously at least unrecognized equity also forms part of the substantial amount of capital that we think is required and we expect to be contributed to these initiatives going forward. And this is sort of a preview of continuing coming attractions. So we don't see a reduction, a substantial reduction whatsoever in the identification of additional equity into joint ventures going forward.
That's very helpful, Peter. Just maybe switching gears, looking at the BMC for a minute and the rental residential tower that's in planning there, the new one, sorry. Can you comment on the rents or the range that you're underwriting and what sort of growth you've seen in the past year or so in new purpose built apartment rents, I guess, in the surrounding area?
Yes. It's Mitch. Well, I mean there haven't been any purpose built rentals in the area for a long time as far as I know, certainly not the immediate area. There's actually quite a paucity of rental res in Vaughan in general of any vintage. So in terms of the anticipated rental rates, we are now just exploring the different approaches to the rental, of course, suite mix segment of the market and so on.
So we haven't completely resolved yet, although very soon we will be probably announcing the building. But we are still working through some of the design features and which will, of course, drive rents. So it's a sort of a very soon, stay tuned. But it is our submission to the municipality we've already met with to include a rental residential building in the first phase of the East Block along with the 2 condo towers.
Got it. I guess maybe just looking at it a little bit differently. If you look at the new condo supply that's been built in the area, to the extent that there are suites in those in that inventory that are being rented out, what's your sense of where those, what the range of rents could be there?
Well, we're not competing with those. I mean in a way, I guess, there will be some overlap. But we will be differentiating ourselves, both in terms of average seat size and amenities. So we don't compete directly We don't compete directly with the rental market in the Condors pot, although obviously, there will be some overlap. But at the moment, you really just have the expo, which is just now occupied, and the Centro, which is now occupied.
They really are the only 2 condos that are completed up here very recently. And I don't think we know, per se, the rental rates, but we do know what they sold at. The other condos, and there are many, we are not the only developers up here, will be completed over the next few years, Plaza Corp, Gangupta and of course, there are a number of other sites around us being built, all sold out, I might add. So they're all condos. There's not one purpose built rental in the lot.
Keeping in mind, we are on the subway line. They are a little bit away from the subway. And keep in mind, we are 2 stops away from York University as well. So we see an opportunity for filling a void in rental residential. While we will overlap and compete in some respects, we really see ourselves separating ourselves from the market that rents that will be renting the condos.
Thanks, Mitch. Just one maybe one last one, I guess, on your comments with respect to the condos. You look at the next 2 condo towers at DMC that you're working on, what are your thoughts here on how much the pricing per square foot has changed relative to the first three towers?
We feel the market is there. In fact, I mean, we would probably go to the market sooner if we could. So at the moment, we would see we will be doing at least as well as we did on the 3rd tower at Transit City. But we, I guess, are also anticipating that we will see a slight increase in price per square foot on Tower 4 and Tower 5. So we, of course, are not going to go to the market in the fall.
We're going to go to the market early in the New Year. So we'll wait and see that things can change. But I guess you probably know that we sold, I guess, Tower 1, 2 and 3, let's say, on average of just over 700 a foot. And we certainly don't anticipate selling for less than that. We do see potential increase in sale price per square foot there.
Got it.
Thanks very much.
We'll now take our next question from Michael Smith with RBC Capital Markets. Please go ahead.
Thank you and good evening. Very helpful update on all the development initiatives. I wonder, Mitch, if you could just talk you have a different approach to development than some of the other some of your peers or some of the REIT peers, I guess. I think I believe you have about 135 on staff. That number may have changed.
First off, you've added people. How from what I understand, it's tough to find people. So I'm just wondering if you could give us some color on that. And secondly, how does your approach differ from others? And what do you think the advantages are?
Well, first of all, yes, we are hiring. We are also getting up a little earlier and staying a little later. We love what we do. We are come from this background. It is our DNA in development and developing for certainly all my working life and grew up around development.
I feel like it's like anything if you ask somebody who's grew up around being in a plane, you just have a certain innate understanding of the way things feel when they feel right and when they don't feel right. You can reduce all that to mathematics, but there is something in terms of circuitry that you have when you grow up around something. I'm sure all of you experienced that. So I think that has grown into an advantage because the business has been built around that sort of nucleus. We have learned over the years many, many things from many others, including Walmart in the way of disciplines and processes and procedures, reporting and so on, which we love, which has made us better.
But we've never lost our development entrepreneurial circuitry. So for us, what we're doing is our it's our natural habitat that we're operating in. So I think you probably understand what I'm saying. To reduce it to actual individuals and skill sets, it's hard to say. But maybe our other our peers were not born out of that.
We were born out of this and grew into all the disciplines and institutional cultures. Here, we were born out of development. So we're in our sweet spot in terms of looking at all this that we're initiating, which we could have done many times, could have started at any time over the course of this company. But for the sake that we were so preoccupied and busy with our retail growth, it just didn't make sense to do. Now, of course, it does.
And hence, we are massively focused on it.
I might just add to that, Michael. A specific example is of we used that team, the 135. And we have instead we obviously still use we use consultants, and consultants are important part of what we do. But we have our own people always involved. We have engineers on the team.
We have architects on the team. We have lawyers on the team who are very much involved with the projects and moving these things forward and use consultants when necessary or when appropriate. But I think that's probably another that is it would be a difference between us and some of the others.
Okay. Very helpful. Maybe you could just give us some color, I mean, costs. And I know you've buttoned down a lot of your costs on the 3 condo towers, and you came in under budget on the KPMG a couple of years ago and PWC, I believe you're on target for that. But we are hearing a lot of belt shortages, cost inflation.
Wondering if you could just give us some color on what's going on there and how you're managing that?
Sure. I mean, there are I mean, you're right about us being in good shape in terms of tendering on the buildings that we actually have under construction. And we are aware of potential cost increases in both the residential and the commercial. But we have a pretty good handle on it, and we are factoring that into what we're doing going forward in terms of the next Transit City condo towers or that rental tower that Mitch was referring to. We're factoring that into the equations that we're using to move forward.
So yes, there are some increases that we're starting to see, and yes, we're factoring those now.
As well, I would add that we're not going to. We're not on autopilot. We don't develop on autopilot. We are not doing this because we want to say we're developing. I mean each development will be evaluated based on the market conditions, including, of course, any movement in costs.
And thankfully, we have land across the country, and we have opportunities in many different markets. So we'll be able to prioritize different markets if costs were, for example, to get so out of hand. But at the moment, we don't see that price increases at the moment in Toronto, for example, the GTA, are going to stop or slow us down from proceeding with our developments that we've announced or that we've talked about today in the GTA.
And maybe specifically, Michael just mentioned on Transit City 12, tendered about 80% of the trades, 80% of
the dollar value of the trades.
So and Transit City 3 is above 55%. So we're in good shape in terms of where we are with those and relative
to our budget.
Okay. And last question. I wonder, it's just like one of the things that some investors, there's so many so much development on the go and intuitively, we know it's profitable, but it's hard to put a number on that when sort of analyzing the stock. And I'm just wondering if so if your what your thoughts are like on if you were to say you're going to bill you're going to spend your share 3,000,000,000 over the next 5 years. And some of that is going to be rental income and some of that's going to be condos and you'll get a profit.
Is
it what ballpark of profit or NAV creation would you standing from a high from a bird's eye view, would you say is the range either from profits from selling a condo or developing a property at 6.5% cap and it's worth 5.5% cap, so there's an implied profit or NAV creation there. So if you spend $3,000,000,000 your share, is that like a 20% kind of number, 20% of $3,000,000,000 is kind of NAV created either through generating profit or through higher valuations. Is that something you is that a way you think about it? Or
I think you can get an answer from a few different people here. I guess, first of all, obviously, we don't want to talk in those terms because it's an each development has to stand on its own. And they're going to vary a bit, and they're going to have to be well safe within profitability. But there'll be one return on a rental, day 1 rental building. There'll be a different profit on a condo at Eglinton versus a condo in, say, Mississauga.
So I know you want just an overarching what would the return be on the €3,000,000,000 But it would be, I mean, it would be,
we'd be
reluctant to try and find an average. But we certainly look at each one and make sure that every one of them will fly. The rental, I will comment, I mean, just to comment that rental, purpose built rental is not from scratch, is not day 1, huge returns, as you no doubt know. But their characteristics are very attractive to us. And that is that there's generally reliable increases every year, very, very low vacancy.
And the worst day is the first day. And we're taking a long term approach with rental. We're going to get into that game. We're going to understand our business and real estate moves in geological time frames. I mean
and so we will start
very strong, very solid residential rental basis. Initially, day 1 will be we still plan on that to be accretive, but it will be better in day 2, and it will be better in day 3. Whereas a condo in VMC, I mean, just a fantastic, very potent return for us. So and then you've got everything else. So it'd be very hard to and maybe a little bit yes, we wouldn't want to think in terms of an average.
So I hope that helps a little bit.
No, no, no. Fair enough. Thank you. That's it for me.
We'll now take our next question from Sam Damiani with TD Securities. Please go ahead.
Thanks and good evening everyone. I just wanted to touch on the distribution increase again. Just given the REIT also already offers a pretty healthy yield in the context of the market and other peers who have not dissimilar development plans and pipelines tend not to be raising the dividend. I'm just wondering if there's some tax reasons or other reasons that you have for offering a distribution increase when you have such a capital need strategy?
Sam, it's Peter. I think as we mentioned earlier to Tommy's question, we're perhaps SmartSide 3 is maybe more uniquely positioned in its ability to generate cash flow off its existing platform, A. B, as we mentioned earlier, we're not embarking upon so called acquisition strategy of going out to buy expensive new lands to accommodate our development initiatives. The existing portfolio of 154 sold properties provides us with an ample supply of space and land and opportunity from which we can lever all of our development initiatives that at least are currently in the development pipeline. And so as I mentioned earlier, with those opportunities, we're finding that the value of the land that is currently recorded for IFRS purposes, which is predicated, as I think you know, based on existing income streams that are emanating from those properties, we're finding that when we take parcels of those lands, sever them and appropriate them into these joint ventures, that we're unlocking tremendous value.
And so from the REIT's perspective, I think it's fair to say our Board certainly considered alternatives to distribution increases, but at the same time, recognized the continued success of our existing portfolio, a b, the tremendous potential for value increments that exist in our portfolio of properties that form our development pipeline and then C, given what we see over the next several years with respect to substantial cash being generated from the condo and townhouse completions, I think it's fair to say our Board thought the appropriate thing to do was to send a strong signal to the market that we do expect to be in a position as a public company to find ways to grow our distributions. And so if nothing else, the decision by the Board should be interpreted as a stronger confidence in the REIT's ability to continue to find ways of increasing distributions.
That is helpful incremental information. And so just to be clear, there were no tax considerations motivating the decision really.
Not at all.
Okay. Just moving on to the premium outlet, Toronto premium outlet sales, it looks like they slipped a little bit Q2 versus Q1 and the year over year growth also got a little slower. Just wondering if there's an explanation behind that sort of blip in the trend?
Yes, Sam. We embarked on the construction and the build out of a
parking deck
started earlier this year. And as a result of that, it's very, very obvious the congestion in there as a result of that. We are now complete and tenants are fixturing in terms of the build out. And we might see a little bit of that, and you may be seeing a little bit of that being a result of that construction. So keep in mind that the percentage growth is significant and was significant in 2017.
So you may just be seeing what's happening in this, I'm going to call it seasonal period and just wait till November when this thing opens up. And we'll see with the new tenants that we'll hopefully be announcing in the next few weeks months what's So again, all temporary.
And when the expansion opens up, will you include that in same property NOI?
No, we will not do that until we've got a full year of it under our belt, so we can compare apples to apples on that basis. But we will report sales on the center, but not at the
same property because it's new construction. Dan, it's Peter. Has there been a change in expectation, would
you like us to include it in the same property?
No, I just want to be clear. And on that same point, I noticed in the quarter, the 1.1% same property NOI growth was largely due to roughly $900,000 coming from, I guess, the new parking at the VNC, which you have included in same property. So I'm just wondering if that's something we'll continue to see for another couple of quarters before it cycles over and the growth kind of peters out?
I think part of it was parking at EMC. And I think it's fair to say that, as I think Peter mentioned earlier, we're continuing to see more commuter traffic into that site. I think one of the challenges might be that we're full. There's no room in the end, so to speak. So at least for the parking the complement of parking opportunity to generate incremental growth of consequence, I think for now at least, we may be somewhat limited.
We'll probably see further growth in that regard for Q3, But I think beyond that, it might be perhaps challenging.
I would add, I don't know if you know this or not or whether it was in the information, but we charge very little at the moment for parking there. And so there is also the opportunity to increase. We set our parking price there based on some estimates that we had early on, which have been far have been exceeded. So there is an opportunity potentially for small increment in the rate parking rates there.
Curve. That makes sense. Final question is just on cannabis. This is an opportunity in the marketplace and with some retailers growing, I'm wondering if that's a sector The REIT is pursuing throughout the portfolio right now?
Rudy, it's Rudy. You love to answer this question. The history
is the sector we will be pursuing in our shopping centers, as you know, across the country. This is not big space, small space, 100 square feet to 3,000 square feet. We already have a bunch of deals already signed up. We have a bunch of deals that we're in discussions with both here and in Western Canada. As soon as the Ontario government figures out which way they're going with whether it's OPCO or private or both, which they're, I think, steering towards, we will take that forward.
So yes, that is something that is on our horizon. But again, not significant dollars to our retail.
And philosophically, we are obviously very much we're going forward with it. We, as a company, are not we have no issue with it. But it is small spaces. Well, it would be a much bigger space. If you're on cannabis, it will seem
like a lot larger space. But it's actually So
Would you be willing to
say the number of
leases you've signed so far?
Yes. I think there's upward of 10 leases signed and we are negotiating with at least the same number right now and a lot of they have a lot of frenzy with calling us up because we're all over the country. And as you know, this is not
a product for consumption in urban markets only, as it's a
good consumption of products everywhere. So whether it's for the elderly, for the sick and so on, So we're getting a massive amount of interest. So we are in discussions with a lot of artists on this.
Great. Thank
you. Just to back up on that
B and C question you asked about the parking and the same property growth levels. Just for clarity, the $900,000 that's referenced in the MD and A that supports the $1,100,000 bump is a function of 3 things. It's a function of the increased parking success at BMC, but it's also a function of additional revenue being generated at TPO as well as additional revenue being generated at the film studios on Eastern Avenue. So just in your thinking, just make sure that you're not thinking that the $900,000 is exclusive to parking, okay?
I appreciate that. I think it's parking was the largest part, but thank you.
We'll take our next question from Tal Woolley with National Bank Financial. Please go ahead.
Hi, good afternoon. I just wanted to ask quickly on the premium outlets. There's quite the productivity gap between Montreal and Toronto and the centers are about the same size and the 10 minutes actually looks a little bit more higher end in Montreal. And so I was just curious, is it just a question of time in the market that that center, that Montreal center needs to season more? Or do you expect that center will
close the gap to Toronto?
When the markets open, Toronto has 6,000,000 population compared to Montreal, that speaks for itself. But Toronto when Toronto opened, Toronto was the best performing premium outlet in the entire Simon Properties portfolio in its 1st year and it was off the charts with productivity. And in the year after, we saw double digit growth in both sales, tremendous ramp ups, as you know. And Montreal looked by comparison, may look small, but it was doing fairly well compared to other premium outlet locations with Simon Properties. So that gap has been closing a little bit because the Montreal growth has taken off in terms of sales, tenant sales.
And you'll see that gap starting to close, all except for now the expansion that's planned for Toronto. And with the banners again that we will announce shortly, you will see Toronto taking off even further. So Montreal is by no means with all of the land we have around it and the expansion that is also possible and the lands that are available for that in Montreal, and we see ourselves doing that and taking advantage of that as well in the near future.
So is it possible like Montreal could be like $1,000 per square foot too? Or is that just that's way too aggressive?
I mean, at some point, I think Montreal will get there. I think with regards to the mapping of it, when our plan was that it would be a year to 2 years between the 2 as we would expand Montreal. And Montreal is tracking very, very nicely in terms of where the sales are going relative to where it started. So we don't see that that is at all we see that as very, very possible in terms of where it's going, and we would probably do that expansion long before it got there.
I would add, Joel, that if you haven't been to the area, it is the area, area meaning actually the region is growing around us. When we opened it, you would have seen the other kind of alone in a very large kind of off the highway in a very relatively undeveloped area, which is not uncommon for other centers. But the area around us has actually grown rapidly. We are surrounded by residential development to the extent that we even are we are actually now even looking at some of our surplus lands there for potential residential because it's closing in on us, that's not the land for the potential expansion of the outlet center itself. We have additional lands.
We are very happy with our position there. And whether we make it to that or not, I mean, that would be more or less our goal. I think we can get there. But it's a very, very strong study out in Toronto. It's just a little bit of an anomaly.
Yes. Okay. And just in your development pipeline, in your commentary, you've made reference to the Westside project, the 407 project and the Point Leclere project and getting sort of like specific future densities that are available to you. And just to be clear, because we get asked question a lot, like all those densities that you're citing, those are zoned right now or not? Yes.
Well, okay. In BMC, yes. In the lands at Weston Road and Highway 7, our neighbor is zoned for just to be clear, the lands at Weston Road and 7 are outside the planning district called BMC, but they are joining it, and they are within proximity of the mass transit that the government is investing in. So there is implicit support for higher densities there, evidenced by our neighbors' 3 towers. We are immediately next to them.
We are in discussions with the municipality for higher densities. And there is a secondary plan, which has now been initiated by the municipality, which means to study the area for the purposes of changing the zoning. It's right next to the BMC. I would not bet against those lands being zoned for high density, so VMC type density. But technically, they are not currently zoned.
Having said that, the lands on Eglinton Avenue, right next to the transit infrastructure there, they are designated. So they are already approved for the concept of high density and the implementation, in technical terms, of that vision of the municipality has not been completed, but that is the implementation of their vision. And we will do that, and we are in the process of doing that. And I certainly would not bet against. It is the city's initiative, by the way.
We did not initiate the zoning there, the designation there. And in Pointe Claire, it is approved. It was just approved very recently. And I don't know whether we mentioned this or not, but it is also within proximity to the proposed new rail line running from to and from Montreal out to the West Island. So like VMC, we think we are a step ahead in terms of we've got a jump on the areas changing.
So that one is zoned, and I don't know if there were any others. But of those 4, I mean those are they're as good as all zones, but those are the technicalities. That's very helpful. And then my last question is probably one for Peter. Just on when we're thinking about transactional FFO going forward, you'll be vending in these things to partnerships.
That FFO though, like it is FFO and I understand that you're booking a gain on it, but from a it's not really a cash gain most of the time, the way these transactions are structured. Is that correct?
Actually, it is a cash gain because typically, the way these transactions are structured
is our going in position with
our partners is that they're expected to pay for their share of the respective properties upon establishment of the joint ventures. And so yes, in fact, they are very much expected to be cash made. There are circumstances from time to time, I think last year in Q2 when we established the partnership with Fieldgate that instead of taking cash, we took financing back, which was accretive, and we thought it was an appropriate risk, etcetera, with more than sufficient security. Having said that, most recently, in the case of the joint venture in Leakside, there was certainly cash contributed by our new partner there, SmartStop. And then similarly, with the 3rd phase of Transit City that was established in Q2 of this year, Our partner, Centercorp, did contribute cash to purchase their respective share in that joint venture.
So it absolutely starts with an expectation of of cash being paid to the REIT by our partner. And to the extent that we think it's appropriate on an interim or short term basis take back financing then, and we'll think about that as we did in the case of the field gate situation. But otherwise, we do and will expect to receive cash.
Okay. And again, just to be clear, going forward, the condo sales that you're talking about in 2019, 2020, those will be like operational FFO and not transactional FFO?
Yes. Absolutely. So just for clarity, I know we spent some time with you and your counterparts on this issue. When we think about the closings of the sales to final owners of both condos and townhouses, the proceeds and income that will be derived from those closings will be considered by the REIT to these FFO. We'll clearly identify it, so it's easily easy to identify and see.
But because it's becoming, as you should have heard over the last hour or so, a big part of our business. You should expect those proceeds to be part of our standard FFO.
Got it.
Thanks very much,
Peter. It appears there are no further questions at this time. I would like to turn the conference back to Mr. Peter Ford for additional or closing remarks.
Okay. Thank you all for being part of our Q2 call. I guess just in summary, it's really our healthy financial situation, our outstanding locations, the tremendous development growth initiatives and our leadership and development teams offering a bright future. Thank you all for your interest and investing in REIT. Good evening.