Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q1 2026 conference call. I would like to introduce Mr. Peter Slan. Please go ahead.
Thank you. Good afternoon, and welcome to SmartCentres first quarter 2026 results call. I'm Peter Slan, Chief Financial Officer, and I am joined on today's call by Mitch Goldhar, Executive Chair and CEO, and by Rudy Gobin, our Chief Portfolio and Asset Management Officer. We will begin today's call with some comments from Mitch. Rudy will then provide some operational highlights, and I will review our financial 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 make on today's call. Mitch, over to you.
Thank you, Peter. Good afternoon and welcome, everyone. As in prior quarters, we will keep our comments brief to allow more time for your questions. The strong retail fundamentals highlighted in 2025 have continued into early 2026, with 80% of our 2026 lease maturities extending by the quarter end at retail lifts of 11.5% ex anchors. This strong retention rate and rental lift is further supported by a 3.4% Same-Property NOI increase ex anchors. Demand for space, including new built space, remains strong as we continue to improve our tenant mix and covenants. As we mentioned in February, we terminated six Toys "R "Us locations in early July before their CCAA filing. This gave us the flexibility and control we needed to manage the re-leasing of these locations.
Shortly after the quarter end, we reached commitments with various grocers for three of the ex-Toys locations, for which we are currently finalizing the documentation. We have also reached a firm commitment with TJX for a Winners in a fourth location. With these deals, if measured today, our occupancy would be 98%. Further, these deals offer higher quality, stronger covenant, and new 15-year terms and 10-year term respectively, replacing the three-year term we had. All that with higher traffic all year long, and not just in the fourth quarter. Most importantly, the new net rents are 20%-25% higher than the previous Toys rents, adding NOI stability and valuation to our portfolio. As I have said previously, we will stay on strategy, taking the appropriate time in building a strong, stable portfolio for the long term.
As we noted in our Q1 press release, we are embarking on a retail expansion program. The three projects announced are board-approved and just the beginning, two of which will start construction later this year. We expect these new build developments to deliver accretive FFO growth. With the program, which has been going on for a while now, will continue for many years. Stay tuned for further announcements in the coming months. At the corporate level, which Peter will speak to in a few minutes, you will see that we have continued to carefully manage our balance sheet, debt, and related metrics. Our financial flexibility remains strong with over CAD 1 billion of liquidity and an unencumbered asset pool of CAD 10.2 billion. We have also taken steps to insulate ourselves from potential interest rate shocks with 88% of our debt being at fixed rates.
With that, let me turn it over to Rudy for some more operational highlights. Rudy?
Thanks, Mitch. Good afternoon, everyone. The resiliency of the SmartCentres Walmart portfolio was once again a standout for Q1. Same-Property NOI continued its strong momentum with 3.4% growth ex anchors in the quarter. If we looked at the longer term of the trailing 12 months, we are at 4.8% ex anchors, with 3.0% all-in. Occupancy in the quarter experienced a temporary drop to 97.6%, largely because of one tenant, Toys "R "Us, which Mitch mentioned earlier, with an early January, that was a termination that we did deliberately to get control of the space. Now, with the committed deals from Grocers and TJX we have in hand since the quarter end, if measured today, we would be back at 98%.
With four of the six Toys R Us units attracting rental increases of 25% above what Toys R Us was paying. As Mitch mentioned. The longer term NOI and FFO looks even better on a go-forward perspective, all combined with a stronger covenant portfolio. This resiliency is also reflected in the 80% of the 2026 lease maturities already completed, and with a rental lift of 11.5% ex anchors, or 5.8% all in. Cash collections continue to remain strong at near 99% in the quarter, and demand continues from our core tenants, grocers, TJX banners, Canadian Tire Brands, Dollarama, pharmacy, banks, pet stores, and fitness. Along with these, we are also integrating a bit of entertainment, racket, and sports, rounding out a more fulsome retail offering where our minor vacancy exists.
Our premium outlets continue to excel in driving traffic, with improving tenant sales and the resulting percentage rents. Toronto Premium Outlets is doing very well and is ranked in the top three in sales in this country and providing an expansion opportunity of near 100,000 sq ft. With 50% of the leasing completed, this expansion will be accompanied by a new parking deck. Construction is scheduled to commence later this year for a grand opening in late fall next year. Overall, the business remains strong, rents are growing, and the covenant quality of the portfolio is improving. We expect this momentum of rental growth and occupancy to continue throughout 2026. Thank you. I'll now turn it over to Peter. Peter?
Thanks, Rudy. As you have seen in our release, the change in FFO this quarter was primarily due to higher interest and G&A expenses, partially offset by the higher net operating income. Our G&A expense this quarter included approximately CAD 2.7 million of non-recurring costs associated with the renegotiation of the various agreements with Penguin. Excluding some non-recurring costs from the comparable period in the prior year, the net G&A run rate increased by about CAD 1 million. This is an improvement over our estimate when we announced the renewed agreements with Penguin, although we continue to believe that an incremental CAD 1.5 million is appropriate for subsequent quarters. As we noted at the time, these new arrangements have resulted in a meaningful simplification of our arrangements with Penguin. The earn-outs are settled, with the related development lands now being solely for the benefit of the REIT.
The mezzanine loans, where the total committed amount was as high as CAD 330 million, half of which was drawn at various times, have all been eliminated. The voting top-up right has expired and was not renewed. The variable portion of the Penguin Services Agreement has been eliminated in exchange for a single fixed fee, and the non-competition agreement was renewed. We again maintained our distributions during the quarter at an annualized rate of CAD 1.85 per unit. The payout ratio to AFFO remains stable at 89.9% for the rolling 12 months, ended March 31, 2026. The adjusted debt to adjusted EBITDA increased modestly to 9.8 x.
However, the proceeds from the partial settlement of the total return swap just after the quarter end were used to retire debt, resulting in a pro forma ratio of 9.7x unchanged from the previous quarter. The weighted average term to maturity of our debt, including debt on equity account and investments, is 3.1 years. As in previous quarters, we've updated our MD&A disclosure, focusing on those development projects that are currently under construction. As you can see on page 17, there were eight projects under construction at the end of Q1, unchanged from last quarter. With that, we would be pleased to take your questions. Operator, can we have the first question on the line, please?
For those who would like to queue up to ask a question at this time, please press star one on your phone's keypad. We have one person that queued up. We will grab their names, and we'll introduce them shortly. Okay. The first question is from Sam Damiani from TD Securities. Please go ahead, Sam.
Thanks. Good afternoon, everyone. Yeah, first question, I guess, just on the Toronto Premium Outlet expansion that was alluded to. Could you provide a little more detail, I guess, on the cost and the return on that?
Return's over 8%, right? Hey, Sam. At the moment, the expansion 100% numbers is about CAD 110 million. The projected return on that is in excess of 8% day one.
Sorry, did you say day one?
Like the initial day one rent projection as a return of that CAD 110 million is, I think it's something like 8.35% or 8.4%.
All right, great.
Yeah, it's already 15% leased. That's partly, you know, it's partly deliberate.
That's for sure. You're confident, I'm sure, that it'll be substantially, if not 100% leased on opening.
Yeah. Yeah. It's, it's very much the case. It's, it's really very in demand.
That's great. Congrats on getting that going. These three new greenfield projects, I guess two of which are starting later this year. Are there sort of size and scope metrics that you're disclosing publicly, including the locations specifically?
Yeah, I mean, like the rest of the portfolio, I mean, you know, it's gonna vary the size. You know, it's pretty typical SmartCentres type stuff in terms of size. You know, they'll be anchored, all of them. Yeah, I mean, probably, I think we don't know whether we announced the sizes in there, you know, very much typical. Some of them will be, you know, two anchors, they're not small.
These would be somewhat meaningful supply additions to the, I assume, the trade areas of these locations. What gives you the, I guess, the confidence and the conviction to move ahead in these, two or three, locations?
Well, first of all, the retailers. These are properties we're buying because we have pre-leased two anchor tenants. You know, you could say they're being driven by consumer demand. Keeping in mind that many retailers, major national retailers have not expanded in sync with the population growth. Things really stopped growing in sync with population probably 15 years ago. In addition to, you know, the pause of physical retail growth around e-commerce, you know, 15 years ago, you also had, you know, a lot of inflation on the value of residential land. You didn't see, you saw a lot of retail being converted to residential density all over.
You had, you know, you had some very healthy annual population growth in this country for the last 15 years. When you put it all together, there are, there's quite a few large national retailers who are playing catch up. I should have mentioned COVID, which then came along. We come to now, there's a lot of national retailers who are interested in catch up. A lot of residential growth across the country in small, medium-size, large-size markets. I mean, these are some of the factors, some of the variables behind the reasons and the confidence for what we're doing.
I don't mean to hog the puck here, but Mitch, obviously you're gonna be building these out in phases, much like the existing SmartCentres portfolio, sort of as the buildings are leased. You know, building them out in phases such that if the center is gonna be 350,000 sq ft, it's not gonna be all built in 12 months.
I'd love to just say, I'd just love to scare you and tell you that we're gonna go and build the 350 all at once. Actually I can't do that to you, Sam. We've never built, I mean, for all intents and purposes, over the last, whatever it is, 35 years, we've never really built a, built from scratch a space that isn't leased. That's why we've always had the earnouts. That's why we've got vacant parcels here and there, 'cause we never built spec space. There are times where on a CRU building, we might add 2,000 sq ft or 3,000 sq ft or 4,000 sq ft because it makes sense.
Other than that, it's we build as we lease.
Okay, great. Thank you. I will, I'll turn it back. Thank you.
Thank you, Sam. The next question is from Lorne Kalmar from Desjardins. Please go ahead, Lorne.
Thank you very much. Good afternoon, everybody. Maybe just switching gears a little bit. I mean, you're talking about turning on the development taps here on the retail side. Just wanted to see if that influences in any way the outlook for dispositions. Are you perhaps a little bit more motivated now that you're gonna have to fund some of these developments? What are you seeing out there in the market? What do you think is achievable in 2026?
Yeah. I mean, we've always been motivated to dispose of, you know, certain assets. Ideally, you know, some land. To the extent that we can't do that because the market, which I'll comment on in a second. You know, we'll just, you know, gauge the rate of our development around, you know, our various metrics. But, you know, we are confident that, you know, we will be able to achieve some dispositions finally. The market's a little better, slowly but surely. You know, ideally it'll be some of our PUD. But, yeah. If the markets doesn't cooperate, we will, you know, we'll act accordingly in terms of the rate of development. Keeping in mind this development's not high rise.
This is like, you know, if we build a Loblaws store, if we started it today, you know, we would be paying rent in a year from now or less. We're not really carrying the, you know, the debt for very long. The path to EBITDA is really very short and straight forward. Nevertheless, we will be managing. That's how we'll be managing. It'd be great if we could achieve some dispositions, you know, next six to 12 months.
Okay. I guess maybe in the event that you can't, because obviously there's a lot of stuff beyond your control, unfortunately, is there like a top end you'd be willing to let leverage go to?
You know, we'd like to maintain our current debt rating. You know, I think, you know, just in some, you know, vague-ish kind of way, that would probably be one of the guiding metrics that would determine whether we go or don't go on something. Generally speaking, the land that we're buying, you know, is not, you know, most of it's not really needle-moving stuff. It's more the development itself. We're certainly pretty confident that we'll be able to, you know, move the development program along. You know, as I said, the only sites we're buying is when we have, you know, pre-leased to anchors.
You know, we'll Even if we have to, we would, I can't imagine it would ever be the case, but, you know, we can always slow down acquisitions. It's the commencement that we'll be watching closely around our debt metrics. You know, it's not very difficult to do.
Okay. Maybe just one.
Lorne, sorry.
Yep. Sorry. Go ahead, Peter.
Lorne, it's Peter. I was just going to add, you know, we do have some levers to pull. As you saw this quarter, you know, we unwound a portion of the TRS, used those proceeds to de-lever a little bit. There's still another CAD 50 million or CAD 55 million to go there. There are some tools in the toolkit that we have to manage the debt levels.
Okay. Then maybe, while I have you, Peter, just one kind of ticky-tacky one on the G&A, I might have missed it. I think you talked a little bit about it. With the CAD 1.5 million incremental expected, did you say there was CAD 1 million of that picked up in Q1, i.e., you know, we shouldn't expect a double counting in Q2 of the CAD 1.5 million once the resolution's approved?
That's right. That's exactly right.
Okay, perfect.
Yeah.
Thank you so much. That's all from me.
The next question is from Mario Saric from Scotiabank. Please go ahead, Mario.
Hi. Thank you. Maybe just sticking with Peter on the Penguin agreements, just very high level. Can you just go through the numbers again in terms of the total potential impact on FFO from the rearrangements?
Mario, there's really not a huge impact on FFO. The biggest impact is on the balance sheet. The largest portion of the Penguin arrangements that we settled was the earn outs, which is not only with Penguin, but with some third-party partners as well. That was about CAD 47 million on the balance sheet, so we now control all of those lands ourselves, there'll be a future FFO impact as those lands get developed at some point in the future. You know, the current impact is mostly the G&A that we discussed in the press release, about CAD 1.5 million a quarter.
Okay. I just wanted to be clear on that. Thanks for that. Just coming back to the Toys "R" Us discussion, what total capital spend expected on the four signed leases that you're getting at 25% rental uplift on B?
Can you say that again?
What, on the four signed Toys "R" Us replacement leases, the three with the grocers and the one Winners, what's the estimated kind of CapEx spend required to get the 25% uplift in net rents?
Yeah, I mean, minimal. Ultimately minimal. Don't know if we have that number on our fingertips, but, yeah. There's not a huge It's not we, you know, they're not bought, you know, sort of rental increases.
Yeah. For the most part, Mario, the grocers and the Winners are taking the boxes and, you know, we're not spending money on subdividing boxes into smaller boxes or changing anything. It's literally a handover, maybe changing some HVAC systems and so on. Like Mitch said, it's gonna be minimal on the capital side.
Okay. Maybe for Peter, during the quarter, was the interest expense associated with those vacated Toys boxes, was it capitalized during Q1? I'm just trying to get a sense of the FFO impact from the vacancy in Q1.
No, it's expense, Mario.
Okay. Okay. Maybe my last question, just coming back to the asset sales. I think Mitch last quarter kind of said you could see or saw, you know, SmartCentres selling CAD 200 million-CAD 300 million over the next two to three years, the timing of which is obviously very unpredictable. Is that still kind of the range that you're thinking about over the next two, three years in terms of what you would like to do?
What number did you use?
CAD 200 million-CAD 300 million over the next two to three years.
Yeah. Over the next two, three years. Yeah. I mean, if the market cooperates, you know. I mean, with PUD alone, I mean, we have sort of in excess of CAD 1.5 billion, maybe CAD 1.7 billion worth of land. You know, if the market comes back even, you know, comes back a bit, we certainly think that we could achieve that and potentially more. That's sort of been our target number and still is.
Okay. Thank you.
Thank you. As a reminder, if you'd like to queue up to ask a question, please press star one on your phone's keypad. The next question is from Giuliano Thornhill from National Bank. Please go ahead, Giuliano.
Hey, guys. Good afternoon, everyone. Just wanted to stick with that line of questioning. Does that kind of imply your goal is mostly to dispose of the kind of more residential exposed lands and just because the retail market obviously is doing quite well. I'm just wondering if that's the main opportunity set that you think is available versus some of the retail lands that you have.
It's not so much, like, you know, disposing of the residential. It's just that we have 50 million sq ft, 60 million sq ft, for all intents and purposes, approved sq ft of residential across the portfolio. You know, it's a, it's a, you know, obviously, you know, it'd be ideal to sell some of that density since it's gonna take a long time for us to build out 50 million sq ft, 60 million sq ft. I mean, I'll still be here, but I don't know about Rudy and Peter. You know, we don't want to sacrifice any of the retail because it's just so, you know, straightforward, low capital, you know, very quick path to profit. accretive. You know, you build and open in the same market.
All those good reasons. Yeah, we don't wanna sell off the retail. We think the residential, which we have an abundance of, would be ideal.
The earn-out that were settled this quarter, can you give us, like, some more sense of what that related to in terms of asset-wise?
Yeah, Giuliano. The lands that this related to were lands within properties that were mostly developed already. These would be the remaining lands in those properties that were subject to final earn-outs. We've just picked up the rest of the land so that the REIT can control and lease up that space itself in conjunction with the rest of the property. None of it was standalone land. It's all land integrated within a shopping center.
Right. Okay. Just one other question on the Penguin agreement? Can you kind of help us understand how shifting to a fixed fee structure may change your approach to capital allocation or even just your alignment with unitholders?
Well, I think what we said was that, you know, it gives us a little bit more predictability and visibility into cash flow going forward. You know, these are fees for development services, so they get capitalized to our development projects. Of course, the beneficial owner is also the largest shareholder of the REIT, so there's very strong alignment with this.
Great. Okay. Thanks, guys.
As you know, you know, the whole approach was reviewed and negotiated by an independent committee of the Board.
Yep.
We have a follow-up question from Sam Damiani from TD Securities. Please go ahead, Sam.
Yes, thank you. Just wondering, as you look out for the balance of the year, are there any other tenants on the watch list that might give rise to some hiccups in occupancy, small as it might be, or bad debt expense? Thank you.
No, no. Maybe some smaller, but no, nothing like the Toys "R" Us situation. That was a big one. That hasn't happened for a while. Frankly, I mean, geez, I wish I could do the math right now in my head. We collected, you know, that's probably 200,000 sq ft and close to 250,000 sq ft, maybe 220,000 sq ft of space. Probably averaging, I don't know, CAD 15 a foot, let's say. You know, you can probably do that in your head faster than me. I think it's probably close to CAD 6 million gross that we collected for many years that, you know, frankly, you know, was longer than I think a lot of people would have predicted for Toys "R" Us.
You know, we probably got two or three years more out of Toys "R" Us rents, you know. Now, of course, it happened, you know, happened all at once, and it affected our quarter really, but we're coming out of this. I mean, it's a setback, but it's turned, and it is already turned into an advance. I mean, there's just no comparison. I mean, we've traded toys for food. We've traded weak covenant for the strongest, and we've traded, you know, three-year term for 15-year term in the case of the food stores, to say nothing of just the quality that it brings and traffic, quality of traffic it brings to the center. Yeah, okay, fine. You know, it, it cost us a quarter. You know, it's a blip.
When you combine it with the growth program that's going on and has been going on for a long time, it's really a blip. I mean, we're talking about today three new centers. There are, you know, many more than three going on. It really is a blip. We're really sort of excited about the future in terms of our growth and our earnings in FFO.
Thank you. Just on those developments, just to clarify, those are 100% owned by the REIT, or does the REIT have partners in these?
No, these are 100% owned by the REIT, you know, at the moment. Of course, I have a non-compete. You know, in the past, of course, when I developed, I did end up being partners with the REIT, going back. Nope, these are 100% REIT.
Thank you. Thank you. I'll turn it back.
The next question is from Pammi Bir from RBC Capital Markets. Please go ahead, Pammi.
Thanks. Hi, everyone. Just want to clarify. Is it fair to say then that Q1 likely marked the low point for occupancy? Should we expect to see perhaps the Same-Property NOI ramp up in the back half of the year, or are we not quite there yet?
No, it's a low point for this year, the way we see it. In terms of, you know, in terms of, you know, rent ramp up, NOI, the back half of the year should get back to, you know, back to what you've been seeing for the last little while.
Okay. Just maybe on the toy space. I may have missed it, but Like, when will these grocers and the Winners space take possession?
Probably near the I mean, maybe the earliest Q3, Q4. You know, it depends on which one we're talking about. Latter half to the end of the year.
Okay. The economic rent, like the economic occupancy would commence late this year or into 2027?
We're hoping, we're sort of hopeful that it will actually, economic rent will commence this year.
Great. Okay. Maybe just on ArtWalk. Can't recall if we've spoken about this one for a while, but can you remind us the total cost of that project and the timing of completion?
Let's go in reverse order there. I think we're looking at, I think we're expecting to top off in November this year. Just stand by in terms of when we anticipate completion and closings. Probably a year from now-ish, I would say, starting. We're out of the ground. The garage, which is three levels, is done. I think in the next couple weeks, we're going to typical floors where we will start finishing a floor, like, once a week. All the arduous, you know, work is pretty much done, and now it's gonna be kind of full steam. I think we'll be doing windows sometime in July. You know, late June, July, windows will start going on ground floor.
I think I'm stalling here for somebody to just quickly find it, but I think it's.
Yeah, Q4 2027 is the first deliveries.
Okay.
Oh, I see. Okay.
Yeah. Q4 delivery, start closings in 2027.
Okay. It's still some time away. I guess really where I was going with this is, you know, first off, have you taken any write-downs at all on that project? Any changes in the assumptions on costs or the assumed default rates on the units that have been pre-sold?
I mean, the costs probably overall are the same as we originally anticipated. We've done better on some trades. Certainly the ones that we thankfully did not let in anticipation of some better prices, so we're happy we did wait on that. I think we could have done a little better on a couple trades that we let, you know, we had to let them like, you know, in the last 12 months. I think we're pretty much on budget there. You know, we have 20% deposits from, you know, from the purchasers. It's hard to say what's gonna happen, you know.
I think if we were closing today, it's just my prediction, I mean, there'd be some defaults just because I think for the most part, you know, they were sold at an average of Let me just check and see whether we closed this before I say it. Yeah. I mean, we sold between, you know, 11 ft and 11.75 ft there. We've got 20% deposits. We've done all the slicing and dicing of, you know, analyzing what happens if scenarios where if we get units back. I mean, we'd rather that not happen, but if it does, I think we'll be in pretty good shape to either, you know, resell them at current market price or then market price or rent them out.
Okay.
We'll be fine with that. Just FYI, in terms of those analyses, we're well within the market if we were to get those back or any of those back.
Okay. All right. Maybe just moving on. Last one, just on the new developments that you announced, the new greenfield sites. Are these Walmart anchored or not? Or are there other anchors, whether it's other grocers or any other of your larger tenancies?
I think it's taken 38 minutes for somebody to ask that. Well, you know, we are not announcing the actual tenants at the moment. You know, they very much reflect the overall profile of our current portfolio. You know, there'll be lots of familiar names in terms of, you know, the anchors that we'll be building on these properties. As I say, the three that we're mentioning right now are really, you know, just represent a larger, a larger program, a larger accretive program. I might add that, you know, for all intents and purposes, all the anchor tenants in this program have bumps and, you know, are for the most part between 15 and 20 years.
There'll be the odd sub-anchor at maybe 10 years.
Okay. Good to hear. I guess, that answers that last question, I guess. None of the anchors will have flat rents forever.
That was a dig there. No, they will not have flat rents forever.
All right. I'll turn it back. Thank you.
Okay. Thank you. There are no further questions in the queue.
Okay. Thank you for participating in our Q1 call. Please feel free to reach out to any of us if you have any further questions. Have a great day. We'll speak to you soon. Bye-bye.
Ladies and gentlemen, this concludes the SmartCentres REIT Q1 2026 conference call. Thank you for your participation, and have a nice day.