Good day, and welcome to the SmartCenters REIT's First Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Hugh Thomas. Please go ahead, sir.
Thank you very much, Stephanie, and good evening, everyone, and welcome to SmartCenters' Q1 2018 conference call. I'm Hugh Thomas, CEO of SmartCenters. It's my pleasure to be leading the call. Joining
me on
the call today are Mitch Golda, our Executive Chairman Peter Ford, our President and Chief Operating Officer Peter Sweeney, our CFO Rudy Gobin, our EVP, Portfolio Management and Investments and for the first time, Stephen Champion, who's our new EVP Development and who joins us most recently as the former Head of Real Estate for Sears Canada. So thank you to everyone for joining us on our call. I'll make some opening remarks about our results for the Q1 and market conditions. Then Peter Sweeney will then talk about our funding activities. And then I'll ask Peter Ford and Mitch to give their perspectives on our development program.
And then we'll open it up for questions. Our comments will mostly refer to the first seven pages and Pages 2021 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 applies to any comments any of the speakers make this evening. Our results for the Q1 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 our core premise of our retail portfolio is a 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 and 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 2019 as the Toronto Premium Outfit expansion opens and also in 2019 as the PwC tower is completed. And then our FFO will then increase substantially in 2020 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 stories projects. Until then, we remain very focused on the health of our core retail portfolio, and 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 in 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 30,000,000 square feet of vacant space into a market estimated to be only about 540,000,000 square feet has caused pressures on leasing spreads for the recent to medium term. To help rebalance the market, retail landlords like ourselves have slowed the opening of new space significantly. And for example, we have only opened 1 Walmart anchored center over the 2016 to 2018 period for approximately 350,000 square feet. Whereas in the peak years, we would have opened 12,000,000 square feet over the same time frame. Ultimately, the retail marketplace will reach a new equilibrium as demand for space and population is still growing and physical retail will remain a core component of the shopping experience.
Despite all the perceived negativity in the market, the reality is that 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. And 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, and 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.
And as we look further forward, while leasing vacant or new space will require more effort than in the past due to portfolio churn, 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 2 premium outlet locations to continue to perform very well, Both are 100% occupied. And for Q1, sales growth at Toronto was up 6.5% and Montreal a very healthy 22 percent year over year. And the Toronto expansion remains on track to open in November this year, and we expect to be largely full by the time we open.
And work on 2 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. So with that, I'll pass the call over to Peter Sweeney to talk about our financing activities.
Thank you, Hugh, 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 5 years with a total value of approximately $7,000,000,000 of which our share is $2,900,000,000 However, because of the time taken to ramp up these initiatives, our actual funding needs for 2018, 2019 2020 will be only $60,000,000 $90,000,000 $90,000,000 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 2 years ago. As a result, our unencumbered asset pool has now grown to $3,500,000,000 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 unitholders.
For our payout ratio and distributions, we saw slightly higher lease allowances and CapEx during the 1st 3 months of 2018. And 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 2019, we do expect somewhat higher tenant allowances based on the tenant churn and the need to rework space to maintain occupancy that Hugh had previously discussed. But our target and our expectations are that our payout ratio will trend towards the 77% to 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 unitholders with stable and growing distributions. And with that, I'll now turn the call over to Peter Ford.
Thank you, Peter. Hugh 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 3 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. And 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 3 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. Now 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 1st class development partners. For example, Rivera, 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 5 projects per year together. Our fifty-fifty joint venture with Rivera sees SmartCentre's land developing and constructing the project, and Rivera will operate the finished residences. Center Court for the first three fifty five storeys sold out condo towers at Vaune Metropolitan Center.
The first two are under construction. The 3rd tower will commence construction in early June, and 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 Centre 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 square foot, 338 Unit 2 Tower Apartment Complex.
And of course, SmartStop, a U. S. Self storage developer and manager. Our fifty-fifty JV with them calls for SmartCenters to land, develop and construct, and SmartCenters will operate once complete. Five initial GTA sites are active with the expectation of opening 4 to 5 new facilities across the country per year for the foreseeable future.
So 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, and 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, and 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. But some other ones, Pointe Claire, Quebec on the island of Montreal, a 385,000 Square Foot Walmart and Home Depot anchored shopping center we purchased in 20 16. 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 would be 1 kilometer from our shopping center.
We've been working closely with the City of Point Claire on a master plan and have last month obtained zoning for 1,500,000 to 2,000,000 square feet of density. Detailed planning is underway for the 1st residential tower expected to be complete in 2020 to 'twenty 1. 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 the new GO train stop. With indicated city and provincial government support, this site is now designated for over 2,000,000 square feet of mixed use development.
Laval Center. This 43 acre site is anchored by a 160,000 square foot 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. Studio Center at Lakeshore Boulevard East, a new sound stage is open and the initial phase of development of office and retail has begun.
And the film studios are fully booked through to the end of 2018. South Oakville Centre. This center in Oakville was 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 square foot shopping center anchored by a Metro Food Store, Shoppers Drug Mart, LCBO, Good Life 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 5 years, we expect to commence development either alone or with various partners on an excess of 50 projects valued between $7,000,000,000 $8,000,000,000 Our share of this investment is nearly 3,000,000,000 euros And different from others, we'll be very diversified in terms of type: office, residential rentals and condos, retirement residences, retail and self storage and in terms of geography, a mix of urban and suburban and some midsized 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 $20,000,000 to $40,000,000 of profit per year starting in 2020 from the sale of condominiums and townhouses. And with that, I'm going to turn it over to Mitch to elaborate further on some of the exciting new developments in heart centers. Thanks, Steve. First, let
me comment that I'm very pleased to now be taking the position of Executive Chairman. I'm 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 bid markets across the country. And as Peter mentioned, we are reviewing and planning for intensification on virtually all of our sites.
You've heard and see on Pages 20 21 of the supplementary information package, many of them are underway already. I will be continuing to lead the team in these developments. And to us, these are very exciting times as development is still very much the DNA of smart centers. For an update on the Volley Metropolitan Center project, things are advancing quickly. If you've not been up here in the last 6 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 is ultimately going to be like a ultimately what is 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 TTC that the traffic at the BMC stations exceeding their expectations.
In fact, it is the busiest station on the extension. We always believe that would be the case, but there were predictions of others have always stops, such as York University. So 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. And 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 subway as their commute and to use the BMC as their regular stop of choice. These 900 stars stalls are full before 8 am each weekday. When you add to that busy pickup and drop off in the streets adjoining, is transferring to and from the subway and the more than 1300 employees working in the KPMG building, including the most recent tenant who 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.
If the regional bus terminal opens, which is expected to happen in May later this month. As we complete the mixed use tower that Hugh and Peter both referred to, Topping off was in April and that's the building that will be substantially occupied by Pricewaterhouse Coopers and YMCA and they open in the fall of 'nineteen. That will be an additional 500 employees at PWC and estimated 1200 daily visits to the YMCA. As we complete the 3 sold out 55 storey Transit City Condor Towers in 2020, There's 1716 units. Towers 1 and 2 are under construction, Tower 3 to commence in early June.
Design commenced now on the next phase with additional condo and rental residential components and a third office tower being as a result of interest from an anchor tenant. Overall, we now see 9,000,000 to 11,000,000 square feet being developed on the VMC 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 Highway 400. Well, not in the DMC technically, it is for all intents and purposes. We have slated this 20 acre retail site for intensification with potential of 2,500,000 square feet for redevelopment, including residential office and retail.
The site is a primary site under the Bon Fisher Plan and is just east of the 2 34 storeys that are sold out next door and the office tower as well that are now occupied. And just across from that, we own a site we call Westridge, which is at Western Road and Highway 7 and it's currently 430,000 square feet of retail with potential for significant retail intensification over time. This retail and intensification node is in and of itself could be seen as keep any company busy. But in our case and as Peter has described, it's just one of many opportunities. Finally, a few words about Hugh.
This is likely Hugh's last analyst conference call as Smart Center REIT's CEO. Hugh joined our Board of Trustees in 2011, agreed to be Interim President and CEO in March 2013 and then to a 5 year contract as President and CEO in July 2013. As announced in February, Hugh is retiring in June at the end of his contract and Peter will be assuming his CEO title. I would like to thank you 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 1 grounded on stable retail operating cash flow, but moving towards moving forward rather with an ambitious redevelopment intensification program on properties we already own. Hugh will remain on our Board and Hugh, 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's as well. So Stephanie, we'll open it up for questions now if you can, please.
Thank And our first question will come from the line of Michael Smith of RBC Capital Markets. Please go ahead.
Thank you and good evening and congratulations to you all the best in your retirement.
Thank you very much, Mark.
I guess, in terms of Vaughan Metropolitan Center, how likely do you think it will be that you'll announce another residential development this year and office development?
It's likely to announce. It's likely to very likely.
Very likely. Okay.
Announce a new residential phase. Yes. We believe that and not just us believe that there is a market for more residential at this time. I mean, to be aware, Mike, that there was
a 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. So 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 Y, would be closer to the subway, closer to transit, etcetera. So while pricing might be different, all of the other advantages that any potential resident would see in the market would clearly be there. And 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.
Well, that makes sense. And so does that mean it's going to be a condo or would it be a combination condo rental?
Yes. As I was going to say, we're anticipating we will be moving forward on a condo and rental residential. And yes, at least we anticipate at least those two forms.
Okay. Thank you. And Mitch, you had mentioned that there's another phase of office. And 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 corporate corporations that are interested in presence up here. So we're sort of anticipating that at least one of them will come to fruition. But in terms of that, I mean, that timing is going to be completely obviously dictated by the negotiation, however long it takes to negotiate a deal. But we feel good about the level of interest for from corporate interest and that it will result in a third office tower sometime in the reasonable near future.
Okay. Thank you. And just switching gears for the premium outlets. So I understand you're looking at some sites. I'm just wondering how that's going.
I mean, we continue to look at, as we've indicated, Mike, 2 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, but there is an alternate site that we're now actively working on. And so 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 the premium brand that outlets can still be successful in Canada. So we have Simon's 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. And 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. But for now, remain very pleased with obviously what we have. And as we note, the Toronto location is expected and will open in November and expect to be virtually full. So that would give us close to 500,000 square feet in that location in addition to the new parking facility we built and so on.
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 and good evening. And Hugh, 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 main the biggest one at the moment, of course, is Transit City. We anticipated it from day 1. We contracted with 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. So we're actually we're buttoned down on those for Transit City. I'll let Peter talk a little bit about some of it.
Did you already touch on that?
No, not really. We've tendered for the first two towers, we've tendered approximately 80% of the costs. And in the 3rd tower, we've tendered about 70% of the trade. So we're and we're doing better than budget even with all that tendering and with the tendering that's done. And we're really not we have seen some cost increases, but not overall not a lot.
There are some specific trades and Mitch mentioned them that have been issues. But I think the other party there are other reasons that project may have disappeared other than just cost.
And if you're talking about that, if you were indirectly referring to the one that was pulled, yes, there's probably more going on there. But in general, you do read about cost increases. But the difference here is that we're not buying sites at market and now and then having exposure to kind of construction costs inflation. I mean, we're building on sites we already own. And 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 costs inflation. But having said that, we are also obsessed with it. And in this case, we do have a partner who is like minded. So and then of course, we did button them down.
These are large buildings. So we feel pretty good that we're on budget. So going forward, we will be baked into our decision making, and 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.
So if you look at the projects, Henry, that are listed on Pages 20 21, philosophically, every time that we put performance into the market on expected returns, and we've generally been conservative in our expectations. We've expected some increases in construction costs, etcetera. So 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 SmartCenters for 20 years building, obviously large amounts of square footage and managing the cost of those projects incredibly closely.
Right, right. That's pretty helpful. And 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 interest in some of your core portfolio?
Yes, we do that as a matter of practice anyway. But given our large pipeline and development plan, we are we do look at it from the point of view of managing cash management and debt levels and all those things. So yes, we're going to stay way ahead of that. And so yes, we'll be as we develop further or make some decisions in that respect, we will, of course, be letting everybody know.
And not surprisingly, Pam, these stable cash flow coming from high quality Walmart anchor 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? Or is it still part of the overall discussion at the Board level?
It's not imminent. We're looking at it. 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 Hugh was saying, we're selling dominant centers.
And now, of course, in most of these markets, there is only a Walmart in terms of a general discount, general merchandiser. And so it's a dominant center with at least a Walmart anchor for long term leases. So we feel that we're pretty we have good liquidity if we did want and we see that as the right thing to do as we look at our cash flow going forward. So we're not at that point yet like to know whether it will happen this year or not, but 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, Hugh, 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 anchor sites and strong sites, you know that sort of the average size of our sites is in excess of 300,000 square feet. But these aren't 50,000 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 locking on the door, hence the 98.1 percent occupancy.
So 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. But generally, we're seeing good attraction and fairly decent rental rate increases.
But as we said before, Tal, yes, you will see I mean, if there has 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 would call normal market And 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. But 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. And then
just my next question is on Walmart. Obviously, the number of net new boxes going up each year is starting to slow down and they think they're north of about 4 10 locations now. They're such a big important partner of yours. How do you see their sort of need for space evolving going forward? Do you see an opportunity to continue to expand stores?
How do you see that sort of relationship over the next 5 years?
Well, the relationship is 30 years almost at this point. So the relationship is very, very good. We're still partners in real estate. We're certainly small partners in our Canadian overall is mutual, huge mutual reliance. So whatever Walmart does up here, we usually are somehow involved in one way or another.
So 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. So we anticipate that we would be involved somehow in whatever form that takes, which with Walmart is always evolving and that's one of the secrets to their success. So we've explored numerous different things with Walmart. They've explored numerous different things with us and of course the stuff at the moment is not expanding at the same rate as it was 5 10 years ago for various reasons. But they continue to adjust where in each market where necessary and a lot of that some of that has been expansions, inbox expansions.
But ground up brand new greenfield expansions have slowed and as you pointed out, I think we have 2 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. And Hugh, obviously, best wishes and 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 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. So they're obviously leveraging those global relationships and not surprisingly highlighting to future tenants the success of the existing site. I mean, if you use constant dollars, I don't do the exchange, then the Toronto site would probably be in the top 5 for Simon Properties globally. So as you can imagine, that means that it isn't the hardest thing to do to attract potential tenants to the Toronto property.
And so as Simon is 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. But 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. So just over to the credit rating, Peter Sweeney had mentioned what's needed to get up to be high. You mentioned the mix of unsecured versus secured debt and the absolute amount of EBITDA. But I'm just wondering on the coverage or ratio side, where you are today versus where you need to be to get that rating?
It'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. But our debt to EBITDA metric, at least to date, has not formed part of any discussions for rating increase with the DBRS people.
Okay. And final question for me is just on the sort of 5 year program, dollars $10,000,000,000 net the REIT share, clearly a fairly detailed analysis behind that. I'm just wondering over the course of those 5 years, how much of the existing income property portfolio would have to be demolished to facilitate that program?
Actually, not a lot. The focus 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 probably 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 we as part of that redevelopment, we'd be knocking that box down and doing seniors and homes and the townhomes. But and 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 that program is.
We don't see really losing any of the retail income as a result of the development in our 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. Congrats on your retirement. Hope there's lots of R and R in the near future for you. So I want to get a sense on the densification opportunities you have. You sort of cited building coverage at 25% to 30% of a lot of the power centers you have.
And 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? And 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 like a meaningful excess of surface parking space that you can use?
Yes. Okay. That's a good question. So I mean, surprise, the floor plate of a residential building, which is residential for starters, is surprisingly small. So it's really to put up 1 tower on a site is not hugely impactful on the parking because the majority of SmartCenters' parking is that great and they're large sites and we only have 25% coverage plus or large.
So and then, of course, the majority of the parking for the new development, the intensity of the tower would be underground or decked parking. So 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. On a subway, you might have a quarter or half a car per unit. And if you're somewhere else, you might have something between a half to a whole car per unit. But that would be for the most part provided underground or and that would be part of the pro form a 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, have over parked our sites for the high volumes that we not just over parked our sites, but we our accesses are also overdeveloped for high volumes because that's the kind of tenants we've always wanted. We've never wanted customers never have a reason not to come to our centers. But as it is, especially with the urbanization of large cities across the country, the parking ratios required for retailers has gone down. So retailers like ours are not demanding the same parking ratios because there are more people living close by and or taking mass transit. So 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. I mean, again, they're big sites. You may have a Walmart that stipulates that there has to be a parking ratio within within the area outlined in yellow on Schedule Z, and that could be 12 of 40 acres. So but having said that, 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 in the world continuing to spend on its axis. So those we don't anticipate to be an issue in terms of anywhere we have to amend the parking ratios. By the way, if you want to use a general rule of thumb and don't, this is a general rule of thumb, 25% coverage is very low coverage.
30% coverage would be considered fairly high coverage for retail. So within that 5%, there's a lot of parking or a lot of building. And somewhere in there, depending on the market, you really need to understand the sweet spot when the place becomes too congested or which is not parking on peak times of the year, stuff like that. So when you get into 30% to 35%, you're getting into pretty high density for retail, but you can do it if you have mass transit and so on and so forth. So those are the sort of margins.
We are probably by far the lowest coverage of any retail owner in this country or maybe even in the continent and was very deliberate and wanted to hit, it was very much part of the strategy. So the whole company's pro performance is based on variable coverage.
Okay. That's very helpful. With regards to the occupancy, I just want to reconcile a couple of comments. Given that it was sitting at 98.0 percent for March 31, and I think it was Hugh 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.
So I'm just thinking over the next few quarters, when you're looking at the occupancy rate, do you expect it to have some sort of some noise to a 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 are some leasing activity that you're anticipating over the near term?
The churn that you 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. So 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 maybe they should be in an enclosed mall or not. And as you can imagine, they're finding out that the traffic in the enclosed mall isn't any better without the anchor in that enclosed mall as well. So while they're figuring out their strategy, we may dip below the above, but we're finding that tenants are typically saying to us, hey, I want to consider that, but I be with you guys.
So we're looking at the rental rates, and that's where you may see the for some of those tenants, while they figure out their retail strategy, a smaller rental increase for them or no rental increase for them. But we anticipate keeping it at that rate, at that overall occupancy rate throughout the year.
Okay, great. Thank you. Yes.
I just wanted to add that you need to keep in mind that Sears and Target are in and of themselves, they're significant onetime events. When leased or redeveloped, I mean, they will be for all intents and purposes, they will be less square footage per capita at the end of the process. The process is very what is ongoing and most of it is with professionals and everybody is looking at what they can do every day to reposition those spaces.
But when it's done, there is very
little new space being built. So we anticipate once the reconciliation of those spaces is done that the market will be really very different. This is a temporal condition. But notwithstanding that, we feel that we pretty much plateaued as where we are in terms of the purpose of your original question. But 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.
So just 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. Hugh Thomas for closing remarks.
Thank you very much, Stephanie. And I guess two quick thoughts. My thanks to Mitch and everybody in the room for all of their support over the last 5 years and obviously to anybody on the call I've had the pleasure of working with. And thank you for the sentiments expressed and obviously for the support you've given us over the last 5 years. And I hope you'll give Peter and Mitch at least that going forward.
Otherwise, thank you for your time tonight. And obviously, we're available for any follow-up calls as appropriate. Have a nice evening. Bye now.
This concludes today's conference. Thank you for your