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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the First Capital Realty Announces Year-End and Q4 2018 Results Conference Call. [Operator Instructions]I would now like to turn the conference over to Alison. Please proceed with your presentation.
Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's conference 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 MD&A for the year ended December 31, 2018, 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. These do not have standardized meanings prescribed by IFRS and should not be considered 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 company'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'll now turn the call over to Adam.
Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today.I'll start off by summarizing what was a very good year for First Capital, and then I'll comment on our strategy moving forward.2018 extended a multiyear period of very strong property- and company-level financial results.We advanced many areas of our business and are a stronger, better-positioned company today than when we started the year.In 2018, we invested over $390 million in properties through both acquisitions and development. We also completed $250 million of dispositions. So a $640 million swing in the composition of our portfolio, before factoring in $290 million of urban development projects that we completed and transferred to IPP.This had a meaningful positive impact on our demographic profile. The average 5-kilometer population density of these urban property investments is over 500,000 people, with the FCR properties we disposed of having less than 150,000 people.The rest of the First Capital portfolio also continued to perform very well through 2018, with same-property NOI growing above our 5-year average at 3.1%, record occupancy of 96.7% and the average leased -- lift on leased renewals equal to a healthy 8.4% on year-1 renewal rates or 10.9% on the average rent during the renewal term.This all led to FFO per share growth of 4.4%, or 4.9% excluding REIT conversion costs. We achieved this FFO growth with lower leverage than when we started the year. So all in all, a very productive year.Now onto our strategy. The key to our long-term success has always been our ability to evolve our strategy to capitalize on new opportunities in changing market conditions.Our executive team and our Board of Directors have worked to evolve our business strategy to optimize our portfolio of assets and accelerate the value we deliver to our investors, our tenants, the communities in which we operate and our people.Long before I joined FCR, Dori and his team recognized the potential of urban markets, taking positions in assets like King Liberty, the former Hazelton Lanes and Mount Royal Village, among many others.We focused on urban real estate for many years, with a particular focus on retail. That served us exceptionally well and has allowed us to build a portfolio that is one of our biggest competitive advantages today.The evolution of our real estate strategy will ensure that remains the case well into the future. And that evolution includes looking beyond asset class, to create urban neighborhoods where the integration of retail with other uses create not just spaces, but places. That's what we call a super-urban approach.Canada's major urban markets are where we'll continue to concentrate, but our investment capital will be targeted to a narrow geographic boundary in the past. I don't only mean cities, I mean neighborhoods within those cities. We were urban-focused in the past. Our focus is now super urban. That means our operating, development and investment platforms will be focused on fewer, larger, more diverse properties.Our strategy will now concentrate more on development and the neighborhood than asset class, allowing us to diversify investment and development opportunities to optimize value potential.Through experience, we have learned that the neighborhood fundamentals contributing to our industry-leading retail NOI and value growth have also led to similar success of other synergistic asset classes.We know firsthand that scale in Canada's highest-growth neighborhoods provides the most compelling opportunity to create value and increase cash flow over time. So we'll leverage our competitive advantages to create value by developing more of our own synergistic mixed-use communities. We'll focus our platform on larger positions in the country's most compelling neighborhoods, many of which we already have meaningful scale to build on.To summarize, our evolved real estate strategy is to increase our investment in high-quality, super-urban, mixed-use properties, focused on large positions in targeted high-growth neighborhoods.We've established specific objectives and corresponding metrics to guide our decision making and measure our progress. Our first objective is to increase the average population density surrounding our properties.We are currently the North American leader amongst our peers by a wide margin. Currently, our average population density is 250,000 people within 5 kilometers. To give you some context, this number was 27% or 70,000 people lower in 2015.Currently, our closest North American peer on this metric is Federal Realty, whose population density is 160,000 people. Our goal is to increase ours to more than 300,000 within the next 24 months.Our second objective is to surface unrecognized value in our incremental density pipeline. We're also focused on expanding it so that it exceeds our current leasable area of 24 million square feet. We continue to make progress on this, which is an indication of the relative upside inherent in our business. As we continue to invest, divest and execute, this metric will keep improving.Clearly, one of the most mispriced elements of our stock is the value of this incremental density pipeline. Substantially all of it is situated in Canada's largest urban growth markets in the form of covered land investments.Highest and best use is a common term in our industry. Many of our properties in their current form are productive but low-density, income-producing properties that are not realizing their maximum value potential. This provides significant downside protection with great upside potential.Examples of these properties include our neighborhood developments in Toronto, such as our property assemblies at Avenue Road and Lawrence, Leslie and York Mills, Humbertown, our 42-acre Meadowvale Towne Centre in Mississauga as well as most of our properties in Liberty Village; in the Vancouver area, Semiahmoo and Scott 72 and numerous properties in Montreal, among other cities.Right now, only 13% of our 22.5 million square-foot pipeline is included in our IFRS NAV. While I acknowledge and note the excluded remaining density is subject to various assumptions, its value is certainly greater than 0 as currently reflected in our NAV. We know it's substantial. Therefore, we intend to surface the unrecognized value embedded in our very significant and growing incremental density pipeline through a robust but thoroughly well-planned development process.Our third objective in support of our evolved strategy is to take advantage of disposition opportunities. We're planning to be more active on the disposition side. Our goal is to sell 100% interest in properties that are deemed to be inconsistent with our evolved real estate strategy. An example of this is the sale of West Oaks Mall in Abbottsford, BC. Notwithstanding it's a very good property, its 5-kilometer population density is 110,000 people, well below our 250,000 average. As well, it did not contribute to our incremental density pipeline. We owned the property in a 50-50 partnership with Bentall, and we jointly sold it in December for $91 million, representing $345 per square foot and a mid-5% cap rate.Our proactive high-grading of the portfolio over the last 10 years has included regular, ongoing dispositions every year. So the assets in this category have population densities that are above what most people have, making them a good fit for many investors.We'll also be more active selling 50% nonmanaging interest to institutional partners in certain stable but growing properties. This strategy will allow us to expand our position in certain markets without investing additional capital. It will also provide capital for our investment strategy. A good example of this is the 50-50 partnership we have with Desjardins in a couple of portfolios, including 3 properties in the Greater Montréal area.To recap our evolved real estate strategy, we will increase our investment and portfolio weighting in high-quality, super-urban, mixed-use properties, focused on large positions in targeted high-growth neighborhoods.To recap, we'll focus on: number one, increasing our average population density; two, surfacing value in and expanding our incremental density pipeline; and three, making new investments that align with our strategy with capital from strategic dispositions that, in some cases, will also improve our market positions.You'll notice that I've referred to the fact that our strategy of focusing on urban markets started well before I arrived at FCR. In fact, we were one of, if not the first company to adopt this approach in Canada. Yesterday's announcement is a signal that we are narrowing the boundaries of what defines urban to us and doubling down on the fantastic portfolio that we have built over many years. However, we believe real estate is a long-term proposition, and our plan will be carried out with an opportunistic approach and as a marathon, not a sprint.While the pace of our dispositions will be higher, our properties are generally market leaders in their respective trade areas. So there is no urgency to dispose of from a quality perspective. It's more about capital allocation and opportunities.In terms of capital funding, we intend to finance our real estate activities over the foreseeable future with existing internal equity. To be clear, we are not planning to raise new equity capital to fund our real estate investments. Instead, the execution of our strategy will be financed through strategic dispositions as I outlined, and to a lesser extent, retained operating cash flow.Our evolved strategy is focused on continuing and accelerating our peer-leading NAV growth. That objective remains a top priority. To advance this, we will exercise a bit more flexibility. For example, we would accept a lower leverage and consequently, slightly less immediate growth in FFO for a short period of time if it was the result of a disposition transaction that significantly advanced our strategy.If this scenario is well executed, we'd expect any impact on short-term growth and leverage to be fully or more than fully offset by an increase to our multiple. And the reverse holds true if we have the opportunity to advance our strategy on the investment side. This always takes a bit of balancing over the near term in order to take advantage of opportunities, but over the medium term, our leverage objectives are similar.Our strategy work contributed to us reconsidering our corporate structure. As we announced, we're pursuing a conversion from a corporation to a real estate investment trust. Becoming a REIT will provide us with a number of advantages. First, it will allow us to benefit from a larger pool of potential investment capital by having FCR included in various REIT indices and being an eligible investment for REIT ETFs and REIT-dedicated investment funds. With our existing corporate structure, we don't qualify for all of these. So this capital would be incremental. We believe this will initially represent several million shares of additional demand at the time or near the time we convert.Second, the conversion to a REIT will enhance comparability to our peers, virtually all of which are REITs.And finally, we will be able to deliver the benefits of our business to investors in a more efficient manner.I'd like to touch on one final benefit our strategic focus offers First Capital. The quality of our portfolio, with its large mixed-use properties in very exciting neighborhoods, has been an important factor in our ability to attract and retain some of the most talented people in real estate. We have an incredibly capable team, who most enjoy applying their skills to these types of properties and creating value for all of our stakeholders. So the increased focus will also benefit our people and our platform.So we've laid out for you today our evolved strategy, the means by which we'll achieve it, how we'll measure our progress and our intention to convert our corporate structure to a REIT.I'll now pass things over to Kay, who will speak to our strong fourth quarter and annual results in more detail. Kay?
Thank you, Adam. Good afternoon, everyone, and thank you for joining us today. As Adam mentioned, we were very pleased with the milestones and the strong results we achieved in 2018.I will now take you through those results in more detail. On Slide 6 of our conference call deck, which is available on our website in the Investors section under Conference Calls, we show the factors driving the growth in FFO for the quarter and the full year. For 2018, we achieved strong FFO growth of 4.4% or $0.05 on a per share basis. Excluding REIT conversion cost of $1.5 million, our FFO per share growth was even stronger at 4.9%.In dollar terms, our FFO increased by $19 million or 6.6%. The primary driver of this growth was a $17 million increase in NOI due to 3 key factors: first, growth in same-property NOI of $11.6 million, primarily driven by rent escalations; secondly, growth in non-same-property NOI of $2.8 million, primarily due to development completions; and thirdly, growth in NOI of $2.5 million due to the net impact of acquisitions and dispositions completed over the past 12 months.As expected, our FFO for the fourth quarter decreased $0.01 per share over the prior year, primarily due to REIT conversion costs incurred in the fourth quarter of this year, higher nonrecurring gains realized in the fourth quarter of last year and the impact of deleveraging from the July 2018 equity issue.Moving to Slide 7. Our same-property NOI increased by a solid 3.1% for the fourth quarter and for the full year versus the prior year periods. The growth was driven by rent escalations, higher occupancy levels and solid lift from lease renewals.On Slide 8, we present our lease renewal activity for the quarter and annual periods. Our Q4 total portfolio lease renewal lift was a strong 9.2% on 825,000 square feet of renewals when comparing the rental rate in the last year of the expiring term to the first year of the renewal term.We achieved a double-digit lease renewal lift of 11.9% when comparing the rental rate in the last year of the expiring term to the average rental rate in the renewal term.On an annual basis, our total portfolio lease renewal lift was also strong at 8.4% on 2.9 million square feet of renewals and even higher at 10.9% when comparing the rental rate in the last year of the expiring term to the average rental rate in the renewal term. We are quite pleased with this metric considering the above-average leasing volume that we completed in 2018.Moving to Slide 9. Our average net rental rate surpassed $20 per square foot for the first time in 2018 and grew a healthy 2.8% or $0.55 over the prior year to $20.24. This growth was primarily due to development completions, renewal lifts and rent escalations.2018 was a big year for development completions, with 283,000 square feet of new GLA being transferred from development to income-producing properties. This included major project completions at Mount Royal West in Calgary and at Yorkville Village in Toronto, including the completion of the mall and 102-108 Yorkville. We also completed new space in our King High Line, One Bloor East, 3080 Yonge and Brewery District projects, amongst others.Of the space transferred, 89% was occupied at an average rental rate of $37.33 per square foot, which will contribute a meaningful $9.4 million of incremental NOI.On Slide 10, our total portfolio occupancy rate increased by 60 basis points over the prior year to an all-time high of 96.7% due to significant leasing activity over the last 12 months.We were pleased to welcome a number of first-time tenants to our portfolio, including the opening of Sail, a Canadian outdoor equipment and apparel store, to massive lineups, as you can see on Slide 11, at our Galeries de Lanaudiere property in Montréal. Additionally, we were pleased to welcome the much-anticipated opening of a Mark McEwan gourmet grocery store at One Bloor Street East in Toronto, shown on Slide 12. This space is a great example of our team's vision and creativity to drive value creation through design enhancements and leasing.Slide 13 highlights our 6 largest developments that accounted for the majority of the $50 million in development and redevelopment spend in the quarter, bringing our annual spend to $214 million.These investments in dense, high-growth neighborhoods, including Liberty Village and Yorkville Village in Toronto, The Brewery District in Edmonton and Mount Royal West in Calgary, are consistent with our evolved strategy.As of December 31, we had identified approximately 22.5 million square feet of additional density within our portfolio. This represents a substantial opportunity relative to the size of our existing portfolio, which is approximately 24 million square feet. Less than 13% or 2.9 million of the 22.5 million square feet of incremental density is included in the fair value of investment properties on our balance sheet. This 2.9 million square feet, approximately 300,000 that is under active development and is valued as part of our development projects and 2.6 million square feet of incremental density, which is included in our IFRS values at approximately $157 million or $60 per square foot. The remaining 19.6 million square feet of density is not included in our IFRS values, primarily due to lease encumbrances, which will free up over time.Slide 14 shows the factors driving the growth in FFO during the quarter and annual periods. This slide also highlights our FFO payout ratio, which has improved meaningfully from 82% in 2015 to 71% in 2018 due to significant earnings growth over the past 3 years.Slide 15 touches on our other gains, losses and expenses which are included in FFO. For the year, we are reporting other gains of $0.7 million, comprised of net gains on marketable securities of $3.6 million, partially offset by reconversion cost of $1.5 million and noncash losses on the early redemption of convertible debentures of $0.7 million. For the fourth quarter, we recognized other losses of $1.6 million, primarily due to reconversion cost of $0.9 million.Slide 16 summarizes our ACFO metric. We generated an additional $23.5 million in adjusted cash flow from operations or a 9.7% increase over the prior year, primarily due to higher NOI. This increased cash flow resulted in a meaningful improvement to our ACFO payout ratio, which declined from 86% last year to 79.6% this year.Slide 17 summarizes our 2018 financing activities. During 2018, we completed $389 million of new mortgages with 10- to 12-year terms at an attractive average effective interest rate of 3.7%. This was much lower than the 5.4% average effective interest rate on the $340 million of debt that was repaid. We also completed a $200 million equity offering in July to fund our growth and strengthen our balance sheet.Slide 18 summarizes the size of our operating credit facility and our unencumbered asset pool as well as our key financial ratios. 70% or $7.3 billion of our total assets are unencumbered, which gives us significant financing flexibility. Our net debt-to-EBITDA ratio and our debt-to-asset ratio both improved in 2018, primarily as a result of $250 million of dispositions, the $200 million equity offering and increased EBITDA of $14 million.Slide 19 shows our term debt ladder. As a result of our 2018 refinancing activities, our weighted average interest rate declined to 4.2% at the end of the year from 4.4% at the start of the year. Our weighted average term to maturity is now 5.5 years. Our remaining 2019 debt maturities have an average effective interest rate of 6%, and we continue to have opportunity to refinance this debt at lower rates.Given our evolved strategy and pursuit of a REIT conversion, we are not providing FFO guidance for 2019. However, we would indicate that we expect our 2019 same-property NOI growth to be at least as strong as it was in 2018 and our 2019 lease renewal lift to be similar to 2018.We expect to invest between $150 million to $200 million in development and to complete between $300 million and $400 million of development. We do not expect to take a meaningful amount of space off line for development during the year.For the 3 years leading up to 2018, we did about $100 million of dispositions annually. This increased in 2018 to $250 million of dispositions. Based on our evolved strategy, we are not setting a specific target, but would expect the number to be meaningfully higher in 2019.Before I conclude, I would like to touch on the REIT conversion. There are multiple ways to convert to a REIT, and we are currently evaluating more than one alternative. These alternatives have different degrees of complexity, and as such, different cost implications and different implementation time frames, to name just a few. Until we determine the ultimate path we will take, we are unable to give definitive guidance on these outcomes.Our objective is to convert within the next 12 months, and we do believe, for all the reasons Adam previously mentioned, that a REIT conversion will have a positive impact on shareholder value. Additionally, we do not expect any of the potential structures we are considering to have an impact on our current liquidity or leverage levels or to have a negative impact on any of our debt holders.Overall, we are very pleased with the results for the fourth quarter and for the full year. 2018 was another outstanding year that would not have been possible without the dedication and support of our entire team. We are very proud of all of the milestones that our team accomplished in the past year, and we look forward to executing on our new strategy and objectives in the year ahead.At this time, we would be pleased to answer any questions you have. Operator, can you please open the call for questions?
[Operator Instructions] Our first question is from Mark Rothschild.
In regards to what you called the more refined investment strategy, can -- is it possible to quantify, in any way, the difference you expect on your same-store NOI? Maybe in regards to the leasing spreads you get on these, what you'd call, weaker assets or maybe noncore assets as compared to the assets -- the remainder of the portfolio that you want to retain?
Yes. I mean -- so we certainly don't look at them as noncore assets per se. To me, there's a bit of a negative connotation around it. And when you look at these assets in isolation, they're very good properties. We just think that as an organization, we can do better over the long run by allocating the capital to a different type of property. And so if you look at our same-property NOI growth over the last 5 years, we've been running at -- on either side of 3%. The average is a touch below that. Clearly, our expectation as we go forward is that the portfolio will generate or at least have the ability to generate higher growth than we've had in the past. And so we believe it will be higher than 3%. Lease renewal rates, that -- ultimately, that's a very important component of same-property NOI growth over time. And so we've been running at, call it, 8% to 10% on average. So again, we'd expect that to bump up as well.
And as a -- did you have a number at all for what you've been getting on these assets you want to sell? Would you call that -- would they be -- would those assets be getting 8% to 10% as well? Or would that be closer to 2% to 5%, maybe?
Yes. I mean, it really depends. They are good assets. So like over longer periods of time, the expectation is that -- they just don't have the population density and the growth and the same type of implications in terms of barriers to entry. And so some of them have generated pretty good growth, but when we look at the opportunity going forward and the ability to leverage scale in these high-growth neighborhoods and integrate other things like additional density, that's where the mindset has shifted. So again, I know that -- that's why I say I wouldn't describe them, per se, as noncore assets. So I just think when we look at the next 10 years, the next 5 years, we look at the platform capabilities, where we've had the most success, it's been on these higher-growth neighborhoods where we generate scale and where we apply the most talented people in the organization. That's where they like spending time and that's what the set of ingredients are most abundant to create value. So yes, they're lower than average for First Capital, and obviously, that's a key component, but if you look at our metrics versus our peers, they -- we've been a leader on those metrics. And so that's why I say, these are not bad assets.
Okay. And then just in regards to West Oaks shopping center, is that a property that you would classify as maybe inconsistent with the investment strategy going forward? And then in regard to the sale, is there something else that motivated it? And maybe if you could give us some information on what the cap rate was on the sale.
Yes, I will do that, Mark. So yes, it is inconsistent with the evolved strategy. We approached our partner, who was very happy with the asset, and we expressed our desire to sell, given the evolution of our views on the world and our strategy, and they agreed to sell with us. And so again, when we looked at that asset, we looked at demographic profiles, we looked at population density within 5 kilometers, 110,000 people versus our 250,000 average with our publicly stated objective to get to 300,000. So dilutive from a demographic perspective. We looked at our incremental density pipeline. We had identified 0 incremental density that we attributed to that property. So that's what rendered it inconsistent with the evolved strategy. We still think the NOI will continue to grow in the asset. And so we traded out of it, again, $91 million, $345 a square foot, mid-5% cap rate.
The next question is from Pammi Bir.
Just on the REIT conversion. This has come up in the past, just in past calls and conversations. But there's always been shelter available to push out the timeline. You've also talked about the structure having some limitations in how you run the business. And I know you provided your rationale. But I'm just curious, what changed to motivate the conversion now?
A REIT conversion is something that's been on our radar for several years, as you're well aware of. And for all of the reasons that we included in our press release and that Adam touched on, we did feel like now was the appropriate time to pursue this conversion. Additionally, in light of the anticipated increase in property dispositions, coupled with the strong growth in earnings that we've experienced over the past several years and expect to continue to experience, a REIT structure is expected to be our more -- be a more efficient structure to deliver cash flow to our investors going forward.
But -- and Pammi, the only other thing I'd add, you touched on, and correct me if I'm wrong, some type of limitation between the 2. We don't see any limitation or any impact on the type of activities we conduct in the business moving to the REIT structure, based on the strategy.
Okay. And then -- and just to clarify the comment around efficiency. Are you referring to just from a tax implication standpoint? I'm just curious whether there was -- were you running -- were you expected to sort of be running down on your shelter, running low on shelter available going forward?
Yes. Look, the efficiency is not limited to tax. There's a lot of variables. If you look the expanded capital pool and delivering benefits back to our investors, we expect a positive impact on shareholder value, share price. That's one way of delivering that value back. So it's certainly much broader than just tax.
Got it. And just on the -- and I'm not sure if it's too early to answer this, but any thoughts with respect to the current dividend?
Well, it's still $0.215 a quarter.
That's really helpful.
But look, we review it every quarter with the board. And if and when there's a further update, we'll certainly let the market know. But as of right now, you guys have the current update.
Okay. Okay. And maybe just switching to the asset sales. When you look at the proceeds, should we think of it as primarily being earmarked for developments, just based on the commentary? Or should we expect that some of these -- some of the proceeds will be put to use in acquisitions or even some debt reduction?
Yes. Look, I hope it's all of those. Acquisitions, we've been fortunate to find pockets of opportunity that are in properties that are consistent with our strategy that have some level of rational pricing, where we do have a value-creation vision that we believe we can execute. And so certainly hopeful that at least a portion of disposition proceeds will go into some of those. Visibility on those, given the competitiveness of the market in the markets and neighborhoods we operate in, is pretty shortsighted. Certainly, there's better visibility on development. We have a very consistent, deep pipeline of opportunities that are very aligned with the strategy we've laid out. And so certainly some of it will be earmarked for that. And certainly, if there's excess, it would go to debt reduction. Whether that's permanent or temporary, it'll depend on other opportunities, but we're not averse to that either.
Okay. And then just on the -- on these asset sales, have you already started the process of marketing these in any sort of portfolio? Or are they just -- is it -- has that not yet started?
Yes. I mean, we always have things in the market. We're -- we've got a little more in the market or that we're pursuing right now than typical. I would say we probably have a little more in terms of irons in the fire than we're prepared to transact on. And that'll put us in a position where we can select the ones that represent the best opportunities, the most compelling transactions. We don't have to transact on all of it. So we always have things that we're pursuing. We have a little bit more right now than we've typically had.
Okay. Maybe just last one for me. I realize you're not providing FFO guidance for the year. But if you stripped out the conversion cost that you expect and then factor in this new strategy or refined strategy, what would you consider an achievable target? Or perhaps even what do you hope to achieve this year in terms of growth?
Well, I mean, Kay gave you the key ingredients for it. And so what -- the missing pieces that need to be assumed relate a little more on the leverage and acquisition, disposition side. But just to back up for a second, the announcement we made really outlined a road map. And one of the reasons we're not providing specific guidance is, number one, the impact of the REIT conversion is not 100% known, and as you know, any costs associated with that would will flow through FFO. They're onetime costs. And certainly, any dollar we spend, we see a multiple of value on over the long term. But the second, it relates to our ability to continue to be opportunistic. We always have been, in terms of executing our strategy. And on this, what we laid out, it really relates to the pace and the timing, which is very tough for us to peg because we don't know which opportunities will be available, both on the investing side or the divesting side, for us to take advantage of over the next couple of years, even over the next 12 months. I'd say the -- our balance sheet gives us flexibility to take advantage of those opportunities when they arrive. But the fundamental things that have been important to us have not changed, and that's namely NAV and FFO growth. And to your point, over the last few years, we've done very well on these. Versus 3 years ago, our NAV is up 24%, our FFO was 22%. That's all on a per share cumulative basis. But it's not a quarter-to-quarter business. We've never operated it that way. And even 2018 was a good example. Our FFO in the second quarter per share was up 11.5%, and in Q4, it was actually down a bit. But on the year, we delivered mid-single-digit growth. We improved our portfolio. We decreased our leverage. That's been the case for a few years. That's how our business works. And so it'll really depend on how aggressive we execute the strategy. But I think you have the key ingredients that you'll need to model up the answer to your question. And really, the balance is going to come back to what I've just talked about in terms of opportunities and which ones we're able to take advantage of.
The next question is from Sam Damiani.
Adam, just as you think about the new refined strategy, and I think you alluded to different property types, would you go to the extent of acquiring other property types, like office, hotel or residential buildings, in your sort of neighborhoods that you're targeting?
Absolutely. I mean, we did. We did it. I mean, we bought a majority interest in the Hazelton Hotel, which has been a very -- one of the top-performing hotels in the city, first five-star hotel. We didn't buy it because we decided that hotels is a great investment on its own. We saw it as a great investment because of the strategic value that it brought to us based on its location in that neighborhood. And that's definitely an evolution of our strategy. We, I would say, have become more asset-class agnostic, more neighborhood focused. Obviously, we've done very well with retail and have deep expertise. We'll continue to exploit that. But if the right residential property or office property or hotel property was available for investment in a way that we thought we could add value, create value and matched our strategy, we would not hesitate for a moment to pursue it.
Okay. That's interesting. And just on the strategy, effecting it over the next, call it, 2 to 3 years, I guess, you've identified 10% of the portfolio that could be disposed, either 100% or 50% interests. Does that get you where you want to be in terms of your density going up to 300,000 people and your portfolio transformation? Like how far up the quality scale do you want to go? And how does that balance against your FFO growth targets as well?
Yes. I mean, look, I think it gives us a lot of flexibility to progress our strategy in a meaningful way. The question on whether it fully gets us there -- and we've kind of given ourselves a 2-year time frame on the demographic objective. And so a big part of that'll be what other opportunities do we find over those 2 years on the new acquisition or investment side. The other thing that we'll be doing over those 2 years is a large increase in getting properties and the unrecognized value in the density pipeline ready for development. Now how much of it we proceed on from there, we will determine at the time. But significantly advancing a meaningful chunk of that is going to be part of our strategy to try and surface some of that value. And so that'll be -- put us in a position in probably a couple of years, because these things don't happen overnight, where we have a lot of opportunity there. So we'll assess it as we go. We said it's approximately 10% of our portfolio. Some of these assets are wonderful assets. We'd love to retain an interest in them. Other logical partners we know would like to co-invest in them. Others, they just don't fit our strategy, and we'll look to divest of all. But it gives -- like it's a meaningful number for us that will allow us to advance the strategy in a meaningful way. But whether -- there's not going to be a finish line. We'll assess this as we go. And I'm sure once we make our way through that, which will take some time, we'll reevaluate our situation, our portfolio, how the strategy has evolved, and we'll give you more updates at that time.
I appreciate that. And then just finally, with this moving upward in quality, how does it change your outlook on leverage, where -- actually your payout ratio too, which was brought up earlier in the call? I mean, targeting higher-quality, lower-yielding assets doesn't necessarily augur well with high leverage and high payout ratio. Just wondering, not that the company has that, but how do you think about changing your goals with respect to leverage and payout ratio over time?
Yes, it doesn't augur well if you're starting from the very beginning. But really to Dori's credit, we've been making these -- those types of investments for a lot of years. And at our AGM, I think we put up a slide about the return profile of some of these investments, and they look like a hockey stick, right. And so we're now kind of off the blade of the hockey stick and on the very steep upward trend on a lot of them. And so that gives us flexibility to invest in new ones. And so from a leverage perspective, I'd prefer to talk about it over the medium term because I touched on flexibility to go up or down depending on opportunity when we see -- we think we have that flexibility over short periods of time. But over the medium term, our leverage objectives would be similar. Some of these investments carry a lower yield from the beginning, but they also carry lower risk and lower cash flow risk with better upside potential. And so this is a program. It's not a single investment, so we're going to manage how much we have on the go and -- at any given time. And then payout ratio, we've made a lot of progress on that over the last few years. And certainly, we're retaining an amount of operating cash flow that's made a difference and has become noticeable. But at some point in time -- and we're certainly closer to that point in time than we were 2 years ago or 3 years ago or 4 years ago. We've always said our intention -- and this'll be a board decision and subject to board approval, but the intention was to start to resume dividend or distribution increases. And once we do, the intention would be to do it on a regular, ideally, annual basis and return at least part of the FFO growth back to shareholders or unitholders through those dividend and distribution increases. So look, in a business like ours, where we have a great use of proceeds, it's a very efficient form of capital, but we have always articulated ourselves as a desirable investment when you look at us from an all-in return perspective. So yes, capital appreciation is an expectation, but so is dividend or yield growth.
The next question is from Johann Rodrigues.
I jumped on late, so I apologize if this has been asked and answered. But in speaking about your strategy of targeting high-growth neighborhoods or nodes, I was just wondering if you had maybe a couple of specific examples of neighborhoods where you either have a small position that you'd like to significantly increase or where you don't really have a position at all.
Yes. Certainly, we do. We're reluctant to talk about that publicly because these are very competitive markets, and I don't think it serves our purpose well to make it well known that we're planning to target a specific neighborhood, and then all of a sudden, increase the price when our LOIs go in. So -- but I'd refer you to the ones that are public. And you look at Yorkville, Liberty Village, that's over 12% of our balance sheet right now. You look at when we started there, you look at the demographic density, Yorkville's got almost 800,000 people within the 5-kilometer radius. It's got all the fundamentals we look for. And if you look at our investment activities over the last 2 or 3 years, I think you get a pretty good picture for the characteristics of the neighborhoods that we're looking to invest in. Again, it's not city specific. It's -- the big evolution in the strategy is the boundaries have shrunk for us. So this is not about a major market, this is about targeted neighborhoods within the major market. And it's about density, it's about transit orientation, public infrastructure, so how walkable is it. We look at walkability scores, we talked about that on a conference call last year, how connected it is to other neighborhoods; population growth, our ability to gain a meaningful retail position and have influence over the merchandising mix of the retail, our ability to introduce things like public art that elevate the experience people have in the neighborhood. And so those are the characteristics. And as we build positions, we will talk about them publicly. That's not a short process, so you'll need to give us some time to do that. But certainly, we have them identified. It just doesn't serve our purpose to make it broadly known until we get some scale.
The next question is from Jenny Ma.
So Adam, when we're thinking about the new strategy, when we're looking back at the acquisitions that First Capital has done over the last couple of years, they're certainly in the right markets. But how would you characterize that bunch as being -- fitting into your new -- your super-neighborhood category? Does it all fit that criteria? I'm just trying to think about how you're going to target acquisitions either of IPP or development land going forward?
I -- yes. No, it's a good question. And again, the way I think of it is more of an evolution of the strategy. This is not a -- I wouldn't say -- it's certainly not a transformation. It's an evolution and what we believe will get us to the next level. And so if you look at the acquisitions that we've done, generally, they've all been very consistent with the strategy. Again, we've been putting this together for a long time. This has not been worked on over the last 2 or 3 months. It's been longer than that. So when you look at the Hazelton Hotel acquisition and the shoppers on King Street that kind of tucked into our Liberty Village portfolio, and then the Yonge and Roselawn acquisition that we're making, which that in itself has enough scale to create something that certainly is consistent with the evolved strategy. Generally, the acquisitions that we've made in recent past are very consistent, with very few exceptions.
So is it fair to say that your pool of potential acquisition opportunities remains fairly unchanged from where you've been?
I would not say that it has remained unchanged because I would say it's more selective in terms of geographic boundaries and more flexible in terms of, let's say, the asset class and how it would've fit into First Capital a few years ago, or even 2 or 3 years ago.
Okay. So when you think about that 300,000 population number, is it like a hard line? Or are you flexible to get the average to about 300,000? Like if you see a neighborhood that's sitting at, call it, 240,000 or something, but you're looking forward 10 years and you can see some growth there, is that something you would target? Or are you very -- you're adamant about staying above the $300,000 -- sorry, 300,000 mark?
Well, look, we've put it out there as a pretty clear objective that we will measure ourselves to. That -- and I noted that these objectives will guide our activities. So they will guide them. It's not gospel in some way. So the example you just gave, we see a neighborhood that's got 240,000 people, but we think it'll get to 400,000 in a reasonable period of time and we can take an early position, then certainly we would do that. But if you look at the investments we made in 2018, the average density was over 0.5 million people. So there's going to be a very strong correlation to our investment activity and an above-average level of population density. But if you're asking will there ever be an exception, I'm sure there will be.
Okay, that's helpful. And then my next question's probably for Kay. With regards to the REIT conversion, I know you mentioned there's different avenues of conversion and different time frames. But would you be able to speak a little to what criteria or what priorities you're focusing on when you're deciding which route to take?
Sure, Jenny. It's obviously a very detailed and thorough analysis that we're undertaking in terms of how our structure looks today and how we can make that structure most efficient going forward in terms of operating the business, managing the business, thinking about the compliance requirements of being a REIT and our structure and what makes the most sense for us. We also take into fact returning cash flow to our shareholders and what's the most efficient and best way that we can do that going forward. We look at our business activities and our plans, we consider that. We obviously think about our debt holders, and as I said earlier, we want to ensure there are no negative implications whatsoever for any debt holder as part of this conversion. So those are all factors that go into our thought process behind this.
Are there any that are weighted more heavily than others?
I wouldn't say that there's necessarily something that weights more heavily than others. It's really looking at the combination of the factors that works best to align with our strategy and what we're trying to achieve over the long term.
Okay. And I presume that would be related to why the board hasn't approved this yet, because I assume you have to take a more detailed plan to them before they can, I guess, give their blessing. Is that fair?
That's correct. Like, the board fully understands the benefits and the reasons and the rationale of why we're pursuing this and is in full support of this. But till -- but until we land on a final structure, the board cannot approve the conversion.
Yes, and I think it's progressed to the point where obviously we felt it appropriate to disclose it. And Kay has given you a time line that we're targeting, which is inside of the next 12 months. So clearly, there's been work that's been done. Still a number of details to fully flesh through before the board approves a detailed structure.
The next question is from Michael Smith.
I'm just wondering, you have a lot of residential density, Roselawn, Christie Cookie, Humbertown, Semiahmoo. Does this new strategy push you more towards rentals over condos?
It's a good question, Michael, and we've -- look, the density pipeline has garnered a lot of attention internally, and the residential component specifically. But no, our preference over the last few years has always been to ideally build rental. We just see long term, that's the best opportunity for us to create recurring, growing cash flow streams, which, at the end of the day, is the crux of our business. But we have a number of properties where the economics are just significantly more compelling, like in Humbertown on the phase that we announced last quarter to do condos. So I don't think that the structure or the strategy that we've announced has had any impact on that. It's more around what the economics look like and can we rationalize one more so than the other.
Okay. And any sense of what the future mix might be 5 years down the road or 10 years down the road in terms of retail and other?
No. No. We're not -- as -- I should be clear on this. The evolved strategy is -- we said it'll end up diversifying the asset class to some degree, but this is not the primary objective. We're interested in the highest-quality positions that we can make in the most attractive neighborhoods. And so that's what's going to drive the mix, not a set target where X percent is going to be retail, Y percent is residential. Retail's had a bit of a negative connotation to it. That's not what we feel in our business. That's not what we feel on the ground. The results year after year have demonstrated that. So we actually love retail still, and we see a ton of opportunity on retail. But we see great opportunity combining that retail with other uses to create dominant positions in high-growth neighborhoods. So that's what'll drive it much more so than an asset-class target.
And with the new strategy, does it mean that your development program will be stepped up?
Look, over the next year or 2, I think we will likely continue to be in that $150 million to $250 million range. But based on the strategy to try and surface some of this additional value, I can tell you that we will certainly -- when we start looking at 2021 and beyond, we will certainly have the opportunity to step it up in a meaningful way. The financial commitment to get to that point is not material. And so we're going to -- we're in the process of pursuing that. And as we get closer, then we'll make decisions around if we step it up, how much we step it up.
Okay. And would a market like London, Ontario meet your new criteria?
No.
No, okay. And is it fair to assume that -- so you have 12% of your balance sheet in Yorkville and Liberty Village. Is that a -- would that be -- some of those properties be a good candidate for a 50% sort of passive interest?
Not anytime soon.
[Operator Instructions] Our next question is from Dean Wilkinson.
I'll make this quick because we're through an hour. Kay, on the REIT conversion, you might not be there yet, would this constitute a taxable event?
So as I said, we are still working on the structure. We're still evaluating multiple alternatives. They do have different implications in terms of tax. So it's too early to provide a definitive answer on that.
Okay, fair enough. And then when you turn to the asset sales going forward, given sort of the rationale for converting over is sort of the burndown of the tax shelters, would there be CCA recapture on that such that you see a potential special dividend? Or is there a way that you're going to be able to fully encapsulate that and keep it within the REIT structure?
Yes, so -- just so we're clear, Dean, again, the reasons we outlined are much broader than the one you just referenced for the REIT conversion. And in terms of the second part of the question, we're way too premature to determine whether a special distribution is in the future. Just way too early. We haven't finalized the details of the structure of the REIT, let alone looking at the specific date and the amount of dispositions and the tax characteristics of properties that are being sold, which we have not fully identified which properties are being sold, what structures they'll be sold under and what the tax implications are. If and when we get to that point, certainly, it'll be a part of the decision-making process on when we sell, what we sell, et cetera. And if it make sense at the time to trigger a special distribution, then that's what we'll do. And it -- yes, but...
Right. It's an upside problem, right, so let's...
Yes, yes. And the truth is, it's just too premature for us really to speak with any degree of clarity around it at this point.
No, that's fair enough. I kind of expected it as I asked that.
There are no further questions registered at this time. I'll return the meeting back over to you, Mr. Paul.
Okay. Thank you very much, operator. Thank you, everyone, for your time this afternoon, your continued interest in First Capital. Clearly, it's a very exciting time for our team, and we very much look forward to updating you on our progress in the near future. Thank you very much. Have a great afternoon.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.