Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q1 2022 Conference Call. As a reminder, if you'd like to queue up to ask a question, please press star one. I would like to introduce Mitchell Goldhar. Please go ahead.
Good afternoon, and thank you for joining us on our Q1 conference call. I am Mitchell Goldhar, Executive Chairman and CEO, and joined by Peter Sweeney, Chief Financial Officer, and Rudy Gobin, EVP, Portfolio Management and Investments. Our commentary will refer mostly to the outlook and mixed-use development initiatives section of our MD&A, which is posted on our website. I refer you specifically to the cautionary languages on pages 1 through 6 of the MD&A materials, which also applies to comments any of us speakers make this afternoon. Overall, we are pleased to report Q1 delivered solid performances in all areas of the portfolio. Operationally, the durability of our tenants once again revealed itself in the quarter with strong performance and demand for space in nearly every tenant category. Retailers are experiencing a resurgence of customers to their stores and sales improvements.
We're looking into new locations, extending lease terms, and asking for more options to extend their leases. The latter is an important metric engaging the future through the eyes of those on the playing field of Retail. For the first time in nearly two years, we are experiencing competition for space with multiple players. This improvement has been seen in our stronger cash flow, which approached 98.5% by the end of the quarter and is expected to cross 99% shortly. As Retail and e-commerce continue to evolve, physical retail locations are clearly playing a central role in both platforms. At the end of the day, hyper locality will be even more advantageous in delivering food, general merchandise, and other categories to the public.
Our regionally strategic locations, which are virtually all Walmart or grocery anchored, are perfectly aligned with this trend and are increasingly becoming the origination for online fulfillment, quick pickup depots, expanded offerings, and of course, physical shopping. We believe Canadians need, and more importantly, deserve a fair deal. We have always positioned ourselves with that belief. That's why we have always prioritized tenants who are like-minded. That is food and general merchandise at fair prices. This has and continues to serve us well. That's also why our portfolio, comprised of nearly 95% strong national and regional tenants, provides the financial stability that has returned us to the near 99% rent collection and industry-leading 97.2% committed occupancy by the end of the quarter.
This has allowed us to maintain full distributions to our unit holders through these unprecedented times, a defining feature that we continue to be proud of. Notwithstanding, these lean, high-performance Retail assets are merely a starting point for our ultimate vision of adding a mix of uses to our properties, including primarily residential density. In that regard, SmartLiving, our new wholly owned in-house residential brand, has been extremely active, unlocking embedded NAV to our unit holders in a number of highly accretive projects across the GTA, the MTA, and across the country. Here are a few of the highlights of the quarter. Phase I of SmartLiving's ArtWalk launched last quarter and is already exceeding expectations. ArtWalk is a mixed-use neighborhood representing 9% of our flagship 105-acre SmartVMC development in the TTC-oriented and connected Vaughan Metropolitan Centre.
Located on the former Walmart parcel, when fully complete, ArtWalk will consist of 5 million sq ft of density, including 5,000 residential units and up to 150,000 sq ft of non-residential buildings such as innovation and community engagement space. The phase one release of over 320 condo units is sold out. It is worth noting that SmartCentres REIT owns 50% of these condos, twice as much as the 25% ownership in Transit City condos. As you may recall, in January, SmartCentres more than doubled its ownership in SmartVMC by acquiring a two-thirds interest in 53 acres within the 105-acre master planned SmartVMC city center. This acquisition united ownership across the property, making SmartCentres the largest owner in Vaughan's dynamic TTC subway-connected downtown.
Following on the heels of this acquisition, and in addition to ArtWalk, we commenced the presale activity two weeks ago, one month or so after ArtWalk, yet another VMC neighborhood, Park Place Condos. Park Place is 1,100 units across two luxury 56-story and 48-story towers, along with service retail in a podium of contemporary design. This million-plus sq ft complex will be built on just two of the 53 acres recently acquired, and it will overlook the VMC's 9-acre Central Park, which unifies through green space the entire SmartVMC. Initial presales in these projects has exceeded expectations, and we plan to commence construction later this year.
Also within Smart VMC, we completed the remaining 100 and 192 condo unit closings in Transit City 3 tower in 2021, bringing the total to 1,741 units closed in the first three Transit City towers, delivering over CAD 60 million in FFO to the REIT at 25% share. As part of Transit City 1 and 2, we also plan for the construction of 22 townhomes, all of which were presold and are now virtually complete, with delivery expected in the second quarter of this year. Finally, within the Smart VMC, Transit City 4 and 5 continue to be on schedule with expected closings in 2023. Transit City 4 is built to the penthouse, and Transit City 5 is currently built to the 44th floor.
The Millway, the first purpose-built rental tower in Vaughan, is built to the 34th floor of its 36 stories and is now accepting applications to rent, with the first apartment units taking occupancy later this year. This is being leased out of our SmartLiving Discovery Center across from the subway station right here in the heart of SmartVMC. These development updates are a small subset of our current permissions in place. 283 mixed-use projects have been identified, mainly on land already owned, which are expected to result in over 40 million sq ft being added to our portfolio over time. As these come on stream, you will begin to see the NAV growth and fair value increments on completion of successful land use entitlements, combined with the thoughtful commencement of each development initiative.
We currently have over 3.3 million sq ft under construction, which includes six rental apartment buildings, two in Mascouche, one in Laval, two in Ottawa, one in our flagship SmartVMC. In total, we have 65 projects either underway or for which work is currently being undertaken to start construction in the next two years. While SmartVMC represents our vision of the future, it is only one of 93 REIT properties currently slated for intensification. Pages 23 through 26 of the MD&A highlights over 20 mixed-use projects totaling in excess of 55 million sq ft of net incremental density to be built, some with partners and mostly on undeveloped land within our existing portfolio upon approval of all. On the financial side, maintaining our conservative balance sheet is always a priority.
With an unencumbered pool of assets in excess of CAD 8.4 billion, a 42.5% debt level, and significant liquidity, which Peter will speak to shortly. As always, we continue to only move forward with capital-intensive construction initiatives as market conditions warrant, sufficient presales occur in the case of condos, and only when financing is in place. Lastly, in today's environment, businesses face numerous challenges, including competitive pressures, economic inflation, to name a few. We take these challenges and associated risks seriously. We are strategically planning, implementing mitigating strategies, and executing deliberately for the long-term success of the portfolio. This includes planning for other changes such as climate change and aging population and inequality. At SmartCentres, we prefer to do the right thing and have the results speak for themselves.
Our actions over the past three decades speaks to our commitment to the communities we serve. As we have said before, ESG is woven into the fabric of our organization. ESG is embedded in everything we do and how we oversee our business, engage with our communities, and develop and energize our associates. Although ESG is getting much more attention as of late, it is not something we just started talking about. It has been part of our DNA since the beginning. When you assess our portfolio, you can see these principles applied everywhere. We've been working to formally improve our retail centers through BOMA BEST certification, through improved resource management, occupant safety, and shareholder communication, and continue to work towards an 80% certification by the end of 2022.
Further, our CAD 15 billion-plus predominantly SmartLiving-focused transformation plans to enhance Canadian communities are focused on Canadians' desire for transit-connected, pedestrian-focused homes with urban amenities, which contributes to the quality of the built environment and promotes sustainability. We are actively working on our ESG report, which will tell you more about our ESG priorities and rollout. Stay tuned. We are grateful for the exceptional work of our talented and dedicated associates who represent the diversity of our community and the customers we serve. Given all of this, and notwithstanding the current economic climate, we see tremendous NAV creation being generated by our skilled development team, executing and focusing on intensification and centered around the best fit for each community. Let's not forget our leasing team, our stable of existing retailers and industry-leading occupancy that has set the stage for all this exciting growth.
With that, I will turn it over to Rudy Gobin for our operational update.
Thank you, Mitch, and good afternoon, everyone. Throughout the first quarter, we saw the underlying strength of our centers in driving leasing activity and customer traffic. Tenants in virtually every category were back seeking more space and locking up locations in our high-traffic centers. With virtually 100% of the leased properties having a full-line grocery and near 70% including a Walmart Supercentre, a wide variety of tenants were back adding locations to our well-located centers, including dollar stores, the TJX banners, furniture, health and beauty, QSR, medical uses, full organic and specialty grocery stores, distribution and logistics, home decor, pet stores, and much more, all driving more traffic and improving our tenant mix in each community. Here are some highlights. We closed the first quarter with 97.2% occupancy.
Virtually all of this change from Q4 was the result of one tenant, Home Outfitters, which closed all locations in Canada, four within our portfolio. You may recall that we negotiated a favorable buyout of a significant portion of the remaining 2022 to 2023 rents with this tenant in Q4. We received payment, and now we are close to renting three of the locations at the same or slightly higher rental rates. With this, we see occupancy improving in Q2 and throughout the balance of this year. At the quarter's end, we have already completed or nearly completed 3.7 million sq ft of the 2022 renewals, representing 74% of the maturities in the year. Over 150,000 sq ft of leases were executed in the quarter for built space.
New entrants to the market in a number of categories have started with strong interest in our open format and resilient portfolio. We continue to work with our tenants, helping them to adapt any way we can in meeting their real estate needs, which gives them the flexibility they need in a valued partnership. We've been fortunate with no creditor filings in 2021 through to the first quarter of this year, which reflects the quality of our tenants and hopefully reflects that the worst is behind us. From a rent collection perspective, we ended the quarter at 98.5%. This is expected to improve throughout quarters going forward, and again, demonstrating the stability and the financial strength of our tenancies. Regarding our premium outlets in Toronto and Montreal, both continue to improve on our 100% occupancy.
With the pent-up demand, accumulated disposable savings, and the returning tenancies, we have a solid start for 2022 with near 100% cash flow. From all perspectives, 2022 is shaping up to be a strong year in Retail and especially in the value segment, an area where we dominate. As we have said before, this portfolio was built for heavy weather. Our high-quality tenants are adapting, customer traffic is improving, occupancy and cash flows are back to near pre-pandemic levels, and most importantly, all of this is happening concurrently with the extensive mixed-use development initiatives already identified or underway in over half of our centers, translating into significant NAV growth to come. With that, I will now turn it over to Peter.
Thank you, Rudy, and good afternoon, everyone.
The financial results for the first quarter reflect the continued steady improvement in our core business that Mitch had mentioned earlier. For the three months ending March 31, 2022, FFO increased by 9.4% or CAD 8 million over the comparable quarter last year. This increase resulted principally from improvements in NOI, lower ECL provisions, lower overall financing costs, and contributions from our total return swap initiative as compared to the prior year's results. On a per unit basis, FFO with adjustments increased to CAD 0.52 per unit from CAD 0.49 per unit for the same period last year, and this level for 2022 includes the impact of CAD 200 million in new units being issued in December 2021 to accommodate the REIT's purchase of a two-thirds interest in SmartVMC West.
The results also reflect IFRS fair value adjustments in our investment property portfolio, representing CAD 271 million for the quarter, resulting in the REIT's total assets now exceeding CAD 11.7 billion. CAD 241 million of this substantive increase is a result of progress in the zoning and entitlements process associated with several strategic properties, together with improved market conditions, and is consistent with the approach to valuation for our development properties that we discussed on our last call. It is important to note that as we continue to advance additional properties through similar zoning and entitlement processes, we will be assessing the appropriateness of similar adjustments in the future.
Given the cash flow generated by the business, our rolling 12-month ACFO payout ratio ended the quarter at a very respectable 91% level, and this level reflects the continuance of our annual distribution level of CAD 1.85 per unit throughout the pandemic, as Mitch had previously mentioned. These financial metrics have followed a consistent trend over the last several successive quarters, demonstrating steady continued growth in the operating platform of our core business, and they support our growing development pipeline that is expected to provide unitholders with FFO and NAV growth for many years to come. We have also continued to focus on further fortifying the strength of our balance sheet. In this regard, we note the following strong debt metrics for the first quarter of 2022 as compared to the comparable quarter in 2021.
Firstly, our debt to aggregate assets ratio has now improved to 42.5% as compared to 44.7% in the comparable period. Secondly, in keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, unsecured debt in relation to total debt increased to 75% from 69%, and our unencumbered pool of assets has now grown to an excess of CAD 8.4 billion. We continue to employ a strategy to repay most maturing mortgages, and accordingly, we expect these metrics to further improve in the future. This strategy permits us further agility when considering opportunities and alternatives for a portfolio of mixed-use developments.
Thirdly, pursuant to our refinancing activity over the last 12 months, our weighted average interest rate for all debt continued to decrease, and at the end of the quarter was 3.09% as compared to 3.26% for the prior year comparable period, while concurrently, our weighted average term of debt continues at approximately five years. This continued focus on both the weighted average term of our debt and fixing interest rates is deliberate and is yet another example of risk mitigation strategy that we have employed for several years now to insulate the trust from interest rate volatility as we are currently witnessing in this rising rate market. As of March 31, approximately 85% of the trust's current outstanding debt is fixed-rate debt, which provides tremendous stability during periods of interest rate volatility.
Lastly, our interest coverage ratio net of capitalized interest improved from the prior year level of 3.2 x- 3.5x . This in spite of the impact that COVID-19 has had on our operating results over the last two years. In addition, it reaffirms the foundational strength and stability of our core business, providing us with a substantive advantage from which to fund our pipeline of development activity and refinance maturing debt. From a liquidity perspective, for the first quarter, cash flows provided by operating activities exceeded distributions paid by CAD 20.5 million. Notwithstanding the macro challenges that have resulted in tremendous volatility in the capital markets over the last 24 months, our business has continued to demonstrate its unique ability to generate sufficient cash flow to fund both operating needs and distributions to our unit holders.
As we look to the immediate future and continue to manage through the current uncertain capital markets environment, in addition to the conservative debt metrics noted previously, consider also that when factoring in our cash on hand, together with our new CAD 300 million facility that was established subsequent to year-end to support the VMC West acquisition, the CAD 150 million new revolving line of credit that was completed last year, and the CAD 250 million accordion feature associated with our existing CAD 500 million operating line. Our liquidity position of an excess of CAD 675 million provides appropriate flexibility for the capital funding requirements associated with our pipeline of development activity.
In this regard, we anticipate our requirement for additional funding over the next 12 months to be limited to construction and any potential acquisition financing requirements that may arise, as the next series of debentures in our debt ladder does not mature until May of 2023. Finally, it is important that we confirm our unwavering commitment to our balance sheet. It has withstood the unprecedented challenges that the past 24 months have proffered. It has permitted the REIT's development plans to continue without delay or impediment, and it is in a position to serve as the backbone to fund and support the vast array of opportunities that lie ahead for SmartCentres. Now I will turn the call back to Mitch.
Thank you. As you can tell, the portfolio remains strong and continues to improve. Our tenants are our priority, and we will continue to strengthen our centers with new and exciting additions catered to each community. We also continue to focus on every detail on every project, and we are building our mixed-use intensification project through our new SmartLiving brand, a name that you will continue to become more and more familiar with. With that, I will now turn it over to the operator to address any of your questions. Thank you.
As a reminder for people on the phone, if you'd like to queue up to ask a question at this time, please dial star one on your phone's keypad. If ever you wish to withdraw from the question queue, press star zero. We already have one individual queued up. Michael Markidis from Desjardins Capital Markets. Please go ahead, Michael.
Hi. Thanks. Good afternoon, everybody. I just want to start off. I don't know if this was particularly new, but it did stick out to me within your commentary in the MD&A. I was just curious if you could provide us with a little bit more detail and color around the repurposing space for logistics comment that was in there. Are there any examples of that in your portfolio today?
Yeah, sorry. Yeah. No, I think Michael, thanks. You know, I sort of was in a sense referring to that in part when I was talking about how Retail is and retailers are using the Retail space. They are adding, you know, some of the e-commerce fulfillment through their physical spaces as well as interestingly enough, we've had entire spaces being leased for actual logistics and fulfillment. Yeah, I mean, that's what I was referring to in my opening remarks. It's kind of cool because we've leased some pretty big spaces to some logistics facilities right, you know, right in our retail centers.
Okay. That's interesting. On the vaccination centers, I appreciate that's an add back of non-recoverable OpEx and rightly so in your FFO calculations. What I'm more interested in is, are these centers counted as occupied space in your occupancy? Would be the first question, and are you receiving rent? I think the answer on the latter is no, but I'll just want to confirm that.
Yeah, we'll go in reverse order. No, we didn't charge the vaccination centers. You know, we did that on behalf of, you know, everybody, for the communities that we're in. Something we don't talk about a lot. It was mentioned today, maybe for the first time, but we are in these communities and have been for decades. You know, we don't talk about it much, but we're involved with so much in these communities. They don't just shop with us. They know us. We're their shopping center that they grow up with. We're involved with lots of community activities. Vaccination centers, you know, when we do something like that, it's great for, you know, the communities that we serve.
No, it's in terms of. It's not part of our occupancy, either.
Okay. Okay. Gotcha. No, because what I was trying to get to is I was wondering if it was in your occupancy in the actual upside on lease, it would be higher as these hopefully are not used in the future. Then I guess just to close off on that point, are they now shutting down? Will this be
Yeah.
Space to be given up?
Yeah. Keep in mind also, Michael, some of them are actually. You know, they were available in part because we're redeveloping some of those buildings, so they were available for that reason. Yeah, it was just also, you know, whatever, you know, was good that they were available for the vaccination center purposes, but they're actually redevelopment spaces.
Got it. Okay. Last one for me. Saw the note on the consolidation of the remaining 50% interest on the three properties. Just curious on the capital recycling side, if there are any dispositions that you've got planned for the rest of this year.
Yeah. I mean, small, but it's not inconceivable that something will happen. In terms of official, I would say, you know, at the moment in terms of dispositions, we don't have anything imminent. We are doing other things. I mean, if you're really asking about capital raise, I mean, we're doing a lot of things for capital raise, but a dispo, you know, is not imminent. Although it could happen before year's end. Lots of dealings with potential partners on a number of these developments. You would understand, since we emphasize that we are developing our owned properties, that partners come in at market. That is very much an active area for, you know, capital raising. Yeah.
Okay, great. I have a few more, but I'm gonna turn it back and requeue it, if you don't mind.
Your callers, happy to take you if you want to call later.
Thanks so much.
Thank you, Michael. The next question is from Tal Woolley from National Bank Financial. Please go ahead, Tal.
Hi. Good afternoon, everybody.
Good afternoon.
Peter, maybe we can just start quickly. I appreciate you don't have any major refinancing to do for this year, but if you were seeking mortgage financing or unsecured financing right now, what sort of rates do you think you'd be getting shown?
Well, as you would know, Tal, it's a function of term. Anything that would exceed seven years currently, we'd be looking at something in excess of 4%, at least for now, Tal. Again, what we're thinking about for now is that we've got lots of runway available for the next almost three years when we look at our debt ladder. To the extent that we've got any of our mortgages maturing during that timeframe, you know, there is an opportunity for us to fill in that debt ladder for the next 2-3 years with just essentially shorter term renewals. Presumably over the next several years, I think it's fair to say the market is expecting to find its way back to lower interest rates.
At least that seems to be the consensus these days, especially on the longer term stuff, just because of some of the concerns that seem to be out there currently due to the macro events. We may find ourselves by the time we have to go back into, you know, the major markets, a year and a half or more from now that we think more seriously about longer term financing options. For now, Tal, anything that we're at least thinking about would be shorter term. The rates that we would expect on those shorter term facilities would be commensurate with the rates that would be in place on those maturing facilities. We wouldn't expect.
I guess my point is that we wouldn't expect a tremendous dilution of FFO as a result of any financing activity that has to take place over the next 18-24 months.
Okay. Just from the DBRS, the trend watch, when do you expect to see a resolution on that?
That's a question that perhaps is better asked of DBRS, Tal. As you would expect, we're in continuous dialogue with them, and keeping them abreast of our progress at all levels. I think with respect to, you know, how they view the world and certainly how they view SmartCentres credit is really a question. You know, their timing on assessing us is really a question that maybe we should be asking either of them.
Okay. That's fair. Just on the self-storage joint venture, obviously your partner is pursuing an IPO right now. Are their plans sort of changing at all with, you know, this evolution in their life cycle? Like, do you expect the JV to sort of continue as planned, or do you expect that could change going forward?
It seems like it's, I would say, unchanged or even maybe more, maybe a bit more aggressive. Definitely not slowing down.
Okay.
Lots on the go with them on existing sites. Actually they bring us, you know, we've got that kind of arrangement with each other. They actually bring us into some of their deals, just give us the option to, so it's got great momentum.
Okay. Just on the staffing side, you know, there's this, you know, sort of coming out of COVID, there's obviously been a lot of factors, you know, that have, you know, caused people to look at, like, different careers. I'm just wondering if you can talk a little bit about, turnover and hiring for, you know, on the development side and then your core leasing, how that's been over the last little bit.
Well, I mean, one thing. We've always been a pretty strong. Like we've had, you know, pretty strong gravity for people in development, especially young people, because it's just a good place to be if you're interested in development. You know, development is a generic term. It could be a land use planner, it could be financial analyst, you know, it could be even, you know, like a junior architect. Could be an MBA, 'cause you're thrown right into it here. You do see things happen that you work on within a few years. Luckily, when it comes to development, I think we're considered, you know, a good place for a lot, you know, for people.
We do attract a lot of people interested in development. It is a young, very energized, cool kind of department divided into business units, like regionals, regions across the country. With respect to leasing, I mean, we have a very stable leasing group. In general, you know, we're also seeing. You know, we're also experiencing turnover and, you know, the same challenges everybody else is experiencing in all sorts of departments. I would say, you know, those two departments that you specifically named, those are two, you know, areas of our very, very much our sweet spot expertise. We have very stable. You know, we have a stable, you know, we have stable when it comes to HR.
Okay. This is a sort of a broader question, I guess, just about real estate markets in general and how I just, I'm wondering, you know, we're seeing some weakness on the, you know, the Residential side of the market now as rates have climbed up. I'm wondering if, like, either yourself or anyone else on the team there, like, can you just talk about how you think about what that weakness in that particular slice of the real estate world? Is there any chance that that sort of bleeds into other parts of commercial real estate in a way that maybe we wouldn't immediately register sitting here from the outside?
It certainly is a little weaker in terms of the Residential. It's a good thing I think ultimately. You know, it's always hard. You know, these things sometimes get overcorrected or whatnot, and so we can't know how that's all gonna play out with Residential, but it's a little bit softer for sure, which is good. Hopefully construction prices will follow, you know, a little bit of pressure, downward pressure on construction prices will follow. We don't feel it in the other commercial sectors like, you know, Retail's got a little bit of a tailwind, I would say right now.
Office, believe it or not, I mean, we have some Office deals going on that are not insignificant in terms of space, like would result in new space being built for Office. I mean, we're gonna spec on a little office building actually up here in VMC. Don't feel it there yet. Like it's. I don't wanna get into it, be maybe too much for right now, but. The industrial seems to be coming off a little bit, but that was kind of sky high, so still strong. I don't know. I don't see it, kind of, you know.. . You know, there's gonna be a general economic macro slowing down, but, I don't think it's just off the froth.
I don't think it's gonna be, like some kind of contagion.
Okay. Just lastly, phase I in Cambridge, what sort of size and scope, you know, will that be? Like, is it 1 million sq ft? How are you looking at phase one?
Well, somebody earlier asked about the vaccination center. I mean, that's where phase I is gonna be there. Yeah, I mean, no, I would say it's gonna be, you know, a tower with some mid-rise, like a six-story, 4-6-story product, which will be rental. The tower will likely be condo and then some townhouses. It won't get up to 1 million sq ft, but it's just based partly on kind of the market. You know, what we think the combination of the absorption rate is, where we feel, you know, we've got the space available to knock down. Then slowly but surely, we're gonna move tenants around and just continue that. It's not small.
I mean, what I just described would be probably, goodness, you know, 5, 6, 7 acres of land initially. Yeah. Strong demand for our markets like Cambridge. We're finding like, you know, the market just saw a lot of COVID-related things have played into the Cambridges and the Allistons and the Kincardines and Owen Sounds and, you know, Carleton Place and The Dairies. Some of these markets where we're doing, you know, Residential. We started that long before, but the market's kind of come to us in those places, which is great.
Okay. That's great. Thanks very much, everybody.
Thank you.
Thank you, Tal. The next question is from Dean Wilkinson from CIBC World Markets. Please go ahead, Dean.
Yeah, thanks. Good afternoon, everyone. Just one question from me. Peter, have you seen any widening of the spreads on unsecured versus secured debt, or has it just moved up lockstep with the rate move and what mortgages are doing?
No, I think it's fair to say, Dean, particularly over the last month or so, we have seen a widening of spreads on our bonds. That's for sure what we've seen relative to what may be available to us in the secured market.
By how much would that have moved, do you think?
Well, I mean, if we're assessing it at the end of March, and granted, March is now a month and a half almost ago.
Yeah.
Certainly at the end of March, if we were looking at our 10-year term debt, the spread on a mortgage would have been about 130-140 basis points. The spread at that point on unsecured debt would have been about 50 basis points higher than that. Typically, as you probably know, we look anywhere from 20-40 basis points as a spread-
Yeah.
...between mortgages and bonds for 10-year term type facilities. Obviously they're wider by at least 10, maybe even up to 25 basis points.
20 points. Right. Don't blink. That could change. That's all I have. Thanks, guys.
Thank you.
Thank you, Dean. The next question is from Mario Saric from Scotia Capital. Please go ahead, Mario.
Good afternoon. Mitch, I want to come back to a comment you made about accessing different sources of capital, including selling land at fair market value to potential JV partners on the developments. Is that something that's kind of far along enough that you feel comfortable kind of quantifying the range of those types of sales you could do this year?
Maybe not yet, but it's moving along. There's interest from very, you know, we consider to be, you know, very long-term minded, like-minded institutions. We're not at the point of knowing exactly, you know, what the magnitude is yet, but, you know, various banks, including your own, have been involved with us on that. It's going very, very well. I didn't mention I guess maybe I should have, but there's other initiatives going on, like we sell condos. We're in a sense de facto raising capital, creating capital. We do have always at our disposal the ability to just sell a parcel instead of bringing in a partner, you know.
We hold that in our hip pocket as well if we want to execute on that, which is very, you know, quick and reliable, you know, can be extremely lucrative. By the way, just in terms of the nuance there, like what we're looking for in the partnerships are more the income, the multi-res, whereas if we were to sell something off, we could sell something off for a condo. I can—I'm sure you can imagine the difference in terms of what that would mean in terms of equity raise. We're not really looking for partners per se, so much in condos, but more so in the, you know, in the multi-res—in the multi—in our multi-res portfolio.
Okay. No, no, that makes a lot of sense. Maybe an associated question then in bigger picture. Clearly you're very long-term in nature in thinking with respect to the vision and strategy in terms of what you want to accomplish. There's been a lot of volatility in the public markets in the short term. I think it's safely down about 15% year- to -date. It's not gonna outperform that, but you're still down overall. How, if at all, has kind of the short-term volatility in the public markets, which I think are essentially saying cap rates for private market assets are going up at some point in the not too distant future, changed kind of the capital allocation decision for you in the near to medium term?
Like for example, if you're coming into 2022 with certain targets in mind and goals, do that influence at all in terms of what you've seen in the public markets in the short term?
No, and yes. I mean, it's not changing. I mean, you know, value creation is in the approval really, a lot of it. The exposure and risk is on the execution, you know? We will obviously weigh each time, like we say, before we go forward. You know, there'll be a different market for each one of these property, you know, each one of these developments. Yeah, I mean, cap rates may be going up on certain things and prices may be coming down, sale price, but construction prices may be coming down and it just may pencil very nicely, and we'll proceed. If it doesn't, we won't. That's, you know, to say nothing of the cost of debt. I mean, you know, we're gonna weigh those things each time.
We're going to continue forging ahead, investing in our land exchanges and set the stage. It's not all long term. It's been going on for a long time, so it's short, medium, and long term. It is a long-term strategy, but it's been going on for a long time, so a lot of the fruit is you know starting to bear fruit. Like, the capital markets rising or depressing our unit price is not going to affect our investment in the long-term strategy. Just will maybe. Depends on how we raise capital and what the overall dynamics are influence whether we go or don't. We don't have to do anything, okay?
Like, you know, our Retail, our value retail is doing very well, you know? We don't have to do anything. I mean, our company's value is based on our Retail income. Like, there's no value in our stock on all of this stuff that we spend time talking about. Like, we don't actually have to do anything. We don't have to grow into some unit price based on future development profits. You know, if the planets are all misaligned, we'll continue to operate our value-oriented retail, collect our rent, and, you know, wait for the planets to line up. I think we're in a very enviable position, but that's because we don't go around buying land at market and haven't. You know, we've got lots of great land, tons of surface parking, and we're, you know, we have development expertise.
You know, we're not gonna bet the farm on any of this, and we're not gonna go forth blindly. We'll just operate our shopping centers and collect our rent if that's what the right thing to do is.
That's interesting. Have you seen any initial kind of cap rate changes for Walmart anchored, you know, high quality Walmart anchored malls, to date? Like, we keep hearing about these new cap rates are coming out, but is there any indication whatsoever that they're actually happening?
You know, we feel resistance for cap rates going up on our stuff or our peers with this stuff. We feel resistance. I think they value the. I mean, the cap rates are not low on our stuff. I mean, you know, if you're talking, you want to talk about low cap rates, I mean, you know, look at industrial, look at REITs. I mean, we're at, like, you know, close to 6%, you know, 5.8 or something. I mean, seriously. You know, we feel resistance for our cap rates to go up, but that's at the moment from our perspective.
Okay. Thanks.
Okay.
For what it's worth, like.
Maybe, Mario, just to finish what you just saw here. Our appraisers, by the way, were of a similar opinion in assessing the portfolio's value at the end of the quarter as well. When you speak to the major appraisal firms in Canada, I'm sure you'll hear a similar sentiment to that that Mitch just shared.
Yes. Well, for what it's worth, I took my kid bowling to your South Oakville center, a couple weeks ago, and I knew about the value of that asset land. I thought the mall was very significant, so.
Well, I hope you went into the Metro and did some shopping while you were there.
I didn't, but my wife did, so you're good.
Perfect.
That's it.
Thank you.
Thank you, Mario. The next question is from Pammi Bir from RBC Capital Markets. Please go ahead, Pammi Bir.
Thanks. Hi, everyone. Maybe just coming back to the comments on stronger leasing and, you know, we've heard actually competitive tensions mentioned a few times over the course of this earnings season, I guess, with tenants. Does it feel like you maybe now have some better pricing power going forward? Did Q1 perhaps mark the turn towards stronger leasing spreads?
Hi, Paddy. You know, because of where we're located and because of the tenants that struggled during the 2020 start of the pandemic and what's happening now with the new entrants coming in, everyone is searching for space that already exists as a starting point, and we're doing new build. What we're finding is we're finding a competing uses from different categories even. Like, we will have food in organic and food in specialty and mainline and discount food banners competing with the likes of the TJX and the Michaels and so on, furniture. So it's very interesting what's going on now. All of them feeling a little bit more bullish about coming back, the physical retail coming back with customers coming into the market.
I know Mitch sees this all the time. We talk to tenants all the time about their real estate needs. That's the kind of competition we're seeing and a lot coming in, even in the smaller spaces, the QSRs. You know, pet stores, you know, you can't go anywhere now without seeing someone walking their dog. All of the pet stores, PetSmart, Ren's Pets, Petland, Pet Valu are all, you know, health and beauty
Very, very active. Health and beauty from the U.S., health and beauty here in Canada. All the discount categories, again, you know, the dollar stores and so on are all wanting to lock up spaces quickly in these and especially in the enclosed format, right? So when you add all of that up, we are seeing some very good activity and keeping our folks very busy trying to figure out the best fit and for each of these centers, because it's a little bit different.
No, that's good color. Yeah, we've visited a few of our pet stores with the new pet as well. I want to maybe go back to ArtWalk, the comments you made there. It's the first, I guess 320 units are sold out. I apologize if this was mentioned. I don't know if it was mentioned on the last call or not, but what was the average price per sq ft on that initial phase? I'm curious if there's been any signs of how you're thinking about Park Place once the sales actually start there.
Yeah. No, you're right on by the way, we did not mention it. Everything you said is totally accurate. Yeah, ArtWalk was sort of in the CAD 1,150 range average. Park Place, as you said, we haven't actually gone to market. We put out a price sheet. I already know there are people walking in every day giving checks without even having contracts to secure units in Park Place. So good, needless to say, good, you know, prognosis there. The pricing there is a little bit, you know, on average between the closer to CAD 1,200. So, I mean, average.
Interesting.
Yeah.
Yeah, interesting. I guess so, you know, it sounds like higher than ArtWalk, but I guess notwithstanding, you know, all the concerns around what's happening in the broader market, in the macro environment and rising rates, et cetera.
Yeah, a little bit. Also keep in mind our average size at Park Place is a little smaller.
Okay.
which kind of influences that. When you back that out, it's still higher, you know, in terms of ArtWalk. With that, we deliberately, you know, sized and, you know, our street mix at Park Place was sort of geared around what we saw in the market. We think we've got it right. That's one of the reasons we feel it's been, the reaction's been strong and for the price being kind of seems to be on point, but lower average size than ArtWalk. Yeah.
Okay. Maybe just one last one as I think we've crossed the 60-minute mark here and earnings onslaught will continue tonight. Mitch, you mentioned, you know, you frankly don't have to do anything with respect to the developments. I mean, you can continue to collect the checks on the rents on the existing portfolio. Does that mean maybe the best place to put capital today might be back into the units at a high six implied cap?
You know, could be. I mean, we believe in our income. We believe in our properties. I mean, I don't know. I'm way past. I think I'm way past harping about, you know, our unit price. I mean, it's a bit of a joke, really. I mean, you know, you could try and buy these properties, you know, and especially with our entitlements, and then, you know, our income being, you know, so solid. We just came through the toughest test of all. We did not cut distributions. You can get, you know, a 6% return.
Like, you can go hire all the geniuses in the world to manage your money and, you know, tell me what you end up averaging, like, you know, after all of the stipulations and the fees for that matter, versus just buying our stock. That's just our yield, you know, not to say anything about the potential of the appreciation of the units. Yeah, I mean, we know the company, of course, better than anyone, so it's not inconceivable that we would invest our money in that. We're never gonna do nothing. Obviously nothing's completely black and white. We do have that for sure.
I mean, the world has priced our units where they are, which in a sense is a bit of a blessing because we don't have to grow into some, you know, some huge unit price based on, you know, a perfect, whatever it's called, you know, you know, a, you know, perfect world. It's quite the opposite. So yeah, it's just, you know, just it's not gonna be all or nothing, but we certainly can tone it down as much as we want because of those reasons. We may very well be buying some of our units. Yeah.
That's great color. Thanks very much.
Thank you. Our final question is from Jenny Ma from BMO Capital Markets. Please go ahead, Jenny.
Hi. Good afternoon.
Thank you.
I just have, you know, a quick question on an update on your development pipeline. When we look at the yields that the numbers are from, you know, older disclosures, but you're yielding sort of in the mid-fours for multifamily builds and anywhere from 6%-8% on the self-storage and the seniors housing. I'm just wondering if you can give us an update on the kind of ranges you're expecting for future projects. Whether or not those ranges still hold or, you know, if you kind of take a bit off the top end, and whether or not market rents are, you know, keeping up with increases in construction costs and financing costs.
Look, if multi-res purpose built is not an exciting day one return. You kinda gotta, you know, just kind of plug your nose a little bit and kick the tire because the worst day is the first day. Thankfully, you know, without much, you know, effort really, in a way, I mean, you know, your occupancies are gonna be very high, and your rent's gonna go up every year. We obviously are wanting to get started on that, but that's just sort of cash on cash returns. In some cases we're sort of putting it in that market, the land, when we see those kind of returns. They could do a little bit better with some leverage. Depends, you know, where pricing, where you're gonna increase, where interest rates are going.
Obviously the intent is to use the profits from the condos. We're not doing so many multi-res only pro-properties. We're building condos, then we're building multi-res. We're looking at that at all times. Construction prices have gotten almost, you know, sort of silly. I think it's kind of come off a little bit in the last couple weeks, but they were getting silly. Given what's going on in this slight little slowdown, we sort of expect construction prices to come off. Obviously, we're gonna be taking all that into consideration. At the moment, for the last year, Jenny, as construction prices went up, sale prices have gone up disproportionately, like so we've actually done better.
You know, our returns are better today, let's say, than a year ago, even though construction prices went up. That obviously is a liquid, not a solid. What the heck did I want to tell you though? Oh, goodness. Yeah. Shoot. Sorry. I just lost my train of thought. Our storage is leasing up faster though, which is great income. You know, we've got a fairly good get our arms around those construction costs. By the way, actually, this is what I meant to tell you.
We're very close to signing a national framework agreement with a large general contractor who will be part of our upfront process so as to have some sort of inside track, let's say, on deliveries and pricing and value engineering in so many ways. You know, and preferred with, you know, preferred terms for them building our buildings. That's something that's been going on off stage for a year or so now, and it's just about to be done. We'll probably announce something about that soon.
Okay. It sounds like those yield ranges are still holding considering market prices are keeping up.
Yes.
Okay, great. I won't stand between everyone and their afternoons or earnings for the analysts. That's it for me. Great, Jenny.
Thank you, Jenny. There are no further questions at this time.
Thank you all for taking the time to participate in our first quarter call. Please reach out to any of us for further questions. Stay safe and have a good rest of your evening. Thanks, everybody.
Ladies and gentlemen, this concludes the SmartCentres REIT Q1 2022 conference call. Thank you for your participation. Have a nice day.