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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 Q4 2019 and Year-end 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 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. 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, 2019, and our current AIF, both of 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 construed as alternatives. 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 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 for our year-end conference call. 2019 was a pivotal year for First Capital. To be successful, change has to be built on a solid foundation. FCR's evolution into an urban platform is not a recent phenomenon. It's evolved over the past decade-plus. Today, as we celebrate our 20-year anniversary and start this new decade, our foundation is very solid. In 2019, we took several bold steps to unearth the true potential value of FCR. We launched our Super Urban strategy and a new brand identity that depicts the importance of community at the center of our real estate portfolio and solidifies our purpose to create thriving urban neighborhoods. We also addressed the Gazit overhang by facilitating an initial $1.2 billion reduction of their ownership interest, including FCR acquiring $742 million at a price well below our NAV. Gazit's ownership now stands at 4.4%, resulting in FCR being a widely-held company for the first time. After a lot of work by our tax, accounting and legal teams, we successfully completed our previously announced conversion to a real estate investment trust near year-end. Our focus on improving the people and culture side of our business came through loud and clear on our high-engagement survey scores, and led to FCR being named a top employer in Greater Toronto by The Globe and Mail for the first time. We were honored to be Canada's only public real estate company to receive this distinction in 2019. Our long-standing commitment as a leader in ESG garnered several accolades for our team, including receiving our third consecutive AAA ESG rating from MSCI. This is the highest rating possible. But perhaps, most importantly, with the advances we made executing our Super Urban strategy, and in turn, enhancing the quality of our real estate portfolio. The composition of our portfolio underwent a significant shift in 2019 through $1.4 billion of investment activity and over 9 million square feet of zoning submissions, of which 6.5 million square feet were in Toronto. This $1.4 billion of investment activity included $835 million of dispositions in our leased urban neighborhoods. We also had a very busy fourth quarter in which over half of our total dispositions closed with the majority of the proceeds used to reduce debt following the temporary spike from our share buyback. By selling our entire portfolios in markets like Québec City, Teatro Verde and Red Deer, we have almost no exposure to secondary markets. And in turn, have increased our exposure to our most Super Urban positions, most notably, those in Toronto. We continue to develop strong partnerships with FCR as the managing partner in portfolios that are urban but not Super Urban. Roughly 20% of our properties or 10% by value, fall into this partnership category now and growing. For example, Ottawa is a market we want to continue to participate in, but it lacks some of the Super Urban attributes that we look for. We now own a 50% interest in virtually all of our properties in Ottawa. It allows us to benefit from their future upside, enhance our returns through fee income and grow together with our partners using less capital. We'll consider this for other markets and properties that we believe have further upside, but that lack Super Urban attributes we're targeting. Throughout 2019, we also invested. We invested over $550 million of capital into Super Urban neighborhoods, with roughly 85% of them in Toronto. Neighborhoods like Liberty Village, Yonge and Eglington and Yorkville, where we expanded our position and acquired a key development site adjacent to Yorkville Village and the Hazelton Hotel. All 3 of these Yorkville properties will benefit from being under FCR's common ownership. We're already seeing the impact of our recent investment activity on our key Super Urban metrics. Our average population density within 5 kilometers of our properties improved by 16% from 250,000 people at the beginning of the year to 290,000 people today. We're confident that we will achieve our objective of 300,000 people sometime during 2020, which is ahead of schedule. Transit connectivity is also an important part of our real estate strategy. Over 99% of our portfolio is now within a 5-minute walk of public transit. I'll now make some comments on our density pipeline, which we believe is the most mispriced element of our company in the capital markets. So surfacing its value is a very important objective for our team, and we took meaningful steps in 2019 to project -- progress this objective. First off, the pipeline grew. This is important because it's an indication of the relative upside inherent in our business through densification. It also protects the downside. We started the year with an existing portfolio of 23.9 million square feet of leasable area. We also had an identified incremental density pipeline of 22.5 million square feet, representing 94% of our existing portfolio at the time. These numbers are all at FCR's ownership share. Owing to dispositions, our existing portfolio actually shrunk to 20.9 million square feet by the end of the year. However, our density pipeline grew, it grew to 25 million square feet, now representing 120% of our build portfolio. Growing the pipeline is one thing, surfacing its value is another. An important initial step towards this is through the entitlement process. Heading into 2019, we had approximately 3.5 million square feet of our pipeline zoned. In 2019, we submitted new zoning entitlements for an additional 9 million square feet of density. As you'll hear from Kay, we have significantly enhanced our disclosure related to our density pipeline. The zoning submissions made in 2019 are detailed by property in this disclosure as well as our current IFRS value for the group. By applying even the most conservative assumptions, it's clear that there is material value to be realized, including for the portion, we have conservatively included in our IFRS NAV. While 2019 was no doubt our biggest year ever for zoning submissions, we are planning an additional 4 million square feet more in 2020, taking our 2-year total to roughly 13 million square feet. Our MD&A now provides insight into the individual properties that comprise our 25 million square foot density pipeline. It also highlights that certain properties haven't been included in our pipeline yet. Properties such as Pemberton Plaza in North Vancouver or the 42 acres we own under Meadowvale Towne Centre in Mississauga, among many others. It's reasonable to assume that these properties will be densified in the future. But our vision and plans haven't evolved to the point of inclusion yet. So this is a future growth opportunity. Looking forward to 2020. We are very focused on unearthing the true value of FCR. As we pursue our Super Urban strategy, we come face-to-face with the paradox of a successful real estate strategy in the arena of the public markets, quarterly metrics versus midterm and long-term value creation. We're well aware that selling our higher-yielding properties to reduce debt, pressures FFO initially. We're also well focused on the future value creation that our Super Urban strategy represents in the midterm. So we will strive to balance metrics like FFO over the short term as we surface the unrealized value in our 25 million square foot density pipeline, all of which is located in the strongest urban growth markets of Canada, and have visible runway for continued and material NAV growth. Our management team is up to this challenge. We intend to deliver on our promise to delever. And until we do so, future investments will be aimed at enhancing properties, which are core to our strategy. We'll continue our efforts to obtain additional entitlements, and we are ramping up our efforts to secure partnerships with partners who share our vision of creating thriving urban neighborhoods. The world is witnessing many new challenges, and the call for increased attention to ESG matters is increasing rapidly. Our Super Urban strategy meshes perfectly with increasing demands from stakeholders related to ESG. Creating a thriving urban neighborhood requires a different vision than managing traditional grocery-anchored shopping centers, one which is extremely well aligned with our approach to sustainability and will enable us to make even more progress in this area. Transit-oriented locations, parks and public realm within our mixed use developments, minimizing shadow impact and pedestrian-friendly projects are as important as our quest for LEED and BOMA BEST certifications. FCR is proud to have always taken a leadership position in sustainable practices, both for new and existing properties, and we're determined to maintain our leadership position. I want to conclude by acknowledging the incredible efforts of the FCR team in 2019. It was a tremendous year. And it's amazing to see how they have rallied behind our Super Urban strategy, our new REIT structure and our new brand. Most importantly, our team has never been stronger, and I know they're up to the challenge of executing our new vision. I'll now pass things over to Kay, who will speak to our fourth quarter and annual results in more detail. Kay?
Thank you, Adam. Good afternoon, everyone, and thank you for joining us on our call today. As Adam mentioned, it was a transformational and very busy year at FCR. We are quite pleased with all of the progress we made towards achieving our strategic objectives and the strong operating metrics we posted for the year. I would like to highlight some of the key strategic milestones, and then take you through the results in more detail. Early in 2019, we introduced our Super Urban strategy and the metrics we used to measure our progress in advancing this strategy. These metrics include the average population density within a 5-kilometer radius of our properties, the proximity of our properties to transit, our portfolio's walkability score, growth in our average rental rate, increasing our density pipeline and achieving our disposition targets. We made very good progress across all of these objectives in 2019. As Adam mentioned, our average population density reached 290,000 and is well on track to achieve our target of 300,000. Over 99% of our properties are now located within a 5-minute walk to public transit, up from our Q3 level of 90%. And this improvement was primarily due to the Q4 disposition of $468 million of properties that were inconsistent with our Super Urban strategy. Our portfolio's walkability score is 78, which is considered very walkable, and where most errands can be accomplished on foot. Our average rental rate grew a record 5% in 2019, well above our 5-year historical average growth rate of 2.4%. During the year, our density pipeline grew by 2.5 million square feet to 25 million square feet. Currently, 7.1 million square feet or 28.4% of this density, up from 12.9% last year, is included in our NAV. 0.6 million square feet is included as part of our active developments and the remaining 6.5 million square feet is valued at $506 million or $78 per square foot. This is an increase of $349 million over the prior year due primarily to acquisitions of property with meaningful incremental density potential as well as entitlements received during the year. We included in this $506 million any vacant land parcels or properties we purchased for development, including properties like Christie Cookie, 1071 King Street West, 400 King Street West, Yonge and Roselawn and 140 Yorkville. We also include land parcels adjacent to existing IPP centers, such as those at Place Portobello and Place Viau. Zone density that is not encumbered by a lease, such as Phase 1 of Humbertown and Class Panama are also included. Class Panama would be the largest property in terms of density that's included here as it's owned for 2 million square feet. Notwithstanding that these properties are currently included in our NAV, this does not mean that there is less upside here than in the rest of our pipeline. For example, our Christie Cookie asset, which is not yet zoned for our intended use, is included here at cost with an incremental density of only 300,000 of square feet, which is based on the current in-place zoning versus the 3.5 million square feet we submitted for. Both of these numbers at are -- are at our 50% ownership interest in this asset.In April of 2019, we became a widely held company. This was accomplished via our repurchase of 36 million common shares from Gazit, combined with the closing of the secondary offering by Gazit for an additional 22 million shares. Upon closing of these transactions, Gazit's ownership in FCR declined from 33.3% to 9.9%. And since that time, Gazit has sold a portion of its remaining interest in FCR, reducing its current ownership to 4.4%. Following the share repurchase, we have been focused on reducing our leverage back to similar levels as at year-end 2018 through our disposition program. In 2019, we completed $835 million in dispositions and made good progress towards our deleveraging objective. One of our key strategic objectives for 2019 was converting from a corporation into a real estate investment trust or a REIT. On December 30, we successfully completed the conversion and began trading on the TSX under the symbol FCR.UN. As a result of the conversion, we expect to be included in the S&P/TSX Capped REIT Index in March of this year. As part of our year-end reporting, we enhanced the disclosures around our density pipeline in our MD&A by including a breakdown of the density by urban markets. We have also shown the individual list of properties where we have already submitted entitlement applications or is planned to submit in 2020. These properties make up roughly 16 million of the 25 million square feet of incremental in total density within our portfolio. We have disclosed our active developments, as we always do as well as a list of the additional properties that largely account for the remaining incremental density within our portfolio. As discussed previously, based on current market conditions, we expect to recognize meaningful increases to our IFRS values once approvals for these submissions are received. We have also highlighted properties with meaningful incremental density that are not at the stage where we would include them in our pipeline, but are likely to be included at some point in the future. That summarizes the significant progress we made during 2019 in advancing our Super Urban strategy. Now turning to the financial results. On Slide 6 of our conference call deck, which is available on our website in the Investors section under Earnings and Reporting, we outlined factors driving the year-over-year change in FFO. For 2019, we achieved FFO growth of 2% or $0.02 on a per unit basis. Excluding the costs related to our REIT conversion, FFO per diluted unit increased 3.3% over the prior year. Moving to Slide 7. Our same-property NOI increased by 3% for the fourth quarter and 3.3% for the year, driven by rent escalations, higher occupancy levels and higher lease surrender fees. On Slide 8, we show our lease renewal activity. For the fourth consecutive quarter, we achieved double-digit increases on our lease renewal rates when comparing the rental rate in the last year of the expiring term to the first year of the renewal term. And for the seventh consecutive quarter, when comparing the rental rate in the last year of the expiring term to the average rental rate in the renewal term. Our total portfolio lease renewal lift for 2019 was a very solid 10.7% on 2.5 million square feet of renewals using the first year of the renewal term and at 12.4% when using the average rental rate in the renewal term. Moving to Slide 9. Our average net rental rate grew a record 5% over the prior year to $21.25 per square foot. This growth was primarily due to renewal lists, rent escalations, development completions and dispositions of our leased urban properties. Our development completions for 2019 included 201,000 square feet of new commercial GLA and 247 residential units. The completions were primarily in our mixed-use King High Line project located in Liberty Village in Toronto. On Slide 10, our total portfolio occupancy rate increased by 20 basis points over the prior year to 96.9%. Slide 11 highlights our 2019 development spend. The vast majority of this investment totaling $166 million was in Super Urban neighborhoods. Slide 12 shows the factors impacting FFO and the year-over-year changes. Slide 13 touches on our other gains, losses and expenses, which are included in FFO. For the fourth quarter, we recognized $3.1 million of other expenses, primarily due to REIT conversion costs of $3 million. For 2019, we recognized $2.4 million in net other expenses, primarily due to REIT conversion costs and transaction costs related to the Gazit secondary offering, being partially offset by a $4 million gain on a proptech investment and the additional proceeds we received from Target. Slide 14 summarizes our ACFO metric. During 2019, we generated $252 million in adjusted cash flow from operations. Slide 15 summarizes our 2019 financing activities. To fund the share repurchase transaction, we put in place $850 million of unsecured bank term loans in the first half of 2019, and repaid $100 million of these loans in the fourth quarter with proceeds from our disposition activity. Additionally, in July, we completed the issuance of $200 million of 7.5-year unsecured debentures, with an interest rate of 3.5% and use of proceeds to repay other debt, including $150 million of maturing debentures with a much higher interest rate of 5.6%. Slide 16 summarizes the size of our operating credit facilities and our unencumbered asset pool as well as our key financial ratios. At year-end, $7 billion or 69% of our assets were unencumbered, and we had approximately $800 million of availability under our revolving credit facility. As previously stated, we have a goal to return our leverage metrics to similar levels as at year-end 2018 within 2 years of the share repurchase transaction. We made good progress in the quarter with debt-to-assets declining quarter-over-quarter from 48.9% to 46.7%, and debt-to-EBITDA declining from 10.8x to 10.0x. Our path to achieve our targets will show a steady decline in our debt-to-asset ratio. However, this will not be the case for debt-to-EBITDA, given EBITDA is calculated on a trailing 12-month basis, and debt is at a point in time. We expect an uptick in this metric in the first half of 2020, but that it will remain below Q3 2019 levels, followed by a decline in the second half of the year to below Q4 2019 levels. Slide 17 shows our term debt ladder. Over the course of 2019, our weighted average interest rate declined from 4.2% to 4%. Looking forward to 2020, we expect same-property NOI growth to be in the range of 2% to 3%. We expect our 2020 lease renewal lift to be in the range of 8% to 10%. We plan to invest between $150 million to $200 million in development, and we expect our development completions to be a similar amount at $150 million to $200 million. We expect to take a small amount of space off-line for development, approximately 40,000 square feet of GLA, primarily in Phase 2 of our Wilderton project as construction continues. At the start of our disposition program, we stated we were targeting approximately $1.5 billion in dispositions. During 2019, we completed $835 million of dispositions. Based on the strategic acquisitions we made in Q3 2019 together with the success we've had thus far with our disposition program, and the fact that the remaining asset should garner even more interest, we expect to exceed our $1.5 billion target. As a result of the progress we made in 2019 against our disposition program and related deleveraging targets, our portfolio today has higher-quality assets with increased density and stronger growth profiles and less downside risk, making it more desirable and more attractive than ever before. All of this is very positive. But in the short term, there is an impact to FFO. And as such, we do expect FFO to decline in 2020. Notwithstanding this, we do expect continued growth in NAV during the year and growth in FFO to resume in 2021. Overall, we are very pleased with the progress we made in 2019. It was a truly remarkable year for FCR. And I would like to congratulate and thank our entire team for their outstanding efforts and accomplishments during the year. We are very proud of all the milestones that our team achieved and look forward to executing on our strategy and objectives in the year ahead. At this time, we would be happy to answer any questions you have. Operator, can you please open the call for questions?
[Operator Instructions] The first question is from Mark Rothschild.
In regards to your same-property NOI, to what extent was that 3% impacted from asset sales that may have been a slower growth assets? And looking forward, do you expect leasing spreads to accelerate and be stronger in 2020 following the large number of asset sales?
Mark, thanks for your questions. In 2019, there was very little impact on same-property NOI from asset sales. So our view longer-term is that the assets we're investing in, have a better growth profile than the assets we're selling. Although the assets we're selling do have a growth profile, just not as strong or compelling based on what we see over the longer term. But as you know, year-to-year, sometimes things happen. And you can't read too much into trends one year to the next. 2019 was an example of that. So there was actually very little impact on same-property NOI based on assets moving buckets as a result of dispositions. And sorry, what -- just so I'm clear on your second question, would you mind repeating it?
Yes. In regards to leasing spreads that have been around the low double-digit range, would you expect that to be stronger in 2020 following the asset sales that you completed last year?
Yes. Again, it's hard to say in any one year, but Kay provided, I guess, soft guidance on kind of 8% to 10% expected for 2020. I can tell you the way our leasing group budgets, we've consistently exceeded what they have budgeted in terms of lease renewal list. We'll see if that's the case in 2020. So I would say, we've had -- we've seen an acceleration in the lifts on renewals over the past year. And so our expectation is that we continue to hang in at around that range.
Okay. Great. And my only other question. In regards to the entitlements and there's the different tables on D&A and is the $9 million that you submitted this past year, can you maybe quantify somewhat on what would the value be in the market to the extent one of these assets would trade now on a -- maybe on a buildable foot on the residential side? And then how would that change pre- and post-entitlement?
Well, I mean, look, we've got a pretty wide range when you look at the properties that are included in that list. So we have some density in South Surrey that's kind of at the low end of the range. And that would be mid-double-digit values today. And then we've got density at the opposite end of the range that's in the neighborhood of $300 a buildable foot for that type of density. I'm talking residential density, the commercial is typically higher. But the residential density is the lion's share of it. So the reason we put this disclosure in is, again, to support our objective of trying to surface some of this unrecognized value that we see in the pipeline. And so we think that for stakeholders, they can take a look at this list, they can go into the actual submissions, which is public information. And they can form a view on -- based on work that if they're prepared to do or the knowledge of the market, or they can form a view on the rough value of each of these properties and the density and how much density is expected, and then compare that to the IFRS NAV. So we -- our goal was to provide disclosure that can get people into a ballpark with an educated set of assumptions. And so we obviously have our view. We've got to be careful, given these are zoning submissions, not completions. And so we're in some cases -- in some circumstances, we're in sensitive discussions with stakeholders like the city and community. So we're reluctant to talk more about that at this stage, but we think we've provided the information that allows investors to get into the ballpark.
The following question is from Dean Wilkinson.
Adam, maybe just a follow-up on Mark's question. On the $6.5 million density that's currently valued at $506 million, that's $78 per square foot. Do you have a range of sort of the low and the high on where those density figures are? I mean, you've seen some numbers sort of core GTA where you might be pushing as high as $200 per square foot for some of these. And just trying to get a sense of the range of that in looking at the $9 million that's sort of in the hopper?
Yes. I mean, GTA, you could say $200, Toronto proper, which is where the majority of this is located, and in many of these neighborhoods, it's well north of that. So I mean, it's really tough to put a specific value on it. And again, we've tried to lay it out. The one thing that I think is very important to flag is that because it's included in our IFRS NAV, does not mean that we've taken our market value for the density and apply it by the expected density. In fact, the majority of it is carried at our cost. But if we buy a piece of land, and Christie Cookie is a great example, it's sitting in our IFRS NAV. But it's sitting at our IFRS NAV at our cost. And the density that's been included in the NAV is the in-place zone density, which is about 300,000 square feet at FCR shares. So I want to make it very clear that while it's included in our IFRS NAV, that should not be directly linked to the expected zone value. So in fact, there are some properties that are included in our IFRS NAV that on successful zoning, we think we'll have more of an increase in value than some of the properties that aren't even included in the NAV. So I think it's an important distinction. We -- our policy on how we value this density and when it gets included in the pipeline, when it gets included in IFRS NAV, I would say, given the options is more on the conservative side. And so until we have a lot of clarity around the zoning that will be achieved, I would say, there's a pretty big gap between what it's carried out on our balance sheet, if it's carried at all and what that value is.
And then in terms of the process of that markup. So as soon as you've got sort of the entitlement and the approval in hand, do you then go back and look at, okay, so now we'll put a value per square foot on those buildable approved footages? Or is it in reference with the market?
Yes.
Okay. That's how you look at it?
Yes, yes. That's what we do. And in some cases, like in the case of 400 King Street, we would reach the settlement with City Council. And so in our view, we've now removed the rezoning risk. And so that did trigger a write-up that the formal rezoning will take place sometime in the next couple of months, Jodi? In March. Okay. So technically, it's not rezoned, but from a practical perspective, we have a settlement with the city on what the zoning will be. And so that was good enough for us to have our appraiser factor that into the valuation, that triggered a write up.
Got it. And can you remind us when you get those approvals and you get that write-up in place, is there an increased component of carry vis-à-vis a tax assessment or anything of that effect? Or it's just a valuation exercise?
Yes, it's just a valuation exercise. I mean, it depends on the municipality. Some will charge your taxes on the highest and best use, whether you've pursued a path of rezoning to that use or not and others. So it depends on the municipality, but typically, there is not a correlation between carrying cost, tax assessment versus when we included in our IFRS NAV or when we write things up based on rezoning progress.
Got it. And then in terms of how you're looking at those, the debt metrics, have you incorporated any of this forward view of that zoning? Or would that tend to sort of be accretive to your debt measures, at least on a book value basis as they come in?
Yes, we haven't -- I mean, unfortunately -- fortunately, the majority of this density is in Toronto. Unfortunately, there's a bit of a backlog in the city getting this zoning done. So our expectation is that the rezoning for the majority of this density will be achieved past the, I guess, the initial milestone date that we set, which was 2 years from last April. So we have not baked that in. But if we fast forward past that time period, our expectation is that some of this density will get developed by us, some of it will sell a partial interest, a strategic partner and codevelop and some of it, I would expect we will sell outright. And so obviously, the sale of outright -- air rights is very positive for debt metrics with little to no earnings accretion. So that bodes very well for starting to look at 2021, 2022, 2023, but we haven't factored it into what we've been talking to the market about in terms of our shorter-term debt metric objectives.
Okay. Great. And then just sort of a final small housekeeping for me. Looking at the Montreal assets, looks like the counter to maybe the rest of your markets, the average rents in place there went down a tick from last year. Was there a big lease renewal or something that happened there? Or was that sale of assets that would have driven that difference?
The only thing that -- no, we didn't have rents go down in Montréal. We sold assets, but the assets we sold had a lower average rent than what we hung on to. So maybe we can take this off-line, Dean, and you can tell us what you're looking at, and we'll help walk through it. Because it...
Yes, yes. So disclosure on Page 8 that -- second line item. So okay, that would be great.
We'll take a look at it right after this and get back to you.
The following question is from Johann Rodrigues.
Sorry, just a couple of clarifications. That -- the $506 million or the 6.5 million square feet, that's made up of all of the pre-2019 entitlement in some portion of the 2019? Or...
Johann, it's Kay. In terms of what I said in my script, I'll just kind of go back to that. So any vacant land parcel or property that we purchased for redevelopment is included in that $506 million. So that's certainly a portion of it. And I referenced some assets like Christie Cookie, 1071 King Street West, Yonge and Roselawn and 140 Yorkville. So that's one component. Excess land parcels adjacent to IPP centers, that's another component because we've got to value those land parcels at something. They're valued separately than the IPP centers. And I mentioned Place Portobello, Place Viau, as both having examples of that. And then the third one would be the zone density. And so I mentioned Phase 1 of Humbertown and Place Panama, both of those are unencumbered by leases. So they would be included in this number.
Okay. So on the pre-2019 entitlement applications, you've got 8 properties there. Only the first 2 Panama and Humbertown are included in that figure, and then the remaining 6 are not?
The majority would be included there because they are zoned as referenced in the table above, not all of these are zoned. So something like Applebee Village is one of the properties that's not zoned. So it would not be included at this stage.
Okay. Okay. That's helpful. And then I just want to make sure I heard you guys correctly. In terms of the $1.5 billion you mentioned at the end that you expected to exceed that total, was that because you expect better pricing on the sales? Or are you plan on selling additional properties?
Both. Yes, both. I mean, part of it is when we set the $1.5 billion target, that was strictly related to getting our leverage back to where it was, with little expected in the way of acquisitions. And then a couple of very strategic ones materialized in Q3, which you would have seen. And so part of it is an uptick from that. Part of it is our conviction in the ability to continue to execute. Because if you say we're half done in the first half in terms of assets, depth of the market for buyers, pricing, et cetera, the first half, we expect it to be tougher than the second half, just given the quality of the assets and the way the environment is and where there's capital and demand for the types of different properties in the various markets. So it's a combination of the acquisitions we did, which kind of required that to go up a bit, slightly better pricing expected and that's the main reason.
Okay. And then the soft guidance of 2% to 3% same-property NOI, is that stable same-property NOI? Or does that include developments?
Yes. Well, as you know, we -- if there's development of any consequence, it's not included in same-property at all. So that other bucket that you're referring to is the one we look at. And in some cases, it's -- we end up demolishing space. So we see development trigger a reduction in the leasable area. So if there's any development of any consequence, the property is not in same-property period in any bucket. So it's the -- but we look at total same property. That's the reference it's been made to.
The following question is from Sam Damiani.
Just on the FFO guidance aside from being down a little bit year-over-year in 2020, can you be a little more specific on the quantity, talking $0.01 to $0.02, $0.03 to $0.04?
Well, look. One -- I'm sure Kay wants to jump in on this one. But before she does, we sold $835 million of real estate this year. The majority, not all, but the majority is IPP. I would describe this as the bottom of our portfolio. I hate to use that word because most of those real estate is actually good real estate. But the average cap rate was about 6%, okay? So I mean, if you just run the simple math on the spread between the 6% and the cost of debt, you can get into a certain level of dilution pretty quickly. So I think that's an important starting point. Kay?
Yes. I'm happy to jump in. So within the MD&A, we've made disclosure on the NOI loss from dispositions, the NOI from acquisitions. We show you development completions. We show you development yield. We've given you soft guidance on same-property NOI growth. And you know there's an impact from the weighted average unit change, given the share repurchase transaction. I think if you triangulate on that data, you can come very close to coming up with a good estimate for FFO next year.
That's where they pay us the big bucks.
Yes. Very big bucks.
But yes -- well, that's another matter. But I guess, when we look at dispositions, I mean, $800 million last year, that's a pretty fulsome pace. Do you see continuing that level in 2020? Or perhaps transacting a little more slowly in the near term?
Look, at this stage, we're still early in the year. But I would say that based on what we see now, we think it's likely we come in the same type of neighborhood. The assets are a little better that we're looking to divest of. There's going to be more partial interest than it were last year, which actually makes it easier for us. We actually have a number of institutional investors that are much more keen to buy partial interest with us as their partner then 100% interest. And the environment in general, there appears to be more capital, looking for investment in the type of real estate that we'd be looking to divest than there was last year at this time. So based on what we see now, it's likely to be a similarly active year in 2020, which works well for us because we -- there's a clear relationship between the level of dispositions we do and the deleveraging. And we're confident that, especially based on the assets we sell that the dilution to earnings from selling these properties, given the growth profile of the business on what remains, we think we should get adequate multiple expansion to offset that.
Okay. That's helpful. And the added disclosure this quarter is very helpful. And just to finish off. On the $506 million, back to that. The handful of properties that you mentioned, most of which were in Toronto, and the only one that seems that actually has or effectively has its zoning in place is 400 King. So is it fair to say...
That's actually the one that doesn't have -- that one, we expect will have its full zoning in March. Applebee Village does not have zoning yet. We expect that relatively soon, but the rest do. So Panama's zoning is in place. Humbertown's in place, Wilderton is in place, Long Street actually is not in place. And then the last 2, Rutherford and 200 West Esplanade are in place.
Okay. I was actually referring to, I think, it was Kay mentioned a handful of properties in that bucket being Christie Cookie, 1071 King, 400 King, Yonge and Roselawn, 140 Yorkville?
Okay. So yes, this is the group of properties that we submitted for in 2019.
Sorry, those are -- those are in the $506 million. Isn't that right?
That's correct. And some of those are recent acquisitions. So you take 140 Yorkville, it would be included at the cost we acquired it at.
Right. And what square footage would you have for that asset? Because you don't have a...
Christie?
No, for 140 Yorkville.
Well, 140 Yorkville, we -- it actually technically is zoned. We're looking for a rezoning to change things. So the -- what we would have adopted is the zoning that's in place.
The $78 a foot does seem on the low side for most of the properties that you mentioned? So I just wanted to...
Yes, yes. It is, it is. But this is why we wanted to put the disclosure out. Because -- just because we say it's in our IFRS NAV, it doesn't mean there's not a lot of value to be realized on rezoning. So obviously, 140 Yorkville is in our NAV at a higher number than $78 a foot. But when you look at the group, and that's why it was important for us to put this out and you use reasonable assumptions, it's clear that there's a lot of value to be realized on rezoning. So we're not telling you the $78 a foot is current market value. We're trying to give you a data point that people can make assumptions on, and get -- basically get into a ballpark on what is expected in terms of value creation on the full successful zoning of these properties.
Okay. And then just finally, then I'll turn it back is, on the list of 2019 applications, which are the first 1 or 2 larger properties where you expect to receive approval?
Sam, it's Jodi. So we have -- we submitted for 13 applications in 2019. And the ones that are, I say, more advanced than the others, the 1071 King is pretty well advanced. So we expect to see that complete itself very soon. Following that, I'd say, Yonge and Roselawn. It will be next one, that should happen. And over in Montréal, Plaza Baie-d'Urf will come later on as well. So I'm sort of giving you a general idea of what we expect to happen. 1071 King and Yonge and Roselawn being, I'd say, the very next wave that will come through. And then following that, we have things like Semiahmoo, Royal Orchard, either one York Mills in Toronto, that will come following. I'd say further down the list, Christie Cookie is a big process, as you know. And so -- and we submitted official plan application last year. 2020 will be the Christie Cookie zoning submission. And so we have a big process for there. So that's a bit further down the line. But the rest of them are -- over the next 12 months, we should see some of these early ones come through.
The following question is from Pammi Bir.
I think most of my questions were answered. Just maybe one to clarify on the, I guess, recognition of value for zoning. Just to clarify, so once it's zoned, you will then -- or successfully rezoned, you would then recognize value. But then do they also need to be unencumbered by leases? Because I do recall, there was some commentary, and I think you made reference to that in the past.
Absolutely. Yes. They -- look, there's a couple of catalysts and triggers for a variety of milestones that range from being included in the pipeline to begin with. Because I can tell you the pipeline after combing all the properties is much bigger than 25 million square feet. But until we have, in our view, a credible visible plan that can be executed, it doesn't get included. And then once it gets rezoned, rezoning is great, but there's other things that impact the value and lease encumbrance is one. And so to the extent there is an encumbrance, whether it's from leasing or otherwise, then absolutely, that will play into the overall valuation for IFRS purposes.
And then just on the 2019 applications that were filed, I guess, on the almost 9 million square feet. Any rough sense of what, I guess, the weighted average lease term left on these properties is?
Most of them are pretty clean. I mean, Dufferin Corners is probably one of the more encumbered ones. Staples Lougheed, we're 7 years max of term, could be as low as 2. Court St. Luke has some encumbrances . I think the rest are pretty clean.
Okay. So it looks like then, with the exception of those 2 or 3 properties to your comment earlier that could take maybe a couple of years for this to get through the process, maybe 3. Fair to say that maybe in 2020, there's perhaps not as much value recognized this year, but as it gets through, it could be lumpy. In other words, I guess, 2021 and 2022 could be bigger years for actual recognition of value.
Yes. Look, I think as time goes on over the next few years, given we have entitlement in '19, that's getting added to in '20, that will get added to in '21. Yes, I'd say it's safe to say as time goes on, the value creation from this program is going to accelerate. The other thing that's worth noting, that's tied to your question is, properties being encumbered is not a new thing for us. So we can go back to a lot of things we've developed over the last number of years, and they were encumbered. But we find ways to unencumber them. We have good relationships with a lot of the national tenants that'd encumber some of these properties. The value creation is such that we have some chips to work with, help facilitate it getting unencumbered. And so it's not that it's encumbered, and there's nothing we can do about it. For retailers that are there, there's ways that -- and tenants that are there, there's ways that we can deal with it in a way that's a win-win for both sides. In a lot of cases, we can offer a tenant a new format, whether it's bigger, smaller, different locations, better loading, better access exposure, change in lease terms, all sorts of things -- all sorts of tools we have to help facilitate that. So if we have included it in an entitlement application, you should definitely assume we have a vision to get at that density in a reasonable period of time, including where it's encumbered.
Got it. Just one last one. As we are generally in a weaker -- typically weaker period of Q1 for closures, you're [indiscernible] generally seen much of that. Can you maybe just comment on what you're seeing in the broader retail market in terms of, I guess, seasonal closures through Q1 so far?
Yes. I'll have -- Carm's with us as well. So he's kind of on the front line of that. I'll pass it over to him. I'll caveat by saying our business is a very specific subsector of retail. And it's -- we're far less exposed to retailers that sell discretionary goods and services and retailers that are more trouble. If you look at a lot of the bankruptcies that have happened over the last 2 or 3 years, there's been almost no impact in the FCR portfolio. And if you look at when our tenants where we do have defaults, it's been pretty steady for many years now and not a lot of seasonality to it. But I'll turn it over to Carm to explain to you from his perspective, what he's been seeing on the ground.
Tenant closures have been relatively consistent for us over the past 3 years. We've seen -- what we've seen in the marketplace is pretty much normal churn. And we always view this as an opportunity in many cases to replace tired tenants with better offerings. Not surprising, some of the more active closure categories we are seeing are some of our most active new categories, such as full service restaurants, health and beauty, QSR and medical offices. Many of these are owner or franchise operated, many are retiring -- many haven't invest in their businesses or haven't innovated. And they're being replaced by, quite frankly, just better operators. But we're not seeing anything yet that's caused us to be concerned.
Yes. A lot of times, we like the use, we still in the use, and we replaced the operator with the same use and with success. So -- but it's very tough in our business. There's not a lot of seasonality. When you look at the sales patterns, obviously, at the end of the year is a little higher than other parts, but not nearly to the same magnitude of like fashion-type retail and more discretionary-type retail.
Yes. No, understood. Just trying to get a pulse on what you're seeing from the ground in the broader market, but that was very helpful.
Okay. Well, I'm surprised it was very helpful, but I'm glad you found it that way, Pammi.
The following question is from Jenny Ma.
Just want to clarify a point about dispositions and the leverage. So you say that you anticipate the leverage to go down to year-end 2018 levels. Is that assumption based on the 15% of asset sales? Or is it based on the additional sales that you talked about earlier in the call?
Well, firstly, we're going to get back to where we were on debt-to-assets before debt-to-EBITDA because of the -- just the way our investment activities have evolved. So I would say it's in between -- it's also going to depend on where our investment spend comes in 2020. So it's a little bit fluid, and I don't think the goal posts are super wide on the dispositions. So I don't know if that's helpful or not, Jenny, but we -- I don't -- we don't have like an exact debt metric matrix on $1.5 billion versus some of the other assumptions we made. Kay, do we?
No. But I would assume that for your purpose, Jenny, that our target, as I said, is above the $1.5 billion. So you should be assuming a number above that for your debt metric calculations.
Okay. Yes. There's a lot of moving parts, obviously. Would it be reasonable to assume a range? Because a year ago, you sort of started at the 10% to 15% mark. Would 15% to 20% be a reasonable range for total dispositions after this program is all said and done?
I think it's in that range. I doubt we'll get to the top end of your range.
And then I would add, Jenny, that dispositions have always been a part of our business. So even when the disposition program concludes, I wouldn't say that you should expect no dispositions going forward after that.
Okay. And then I want to talk a little bit about pricing. So it looks like based on your disclosure that it came in at about 5.6% on the 2019 stuff. But if we just look at the much smaller held-for-sale bucket, it looks like the implied cap on that is closer to 6.5%. So I'm just wondering if you could talk about what you expect from -- in the fulsome disposition program. Is 6.5% is sort of indicative of that second half? Or if that's very specific to the held-for-sale bucket?
Yes, it's specific to the held-for-sale bucket. The -- I think what you're taking to get to the 5.6% is the NOI that we've disclosed on dispositions divided by the $835 million. But the $835 million includes a little bit of air rights. So on our math, the cap rate's close to 6%, not 5.6%, so 6%. But that's what -- for the IPP dispositions we made, it's in that range, just under 6%. I'd say at this stage, that's probably -- look, in our internal models, we're using 6%. I'll be disappointed if it's not slightly lower than 6%. But we're using 6%.
Okay. Great. And then you did mention that you expect some more JVs with some institutional partners. Just wondering if you can comment on for some of the exits in the smaller markets, what kind of buyer profile you're seeing for these assets? Like, for example, in Red Deer or Teatro Verde, who's coming to the table in those markets?
Teatro Verde was a private local investor. Red Deer is a private REIT. So we're seeing -- I mean, if you look at the broader program, it's been small public REITs, small- and medium-sized pension funds, private equity capital, large family offices that have a focus on specific geographic regions. Life insurance companies...
Yes, a local player.
Yes. So it's been pretty broad-based, and that's where we continue to see demand. If there's -- the uptick we've seen is a little deeper in what I would describe as more of the institutional bucket, where institutions that were quite adverse to investing additional capital in retail have now kind of analyzed the various buckets of retail and found grocery-anchored retail as a compelling place to be. And that was not the case a year ago. So...
Okay. That's great to hear. And then my last question is, can you provide an update on the leasing of the residential component of King High Line?
Yes, we can.
Jenny, it's Jodi. Happy to answer that question. So as of now, this week, we're at 263 out of 506 units. And so we're very pleased with this. We're well on track, and we're -- but more importantly, we're actually getting the leasing rates that we're looking for, which is north of $4 a foot. And so it's going according to plan.
Yes. We started -- I really cap read our operating partner on the resi component, started leasing that midyear 2019. We've had a lot of dialogue with them. There's a clear relationship between leasing velocity and rent. They have a very strong conviction that we have the right balance right now. So we could certainly lease it up quicker. But they see -- and we're very well aligned, given the deal structure. So we defer to them on this, and they feel we have a very, very good balance between leasing velocity and the rental rates that we're achieving.
And just one more quick question. Remind me that if this one doesn't get rent controlled because of the timing of completion, is that the case?
No. We're not subject to rent control. Because the legislation changed and it changed at the perfect time for us. So we're out of that.
The following question is from Tal Woolley.
Adam, I'm wondering, just to go back to Jenny and Johann's question, just about dispositions, you're sort of talking about maybe upsizing the program a little bit over the longer term. I'm just wondering if we go out even further, like when you're talking to the board when you're talking amongst our management team like what is the right mix of grocery-anchored retail versus mixed-use for the future. Like, what do you guys see that mix ultimately being?
We talk about the mix of not by asset class, but by quality of real estate and investment in super urban neighborhoods. So we -- that's where the focus is. So we look at some retail, and we say this is phenomenal retail. We have a lot of conviction that a lot of money can be made on it, without densification just in its current form over the next 5, 10, 20 years. And then we look at other retail and we say -- but we don't have the same level of conviction. We look at some of the office space we own, same thing, some of the residential space, same thing. So it's really about the quality of the real estate. We don't have targets on mixed-use, resi retail, we want phenomenal real estate. And every year that goes by, we want the bar on average portfolio quality to continue to rise.
So it's not a question of like, if someone came in and bid for 20% of your retail at a 5% premium to NAV, you'd be a taker of that right away? Like -- that's not your view at all?
Sorry, can you repeat that, Tal?
I was just going to say if someone -- like if there were -- if we could take that sort of transaction costs and the timing and everything out of it, and if someone came in with a really solid bid for like a significant chunk of your existing sort of retail portfolio, that's not necessarily a bid you would take today?
No, it depends on the real estate.
Okay. On the $506 million in density value in the NAV, what's the current loan-to-value outstanding against those properties that are included in that?
Probably close to 0. But...
Yes. I would have to take a look at it, Tal. I don't know that number off the top of my head. But the majority of our assets are unencumbered. So high level, I would say you can assume a small amount.
Yes. And where we have encumbered properties, generally, there are properties that are chunky in size and where we don't anticipate making a lot of changes to them over the next 10 years. So it's unlikely that we have debt on any of these properties.
Okay. And then I guess, just my last question. We saw a fairly significant trade of a urban-focused portfolio of retail assets in the face with Palm Land getting bought this week. Do you have any thoughts or feelings about how that -- when you look at that, there was a set of very highly productive retail assets with good locations that could be redeveloped. Obviously, I've been talking with some investors, some parallels were drawn between yourself and their. Like what was your sort of -- looking at that transaction, what did you -- how did you feel about how it should go in terms of valuation?
Yes. Look, the market is very different there. And that's a different retail asset class than what we own. So we didn't draw a lot of similarities or a lot of strong takeaways. Our business or the environment in Canada.
[Operator Instructions] The following question is from Mike Markidis.
Maybe just 2 parts here. First, looking at the entitlements that you have outstanding in your existing pipeline that's actually active in end production. What could we expect to get added over the next 12 months or so? Would be the first part. And then second part, just given the way that's expected to evolve, how should we be thinking about your development investment in 2021 and 2022 versus the $150 million to $200 million that you expect this year?
Okay. I'll answer the second question. And then, Jodi, if you don't mind taking the first one. So look, right now, the first step in this process of unearthing some of those unrecognized value for us is through the rezoning process. And that's going to take the better part to 2 years. So once we've realized that uplift from securing entitlements, then we're going to have various options. We can -- most of these are income-producing properties. So we can do nothing for a period of time and continue to grow the cash flow from the existing tenants. And these are generally neighborhoods that are getting better and better over time. So we can do that. We can initiate developing the density on our own. We can sell a partial interest to strategic partners. And in some cases, we can outright sell the density where there isn't a strong of a strategic fit for First Capital. We're likely to do all of those. The mix of the various buckets is going to have to be determined as we get closer, and we'll make decisions for each property and the overall program. We're going to look at a bunch of factors besides the strategic fit of the properties and the amount of development profit to be realized by taking it through the full development process. Our overall capacity, both human resource wise, but also capital and balance sheet wise. And if you look at how much has changed over the last 2 years, you can understand why I would be reluctant to commit to what the magnitude will look like in 2 or 3 years from now. What we know is it's a great road that leads to great things. Where we go from there, we have lot -- we'll have lots of options, but it'd be premature for us to start indicating at this stage what concrete steps we'll take, how much our development spend will change by, if any, at that time. It's just a little too early.
Okay. And then just in terms of any of the pre-2019s that you think might get put into production in the next 12 months or so? Or is that still too early to say at this point?
No. I think we can give you some color around, at least some of those.
Mike, it's Jodi. So in terms of the pre-'19, the each that are on the list, these are other than, as we mentioned, 400 King, which is -- got settled with the city of Toronto Council last July. And...
Sorry, Jodi. I think I'll correct us if we're wrong. But I think your question is, what are these will actually go into production in terms of construction.
Correct.
Was that your question?
It was.
Okay. Very good. Okay. So on the pre-'19 list, is that what we're looking at? Or just in generally?
Yes. Well, just in -- just generally. Sure.
Generally. Okay. So -- well, what we -- there's some that we have partnerships already established. So those are going to go into production very soon. So first phase of Humbertown, so that's a pre-'19. It's been zoned for a while. And our partner is Tridel. So we expect that to go BNUD next year in 2021 in the first quarter. So the early part of next year. 400 King would move into production as well, that's getting zoned. Wilderton Phase 2 will also be 2021. As soon as Phase 1 is complete, Phase 2 gets to start, and we have a partner as well for Wilderton Phase 2. Long Street already has some base zoning, but we partnered with a local developer, and we're going to increase our zoning. So we're going to try and get some more density. And I would expect that will be in production in the next couple of years. Rutherford marketplace, that's 50 town homes, where we partnered with Greenpark. Those have done very well with presales. And so those homes are going to start construction as soon as we're out of winter, and we'll close on those probably in the first quarter of next year. And 200 West Esplanade, also, we expect to get a local partner. They're in North Vancouver at Cressey and we'll be NUD on that one at the end of this year, probably Q4. So following that, the 2019 submissions, obviously, those have to go through the zoning process. But as I mentioned earlier, things like Yonge and Roselawn and 1071 King are well advanced. 1071 King, we have a partner already. And so as soon as we go to get our entitlements, it's a vacant piece of land. So that will be in production, I would say, in 2021. And then the list will continue from there. So I would expect that us to have a sizable amount that will start in 2021, and there will be probably 2 that will start later this year. We also expect Panama Phase 1 could start at the end of this year or early next year as well. Not a mixed-use development Leaside, adjacent to our Leaside shopping center, retail expansion of the shopping center is already in UD. And that will be complete in the next year in 2021.
The following question is from Sam Damiani.
Just a follow-up on some leasing either for Carm or I'm not sure if Jordie is in the room. But how is the lease-up of the Brewery District and also One Bloor East?
Okay. They're both in the room. And I think you're going to get to hear from both of them on this one.
Sam, it's Jordie. So with respect to -- so with respect to One Bloor, I would say the lease-up, as you know, has been slower than we would have liked. But I would say to you, in light of the performance of Nordstroms, McEwans and the opening of Chick-fil-A, which has received a lot of attention. By virtue of that, we are starting to get a tremendous amount of inbound calls. And I would suggest to you, we are confident about the prospects going forward. It's a great piece of real estate, as you know. It's one that we have a strong conviction about. And we know at the end of the day, it's going to be worth more than we paid for it.
So I hear, there's a Tokyo Smoke opening up at One Bloor. Is that a firm deal? Or are they -- I think they are...
That is a firm deal. Yes. They are in possession, in fact, paying rent.
What unit are they taking?
They're taking the Bloor Street frontage or a portion of the Bloor Street frontage at grade.
Grade. Okay.
Yes. So we don't have much left there now. And we -- like Jordie said, we're in negotiations actually with a couple of groups for the balance, but there's not much left at this point. Okay, Brewery District.
All right. Brewery District. As a reminder, this project is a 300,000 square foot mixed-use project retail and office. As you would typically expect early on, we experienced very strong leasing velocity. We finalized significant deals with Loblaw, Shoppers Drug Mart, GoodLife, Winners, TD Bank. Deal Velocity has slowed, but the centers continue to draw interest. And in the second half of the year, we actually finalized about 35,000 square feet of deals consisting some office tenants, a medical use, fast food and a 23,000 square foot second floor retail box, which was the toughest space to lease because it could not be demised. So we're also in active negotiations with additional restaurant and other large retail format group. So things are good.
Yes. So Brewery, to Carm's point, it took a little longer than we expected to get through the final space. But credit to him and his team that they did a lot of leg work and really broke the back on the balances towards the second half of the year. So we would have thought it would happen earlier, but a lot of progress towards the end of last year.
There are no further questions registered at this time. I will now turn the meeting back over to Mr. Paul.
Okay. Thank you very much, operator. Thank you, everyone, for your time this afternoon, and your continued interest in First Capital. Clearly, continues to be a very busy time. And we 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. We thank you for your participation.