Good evening, ladies and gentlemen. Welcome to the SmartCentres REIT Q2 2025 Conference Call. I would like to introduce Mr. Peter Slan. Please go ahead.
Good morning, everyone. Apologies for a slightly delayed start. We had a couple of technical difficulties on our end. Welcome to our Second Quarter 2025 Results Call. I'm Peter Slan, Chief Financial Officer, and I'm joined on today's call by Mitchell Goldhar, SmartCentres Executive Chair and CEO, and by Rudy Gobin, our Executive Vice President of Portfolio Management and Investments. We will begin today's call with comments from Mitch. Rudy will then provide some operational highlights, and I will review the results. We will then be pleased to take your questions. Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A. This also applies to comments that any of the speakers made this morning. Mitch, over to you.
Thank you, Peter. Good morning and welcome, everyone, and so sorry for the delay. As you have seen from our disclosures, Q2 continues the trend started last year. That is a quarter of solid performance across all sectors of the business. That is retail, industrial, residential, storage, and office, translating into higher occupancies, healthy same property NOI increase, respectable and sustainable lease extension rates, and a reduction in payout ratio, all with a focus on high-quality covenants from national retailers in our preferred categories of general merchandise, grocery, pharma, home improvement, apparel, financial services, and quick service restaurants, extending our lead in the area of value and convenience retail. As I said before, the seeds of this positioning and weatherproofing of the business were planted years ago, guided by our belief and first principle that providing value and convenience to all Canadians is good business.
The second quarter performance reflects this in many different metrics, such as same property and a lot of growth of 4.8% all in, or 7.7% excluding anchors, positive leasing spreads of 6.1% all in, or 8.5% excluding anchors, 82% of 2025 lease maturity have already been extended, 98.6% occupancy for in-place and executed deals, a reduced payout ratio of 89.4%, rent collections of over 99%. During the quarter, Costco took possession of their premises at our 80-acre Winston Churchill 401 Centre, formerly occupied by Rona, and have commenced fixturing with a planned opening later this year. The centre is now anchored by Loblaws, Walmart, Winners, and Costco. Also worth noting, Walmart's fixturing is well underway on schedule at our South Oak Hill Centre, located at Third Line and Rebecca, with a scheduled grand opening this fall in the old Zeller's Target space.
This is the first Walmart opening in quite a few years. Value-oriented retail will not always invoke, is always in demand. In addition to the metrics mentioned, this is further evidenced by our very active new build program where negotiations for new space and existing SmartCentres are up to expand our 37 million square foot portfolio with the latest in general merchandise, pharma, apparel, and other offerings. Further on the development spectrum, our project is now under construction, which I will describe in a moment, and also contributing to future value is our ongoing land use permissions program across the platform. With the 59 million square feet at the REIT's share already zoned, we believe SmartCentres could possibly possess the largest pipeline of zoned real estate in the country. When the time comes, the ability to quickly execute on this valuable inventory will prove a competitive advantage.
Active developments include the 340-unit ArtWalk condo project, well underway and at parade. As previously reported, 93% of the units are pre-sold with substantial deposits. Our recently completed 458-unit Millway apartment is now 97.8% leased, performing ahead of budget. Construction of our Vaughan Northwest townhomes with our partner is progressing well, with nine more closings taking place in the quarter, bringing the total to 98 units now closed. Construction continues in our 224,000 square foot Canadian Tire flagship store, which will be completed and fixtured for opening in Q2 2026. Three SmartStop self-storage facilities opened in the quarter, two in Toronto, Eglinton West, and Gilbert, and on Jane Street, and also one in Dorval in Montreal, bringing the total open facilities to 14, with three remaining under construction. Altogether, this brings the gross square footage of the 17 projects to 2.3 million square feet at 100%.
This portfolio continues to perform well, and we intend to continue its expansion. On the capital recycling side, we have deals on one-third of the planned CAD 100 million of dispositions under negotiations. Closings for this particular part are scheduled for September. While the business continues to grow organically and through new income-producing developments, we carefully manage our debt and debt-related metrics. In this regard, we have improved our financial flexibility with approximately CAD 1.2 billion in liquidity, 89% of debt being fixed rates, and an unencumbered asset pool of CAD 9.6 billion, which Peter will speak to in a moment. Before that, let me turn it over to Rudy for some more operational highlights. Rudy?
Excellent. Good morning, everyone. As Mitch mentioned, the second quarter was once again a standout in many areas and related operating metrics. Tenant demand for space remains strong, with 148,000 square feet of lease up completed in the quarter, delivering high-quality income across all provinces, with a leading 98.6% occupancy at the quarter end. Same property NOI continued its strong momentum, with 4.8% growth overall and 7.7% excluding anchors compared to the same period in the prior year. With 5.3 million square feet of space occurring in 2025, by the quarter end, the REIT had already extended 82%, with rental spreads of 8.5% excluding anchors and 6.1% all in. Cash collections remain strong, exceeding 99% in the quarter. Costco, with a 20-year initial lease term, took possession of the ex-Rona space at the 650,000 square foot shopping center at Winston Churchill 401 , with an opening scheduled for the fall.
Also during the quarter, and also with a 20-year term, a grocer and entertainment user took possession of the ex-Lowe space at another Vaughan center with a prior fall opening. As we have mentioned recently, the relaxation of grocery restrictions will not only continue to benefit large open format retail, but we believe will also accelerate the pace of tenant demand and customers to our centers, maintaining strong cash flow and high occupancy. Generally, we have also been adding to the portfolio and upgrading users with medical, daycare, entertainment, health and beauty, fitness, test scores, and more. Our premium outlets continue to excel in driving traffic, with improving tenant sales leading to strong growth in EBITDA and valuation to the REIT. Tenant sales continue to improve with the Toronto Premium Outlets in the top three highest sales performers of all shopping centers in Canada.
The track space, only just disclaimed after the quarter end, will be outfitted with a temporary user for up to a year while we lock in and expand some luxury names into the space at significantly higher rent. On ESG, we are advancing several initiatives across the organization as part of our three-year plan, including training for all staff, completing materiality assessment, further defining the net zero framework established last year, implementing utility tracking software, advancing a number of IT initiatives to enhance our governance, improving climate change awareness, and implementing related policies and procedures to address our assessments. During the quarter, we submitted our GRESB reports, and shortly after the quarter end, we published our annual ESG report, which you can find on our website. Through ESG-specific targets being tied to compensation for all associates, we ensure ESG issues are integrated across the organization and retail platform.
Overall, the REIT continues to grow, strengthening its cash flow and stability while reducing risks. Our strong and expanding relationships with dominant retailers also pave the way for the introduction of new brands in our existing platform, enhancing the customer experience. We expect this momentum to continue throughout the year. Thank you, and I'll now turn it over to Peter.
Thank you, Rudy. The financial results for the second quarter once again reflect a strong performance in our core retail business. For the three months ended June 30, 2025, net operating income increased by CAD 10.2 million, or 7.3% from the same quarter last year, primarily due to lease up and renewal activities. FFO per fully diluted unit was CAD 0.58 in the quarter compared to CAD 0.50 in the comparable quarter last year. The increase was primarily due to higher NOI and changes in the fair value adjustment on our total returns flow, partially offset by a decrease in interest income as a result of the repayment of mortgages receivable and lower interest rates. During Q2, we also delivered and closed on nine additional townhomes in our Vaughan Northwest project. This has resulted in a cumulative margin of approximately 23% for the projects to date.
For the three months ended June 30, 2025, FFO with adjustments, which excludes the townhome profits, transactional gains and losses, and the total returns flow, was CAD 0.55 per unit compared to CAD 0.51 for the same period in 2024, an increase of 7.8%. We again maintained our distribution during the quarter at an annualized rate of CAD 1.85 per unit. The payout ratio to AFFO with adjustments continues to show improvement at 89.4% for the quarter, or 93.3% for the rolling 12 months ended June 30th. Adjusted debt to adjusted EBITDA was 9.6x the 12-month period ending in Q2, which is unchanged from last quarter, and an improvement of 30 basis points compared to the same period as last year, primarily due to continued growth in EBITDA.
Our debt to aggregate assets ratio was 44.2% at the end of the quarter, a 50 basis point increase compared to the same period last year. Compared to Q1, our unencumbered assets will increase by approximately CAD 50 million to CAD 9.6 billion in Q2, mainly due to fair value increases on existing unencumbered assets. Unsecured debt, including our share of equity accounted investments, was CAD 4.7 billion at Q2, slightly higher than the prior quarter, and represents approximately 84% of our total debt of CAD 5.5 billion. Subsequent to the quarter end, DBRS reconfirmed our triple B mid-rating with a stable outlook. From a liquidity perspective, we remain comfortable with our current liquidity position. As at June 30, 2025, we have approximately CAD 907 million of liquidity, which includes both cash on hand and undrawn credit facilities, but excludes any accordion features.
This was boosted due to the closing of a new CAD 100 million revolving bilateral credit facility during the quarter at an attractive cost of capital compared to our syndicated operating facility. The weighted average term for maturity of our debt, including debt on equity accounts and investments, is 3.1 years. Our weighted average interest rate is 3.94%, virtually unchanged from the prior quarter. Our debt ladder remains conservatively structured, and we have ample liquidity to refinance the maturities for the remainder of the year. Approximately 90% of our debt is at fixed interest rates. Just before we open up the call to questions, I want to touch briefly on our development projects that are underway. As in previous quarters, we have updated our MD&A disclosure, focusing on those development projects that are currently under construction.
As you will see on page 17, there were seven projects under construction at the end of Q2, down three from last quarter, as Mitch described the three self-storage facilities that opened during the quarter, two of them in Toronto and one in Dorval today. The REIT share of total capital costs of these development projects is approximately CAD 456 million, with our share of the estimated cost to complete standing at CAD 255 million. With that, we would be pleased to take your questions. Operator, can we have the first question on the line, please?
Certainly. As a reminder, if you'd like to interrupt us with questions, please dial star one on your phone's keypad. The first question is from Mario Saric from Scotiabank . Please go ahead, Mario.
Hi, good morning. Thank you for taking my questions. I just have a couple of them. First one, Mitch, I think on the last call you noted about a 50% chance of closing up to CAD 100 million of non-ITP sales this year. Can you maybe give us an update on those figures and any kind of incremental broader market changes in terms of appetite since then?
Yeah, I mean, I would say it's above 50% for one of the deals, one of the transactions. I would say it's maybe below 50% for one of the transactions at the moment. I don't think it's actually a reflection of the market. I think there's a market improvement since we last talked about this, outstanding the one that would be, I think, a little bit less likely. That's just due to the particular purchaser that we are contracting with. That particular asset, while maybe not sold to maybe lower than 50% for this particular buyer, I think it was well above 50% to a buyer as a project. You mean the specifics that say reported activity last quarter has, you know, we have more, you know, visibility on it. I think one will be probably a little bit delayed and the other is imminent.
The general capital recycling program, I think, has improved. The prospect of capital recycling, the climate has improved slightly since we last spoken quite a bit. It's a lot of months ago.
Got it. Okay. When you think about recycling opportunities on the one that may be imminent, how would you prioritize your capital allocation priority? What's most attractive in terms of your deploying proceeds today?
We'll repeat it.
Okay. My second question, more on the operational side. You know, we have a mixed consensus report in Canada today. I appreciate SmartCentres as probably the last to see any weakness in this portfolio given the consumer stable nature of the accountables. I was asked, and I'm kind of curious about what kind of ton of demand leading indicators you're focused on and whatever indicators telling you today.
Yeah, I mean, we are not directly or proportionately affected by those types of trends or data points. Our tenants, the No Frills and Loblaws, Winners, so on, I think thrive. I think they thrive in all markets. There's a very strong underlying reliance on values and convenience across the country. When there's a perceived belt tightening going on, there probably is even a little bit more rush to value. We do see an increase in leasing activity for new space from our core retailers going on right now. We will report on more specifics about that in the coming quarters, but we're anticipating doing a fair amount, if not quite a bit, of leasing for new spaces as well as occupancy. I think we're ultimately kind of benefiting. We're sort of in the right place for those trends, the trends that you're referring to.
Okay. My last question may be for Peter. The CAM cost recovery ratio was up 200 basis points to roughly about 94% based on our number. New occupancy is now back to marking 98%. Are you essentially at a peak cost recovery ratio today, or is there more upside there?
Mario, there is a little bit of seasonality to that, but I think our year-to-date number is a pretty good one, right?
Okay.
Don't just focus on the quarter, but look at the six months.
Got it. Okay. Thank you. As a reminder, if you'd like to jump back to questions, please dial star one on your phone's keypad. The next question is from Lorne Kalma r from Desjardins Capital Markets. Please go ahead.
Thanks. Good morning. Maybe just going back to the discussion around the transaction market. I'm sorry if I missed it when I was queuing in for the questions. Mitch, what do you attribute the improvement over the last, you know, couple of quarters to?
I would say it's really, just looking at the last 12 months, I would say there's less uncertainty, even though there's uncertainty. I think the world, any of the Canadian, you know, the Canadian markets, I think, is less concerned about consequences ultimately. Whereas a year ago, I think people were thinking in more dramatic, if not even catastrophic terms. Maybe six months ago, even, that's continued on. In the last six months, I think capital is a little bit more comfortable with the next 6- 12 months. We're getting inquiries. We feel some convective energy in the area that would result in capital recycling for us. It's really a question of what we're willing to harvest. I think there's a market for our product, particularly given what's going on, particularly with the results of sales results of the food stores and the Walmarts, Costcos, and so on.
Our assets are particularly attractive, I think, to capital. I think it's a combination of the uncertainty, which is not as wobbly as it was before, and the strength of value-oriented assets.
Sorry, just to be clear, because I missed it. I'm sorry if you have to repeat yourself. Are the dispositions you're looking at, they are of income-producing properties?
Yes. One of them, yeah, you must have missed it. One of them is pretty far along, you know, better than 50/50 in the close. The other one, I'd say, has gone from 50/50 to below 50/50. That one is an asset that's not complete, but will be an income-producing asset. They're not our core, they're not our core assets. It's not a core Walmart Anchor Shopping Center. We're not talking about that. These are assets that are non-core, or for other reasons, that we are looking to sell, but not our core, you know, not our core assets.
Okay. I guess maybe following on that, how much, you know, value-wise the portfolio do you believe that there is of these non-core, you know, disposition targets?
I mean, these assets would probably total, I guess, CAD 150 million- CAD 200 million if they were all sold once we are actively in negotiations on. We'd like to sell CAD 300 million- CAD 400 million of assets. We just want to get these done, and then we might actually not even wait for these to get done. The market's looking more interesting right now, so we're not going to part with assets that are a little closer to our core without the right cap rates. We might start looking at some capital recycling on the next tranche of assets, given the improvement in cap rates and the interest out there. We haven't really, we're nowhere on that. I mean, that's just something that might happen in the next few quarters.
You're looking at, best case scenario, CAD 150 million-C AD 200 million, but short term, very short term, you're looking at under CAD 100 million.
Okay, thanks for all the time. I'll be right back.
Thank you. The next question is from Dean Wilkinson from CIBC World Markets. Please go ahead, Dean.
Thanks. Morning, everybody. This will be a question around the balance sheet in general. Mitch, you said things aren't as wobbly now. What would have to happen for you guys to say, "Look, there's enough opportunities here to maybe gear up a little, move it from this mid-40% range?" How are you thinking about just the optimal capital structures here, just for, you know, debt relative to where your units are trading, I guess, now?
Yeah. I mean, I think we're more and more comfortable with lowering the debt. We are feeling pretty stable. I mean, you know, you see our occupancy, our rent collections. There's definitely positive trends, but we want to lower debt. I don't think you're going to see us looking to, you know, leverage up. I don't think that's certainly not in our plans, and it's not in our DNA. I think we'll play it a little bit more conservatively as it relates to debt.
Do you have a target as to where you want to see that get down to?
We're comfortable with where it is. You know, under, at or below 40% is pretty conservative. We've always been in the low 40s, I think. We'd get pretty excited if we could get down to 40% or a little below 40%.
Okay. Perfect. That's all I had. Thanks, guys. I'll head back.
Okay. Thank you. As a reminder, if you'd like to jump back to ask a question, please dial star one on your phone's keypad. The next question is from Sam Damiani from TD Securities. Please go ahead, Sam.
Thank you, and good morning, everyone. Maybe the first question just on the same property and a lot. Rudy, I didn't catch it if you did, but did you guys reiterate your outlook for 3%-5% for this year on same property and still looking at the lower end of that range?
No, sorry, you did not miss it. We would reiterate that same outlook, and that is the same range. We think we will probably, as a forecast for the run rate for the rest of the year, be closer to the middle of that range. We had a great quarter, but on a run rate basis, look to the middle of that range as our guidance.
Appreciate that. Switching over to the premium outlets, and maybe specifically Toronto Premium Outlets, the NOI growth there has been very strong in recent years. You've got here an opportunity with the former HBC store, the Saks OFF 5th store. Is the NOI growth starting to slow a little bit there, or do you think the growth that we've seen in recent years is sustainable over the next few years?
Yeah. I mean, I think the outlets in both Toronto and Montreal continue to, you know, amazingly, to improve. I think what's moved significantly in Toronto, we are looking at a possible expansion, another expansion there. We're in the approval process right now, and if we're able to do that, I think you'll see, you know, see a significant increase there. There's a lot of demand, obviously. That's why the expansions. I think, Rudy, do you want to make any comments on the organic list?
Yeah. As you mentioned in the outlets space, the rental bumps and the rental lifts are annual, and as a result of that, you're going to see annual growth in NOIs to the extent that the property is almost fully leased. When there's a little bit of churn, like there is with the Saks space, that gives us opportunities, especially this particular space, to do something bigger. In addition to what, the NOI is just going to continue to grow. The sales, as I mentioned earlier, are in the top three in the country, and it's one of the highest performers, even in the Simon's portfolio, they tell us. Performing really, really well, which is why we're looking at an expansion of that center. You can imagine the expansion of that center and with the current construction costs, what the rent would have to be.
There is a list of parties that are already interested and new names that would come in that would be names that you would see south of the border in the bigger outlets. The property continues to do really well. Existing tenants are wanting to expand into larger spaces and pay higher per square foot rent as well. All of that bodes well for continued growth in TPO. Yeah.
Sure, that's helpful. I guess just on the Sax space, your comment about the rent growing annually is just kind of geared to sales, perhaps more so than a regular shopping center. It's just that obviously the Sax space, I think everyone would probably agree, hasn't seen the kind of sales growth that many of the rest of the tenants would enjoy. There's a big reset potential there.
Yeah, their rent was, I would say, substantially below market. I mean, they just happened to have a lease that was below the average rent in that place to start with in their sales, you know. That's certainly new and opportunity. I would also add that Montreal is also, there's things going on in the Montreal outlet center and around our outlet center there. They're going to make, I think, move the needle in Montreal as well. The outlet center in Montreal, there just happens to be a lot of growth in the area in Mirabel. We've got surplus land there. We're anticipating that there'll be things happening, because we're in negotiations. That'll add some voltage over there as well. There's some potential NOI increase over there.
I'll go up there. Last question for me is just on the distributions. The last bump was right before the pandemic. Peter, you mentioned the improving payout ratio. How are you guys feeling about reinstating annual distribution increases today, perhaps versus 6 or 12 months ago? What's needed to sort of make that decision more real for the board?
[7/2] is not good enough then. I mean, I'll turn it over to Peter, but, yeah, I mean, we're very comfortable with the severity of our disposable income, or recurring income. You know, that's a decision anyway that's made basically, you know, monthly and quarterly. We will obviously be considering it each time. I don't think, did we confirm, re-announcing yet about, you know, no. Anyway, that decision has not been made, but, you know, I'll turn it over to Peter to add some.
I don't have much to add, Sam. The payout ratio continues to improve. We're pleased to see that. We certainly, as it improves, grow more confident in the sustainability of the existing distribution. It leaves us more room. Ultimately, the board will have to make a decision on what to do with distributions. No change is currently contemplated.
Thank you all, I'll turn it back.
Thank you. The next question is from Gaurav Maurav from Green Street. Please go ahead.
Thank you, and good morning, everyone. Just one question from me on self-storage. We're hearing that there are certain operators in the market, you know, the new entrants that have come in that are slashing rents very quickly just so they can shore up occupancy. As you're delivering more store units to the market, is that somewhat changing how you're thinking about underwriting some of these assets? Is there any change in the pricing strategy at your end?
Yeah, I don't think, first of all, we are often the ones with the lowest rental rates going into the market. We're very competitive in that regard. I think, in fact, we're a bit of a disruptor when we open, around existing storage. The big picture, Canada is still substantially below the average square footage per capita of storage than the U.S., for example. Yes, everyone's going to respond to market forces. There might be some aggressive competitiveness going on in any given market. Overall, I think we're very cognizant and we're watching very closely about overbuilding in storage. Most of our locations are pretty tough markets to get into if you look at our Gilbert's or Dorval, Dupont, Victoria, Burnaby. These are really land plays that we've been able to get approvals for.
Nobody's going to be, I mean, I doubt anyone's going to be building nearby or down the street anytime soon on the majority of our stuff. A lot of the other storage locations are on our shopping centers, on our SmartCentres. That's just a choice that we've made as we went into the storage business to give our storage network an advantage. We're already drawing massive amounts of traffic to our SmartCentres, and then we're putting storage on that site. That is a very strong competitive advantage. In those cases as well, our competitors don't have, are opening and are unable to open down the street. I think in both, most all of our cases, we're well-positioned in it. Nevertheless, we're watching closely to make sure that we're not committing a folly in terms of storage in the storage industry here in Canada as it grows.
Thank you for the call. I'll turn it back to the operator.
Thank you. We have a follow-up question from Mario Saric from Scotiabank . Please go ahead, Mario.
Hi, thank you. Just really quickly, coming back to the central disposition, the CAD 150 millio- CAD 200 million kind of that KC4 asset. Can you comment on the blended approach that you're hoping to achieve on that? Presumably it's a mixture of different types of assets?
Okay. You don't need to do a calculation of what we're giving up and what we're getting. These are the ones that are happening right now on lands where there's no actual income at the moment. They're building, but there's no income. The reason for that is when we started this capital recycling program, there was just a tiny little flickering glimpse of a market. There was just no interest in selling our core assets at then cap rates. These are the assets that made sense. Now, you'll see in the foreseeable future, there seems to be a little bit more energy, you know, cap rate compression and might start to entertain the sale of properties where there is actual income. We're not sellers at any price, although we're motivated to recycle capital. We're waiting for the cap rates.
Those were the only assets that made sense at the time, given market conditions. I would not plug in CAD 150 million anytime soon. This is going to be a step-by-step process. When it happens, when the market does turn around, we'll have lots of options and the numbers will be significant. For now, I would plug in in the short term, well under CAD 100 million and then hopefully not too distant future, closer to CAD 100 million. When we turn the corner in the new year, maybe the balance of the CAD 100 million- CAD 200 million.
If I understand you correctly, on the first little bit, it's essentially a cap rate of zero. As we add properties to it down the road over the next year or two, then your cap rate comes up a little bit. That's initially how I think about it.
I'm not sure I understood that, but everybody here is nodding. I just try to understand it, but I'm going to just go on without.
I guess in the short term, buildings that are being sold, I think there's no income associated with them. Over time, as cap rates for the buildings that you may look to sell come down, you have to monitor over time a blended cap is on where you're planning to go up because there's no income in that program.
Yeah, yeah. Okay. Yeah. Yeah. The assets we're selling are ones, you know, a vacant building. It's being bought by somebody who wants to use it. We have no income on it. The other one, I don't want to say too much about it. It's kind of, you know, we don't want to be an asshole in this, but there's no income on it. At the moment, we could keep it and generate income on it. We decided to sell it for reasons earlier stated. If the deal doesn't go through and we think it makes more sense to just complete it and generate the income, then we might do that. We're really waiting for the market to get a little bit better. It seems to be moving in the right direction.
When it does, we will seize the moment and we'll be looking to do more than what we're kind of just kicking around and playing footgear on right now. It's just the only things we feel make sense to sell at the numbers that we've been able to achieve. That day will come and we will act on it. I hope that will be, if this trend continues, I hope that'll start to happen sometime in the next six months.
Okay. All clear. Thank you, Mitch.
All right. Thank you. If there are no further questions in the queue.
Great. Thank you all for participating in our Q2 calls. Please feel free to reach out to any of us if you have any further questions. In the meantime, have a great rest of your day and a great weekend. Thank you.
Ladies and gentlemen, this concludes the SmartCentres REIT Q2 2025 conference call. Thank you for your participation and have a nice day.