Ladies and gentlemen, please stand by. We're about to begin. Good day, and welcome to the SmartCentres Real Estate First Quarter 2018 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Huw Thomas. Please go ahead, sir.
Thank you very much, Stephanie, and good evening, everyone. Welcome to SmartCentres' Q1 2018 conference call. I'm Huw Thomas, CEO of SmartCentres, and my pleasure to be leading the call. Joining me on the call today are Mitch Goldhar, our Executive Chairman; Peter Forde, our President and Chief Operating Officer; Peter Sweeney, our CFO; Rudy Gobin, our Executive Vice President, Portfolio Management and Investments, and for the first time, Stephen Champion, who's our new Executive Vice President, Development, and who joins us most recently as the former head of real estate for Sears Canada. Thank you to everyone for joining us on our call. I'll make some opening remarks about our results for the first quarter and market conditions. Peter Sweeney will then talk about our funding activities, and I'll ask Peter Forde and Mitch to give their perspectives on our development program.
We'll open it up for questions. Our comments will mostly refer to the first seven pages and pages 20 and 21 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 applies to any comments any of the speakers make this evening. Our results for the first quarter of 2018 largely mirror our results for the last few quarters, and I suspect the next few quarters to come as well. Those of you who know our business well understand that a core premise of our retail portfolio is the remarkable stability in our core FFO levels, subject only to minor variances in same property income and augmented in some quarters by the impact of select accretive acquisitions.
More recently, the benefit of transactional FFO as we begin to realize on the inherent value in our significant land holdings when we create new joint ventures. The substantial benefits that will flow as our development pipeline begins to deliver will be felt late in 2018 and 2019 as the Toronto Premium Outlets expansion opens, also in 2019 as the PwC tower is completed. Our FFO will then increase substantially in 2020 and 2021 as our first residential developments are completed and continue to grow after that as our pipeline of joint venture relationships delivers multiple new residential, seniors, and self-storage projects.
Until then, we'll remain very focused on the health of our core retail portfolio. There's no doubt that the retail industry globally is going through a period of transformation as it adjusts to the impacts of urbanization and aging population and e-commerce and the digital economy. Canadian retailers are showing that they are reacting to these changes at a measured pace, evolving their bricks-and-clicks models and their store formats. The closure of Target and now Sears has been by far the most influential impact on the market in recent times. Not surprisingly, the introduction of over 30 million sq ft of vacant space into a market estimated to be only about 540 million sq ft has caused pressures on leasing spreads for the recent and medium term. To help rebalance the market, retail landlords like ourselves have slowed the opening of new space significantly.
For example, we have only opened one Walmart anchored center over the 2016 to 2018 period for approximately 350,000 sq ft. Whereas in the peak years, we would have opened 12 million sq ft over the same time frame. Ultimately, the retail marketplace will reach a new equilibrium as demand for space and population is still growing. Physical retail will remain a core component of the shopping experience. Despite all the perceived negativity in the market, the reality is our principally Walmart anchored open format centers continue to perform well with Walmart, Canadian Tire, the food and home improvement retailers, select specialty stores like the TJX Group and Indigo, together with discount stores such as Dollarama and Dollar Tree, all posting very good financial results and driving traffic growth over the last few months.
As recently as earlier this week, studies show that Walmart continues to increase its market share in the core food category versus traditional food retailers. This only bodes well for the majority of our sites going forward. The recent news on the future of Toys"R"Us is also a positive indication of the views of a category that in other markets has been much more challenging. For our portfolio, we see occupancy remaining at 98% or above. Our renewals for 2019 are moving forward well, with over 60% of leases already committed. As we look further forward, while leasing vacant on new space will require more effort than in the past due to portfolio churn, and we may need to invest more in tenant improvement, we do not see any fundamental weakness in the market.
In fact, we're actively working on large new format stores for both Walmart and other retailers as they continue to grow their store networks. Despite now being more mature sites, our two premium outlet locations continue to perform very well. Both are 100% occupied. For Q1, sales growth at Toronto was up 6.5%, and Montreal a very healthy 22% year-over-year. The Toronto expansion remains on track to open in November this year, and we expect to be largely full by the time we open. Work on two potential additional sites continues. With our extensive and growing retail portfolio, as both a stable generator of cash and a source of substantial future value creation through both further store development and intensification, we feel we're extremely well-positioned to grow our business well into the future.
With that, I'll pass the call over to Peter Sweeney to talk about our financing activities.
Thank you, Huw, and good evening, everyone. 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 is 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 we are being provided. Once the project is finalized, we will then term out the funding as appropriate. With the inclusion of multiple well-capitalized JV partners in our program, this mitigates a significant portion of our funding needs.
For example, we have previously highlighted that we expect to commence development projects over the next five years with a total value of approximately CAD 7 billion, of which our share is CAD 2.9 billion. However, because of the time taken to ramp up these initiatives, our actual funding needs for 2018, 2019, and 2020 will be only CAD 60 million, CAD 90 million, and CAD 90 million respectively. Clearly, well within our funding capability, given the size of our balance sheet, and thus further minimizing the impact that rising interest rates may have on our development projects. Secondly, to lower the cost of our future funding requirements by achieving a ratings upgrade to BBB (high). Our conversations with DBRS to date have indicated that we need to both balance our secured and unsecured funding portfolios and increase the level of our EBITDA, and we are well on our way to achieving both of these objectives.
Based on our funding plan for 2018, we expect by year-end to have over 50% of our debt funded in this unsecured market, which is a significant change from just over two years ago. As a result, our unencumbered asset pool has now grown to CAD 3.5 billion, supported by income from many of our high-quality assets. Also, our funding activities in 2018 are still showing a positive contribution to FFO, despite a rising interest rate environment. We continue to review with our board our long-term funding needs and the appropriate capital structure. We have updated our discussions on both a normal course issuer bid program and our DRIP program, but have no current plans to introduce or amend these at this time, as we don't feel that they would be value-creating for our unit holders.
For our payout ratio and distributions, we saw slightly higher lease allowances in CapEx during the first three months of 2018. As noted in our financial disclosure, going forward, we will be using an ACFO as our benchmark cash flow measure and reporting our payout ratio on this basis. For 2018 and 2019, we do expect somewhat higher tenant allowances based on the tenant churn and the need to rework space to maintain occupancy as you had previously discussed. Our target and our expectations are that our payout ratio will trend towards the 77%-82% range over time. Our ACFO metric, or adjusted cash flow from operations, shows a continued healthy level of cash generation, reflecting the strength and core characteristics of our business model.
Overall, we feel we are well-positioned to both support our existing business and fund our growing development pipeline of retail and mixed-use initiatives while still providing our unit holders with stable and growing distributions. With that, I'll now turn the call over to Peter Forde.
Thank you, Peter. Huw and Peter have described the stable cash flows from our solid retail portfolio. This is the backdrop for the significant growth expected over the next 10 years from our many new development business initiatives. It's now almost three years since the REIT acquired the SmartCentres development platform. That team of 145 development professionals, planners, engineers, government relations, construction, leasing, architects, and financial analysts, all in-house, puts us in a unique position to deal with the mixed-use and intensification initiatives that are underway. We are able to transform our retail sites to residential and other uses by utilizing our own people, supplemented by key long-term consultant relationships when necessary, to obtain the municipal approvals required. Many members of this development team have backgrounds with relevant experience in our new development businesses. We will be able to have a very hands-on and detailed approach to these new businesses.
just as we've always had for retail. I believe this makes us very different than the other REITs. Now we have the added benefit of Mitchell Goldhar being on our executive team as Executive Chairman. While he has been involved with many of our projects during the last three years, having one of the best developers and businessmen in the country leading the development and intensification initiatives inside the REIT, puts us in an even more unique position. Mitch has obviously been in the same building as the REIT for more than 10 years, and is affected as much as anyone by every decision made in the REIT. He has always been there and been involved with not just the development, but leasing, financing, management, and HR. There has not been an executive in the REIT over the years that has not benefited from his expertise.
We will receive it more and more directly in his new official capacity. Although we have this in-house capability in the various new development initiatives, initially, we are acknowledging there are certain unique elements to each business type and have partnered with first-class development partners. For example, Revera, one of Canada's largest operators in the retirement home sector. Initial sites have been identified in the GTA and in Western Canada. Once the pipeline is approved, we expect to complete at least five projects per year together. Our 50/50 joint venture with Revera sees SmartCentres land developing and constructing the project, and Revera will operate the finished residences. CentreCourt, for the first three 55-story sold-out condo towers at Vaughan Metropolitan Centre. The first two are under construction. The third tower will commence construction in early June, we are now exploring further towers at VMC and at other sites.
Another partner, Fieldgate, for development of the 229 townhomes on 16 acres in our Vaughan Northwest Major Mackenzie and Weston Road shopping center site. Jadco, a Quebec-based residential developer and manager, for the development of rental apartments. The initial project in Laval Centre is just about to break ground on a 290,000 sq ft, 338-unit, two-tower apartment complex. Of course, SmartStop, a U.S. self-storage developer and manager. Our 50/50 JV with them calls for SmartCentres to land develop and construct, SmartCentres will operate once complete. Five initial GTA sites are active with the expectation of opening four to five new facilities across the country per year for the foreseeable future. You start to see the pattern. We have carefully selected top-notch partners, experts in their fields with a similar style, discipline, and culture as our own.
We will work very closely with them to jointly develop the properties. As I say to each of our new partners, we do not know how to not be involved. We are very hands-on and are very active partners, that's just the start. Here are some other examples. Of course, there's the Vaughan Metropolitan Centre, which I'll leave for Mitch to review with you in a few minutes. Some other ones, Pointe-Claire, Quebec, on the island of Montreal, a 385,000 sq ft Walmart and The Home Depot anchored shopping center we purchased in 2016. At that time, the acquisition valuation was based solely on the income in place. There is a new electric train line under construction serving this area. A station on this new line will be one km from our shopping center.
We've been working closely with the City of Pointe-Claire on a master plan and have last month obtained zoning for one and a half to 2 million sq ft of density. Detailed planning is underway for the first residential tower, expected to be complete in 2020-2021. Westside Mall, Toronto. Our 12-acre property on Eglinton Avenue West will benefit from an LRT station being built on our lands and a pedestrian bridge connection to a new GO train stop. With indicated city and provincial government support, this site is now designated for over 2 million sq ft of mixed-use development. Laval Centre. This 43-acre site is anchored by a 160,000 sq ft Walmart store. Construction of an office building, a hotel, and seniors building on lands we've 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. StudioCentre at Lakeshore Boulevard East. A new sound stage is open, and the initial phase of development of office and retail has begun. The film studios are fully booked through to the end of 2018. South Oakville Centre. This center in Oakville is anchored by a Target store. 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 anchored by a Metro food store, Shoppers Drug Mart, LCBO, GoodLife Fitness, and a number of other service uses with an adjoining seniors residences building and a townhouse development.
Our plans overall so far indicate that over the next five years, we expect to commence development either alone or with various partners on an excess of 50 projects valued between CAD 7 billion and CAD 8 billion. Our share of this investment is nearly CAD 3 billion. Different from others, we'll be very diversified in terms of type, office, residential rentals and condos, retirement residences, retail, and self-storage. In terms of geography, a mix of urban and suburban, and some mid-size markets. We estimate that 10 years from now, we will be generating recurring NOI from these new rental businesses equal to approximately 15% of our total rental NOI at that time. Plus, an additional CAD 20 million to CAD 40 million of profit per year starting in 2020 from the sale of condominiums and townhouses.
With that, I'm going to turn it over to Mitch to elaborate further on some of the exciting new developments in SmartCentres.
Thanks, Peter. First, let me comment that I'm very pleased to now be taking the position of Executive Chairman. I am enjoying the role so far, and in addition to the core responsibilities, I'll also be officially leading the REIT's strategy development and execution of that strategy. We have well-located properties in both urban and strategic mid-markets across the country. As Peter mentioned, we are reviewing and planning for intensification on virtually all of our sites. You have heard and see on pages 20 and 21 of the supplementary information package, many of them are underway already. I will be continuing to lead the team in these developments. To us, these are very exciting times, as development is still very much the DNA of SmartCentres. For an update on the Vaughan Metropolitan Centre project, things are advancing quickly.
If you've not been up here in the last six months, you really should come up here and see what's going on. It's probably time for us to arrange another investor presentation on-site as we did last year. VMC is really starting to feel like a downtown. You can start to get the sense of what it's ultimately going to be like on full build-out. The subway line extension, which is 45 minutes direct to Union Station, opened on-site in December. We understand from the TTC that the traffic at the VMC station is exceeding their expectations. In fact, it is the busiest station on the extension. We always believed that would be the case, but there were predictions of other subway stops, such as York University. We are busier than York University.
We, on our own, added, in anticipation, 900 surface parking stalls in addition to the parking for the KPMG building on lands just adjacent to the subway station. This was to accommodate commuters to and from the VMC. This was also to begin the process of establishing patterns with the population that frequently use, and their patterns are to take the subway as their commute and to use the VMC as their regular stop of choice. These 900 stalls are full before 8:00 A.M. each weekday. When you add to that, busy pickup and drop-off in the streets adjoining, the bus commuters transferring to and from the subway, and the more than 1,300 employees working in the KPMG building, including the most recent tenant to have opened for business, FM Global Insurance. Our project is becoming a metropolitan area.
This will only increase and intensify as we complete the internal and surrounding road networks. With the regional bus terminal opens, which is expected to happen in May, later this month. As we complete the mixed-use tower that Huw and Peter both referred to, the topping off was in April, and that's the building that will be substantially occupied by PricewaterhouseCoopers and the YMCA, and they open in the fall of 2019. That will be an additional 500 employees at PwC, an estimated 1,200 daily visits to the YMCA. As we complete the three sold-out 55-story Transit City condo towers in 2020, there are 1,716 units. Towers one and two are under construction. Tower three to commence in early June. Design commence now on the next phase, with additional condo and rental residential components and a third office tower, as a result of interest from an anchor tenant.
Overall, we now see 9 million-11 million square feet being developed on the VMC lands that the REIT owns, with my company as partner. In addition, the REIT owns a retail site of 20 acres on the west side of Highway 400. While not in the VMC, technically, it is for all intents and purposes. We have slated this 20-acre retail site for intensification, with the potential of 2.5 million square feet for redevelopment, including residential, office, and retail. The site is a primary site under the Vaughan official plan and is just east of the two 34-stories that are sold out next door, and an office tower as well that are now occupied.
Just across from that, we own a site we call Westridge, which is at Weston Road and Highway 7, and it's currently 430,000 square feet of retail with the potential for significant retail intensification over time. This retail and intensification node in and of itself could be seen as keep any company busy. In our case, as Peter has described, it's just one of many opportunities. Finally, a few words about Huw. This is likely Huw's last analyst conference call as SmartCentres REIT CEO. Huw joined our board of trustees in 2011, agreed to be interim President and CEO in March 2013, then to a five-year contract as President and CEO in July 2013. As announced in February, Huw is retiring in June at the end of his contract, and Peter will be assuming his CEO title.
I would like to thank Huw for his contribution to the success of our REIT, and in particular, for his stellar job of keeping you and all of our stakeholders informed as to the transformation of our REIT from a shopping center operation-focused REIT, to one grounded on stable retail operating cash flow but moving forward with an ambitious redevelopment intensification program on properties we already own. Huw will remain on our board, Huw, I would like to thank you and wish you all the best. Thank you.
Thank you very much, Mitch, for those thoughts and to Peter as well. Stephanie, we'll open it up for questions now, if you can, please.
Thank you. If you'd 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, press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question will come from the line of Michael Smith of RBC Capital Markets. Please go ahead.
Thank you, good evening. Congratulations to you. All the best in your retirement.
Thank you very much, Michael.
I guess, in terms of Vaughan Metropolitan Centre, how likely do you think it'll be that you'll announce another residential development this year and office development?
It's likely to announce. Very likely.
Very likely. Okay.
Announce a new residential phase? Yeah.
Yeah.
We believe that, and not just us believe that there is a market for more residential at this time.
I mean, you'll be aware, Mike. Sorry. I'm just going to say, Mike, there was a development that was to move forward in the market that was canceled a few weeks ago.
There potentially is pent-up demand from those potential residents who are obviously excited about coming to the new neighborhood. Obviously, our development would be closer to the YMCA, would be closer to the subway, closer to transit, et cetera. While pricing might be different, all of the other advantages that any potential resident would see in the market would clearly be there. As Mitch has talked about, the neighborhood is rapidly evolving, and I think anybody coming up here and thinking about living in this part of the world can only be really excited about everything that they see.
Good. Well, that makes sense. Does that mean it's going to be a condo, or would it be a combination condo rental?
Yeah. As I was going to say, we're anticipating we'll be moving forward on a condo and residential. Yeah, we anticipate at least those two forms.
Okay. Thank you. Mitch, you had mentioned that there's another phase of office. I guess that was spurred on by discussions with a potential anchor tenant. Did I hear that correctly?
There's a number of high-quality corporations that are interested in presence up here. We're sort of anticipating that at least one of them will come to fruition. In terms of that timing is going to be completely, obviously, dictated by the negotiation and however long it takes to negotiate a deal. We feel good about the level of interest from corporate interest, and that it will result in a third office tower sometime in the reasonable near future.
Okay, thank you. Just switching gears. For the premium outlets, I understand you're looking at some sites. I'm just wondering how that's going.
We continue to look at, as we've indicated, Mike, two different sites. We have highlighted before that we did have a site that we were expecting to move forward with that we, in effect, abandoned. There is an alternate site that we're now actively working on. Both of those continue to progress. I think the success of the Toronto and Montreal sites indicate that appropriately located and with the right mix of stores and with a premium brand, that outlets can still be successful in Canada. We have Simon support to continue to look at these two properties. We continue to be delighted about, obviously, the ones that we have and their continued progress. As soon as we're obviously comfortable that we are going to move forward, then we will specifically indicate the locations and everything else like that.
For now, remain very pleased with obviously, what we have. As we note, the Toronto location is expected and will open in November and expect to be virtually full. That would give us close to half a million sq ft in that location, in addition to the new parking facility we built and so on.
Okay. Thank you. I'll let somebody else ask a question now.
We'll take our next question from Pammi Bir of Scotia Capital. Please go ahead.
Thanks, good evening. Huw, just again, all the best in your next chapter. Just a quick question. With the projects that were canceled by, I guess, that developer a few weeks back. Can you remind us how you're mitigating the risks on cost inflation for your pipeline?
Well, the biggest one at the moment, of course, is Transit City. We anticipated it from day one. We contracted with a GC that both our partner and us are very familiar with, so that we together jumped on the major items of exposure, being things like concrete and windows. We're actually buttoned down on those for Transit City. I'll let Peter talk a little bit about. Did you already touch on that?
No, not really. For the first two towers, we've tendered approximately 80% of the cost. In the third tower, we've tendered about 70% of the trades. We're doing better than budget, even with the tendering that's done then. We have seen some cost increases, but overall, not a lot. There are some specific trades, and Mitch mentioned them, that have been issues. I think, the other party there are other reasons that project may have disappeared other than just cost.
If you're talking about that, if you were indirectly referring to the one that was pulled, yeah, there's probably more going on there. In general, you do read about cost increases. The difference here is that we're not buying sites at market, and then having exposure to construction costs inflation. We're building on sites we already own. While we are obviously going to do everything we can to make the best deals we can with various trades, this is not the same exposure as somebody coming in at market. Our projects are not going to rise and fall on some construction cost inflation. Having said that, we are also obsessed with it. In this case, we do have a partner who's like-minded. Of course, we did button them down. These are large buildings, we feel pretty good that we're on budget.
Going forward, we baked into our decision-making, we don't feel the same as the traditional condo developer whose business is buying land at market and now having to face the unknown of construction costs.
If you look at the projects, Pammi, that are listed on pages 20 and 21, philosophically, every time that we've put pro formas into the market on expected returns, then we've generally been conservative in our expectations. We've expected some increases in construction costs, et cetera. We're not anticipating that there are going to be adjustments to those expected returns because, as Mitch indicated, it's been a fundamental premise of SmartCentres for 20 years, building obviously large amounts of square footage and managing the cost of those projects incredibly closely.
Right. That's pretty helpful. Just maybe one last one. When you look at the scale of the overall pipeline on those pages in the supplemental, and of course, there's still a fair bit that's not even on that schedule. Have you given any new consideration to perhaps some larger scale non-core disposition programs or perhaps even maybe selling interests in some of your core portfolio?
Yes, we do that as a matter of practice anyway. Given our large pipeline and development plan, we do look at it from the point of view of managing cash management and debt levels and all those things. Yeah, we're going to stay way ahead of that. Yeah, as we develop further or make some decisions in that respect, we will, of course, be letting everybody know.
Not surprisingly, Pammi, stable cash flow coming from high-quality Walmart anchored centers represent attractive assets that insurance companies or pension funds might be interested in.
Right. I guess maybe just on that, is there any thought to perhaps embarking on anything like that this year? Is it still part of the overall discussion at the board level?
It's not imminent. We're always looking at it. We've done dispositions in the past. The good thing is that when we're selling, we are selling, like Huw was saying, we're selling dominant centers. Now, of course, in most of these markets, there is only a Walmart in terms of a discount general merchandiser. It's a dominant center with at least a Walmart anchor on long-term leases. We feel that we have good liquidity if we did want it, and we see that as the right thing to do as we look at our cash flow going forward. We're not at that point yet to know whether it will happen this year or not. We are looking at it in the scheme of the overall program.
Great. Thanks very much.
We'll go ahead with our next question from Tal Woolley of National Bank Financial. Please go ahead.
Hi, good afternoon. I just wanted to ask quickly, Huw, in your letter, you mentioned that you're seeing good rental increases across most of your markets. Are there any sort of trends that you can sort of talk about in terms of renewals? Or is it mostly a site-specific kind of phenomenon?
No, it's Rudy. Sorry. No, I mean, generally across the market where we have Walmart entry sites and strong sites, you know that sort of the average size of our site is in excess of 300,000 square feet. These aren't 50 or 100,000 square foot sites. These are large, dominant sites in their markets, and they continue to have tenants who want to remain and new tenants still knocking on the door, hence the 98.1% occupancy. Generally across the market, you will have some particular retailers who struggle in smaller markets, and we know that some of them are closing smaller stores. Generally, we're seeing good attraction and fairly decent rental rate increases.
As we said before, Tal, yes, you will see, if there's been a former Sears location where the rent that was being paid was in low to mid-single digits, and that space is now back in the market, the landlord can be extraordinarily aggressive compared to what I will call normal market. While we won't necessarily match that rate, then we will potentially make adjustments to our rate to retain a long-term tenant in a particular market because that's the right strategic thing to do for that market. That's not symptomatic of the entire marketplace. It is, as you indicate, very site-specific, as landlords are obviously trying to lease up vacant former Sears space.
Okay. My next question is on Walmart. Obviously, the number of net new boxes going up each year is starting to slow down, and I think they're north of 410 locations now. They're such a big, important partner of yours. How do you see their needs for space evolving going forward? Do you see an opportunity to continue to expand stores? How do you see that relationship over the next five years?
Well, the relationship is 30 years almost at this point. The relationship is very good. We're still partners in real estate. We're certainly small P partners in our Canadian overall. There's huge mutual reliance. Whatever Walmart does up here, we usually are somehow involved in one way or another. I think you can always step back and look at Walmart, and their success in Canada and imagine that they will continue to look for ways to expand in this market. We anticipate that we would be involved somehow in whatever form that takes, which with Walmart is always evolving. That's one of the secrets to their success. We've explored numerous different things with Walmart. They've explored numerous different things with us.
Of course, the stuff at the moment is not expanding at the same rate as it was five and 10 years ago for various reasons. They continue to adjust, where in each market, where necessary, some of that's been expansions, in-box expansions. Ground-up, brand-new greenfield expansions have slowed, as you pointed out, I think we have two on the boards at the moment.
Okay. Thanks very much.
Your next question comes from Sam Damiani of TD Securities. Please go ahead.
Thank you. Huw, obviously best wishes. It's been a true pleasure working with you and getting to know you over the last number of years. First question is on the premium outlets, the phase 2 in Toronto. Just wondering, are those leases largely finalized, or are the rents still to be nailed down for those tenants that are going to open up?
They're in various stages, Sam. As you can imagine, one of the huge benefits of dealing with an organization of the size of Simon and their premium brand, that they have global relationships that we would never be able to leverage. They're obviously leveraging those global relationships and not surprisingly highlighting to future tenants the success of the existing site. If you use constant dollars, i.e., don't do the exchange, then the Toronto site would probably be in the top five for Simon properties globally. As you can imagine, that means that it isn't the hardest thing to do to attract potential tenants to the Toronto property. As Simon's going through that exercise, some are fully signed up, other leases are sitting on a desk somewhere, others are just in the final stages of negotiation.
Based on historical patterns of where we are before opening, then, as I said, we expect to be virtually full by the time we open in November.
Great. I was just wondering with the increased traffic there with the garage now open and tenants can sort of look at that increased traffic and pencil in some higher sales and maybe afford to pay some higher rents. Just over to the credit rating. Peter Sweeney had mentioned what's needed to get up to B (high). You mentioned the mix of unsecured versus secured debt and the absolute amount of EBITDA. I'm just wondering on the coverage or ratio side, where you are today versus where you need to be to get that rating.
That's a good question, Sam. In fairness to the process, we haven't had that discussion, or at least that's part of the discussion yet with DBRS. We intend to have that discussion going forward. Our debt-to-EBITDA metric, at least to date, has not formed part of any discussions for a rating increase with the DBRS people.
Final question from me is just on that sort of five-year program, CAD 7 billion, CAD 3 billion at the REIT share. Clearly a fairly detailed analysis behind that. I'm just wondering, over the course of those five years, how much of the existing income property portfolio would have to be demolished to facilitate that program?
Actually, not a lot. I think I've said this before, the focus is on projects where we have land available or density available on the site as opposed to knocking down retail to get there. There are a couple on the list. For example, the one I mentioned, Oakville South, where we had an empty Target box, which of course, as part of that redevelopment, we'd be knocking that box down and doing seniors and homes and townhomes.
There are a couple. There will be some retail that will disappear for a year or something while we're developing, but not very much. Very little of what our program is-
We don't see really losing any of the retail income as a result of the development intensification program.
Great. Thank you very much.
Your next question will come from the line of Jenny Ma of BMO Capital Markets. Please go ahead.
Hi. Good evening, everyone. Huw, congrats on your retirement. Hope there's lots of R&R in the near future for you. I want to get a sense on the densification opportunities you have. You cited building coverage at 25%-30% of a lot of the power centers you have. I'm just wondering, for the projects where you've embarked on some planning or some firmer ideas of what you want to build, how much of that excess land is basically free to build? I guess what I'm getting at is, how much parking do you still need to provide to the center? Is there a need, maybe in certain locations, where you have to replace that parking availability with some sort of structure, or if there's just been a meaningful excess of surface parking space that you can use?
Yeah. Okay. That's a good question. The floor plate of a residential building, let's use residential for starters, is surprisingly small. To put up one tower on a site is not hugely impactful on the parking, because the majority of SmartCentres parking is at grade, and they're large sites, and we only have 25% coverage, plus or minus. Then, of course, the majority of the parking for the new development, the intensity or the tower, would be underground or decked parking. We won't get into how much parking we would provide for the various forms of residential, because, of course, that depends on the market. If you're on a subway, you might have a quarter or a half a car per unit. If you're somewhere else, you might have something between a half to a whole car per unit.
That would be, for the most part, provided underground, and that would be part of the pro forma, and it would be sold or rented, that parking.
In terms of the loss of parking on the site, we've always, for the most part, over-parked our sites for the high volumes. Not just over-parked our sites, but our accesses are also overdeveloped for high volumes, because that's the kind of tenants we've always wanted. We've never wanted customers to have ever a reason not to come to our centers. As it is, especially with the urbanization of large cities across the country, the parking ratios required for retailers has gone down. Retailers like ours are not demanding the same parking ratios because there are more people living close by and/or taking mass transit. We don't anticipate that as being an issue with respect to the operations of the retail.
Okay. Now, are the parking ratios something that is stipulated in the leases?
Yes, some of them. Some of them not. Again, they're big sites. You may have a Walmart that stipulates that there has to be a parking ratio within the area outlined in yellow on Schedule Z, and that could be 12 of 40 acres. Having said that's where relationships come in. We have very good relations with Walmart and others that would likely have that kind of provision. They also want this. They like the people living nearby. They also recognize all the things that we're talking about in terms of urbanization and the world continuing to spin on its axis. Those, we don't anticipate to be an issue in terms of anywhere we have to amend parking ratios. By the way, if you want to use a general rule of thumb, and this is a general rule of thumb, 25% coverage is very low coverage.
30% coverage would be considered fairly high coverage for retail.
Okay.
Within that 5%, there's a lot of parking or a lot of building. Somewhere in there, depending on the market, you really need to understand the sweet spot for when the place becomes too congested or there's just not enough parking on peak times of the year, stuff like that. When you get into 30% to 35%, you're getting into pretty high density for retail. You can do it if you have mass transit and so on and so forth. Those are the sort of margins. We are probably by far the lowest coverage of any retail owner in this country or maybe even on the continent, and it was very deliberate. It was very much part of the strategy. The whole company's pro forma is based on very low coverage.
Okay, that's very helpful. Thank you. With regards to the occupancy, I just wanted to reconcile a couple of comments. Given that it was sitting at 98.0 for March 31st, I think it was Huw, you mentioned that you expect to maintain occupancy at 98%. There was a little bit of a markdown on the NOI run rate because of some expected vacancy, and also you mentioned on the call some additional tenant allowances. I'm just thinking over the next few quarters, when you're looking at the occupancy rate, do you expect it to have some noise to it dipping below 98% and sort of ultimately settling out at this point? Or do you expect to sort of stay above that watermark because there's some leasing activity that you're anticipating over the near term?
The churn that Huw mentioned that's happening in the marketplace when people are trying to figure out their real estate strategy for their retail box, there is going to be a little bit more churn, and I think Peter Sweeney mentioned it as well, in terms of commissions and TAs for tenants coming in, going out. It may dip above and below that. What we're finding is that in those markets as well, where you have Sears and other vacant boxes, other nearby Target boxes that have not been filled, retailers are still looking at those and trying to figure out whether they should be in an enclosed mall or not. As you can imagine, they're finding out that the traffic in an enclosed mall isn't any better without the anchor in that enclosed mall as well.
While they're figuring out their strategy, we may dip below, be above, but we're finding that tenants are typically saying to us that, "I want to consider that, but I really want to be here. I want to be with you guys." We're looking at the rental rates, and that's where you may see, for some of those tenants while they figure out their retail strategy, a smaller rental increase for them or no rental increase for them. We anticipate keeping it at that overall occupancy rate throughout the year.
Okay, great. Thank you.
I'd like to.
Yeah.
I just wanted to add that you need to keep in mind that Sears and Target are, in and of themselves, they're significant one-time events. When leased or redeveloped, for all intents and purposes, there will be less square footage per capita at the end of the process. The process is ongoing, and most of it is with professionals. Everybody is looking at what they can do every day to reposition those spaces. When it's done, there is very little new space being built.
We anticipate once the reconciliation of those spaces is done, that the market will be really very different. This is a temporal condition. Notwithstanding that, we feel that we've pretty much plateaued at where we are in terms of, for the purposes of your original question. Looking out in the next year or so, I think you'll see every quarter less and less of that space on the market and no new space being put into the market. We need to keep that in mind.
Okay. Thank you very much. I'll turn it back.
There are no further questions at this time. I would like to hand it back over to Mr. Huw Thomas for closing remarks.
Thank you very much, Stephanie. I guess two quick thoughts. My thanks to Mitch and everybody in the room for all of their support over the last five years, obviously to anybody on the call I've had the pleasure of working with. Thank you for the sentiments expressed and obviously for the support you've given us over the last five years, and I hope you'll give Peter and Mitch at least that going forward. Otherwise, thank you for your time tonight, obviously, we're available for any follow-up calls, as appropriate. Have a nice evening. Bye now.
This concludes today's conference. Thank Thank you for your participation. You may now disconnect your lines and have a wonderful day.