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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the First Capital REIT's Q1 Results Conference Call. [Operator Instructions]I would now like to turn the conference over to Alison. Please proceed with your presentation.
Thank you. Good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements.A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our Q1 MD&A, our MD&A for the year ended December 31, 2020, and our current AIF, which are available on SEDAR and on our website. These forward-looking statements are made as of today's date. And except as required by securities law, we undertake no obligation to publicly update or revise any such statements.During today's call, we will also be referencing certain financial measures that are non-IFRS measures. You do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call.I will now turn the call over to Adam.
Thanks very much, Alison. Good afternoon, everyone, and thank you for joining us today for our first quarter conference call. In addition to Alison, with me today are several members of the FCR team, including Jordie Robins and Neil Downey, both of whom you will hear from shortly. It feels like Neil has been here a while, but it is his first conference call or at least the first one answering questions instead of asking them. So welcome, Neil, it's been great to have you on board.Now turning to the quarter. It's safe to say that the environment from an operating perspective over the past year has been far from normal and has been subject to restrictions that have been more frequent and long-lasting than we initially expected back in the spring of 2020. That being said, our Q1 results continue to demonstrate the stability and resiliency of our portfolio during a quarter in which we have the most severe and longest lasting restrictions imposed on our tenants and their customers since the pandemic began. Yet, same-property NOI and FFO per unit were marginally positive on a year-over-year basis for the first time since the pandemic started. These results were supported by continued leasing momentum, which Neil will touch on.Despite the lockdowns, our rent collections have been fairly stable over the last 3 quarters, tracking in the mid-90% range. Focusing on this quarter specifically, we have collected 95% of Q1 gross rent to date, notwithstanding a less favorable operating environment for many of our tenants to start the year. Similarly, our collection rate on amounts that we have previously agreed to defer has also tracked in the mid-90% range.Our acquisition efforts continue to be opportunistic and strategic. Our Q1 acquisitions were small properties, which expand existing positions we had already established in these neighborhoods. Despite their size, the addition of these parcels will enhance and improve these future redevelopments.FCR's conviction in our super urban strategy, which is focused on established high-growth neighborhoods situated in Canada's largest cities, is based on the multi-century evolution of cities as the principal place of preference for the majority of people to live, work, socialize, educate and so on. Our portfolio is exceptionally well positioned in this regard, offering significant benefits and opportunities ahead for both FCR and the neighborhoods in which we operate.We continue to make progress on our ESG mandate, further embedding environmental, social and governance principles into our business and culture. Last quarter, we reviewed various milestones we had met and recognitions received. So I won't repeat those, but we'll add another. Our very own Michele Walkau, SVP of Brand and Culture, was recently presented with the Best Executive Award from the report on business. Each year, 10 awards are made to non-CEO executives in 5 different functional job categories. Congratulations, Michele, on this well-deserved honor.From a people and social perspective, we remain focused on fostering a culture that ensures equal opportunity and well-being for all employees, and our team has been one of our key strengths during these unusual times. Last quarter, we discussed our Equity, Diversity and Inclusion Council. At FCR, equity, inclusion and diversity are at the core of our values. Our ED&I Council is the engine that will drive these matters forward at FCR. Part of their mandate is to create meaningful actions that foster awareness and advocacy. Our employee-led council has identified the key pillars of focus, which includes building our foundation for lifelong progress, education, awareness and community outreach in the key neighborhoods we operate. This council is staffed with a diverse group of employees across departments and geographic locations. One trait that each of its 24 members have in common is their intense passion for ED&I. They've been very busy. And I am so proud and thrilled with their progress because it will clearly lead to meaningful improvement at FCR. More on that to come.In conclusion, although the last year has been dominated by the pandemic and related lockdowns and restrictions, our focus is now clearly set beyond the pandemic. We expect a strong reopening for many impacted FCR tenants. We also believe we will enter that reopening phase from a solid position. These are some of the reasons why: great locations maintaining strong occupancy; rising rental rates for both renewal and new space leasing owing to the desirability of these great locations; growing same-property NOI; a strong and improving tenant base as turnover has provided opportunities, which were previously prevented by lease contracts.Our density pipeline is exceptionally deep with material progress and NAV creation expected from it over the short, medium and long term. This, together with other factors, such as the incremental retained cash flow from the distribution cut, will also contribute to strengthening our balance sheet.Our demographic profile is also the best it has ever been with over 300,000 people on average now living within 5 kilometers of FCR properties, making us the clear and distant leader amongst our peers.To close, FCR represents the best opportunity to invest in a super urban strategy and for the time being, at a material discount to our net asset value. And with this platform, our development team is working tirelessly to advance our current projects and planning our new neighborhoods. More to come on that.So with that, I will now pass things over to you, Neil. Neil?
Thank you, Adam. And for those joining today, we do have a webcast conference call slide deck, and that slide deck has also been posted to our website.So I'll jump right into the numbers on Slide 7. First quarter of '21 FFO was $55 million or $0.25 a unit, representing an increase of 2% over last year's $53.9 million or $0.24 a unit. Working from the top down, total net operating income of $101 million decreased by $2 million or 2% year-over-year from $103 million last year. A key driver of the decline is $2.2 million of lower NOI due to property dispositions over the past 12 months. Net of lower interest expense that was primarily attributable to these dispositions, plus some interest rate roll down, FFO dilution from trailing 12-month asset sales was less than $0.01 per unit on an annualized basis. As Adam indicated, organic growth was slightly positive, which we believe is quite a favorable showing under the circumstances, and I'll provide a bit more color on that in a moment.Moving to interest and other income, where the contribution decreased by $800,000 year-over-year, decline was principally related to lower interest income on loans receivable, the balance of which was $84 million at the end of the first quarter versus $132 million 1 year ago. Partially offsetting the decline in interest income was higher fee income. Year-over-year, G&A and trust expenses increased by $1.1 million in the first quarter of 2021. Of note, the quarter does include approximately $1 million of employee restructuring expenses. And finally, our other gains, losses and expenses line is $3.6 million favorable this year relative to last. The prior period included unrealized mark-to-market losses on marketable securities, a tag end of the 2019 REIT conversion expenses and some residential selling costs. These nonoperating amounts are provided for you on Slide 8.While not detailed in the conference call deck specifically, I will provide several points of context regarding our Q1 '21 results relative to the fourth quarter of last year. Firstly, as I just indicated, the recent quarter did include about $1 million of restructuring costs. But equally, the fourth quarter of last year in G&A expenses, there was a like amount reversal of a variable compensation accrual. So collectively, these 2 factors created a quarterly swing in G&A of about $2 million or $0.01 per unit.Secondly, Q1 '21 variable revenues were $2.2 million lower than the fourth quarter. Now the nature of our business is such that seasonality is not usually much of a factor. In Q1 '21, however, the variable revenue decline is mostly due to the extended lockdowns in some of our bigger markets. And finally, again, relative to the fourth quarter, there were some other operating expense items that were higher in the first quarter, mostly due to timing.Moving to Slide 9. The REIT's FFO payout ratio was 43% this year versus 88% last year. The key driver, of course, was the January 2021 distribution reduction. This lower distribution rate provides FCR with $95 million of annualized incremental retained cash, which we believe can propel FFO and NAV per unit growth from what it might otherwise be.The bottom part of this slide provides our ACFO derivation. In the first quarter of 2021, ACFO increased by approximately our $4 million, or 10%, aided principally by lower capital expenditures. Our ACFO payout ratio is derived from trailing 12-month cash distributed versus trailing 12-month ACFO. And as such, the ratio remained steady as at Q1 '21 versus Q1 '20. As our rolling 4-quarter data is incorporated into the calculation, we anticipate the ACFO payout ratio will also trend lower.Moving ahead to touch on some of our operating highlights. Q1 '21 same-property NOI growth was $0.4 million or 0.4% positive. So in the face of very restrictive lockdowns, we generated modest same-property NOI growth, and notably, this was against what we would describe as a pre-pandemic quarter. For those of you who do wish to isolate things like lease termination fees, they were $697,000 in the recent quarter versus $304,000 a year ago. So the increase of about $400,000 did benefit same-property NOI growth by coincidently 0.4%.On the flip side, however, factors depressing Q1 '21 organic growth included a year-over-year increase of $2.6 million in our same-property bad debt expense. On a stand-alone basis, this hurt organic growth by a sizable 2.7 percentage points. And as you might imagine, under the circumstances of widespread lockdowns in the recent quarter, there was a decline year-over-year in variable revenues that also adversely impacted Q1 '21 same-property NOI growth. So overall, I believe these statistics truly reaffirm the resiliency of our business.Moving ahead, Q1 leasing momentum remains solid. During the quarter, we had 547,000 square feet of expiries. We renewed 450,000 square feet of leases, generating an 8.4% rental uplift. Of note, within the Q1 '21 statistics, there were 2 large fixed, flat rate lease renewals covering 186,000 square feet of area in total or about 40% of the renewed GLA. As indicated on Slide 11, I believe it is, our average net rent per square foot rounded out the first quarter at $21.99. That's an increase of $0.10 per square foot from year-end 2020 and that's principally a function of rent escalations.On a year-over-year basis, net rent increased $0.48 per square foot or 2.2% from $21.51. That growth has generated quite equally between rent escalations, renewal lifts and an impact from some dispositions where we did sell properties with lower average net rents.Briefly on Slide 13, our Q1 year-end occupancy was 95.8%. That's down 40 basis points from year-end 2020 and down 60 basis points year-over-year. The first quarter of 2021, specifically, 20 basis points of that impact was due to 97,000 square feet of closures exceeding 45,000 square feet of openings. Now placing the occupancy decline into context, recall that a year ago, our occupancy was close to an all-time high. And if you look back over a decade, at FCR's historical data, it does show that the portfolio is most frequently between 95% and 96% occupancy. Moreover, owing, in a large part to portfolio quality improvement over time, in the recent years leading up to 2020, occupancy was 96% plus.Turning to Slide 14. During the first quarter, we invested $44 million into development, redevelopment and portfolio CapEx. Investment activity included development CapEx of $29 million where the bigger spends were our Leaside Village, Dundas and Auckland and Wilderton projects. Adding to this was portfolio sustaining and revenue enhancing of capital -- CapEx of $11 million as well as approximately $4 million invested into residential inventory. And during the first quarter, we did complete 2 small property acquisitions or an $8 million investment at our share.Turning to our balance sheet. And in this regard, I would refer you to Slides 15 through 17 of the deck. At the end of the first quarter, total property assets at our share, including residential inventory, our hotel and properties held for sale, they were $9.7 billion in total. This amount was unchanged from year-end 2020 and on a year-over-year basis. Of note, within our MD&A disclosures, there are some enhancements with respect to our investment properties, their character, their valuations and their income-generation potential. We hope that you find these disclosure changes useful in understanding our business and the inherent value in our company.For 2021, property values have been, in aggregate, quite steady. Our March 31 overall weighted average stabilized cap rate was 5.0% and that number is consistent with year-end 2020. Within FCR's balance sheet, you will note that some property classification amounts have changed. Most notably, held-for-sale properties are $254 million at our share at the end of the first quarter, and that's an increase of $92 million from year-end 2020.While we do not disclose are held-for-sale properties on an asset-by-asset basis, I will note for you that there's 11 properties in this category. They are a mix of density value, income producing and development properties. And this is something you should be able to easily infer based upon the relatively modest NOI contribution from these assets in the first quarter of 2021.Our net debt rounded out Q1 at $4.7 billion, again, unchanged from year-end 2020. So 2 is our net debt to total assets ratio of 47.3%, unchanged. Although there's essentially no movement in the amount of debt over the last 3 months, there were some changes in our debt composition. We did carry over $100 million of cash coming into Q1. On March 1, upon the maturity, we repaid $175 million Series N unsecured debenture.We also funded $14 million of mortgage maturities and amortization in the first quarter. These debt repayments, along with small acquisitions, maintenance CapEx, development CapEx are such that our cash balance rounded out the first quarter at $19 million, representing a drawdown of $82 million from the end of the fourth quarter.During the quarter, we also drew approximately $108 million on our credit facilities, including $104 million on our revolvers and $5 million on our construction facilities. At March 31, we had $720 million of availability under our credit facilities and including our cash balances, this put total liquidity at $739 million. Today, our corporate liquidity is slightly higher at $745 million.And on Slide 17, specifically, you can see a graphical depiction of our term debt maturities. Those maturities are very modest this year. They include only $56 million of mortgage maturities over the balance of the year, and that's about 1% of our total debt. And so with significant FFO retention, expected asset sale proceeds as the year progresses, from these notes, it is very clear that First Capital is operating from a position of significant financial strength.I'll now turn the call to FCR's Chief Operating Officer, Jordie Robins, who will provide some further comments that are principally related to our development activities.
Thanks, Neil, and good afternoon. In Q1, notwithstanding extensive lockdowns, we made meaningful progress, both with our major construction projects and with our entitlement program. Given the nature of the work, all our major projects were exempted from the government-mandated shutdowns. What's more, our extraordinary construction team successfully managed both manpower and materials. As a result, we've not seen any material impact to our construction schedules or to our budgets.In Montreal, the construction of the first phase of our Wilderton development located in Côte-des-Neiges continues to progress. The majority of the 110,000 square feet of retail space has been pre-leased, and we are nearing completion and expect to deliver possession to Metro and Pharmaprix in the second quarter. With the progress we've made to date on the project, we're now in the process of selecting a residential development partner for the final phase, consisting of a 200,000 square foot, 111 unit residential rental building that we plan to begin construction on next year.Moving to Toronto. In Q1, we received our occupancy permit for the first commercial floors of Station Place, our newly named mixed-use retail and rental residential project located at Dundas and Aukland abutting the Kipling Transit Hub. Leasing of the residential component will commence later this year. Farm Boy took possession of their 26,000 square foot space in April and is currently fixturing with a planned opening date in the second half of this year.Construction on the 70,000 square foot expansion to our Leaside Village Center in Toronto was also deemed essential, given our new tenants operate in the health care sector. New development is 85% leased and the tenants in this -- in the primary building, including Shoppers Drug Mart, PetSmart and a collection of specialty medical office tenants took possession of their respective premise in Q1 with a plan to open later this year.We know the addition of these new uses will broaden and enhance consumer appeal to this geothermal, open-air center anchored by a Longo's Supermarket. By incorporating these new lands, it also provides our expanded retail center, frontage and access from 3 public streets, which will improve access and traffic flow through the entire center.Our 50-unit townhome joint venture development with Green Park, adjacent to our Rutherford Marketplace, is nearing completion as well. The final units were sold in Q1 with the registration scheduled to occur in June and all closings to occur before the end of the year. At Humbertown, sales in Edenbridge, our 260,000 square foot retail condominium mixed-use joint venture project with Tridel, are also progressing well, with 79% or 166 of the units now sold. As anticipated, given the demographic profile of the neighborhood, purchasers are primarily owner occupants. LCBO has been relocated to the main site and demolition of their former premises is now complete.Considering what we're seeing both in our portfolio and in the marketplace, we retain a positive view towards mixed-use development in our super urban neighborhoods. Most of our 23 million square foot development pipeline is residential. And across the country and in Toronto specifically, where over half this density is located, it remains a housing supply shortage. This shortage, coupled with low interest rates, is driving residential demand and in turn, pricing higher as evidenced by a number of residential high-rise projects that have recently come to market.In Q1, we successfully launched the sales of our 400 King Street development joint venture with Plazacorp located on King Street West in Toronto. This 500,000 square foot mixed-use retail condo was incredibly well received, with over 350 or 60% of the units sold within the first 4 weeks of launch. The average price of these units is about $1,400 per square foot, higher than our pre-COVID pricing expectations. We anticipate the start of construction at 400 King in early 2022.Turning to entitlements. We've had a very busy quarter with important progress on several of our active files, the most exciting of which relates to our 2150 Lakeshore development. On April 22, after years of effort by our dedicated team, the Planning and Housing Committee at the city of Toronto recommended approval of the Christie’s Secondary Plan and zoning bylaw, which governs our 28-acre development site. With this recommendation, we expect that Toronto City Council will approve the Christie's Secondary Plan and bylaw at this week's City of Toronto Council Meeting. This draft zoning bylaw recommended for approval by the planning and housing committee contemplates permission for 7.5 million square feet of total density on our property.This density is made up of 6.3 million square feet of residential and a further 1.2 million square feet of commercial density. The draft bylaw further contemplates approximately 7,500 new residential units, with 15 tall towers ranging in height from 28 to 67 stories. The project will also incorporate a Metrolinx Go Station, 2 parks totaling 3 acres over an acre, a privately-owned public space, community center and 2 elementary schools. Once approved at council this week, there are a few procedural steps for the zoning bylaw to become enacted and in full force, which we expect will occur by the end of this year.As we've articulated in the past, 2150 is a generational development property that will be transformative for FCR and for the city of Toronto. What's more, we carried 2150 today at cost on our balance sheet.Moving to Vancouver. North Vancouver specifically, we're redeveloping our smallest property in the neighborhood with a residential partner that we have selected. Over the course of the last 15 months, we've been working on securing the required municipal approvals for proposed 70,000 square foot, 75 unit multifamily residential rental development. Final approvals are now in place and demolition of the structure is currently underway with first phase occupancy expected in 2023.We have an additional 11 million square feet of entitlement submissions at various stages with municipalities across the country and a further 9 million square feet of incremental density where entitlements have yet to be submitted. COVID may have slowed the approval time line slightly, but as demonstrated by our 2150 Lakeshore application, it has not prevented our incredible development team from advancing these files. While we can't be specific, given the sensitivities of discussions underway, we can say that over the course of the first quarter, we made great strides in advancing negotiations for a number of these applications and look forward to sharing our progress with you over the next several quarters.Before we open it up for Q&A, it's important to point out that our entitlement program will continue into 2021 and 2022 with another 1.9 million square feet of submissions in the queue. As these previous and future applications are approved, we will be able to create and realize meaningful value but retain optionality by developing this incremental density ourselves with a strategic partner, or by selling it to a third party.
Okay. So that concludes the prepared remarks. Paul, if you can open up the line for questions, that would be wonderful.
[Operator Instructions] We have a first question from Tal Woolley.
Okay. Just to start off with the Christie Cookie site. So if the zoning comes through before the end of the year and I think, Adam, we talked about this last quarter. Do you have a -- will all the transit piece be decided over the course of this year as well?
Tal, it's Jordie. The answer to your question is the transit piece will go along hand-in-hand. It may lag slightly, but it is and will be resolved as part of the bylaw.
Okay. And fair to say you've had conversations about partnership potential on that site already?
Yes. I mean, one of the things we've said from the beginning is that at an appropriate time, we felt that it was important for us to retain control over the master plan and the zoning process and retain certainly the upside of that. And given our platform capabilities and our comfort level taking that on, we also said, though, that when it starts to shift towards a point in time where physical construction would start taking place, given the mass amount of construction and infrastructure that will take place, that's where we have long believed that there would be a significant benefit to bring in a strategic development partner to co-develop it with us. And so certainly, as time has gone on, we have gotten a lot closer to that and that's something that's been brought more to the forefront of our thinking.
And obviously, you want to retain significant interest in this. Are you looking to be like leading the development of this? Or when you say strategic partner, do you mean you might let -- provide a managing interest to someone else in some phases of the project?
Yes. I mean the site is so large and so complicated that when we look at it, there are elements where we feel we would be the logical platform to lead the development. There are other elements of it where, if we're successful in selecting the right partner, we think we can bring in someone who is more -- even more well equipped to do those phases. So I would anticipate us playing various roles, depending on the phase and components and elements of the project, and it will depend on the skill set of our partner ultimately when they're brought in.
Okay. And then I just want to ask a bit about King High Line. So there's still about -- I believe it's just under 30,000 square feet you're completing. And I'm just wondering what parts of that, that is. Like what's still left to kind of complete on the site? And if you can give us an update just on how the residential operations have gone there?
Yes. Jordie will comment more on it, but it is all residential. So the retail is about 160,000 square feet. That's been fully leased for quite some time. All tenants in the commercial retail component are in occupancy and paying full rent. So the balance is some of the residual components of the residential that are nearing completion and likely in the next quarter or 2 will transfer in terms of -- and just so we're clear, was the other part of your question, how the residential is going?
Yes.
Yes. Okay. So that's the part I'm going to turn it over to Jordie.
Okay. So we're just about 70% of the 506 units are leased today. Average rents are generally in line with our budget. As you and probably everyone else have seen with other purpose-built rental property owners in the city and the country, residential rental has been a segment that has been certainly most impacted by COVID. And King High Line, I would say, is no exception to that. And so it has certainly delayed our lease-up period.But I do suggest you, certainly, if the last month or 1.5 months is any indication that the trend is starting to move the other way. And generally speaking, I would say, we remain very bullish on rental residential, in particular, in Toronto. In the case of King High Line, it really benefits our entire Liberty Village portfolio and, frankly, makes all of it better.
Okay. And then just lastly, on the Rutherford Marketplace closing, just like when I look at sort of the rough invested capital there, like that's maybe a couple of pennies towards the back half of the year in terms of FFO. Is that the right way to think about it?
Sorry, we're talking Rutherford or Leaside?
The Rutherford market, the condo...
Maybe the closing of the Town Homes?
Yes.
Tal, I think as we indicated, that's likely to be a Q3 closing, and there will be some development profits there that are effectively part of our income, interest and other income line. So those will not be material in the context of our total FFO, but that's when you should be expecting them and where they will probably show up in the P&L.
The next question is from Pammi Bir.
Just with respect to the, I guess, the expected approval at Christie Cookie, how are you thinking about recording to get the incremental value created in terms of the process from zoning and/or successful zoning? And then any comments on perhaps the potential magnitude and timing of that?
Yes. I mean our process for writing up land that's going through the development process is generally, the first write-up occurs when we have certainty or a high degree of certainty around zoning. We think we're within a quarter of achieving that on Christie Cookie. So unless something unfolds different than what we expect at this point, we think that likely in Q2, that milestone gets achieved. And consequently, there would be an impact because there is -- we're not going to comment on the magnitude of it, but there is a meaningful delta between what it's being carried on, on our balance sheet, which still represents historical cost and what the range of market value would be for a zone site.
And sorry, Adam, can you maybe just remind us what it's carried on the balance sheet at?
No. We never disclose individual asset values that we're carrying it at. But we disclosed, at the time of acquisition, what it cost to purchase. We've been working very hard on it. Lots of sweat equity invested, but also some meaningful capital as well. And so you'll be able to get in the ballpark, Pammi, but disclosing what we're carrying individual assets at is not something that we've historically done and are not planning to change that anytime soon.
Got it. Okay. And then just maybe going back to your comments on partners there, I guess, again, thinking about it as getting through the zoning process or successfully zoning, whether it's next quarter or maybe shortly after. But is it maybe too early then to still think about monetizing any portion of that value created? Or would that be under consideration this year?
There's -- look, one of the things we're really excited about with Christie is the number of levers that it represents for us. And while the monetization of it is -- a portion of it's appealing to us, what's more important to us is securing the right partner because this is a multibillion-dollar development that should have a very material amount of profit in it for an extended period of time. Mining and maximizing that profit, in combination with delivering a state-of-the-art, from an ESG perspective, neighborhood and delivering some of the social benefits we think it can, environmental benefits we think it can.The right partner will be very, very important for us to achieve Christie's maximum potential in that regard, both financial and nonfinancial. And so that's going to take priority over monetization. Obviously, they're both really important to us. But just so we're clear on where we're focused in terms of priorities. We think assembling the right development partnership group to complement our skills will be exceptionally valuable. And that may not mean that it goes to someone that's going to pay the highest price and that's just something we'll factor into the decision-making.
Got it. Okay. And just maybe one last one for me. Coming back to just the overall disposition program and looking beyond, I guess, the -- I think there's $275 million held for sale. Is it fair to think that perhaps the bulk of what might be sold beyond that amount and thinking about this year or even next year? It's fair to think that those would have similar attributes, meaning minimal NOI. Or do you see them -- see some additional or more traditional income-producing properties on deck for the rest of this year?
Yes, it's a very good question, Pammi. And our disposition program has evolved in a very deliberate way. And we didn't necessarily take the easiest path forward. So we really started at -- focused on selling what we viewed to be the tougher assets we would have to sell. And some of those went a lot better than we expected, and some of them were a bit tougher. And all in all, we felt the business was much better off proceeding the way we did. They were the most painful because they also carried the highest yields in place, which resulted in the most dilution from an FFO perspective.Then we said, okay, so we've kind of cleared the vast majority of those types of assets. And so then the composition started to change. And if you look at the transactions that we closed at the end of last year, they were different. They were -- the composition between density and IPP started to gravitate a bit, not materially. But the cap rate and the quality of the assets, the IPP portions were -- they're great assets, but they are in the bottom bucket of our portfolio. They would not have been in that same bottom bucket 2 or 3 years ago.So you see cap rates coming in. And then we've said in Neil's comments in -- when he touched on this in his opening remarks, would indicate that there's a much more balanced mix between density and IPP and held for sale. That's definitely something that we see continuing as we progress through the current assets held for sale and others that we would contemplate adding in the future.
The next question is from Dean Wilkinson.
First, I'd like to congratulate Michele on her award. I think with Neil, that puts 3 Humberview High School grads on this contact.
Funny you mentioned that. Michele has also reminded me of the Humberview Alumni connection.
Yes. There's got to be something with our English feature there. My question is for Mr. Downey. If, Neil, you come into this role with a very unique and tenured skill set and have a lens, I would argue, unlike no other CFO in the space. As you sort of looked over this and have started, do you see opportunities, and it's not to suggest that disclosure was lacking in any way, shape or form, but do you see opportunities to help bridge that disclosure gap on things like entitlements and excess density to narrow that $5 gap between where the units are trading and where your IFRS book value is? And sort of how are you thinking about, for lack of a better term, bringing Mohammed to the mountain?
Well, Dean, I don't recall that you were on the high school basketball team, but that sounds like you've been able to lay-up. You do see some changes, I hope, within the MD&A, specifically in the section entitled valuation of investment properties. And the objective here really was to try and add some clarity in terms of the components of value within FCR's portfolio. And hopefully, what you can see from that on Page 13 of the MD&A, in particular, is that we generate the overwhelming majority of our income off of $8.4 billion of generally stabilized same-property assets.And then beyond that, we do have $1.1 billion of other assets, including major redevelopment, ground-up developments, properties under construction, our held-for-sale bucket as we've already discussed. And those assets, characteristically, you can see, are earning a fairly low NOI yield.But for the most part, they're not -- their value is not in the NOI that's in place. In many cases, the value, for instance, is in the -- as of right density within these buckets. The fact that some of these assets are still in transition, et cetera, et cetera. So I would say that we are hopeful that this will help readers of our disclosures maybe bridge some of the gap that's been there in terms of understanding the components of value.
Yes. I guess it's a problem that's endemic within the space, right? The way we've always looked at NAVs, it's like a 1-year DCF and that's now what the real world looks like. So big job ahead of you, but I'm sure we'll all get there.
The next question is from Mark Rothschild.
In regards to the releasing spreads, which I think were 8% in the quarter. Just like a few questions on that. One, is that a good number to take? Obviously, it jumps down a little bit as a trend that you think you can operate around now. And in that context, do you think market rents have stabilized? Is there a good information now to know where rents are? Have they moved at all? And maybe you could also just expand on it. I'm not sure if you disclosed the retention rate of leases that expired in the quarter, it might be in disclosure, I missed it. What was the retention rate for the quarter?
Yes. So I'll start with your last point, Mark. So you're right. We haven't typically disclosed it because we don't actually place a whole lot of relevance on it. Hire is not better in our mind in terms of retention. We have really benefited from the turnover of specific space over time, and there's no shortage of instances where we get control of space and a tenant may want to renew. And we're the ones that see a different opportunity for the space.This quarter, Neil did, in his prepared remarks, give you the elements of the retention rate. It was about 72%, I believe. We like it to be not much less than 70%, not as high as 80%, generally. That's generally where we've run. We have not seen much of a change to that with the exception of Q2 of 2020, where there were a couple of instances that we may have been more compelled to take space back. But given the uncertainty in the world at the time, we chose to renew. So it was one of our highest retention quarters ever, actually.Market rents, you touched on a couple of things that would indicate perhaps they've moved around. We have not seen that. Market rents and, in fact, most of the leasing metrics, if not all of them is the one element of the business we have not seen evidence of the pandemic. And so we have not seen a softening of rents at all. And on renewal rates, that's in pretty much the same thing. The current quarter was decent. It was weighed down by a couple of large fixed flat rate renewals. So that would have taken it well through 10%. And our long-term average has been around 9%. That's probably a good place to assume in terms of looking forward.
Okay. Great. And in regards to occupancy going forward, obviously, it's helped us pretty well, but there has been some slip. One of your competitors just the other day on their earnings call expect confidence that it will recover, but it will be in 2022. Would you agree with that sentiment? Or do you think you can see an improvement in occupancy sooner?
Mark, it's Neil. Like many of our peers, we're probably not going to give you a whole lot of forward-looking guidance with respect to things like same-property NOI growth, et cetera. But to give you a bit of context, firstly, in my prepared remarks, I did talk about the historical band of occupancy and how the portfolio has performed over the longer term and in more recent years.In the short term, so let's say through until midyear, we do not expect any significant occupancy change relative to the Q1 number that you'll see in our disclosures. A point of note is that earlier this year, Walmart did announce 6 store closures, I believe it was across Canada. And several individuals on this call did pick up the fact that 2 of those stores are within the FCR portfolio.So as we look out to Q3 specifically, we do have an 87,000 square foot Walmart store in Calgary, where the lease expires on September 15. So that will be vacant space in our third quarter statistic. That would represent 40 to 45 basis points of future vacancy. So that's something we know. It's something you should keep in mind.As you're aware, these stores typically have a very low rent, and this location, it's no different. Think mid-single-digit rents per square foot in terms of dollars per square foot. And while we carry this vacancy, you'll see them in the stats, and there will be some lost FFO as we progress through into year-end 2021. But our experience with similar situations like this gives us very little doubt that upon this nonrenewal is, in fact, a positive NPV outcome for us. We'll just have to rework the space, reinvest in the property. And ultimately, we will generate significantly higher future NOI.
The next question is from Sam Damiani.
I was wondering if we could just hear about the types of tenants that are expanding in your markets and in your portfolio in recent months and what you're expecting as the year plays out based on what you're hearing from your -- the retailer tenants that you have?
Yes. Thanks for the question, Sam. We've got Carm with us who's closest to it of anyone in the room. And so he'll give you the details, but I mean the short answer is it's been the same types of tenants that we've had in the portfolio from the beginning. We see much less change than we thought was potentially the case a year ago. It spans both tenants that are deemed essential, nonessential.And I think what you're going to hear from Carm is the broad view is that there's a very strong reopening recovery, economic recovery, whatever you want to call it, pending. And what we're seeing are some preliminary signs of retail tenants specifically really being aggressive in their actions to try and position themselves to take advantage of that recovery. But in terms of the specific types of categories and things like that, we'll let Carm speak to it, Carm?
Sam, the story is really -- the tenants that were active pre-COVID remained active during COVID. So you're seeing some categories like food, drug, pet, the discount retailers, QSR, home furnishing, medical uses and office supply is really providing some strong demand. I think very recently, you've seen -- we've seen some sit-down restaurants trying to regain some traction in the marketplace. I view those tenants as really -- they're trying to gauge when the recovery is going to spark, and they want to get into the gate now and look for some key locations as well as apparel. I mean it's not usually a big category for us, but some apparel tenants are starting to reengage with us and trying to look for space.
Okay. That's helpful. What about fitness and gyms? Are they -- how are they holding up? And what's your expectation over the medium term?
Yes. I mean, look, they've had a tough goal. No question about that. We're feeling like we have a lot of confidence in that category now versus a year ago. And that source of confidence comes from the multiple reopenings that have occurred so far in Canada. And in general, they've opened up exceptionally strong and recaptured a very high percentage of their sales volume.And probably more important than that is monitoring that industry in other countries that are much more advanced and are effectively fully reopened. And what we've seen is there's clear evidence that there's pent-up demand. It continues to be a growing sector. While people maneuvered through this -- so far through the pandemic, whether it be Peloton or et cetera, they do go back to the fitness clubs in big numbers. And it will be an important element of our merchandising mix going forward.And we have actually done a small handful of new deals with fitness operators in our properties. So I wouldn't call it a category that we've done the most number of deals with. But surprisingly, at least to us, we have done some there with entities that are reasonably well capitalized, established operator, strong operators. And we think we'll continue to do more.But they're at a stage now where they've gone through, obviously, a very, very tough time. And now cannot operate in several of the markets we're in. So that's obviously problematic. But we haven't seen a spike in defaults or things like that, like we did last spring. So we feel like the fitness tenants we have now are generally holding in and will hold in to the other side. And generally, the ones we've got, we're happy with and we're going to try and support them to the other side. But hopefully, that gives you a little bit of color on what we're seeing from a fitness perspective.
That's helpful. And my last question is just on the distribution. It's been, I guess, 4 months now since the temporary distribution cut was put in place. With 4 months now under your belt, how do you feel about the prospect for deleveraging and ultimately restating the prior distribution?
We feel similarly to the way we did when we announced it. So we don't have anything new to say. We think it's a helpful tool. We still think it's a temporary tool. But there's other things that are going to be required for us to get where we want to go to beyond that. But we think it was a step in the right direction given the environment and our shorter- and medium-term goals, but yes. It's one element that we've looked to help us. And we have the same views on that topic as we did when we made the announcement.
And I'll just say the enhanced fair value disclosure is greatly appreciated.
It was my pleasure. Neil had nothing to do with it. I'd say that jokingly. Obviously, that was a Neil initiative.
The next question is from Jenny Ma.
Just going back to the development pipeline, I'm wondering if you're thinking on apartments versus condos have shifted over the last while, given that there's so many moving parts. It seems like, at least with 400 King, you're getting some pretty strong pricing. But when you try to balance out some of the short-term challenges and potential risks with regulation around multifamily ownership and higher construction costs overall and the certainty of selling off condo projects, has that changed your thinking around how to balance the residential development?
Well, it actually extends beyond that because our changing has evolved a bit. And another element in addition to the ones you mentioned was the fact that as a public company, condo investments are not treated in the most ideal fashion by the capital markets. And what I mean by that is you go through the development of a condominium and you take on debt while you're going through that and the market fully factors in that debt into the business.But then when you realize the profits, they can be meaningful. But the market also discounts those as more onetime items and nonrecurring. And so you kind of get the full -- you live with the full headwind of the debt through the development, but then you kind of fall short of full credit for the profit. So it's not the most natural fit in our view.And so Jordie went through a few condos that we have under development right now. And I think what you'll see going forward for First Capital is that we will do less condo development. We will focus on neighborhoods that are highly strategic for us where the economics are quite compelling and where -- often where there's another benefit beyond the sole profitability of the single condo.So we will -- we're spread a little wider now than I think we would be in the future on condo development. Look, every project we've underwritten, the condo pro forma looks better than the rental pro forma. But we know, over time, you have to make your condo profits on completion. That's not the case with residential rental, if you hold it. And we've seen wonderful value appreciation. Most people don't know. We actually built our own first residential property. I think it was over 10 years ago now in Vancouver. So it's not entirely new to us. And the rents that we're renting that project for now, I think are double what they were even 10 years ago. So there's been a lot of value appreciation over that time period, but it didn't all occur on the day it was completed.So we definitely have a bias towards rental. It is more challenging in some places, given the condo profitability. And so in some cases, where that's the type of profile that sits in our density pipeline, that's a good example of some things that would make logical sense for us to monetize and recycle that capital into things that can generate a more recurring permanent income stream.
That's great color. With regards to the variable revenue component, I'm just wondering if you could talk a little bit more detail about what makes that up. Like in terms of balance, how much of it is the hotel versus temporary rentals and parking? Just how should we think about that piece, which is not big, but it's -- there's a materiality to it? So anything would be helpful there.
Yes, Jenny, it's Neil. So you have, I think, in essence, identified the components. It would be the hotels, it would be parking revenue. And believe it or not, there is a small amount of percentage rents in the business that have tended to be consistent from year-to-year. So you did identify the 3 primary sources. Obviously, it's very difficult for a hotel to be profitable when things are pretty much in full lockdown and occupancy is close to 0. So that would certainly be a big part as to why the Q1 was impacted in that regard.
Okay. So if I'm hearing you correctly, there was basically no contribution from the hotel and perhaps you should look at some pre-pandemic quarters to look at the magnitude of that and factoring for the change in ownership. So I guess in Q1, then it's primarily the parking and the percentage rents?
Q1 versus Q4? Yes.
Okay. And how would you differentiate the percentage rents in that bucket versus the actual line item for percentage rents?
Sorry, I don't quite catch the nature of the question. But if you want, we can look at it offline.
Sure, sure. We can do that. I'll follow-up with you. And my last question is with regards to the held for sale. How should we think about the timing of these deals? Are these mostly one-off properties? Or is there a small portfolio in there that may take a little bit more time to close?
There's a bit of a mix bag in terms of what's in there. I think one of the rules with held for sale is you have to expect to transact within a year. So we definitely expect to transact within a year. We usually don't make any formal disclosure until a minimum of when transactions are firm, in some cases, when they close. And so we haven't reached that point on a material amount of it or you will expect to see that. So yes, inside of a year, Jenny, and generally, those assets that are in there have identified buyers and are subject to conditional agreements at this point.
There are no further questions registered at this time. I will turn the call back to Adam Paul.
Okay. Thank you, Paul, and thank you, everyone, for joining us today for taking the time to listen and participate in our Q1 conference call and for your interest in First Capital. Have a great afternoon. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.