First Capital Real Estate Investment Trust
TSX:FCR.UN
Earnings Call Analysis
Q4-2023 Analysis
First Capital Real Estate Investment Trust
In a year marked by economic turbulence and rising interest rates, the company demonstrated a remarkable sense of resilience. The fourth quarter net operating income (NOI) showed a slight increase to $109.3 million from the previous quarter, where same-property NOI, excluding lease termination fees and bad debt recoveries, rose by 3.3% year-over-year. This growth in NOI was driven by higher base rents and improved recoveries, yet it's important to note that property dispositions led to a $2.8 million decrease in NOI. Interestingly, other income sources contributed an additional $2.4 million year-over-year, thanks primarily to new acquisitions and developments like Cedar Bay.
In a compelling twist, despite sweeping interest rate hikes over the past two years, the company's interest expense remained steady. This is due to an astute financial strategy that mitigated the potential jump in interest expense that could have been $11 million annually. The company's optimization plan, introduced in September 2022, allowed them to effectively weather the interest rate storm, resulting in a net debt increase of over $350 million but safeguarding the bottom line. Additionally, the full year funds from operations (FFO) per share slightly decreased from $1.19 in 2022 to $1.18 in 2023.
The company's operational metrics exhibited strength, with a fourth-quarter occupancy rate of 96.2%, an increase from the previous quarter. Renewal leasing volume was robust, with renewals being executed at a notable average increase of 13.5%, pushing the full year renewal leasing spread to 12.1%. These conditions propelled the December 31, 2023, in-place portfolio net rent per square foot to $23.34, setting a new record and marking a 1.7% increase year-over-year.
Looking ahead, some of the trends affecting the latter part of 2023 are expected to persist into 2024. This includes challenges with same-property NOI growth, partly because new leases won't produce cash rent in the first half of the year. The company anticipates this will have a continued impact on NOI growth, with an approximate 140 basis points effect per quarter, equalling nearly 70 basis points for annual 2024 same-property NOI growth.
Despite facing an array of external pressures, the company maintained a strong financial position. As of the year-end, liquidity was robust, with $6 billion of unencumbered assets and nearly $800 million in unrestricted liquidity. Furthermore, a prudent effort to reduce net debt led to a decrease to 9.9x from 10.1x in net debt-to-EBITDA ratio, emphasizing the company's disciplined focus on debt management and liquidity preservation in challenging times.
You don't have any saved screeners yet
Good afternoon. Thank you for standing by. Welcome to the First Capital REIT Q4 Conference Call. [Operator Instructions]. I would now like to turn the meeting 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. A summary of these underlying assumptions, risks and uncertainties is contained in our securities filings, including our MD&A for the year ended December 31, 2023, and our current AIF, which are available on SEDAR and 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 to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this 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. 2023 was a busy and successful year. But before we get into our results, I want to start with some perspective on the strong fundamentals supporting our business. One of the main drivers of these underlying fundamentals has been the significant increase in the customer base of our tenants. Over the last 2 years alone, Canada's population has grown by 2.1 million people. That's a staggering number for a country of our size, representing a 5.4% increase. First Capital properties are located in neighborhoods within Canada's largest markets, which are precisely the areas that are attracting the majority of this growth. This population increase creates more demand for everything, particularly the necessity-based goods and services that our tenants sell. Against that backdrop, there has been almost no new supply of grocery-anchored centers for several years. There are 2 main barriers to entry for new supply in the neighborhood our properties are located. The first are physical barriers. Clients are scarce given the urban nature of our portfolio. And for sites that do exist, high-density residential is typically the highest value use. The second barrier is economic. Replacement costs, mainly from higher construction and soft costs have increased significantly over the last few years. They are well in excess of current market values for grocery-anchored centers, which makes it highly unlikely there will be any new supply over the foreseeable future. The combination of high population growth and a lack of new supply continues to reduce the square footage per capita of FCR type retail. In terms of inflation, it too is having an impact. 75%of our top 20 tenants are public companies. So we know that inflation has benefited their top line sales and importantly, their profit margins have largely remained intact. This means that store profitability and therefore, rent paying capability have improved. Against that backdrop, our leasing pipeline remains deep with many of our tenants pursuing an expansion of their physical footprint. This includes all the major grocery stores. For instance, our largest tenant, Loblaws is to open 40 new stores across our grocery and pharmacy banners. It also includes restaurants across the spectrum, such as Chick-fil-A, McDonald's, Firehouse Subs Chipotle and many others seeking large expansions. Jersey Mikes is another example. They're seeking 300 locations across BC, Ontario and Alberta. It includes the fitness category with Goodlife, Planet Fitness and Anytime Fitness growing their location count. It also includes the pet category across multiple retailers. For instance, Pet Valu is targeting 40 to 50 new stores per year. Daycares are expanding as well. Solar general merchandise retailers, such as Winners and the likes of Dollarama, who, for example, are aiming for 30 new stores per year over the foreseeable future. I could go on. The point is fundamentals are solid, so we continue to expect strong operating performance and that came through in our 2023 results. Occupancy improved by 30 basis points since Q3 to 96.2%. Lease renewal spreads also continued to track well. In 2021, they were 8.6%. In 2022, they increased to 9.5%. And in 2023, they jumped to 12.1%, our strongest since 2009. Our leasing activity led to an average in-place rental rate at year-end of $23.34 per square foot. This is higher than all of our peers, and it's also a record at FCR, a record we expect to equip this year. During 2023, we made important and meaningful progress on our optimization plan. Our investment team had an outstanding year executing this plan. Jordy will provide some color on the transactions we announced yesterday. But in total, we are now at over $630 million of dispositions under the plan at an average yield of less than 3% and an average premium to premark IFRS carry value equal to 21%. The new sales we announced yesterday had a much higher [indiscernible]. This outsized premium was heavily weighted to a development property in which our zoning progress is well advanced. However, under our valuation policy, the value uplift isn't recognized until a series of conditions are made. One of these conditions is obtaining the foldable boning permissions, which is imminent. Therefore, we believe the buyer valued the property on a fully zoned basis, which drove such a high premium to IFRS NAV. Our collective investment activity continues to demonstrate that we can sell the right assets for FCR at big prices. I know many are focused on how we're tracking against our $1 billion target, and we are clearly on track. But what's more meaningful than disposition volume is that we're tracking ahead on the objectives of the plan. Specifically, our targets on growth in FFO per unit and on lower debt to EBITDA. Our disposition activity is largely neutralizing a significant headwind that the entire real estate sector is facing, which is, of course, higher interest rates. This is having a positive impact on FFO per unit. Now we have some noise impacting the headline number in Q4, but as Neil will explain, it is just noise with continued strength in the underlying business. Our investment activities are also having a positive impact on our debt to EBITDA, which has decreased by 1 full turn in the last 5 quarters and having lower still. Lower debt-to-EBITDA is important for our cost of unsecured debt capital and it's also important to our equity investors and our FFO multiple specifically. Lastly, we believe that many of the assets we're selling have not been fully valued by traditional REIT investors when they assess FCR. The bottom line is that our investment activities are increasing the value of First Capital. Now we're pleased with our progress, but we will continue pushing forward and working hard for our investors. That's a good segue into our upcoming Investor Day, which we've also been very busy preparing for. We're going to cover several important things on February 21. This is an in-person event. And based on our current registration levels, we're going to have a great turnout. For those who haven't registered, please do so, and we look forward to welcoming you. And with that, I will now pass things over to Neil.
Thank you, Adam, and good afternoon to all of our call participants. As is customary, we have posted a quarterly conference call presentation on our website at fcr.ca. In my prepared remarks today, I will make references to that presentation. Overall, we are very pleased with the performance of the business through the final quarter of 2023. Thematically, FCR's operating and financial results were slightly better than our internal projections. Beginning with Slide 6 of the presentation. Fourth quarter funds from operations were $58 million. This was a $22.5 million decline from $80.5 million in the fourth quarter of 2022. The reported results were $0.27 on a per unit basis relative to $0.37 in the fourth quarter of 2022. As you can see near the bottom of Slide 6, there was a large year-over-year decrease in FCR's other gains, losses and expenses or OGLE, as we commonly refer to them. In Q4 2022, OGLE was positive $12.7 million. In Q4 2023, it was negative $9.7 million. In both periods, OGLE was almost entirely comprised of noncash mark-to-market gains and losses that we are required to recognize each quarter under IFRS. We see these amounts as entirely independent of FCR's operating results. Therefore, Q4 FFO prior to OGLE was $67.7 million. This equated to $0.32 on a per unit basis, which was an improvement of 1% relative to Q4 2022. Now let's take a moment to walk through the components of Q4 FFO. Total net operating income of $109.8 million was $2.3 million lower year-over-year. While not shown on this slide, I do note that Q4 NOI increased slightly from $109.3 million in Q3. Same-property NOI prior to lease termination fees and bad debt recoveries was $101.1 million, a 3.3% increase year-over-year. Higher base rents and improved recoveries were the key drivers. Now working against this core growth rate was the fact that lease termination fees and bad debt recoveries totaled $1 million in the recent period. This was much lower than the outsized $6.2 million amount recognized in the fourth quarter of last year. Moving down to NOI. On a year-over-year basis, property dispositions accounted for $2.8 million of lost NOI. And finally, other NOI of $6.9 million improved by $2.4 million year-over-year. The increase was mostly related to 2022 and 2023 acquisitions as well as contributions from developments coming online, including the likes of our Cedar Bay redevelopment, which began generating rental income in the back half of last year. Moving further down the FFO statements. Q4 interest and other income was $6.7 million. This was $900,000 higher year-over-year due primarily to higher average cash balances as well as higher short-term interest rates. Q4 corporate expenses were $9.1 million. Again, this was $900,000 lower year-over-year and $800,000 lower relative to the third quarter. While G&A expenses can fluctuate from quarter-to-quarter, we remain proactive in managing corporate expenses and most of the trend line growth here relates to low inflationary type increases in salaries and compensation costs. Interest expense was $39.1 million in Q4 2023. This was little changed from $39.3 million in Q2 and $38.8 million in the fourth quarter of 2022. This is noteworthy. Interest rates have increased a lot in the last 2 years. If we take the fourth quarter in isolation, FCR's weighted average in-place interest rate was approximately 25 basis points higher than it was in the fourth quarter of 2022. So if we hold all other variables confident on $4.2 billion of total debt this would have otherwise resulted in an $11 million increase in annualized interest expense. This is a big number, but we have mitigated the impact. FCR's ability to diminish the interest rate headwinds, which is impacting many, if not all of our peers, is a direct outcome from the successful execution to date on the optimization plan. The plan is a key differentiator for FCR. And since announcing the optimization plan in September 2022, the REIT's total net debt has increased by more than $350 million. Slide 7 summarizes our full year results. I do not intend to review these in detail, but the bottom row of the slide shows that FFO per unit prior to OGLE was approximately $1.18 in 2023 versus $1.19 in 2022. Now both years had a few income and expense items that were nonrecurring, including the lease termination fees and a debt recoveries that I previously cited, but also including some restructuring costs that were included in G&A, so nonrecurring other income as well as cost in both 2022 and 2023 related to unitholder activism. Slide 8 outlines the components of OGLE and is provided primarily for reference purposes. But to emphasize the key takeaway here, the components of Q4 OGLE are almost entirely unrealized mark-to-market income and expense items. As you can see for the quarter, the gains and losses relate to financings or derivatives that are employed as part of our financing initiatives, where over the fullness of time, the sum total of these unrealized gains and losses will ultimately net to 0. Referencing Slides 9 and 10, FCR's operating performance metrics finished the year with strength. As I've touched on some of these already, but to elaborate just a bit, Q4 occupancy was 96.2%, up 30 basis points in the quarter as we had 155,000 square feet of tenant possessions relative to 103,000 square feet of closures. Fourth quarter renewal leasing volume of 672,000 square feet was stronger than Q3's activity and generally consistent with that of Q4 2022. These renewals in the quarter were affected at a strong average increase of 13.5%, bringing the full year renewal leasing spread to 12.1% on 2.3 million square feet of volume. And so with these conditions at hand, our December 31, 2023, in-place portfolio net rent per square foot reached $23.34, an all-time high and an increase of 1.7% year-over-year. Slides 11 and 12 provide a distribution payout ratio metrics. These 2 are mostly for informational purposes, and they show how we view and measure cash generation and sustaining capital expenditure requirements within the business. The key takeaway for 2023, FCR generated $233 million of adjusted cash flow from operations relative to $184 million of cash distributions, thus equating to a 79% payout ratio. Advancing to Slide 13, the REIT's net asset value per unit at December 31 was $21.95. This is relative to $21.26 at September 30 and $23.48 1 year prior. So on this basis, FCR's NAV increased by 3% or $0.69 per unit in the fourth quarter, while it decreased by $1.53 per unit or nearly 7% over the course of 2023. During Q4, we recorded a net fair value increase on investment properties of $168 million. Now for additional color, there was really 3 components of the Q4 adjustments. Firstly, a $127 million net fair value increase related to small yield changes. During the fourth quarter, the portfolio weighted average cap rate compressed by approximately 10 basis points to 5.5%. I would describe these valuation adjustments as some fine-tuning. For added context, you may recall that they followed a sizable round of adjustments in the third quarter when the REIT's weighted average cap rate increased by 30 basis points, and this had the effect of reducing the portfolio's value by $457 million in that quarter. The second notable component of the Q3 revaluation was $61 million of fair value increases that were specifically related to marking certain property carrying values up to their contracted sale prices. These valuation increases were partly offset by a third factor, which was a net decrease of $20 million related to individual cash flow modeling, including capital expenditures. And providing an update on capital deployment, as summarized on Slide 14. During Q4, we reinvested $50 million into the portfolio. This included $27 million into future income properties and residential developments and $26 million in the portfolio CapEx and leasing costs. For 2023, in its entire development expenditures were up $130 million. Slide 15 summarizes key financing activities over the course of 2023. Now during our third quarter results conference call, we discussed the Series 2 senior unsecured debenture maturity and the new $150 million unsecured term loans that are listed here in the Q4 activity. One additional point I will add is that in mid-November, we preemptively addressed 2024 second largest debt maturity. More specifically, a $200 million unsecured term loan that was due on March 29. In this regard, we extended the loan for approximately 5 years to a new maturity date of January 2029. The loan 3.17% interest rate remains in place until the end of March and thereafter, the interest rate increases to a fixed rate of 5.8% through maturity. Reflecting this extension, our 2024 debt maturities consist primarily of a $300 million senior unsecured debenture due at the end of August and 6 property-specific mortgages having an aggregate balance of $162 million. FCR's debt maturity profile is reflected on Slides 16 and 17. So turning to Slide 18, I'll make 3 key points on debt and liquidity. But first, Q4 net debt was $4.1 million. This is a decline of a little more than $50 million during Q4 and more than $100 million year-over-year. Secondly, FCR's trailing 4th quarter EBITDA of $412 million held steady relative to Q3. And in combination with the lower debt, net debt-to-EBITDA decreased to 9.9x from 10.1x. And thirdly, FCR's liquidity and financial strength remains excellent. At year-end REIT had $6 billion of unencumbered assets and nearly $800 million of unrestricted liquidity comprised of $700 million of revolving credit facilities that were undrawn and $92 million of cash. So to wrap up, we look forward with optimism towards the year ahead. I will note, however, that there are -- some of the trends that impacted the latter part of 2023, will continue into 2024, including same-property NOI growth. As you're likely aware, FCR's same-property NOI is derived on a cash rent basis. So notwithstanding the recent leasing successes at our [indiscernible] East property. For the first half of this year, we will have no cash rent on these new leases. So just as the lost NOI on the 40,000 square feet of space that was formerly occupied by Nordsee was a drag on NOI growth in the back half of 2023. This will continue for the first half of 2024. To date, the cost of this carry has been approximately 140 basis points per quarter. Therefore, the full effect on annual 2024 same-property NOI growth will be close to 70 basis points. Moreover, amidst a challenged environment, we also have an office lease in Montreal that is rolling off on March 1. The annual gross rent on this space is $3.3 million, and this will present a headwind to 2021 same-property NOI growth. On the disposition front, we've made great progress on our optimization plan. And this year, we are targeting more than $400 million of asset sales. Similar to the nearly $500 million of dispositions that were completed under the optimization plan to date to December 31, you should expect 2024 transactions to be a mix of development and density sites and some low-yield income properties. On a blended basis, we expect the lost NOI yield on this year's dispositions to average 3% or less. And we have some good momentum established as evidenced by the $157 million of transactions that are subject to firm sale agreements with closings scheduled in the first quarter. And with that, I'll now turn the session to Jodi to provide an investment update.
Thanks, Neil, and good afternoon. Today, I'm going to provide you with a brief update on our investment activities and our progress this quarter in particular. In Q4, we closed on $58.5 million of previously disclosed assets. The assets were sold include our Sterling retail property located in the Kerrisdale neighborhood in Vancouver. Sterling is a single tenant, 30,000 square foot space leased to Sabon Foods who operate a store on the ground floor for residential condominium. Sabon has a long-term fixed rate lease with little growth. We bought this property in 2018 on their lease commencement date, and our sales price is greater than the price we have paid. We also sold a further 25% interest in our Young and Rosa mixed-use development project to our partner, Woodward. Pursuant to the sale, we retained a 50% interest. In Q4, we entered in combining the agreements to sell an additional $116 million of income producing and development assets. These assets are being sold at a 40% premium to our pre-mark IFRS. As Adam had mentioned, this unusually high premium primarily relates to our Royal Orchard sale, the details of which I will touch on short. This brings the total amount sales under our plan to over $630 million. The run rate yield on these assets is less than 3%, which is consistent with the objectives set out in our plan. Included amongst the income-producing assets for which we have a binding agreement to sell is our circa residential property located in Richmond, B.C. The property was built by FCR in 2013. It consists of 68 residential units and above-grade partner loans. The in-place tenancies are all subject to rent control, and turnover is exceptionally low. So projected income growth is muted. We will reallocate the capital from the sale to higher growth alternatives. Circle Residential sits about 3 retail units that do not form part of the transaction. This retail will be retained and continued to pull part of our related broad more shopping center. The purchaser waived its conditions in late December and will close in March 2024. As mentioned in Q4, we entered into a binding agreement to sell our interest in our Royal Orchard broker. The properties and development site located at Yonnoyal Orchard and Thorn Hill and the transaction will close later this month. Given the residential growth of the surrounding neighborhood and the pending lease expiration, we saw an opportunity to intensify the profit. In 2021, as part of our entitlement program, we submitted an application for 3 residential towers and 1.6 million square feet of density. We expect municipal approvals for this density later in the quarter. In Q4, we also reached to sell a 42% interest of our 1071 King Street West residential development project to Woodborn, an existing strategic partner and a leading operator and developer of residential multifamily apartments. Pursuant to this transaction, FCR will retain a 25% interest in this quality, purpose-built residential rental development site located here in Liberty Village. In addition to the proceeds on closing, Woodborn will reimburse FCR for their proportionate share of costs incurred to date. Last, in Q4, we entered into a binding agreement to sell 71 King, a small 5-story, 45,000 square foot medical office building located in Mississauga. The total sale price reflected its Q3 2023 IFRS values. In Q4, we invested $27 million in our development projects. This investment was broad-based and included our Cedar Bay and our 400 King Street projects in Toronto and our 200 West Espana project in Vancouver. We have continued to advance our entitlement ladder as well. In Q4, we submitted applications for an additional 1.5 million square feet of incremental density. To date, we've submitted for entitlements on over 17.3 million square feet of incremental density, representing 73% of our 24 million square foot pipe. In 2023, we've also received approvals for 2.5 million square feet, bringing our total approved density to more than 10.9 million square feet. As you'll note, it was a very busy Q4 on the back of a very busy year. We expect that this pace will continue into 2024 and look forward to updating you with our progress. And with that, operator, we can now open it up for questions.
[Operator Instructions] Our first question is from Mario Saric from Scotiabank.
I want to touch on the leasing environment and kind of broader tenant trends. Specifically, first question would be on the renewal spread this quarter. I know it's not disclosed, but can you give us a sense of what percentage of the 670,000 square feet of leasing that was in this quarter had contractual rental escalators in it? I'm just trying to get a bit more color in terms of the composition of the lift this quarter.
Yes. So I guess the way we've described the renewals that occurred in the fourth quarter is very typical. We had 2 major fixed flat rate renewals. So we had a Walmart and a grocery store that both had fixed rate options at a flat rent. That was nearly 20% of the total volume. We also had another grocery store that went to market that saw an 86% rent increase. So those are 2 opposite ends of the spectrum, but if you take a look at our previous activity, it's actually pretty typical.
Okay. And then, Adam, maybe for Jordi. If you look back over your experience within the retail industry and you think about the new record international integration and negligible supply, you pointed out, how would you characterize your view of First Capital pricing power with CRU tenants today? Like on a scale of one to 10, let's say, what's tending in the strongest year recently.
Well, it's definitely closer to 10 than one.. It's been good. Leasing has been good. We own great properties. The macro trends have been working in our favor. It certainly feels and appears that, that will persist for the foreseeable future. Our portfolio is near full north of 96% occupancy. So it affords us the opportunity to not only generate much higher rents, but we're constantly trying to upgrade the quality of the merchandising mix and retail dynamic and changes over long periods of time. So we still -- we do a lot of work asset-by-asset, space-by-space, looking for the best retailers we can bring in under the different uses that we think serves the needs of the community and the best -- and ultimately, we're trying to drive the highest sales per square foot in the entire center. So from an asset strategy perspective, we're getting more leverage where we lose leverage is tenants that have options where in some cases, there's an opportunity to upgrade the exercise of the option, so we work with the tenant. But generally, the fundamentals have been very strong, and we've been taking advantage of that and it's starting to come through in our numbers.
Okay. And then just you mentioned 96% occupancy. If we pro forma on lower, I guess that goes up closer to the mid-97%, or a bit higher than the 97%. I mean how many percentage of your lease maturing at '24. So look in the context of the market today and taking into consideration that [indicernible] we expect in the COVID government tenant programs like CEBA starting to taper off. But taking all that into consideration, what do you think can be achieved occupancy-wise by the end of the year if you have the target?
Yes. So keep in mind that 31,000 of the 40,000 square foot Nordstrom space is reflected in the occupancy number. So Neil touched on that our same property NOI is reported on a cash rent paying basis. Keep in mind that our occupancy is on a tenant possession basis. So you mentioned the office lease in Montreal. The other data point I'd point you to is in our 25-year history, our all-time high occupancy was 96.9% in the fourth quarter of 2019. So we view where we are now at near full occupancy, the bandwidth for this business over that 25 years is roughly 95% to 97%. We're kind of in the middle of that. We think there's a good chance we grind our way a little bit higher, but we would describe our current occupancy is near full.
And just maybe on the CEBA. Are you seeing any implications on that so far with your questions or that...
No. There's a couple of things we -- yes, there's a couple of things that we keep reading about that we see absolutely no evidence in the business whatsoever. One is that what you referenced. We don't think any of our tenants are dependent on that or impacted by that from a rent paying capability perspective. The second is on the restaurant category. There's no shortage of articles around lack of profitability across restaurants. We are seeing the absolute opposite. We have hundreds of restaurants. I'm not sure they've ever been in better shape in our portfolio than they are today. The demand beyond the ones we have is exceptional. And so we would actually describe that category as exceptionally strong today. But the CEBA alone issue, we see absolutely no evidence in our business whatsoever.
Our following question is from Dean Wilkinson from CIBC.
Just wanted to clarify, Adam, on the $157 million of asset sales that are going to happen Q1 of this year, you said that they had not all been reflected in terms of your IFRS valuation. Is that to say that we would expect something in the order of $60 million, $70 million gain, which will increase the book value there? Or just I'm trying to get a sense of what's already in the numbers.
Yes. Well, we certainly stay clear about Double County be to clarify the comments is the numbers we reported at the end of Q4 and the IFRS value lift to $21.95 includes marking the asset sales we announced to the sale price. So that is already baked in. So the premium to IFRS NAV that we reported is the pre-mark IFRS debt. So think of it as the Q3 . [indiscernible] Yes. So the $60 million is fully baked. And so any further contributions to NAV premiums to NAV that come about from asset sales move beyond ones we announced in the future.
Got it. And would those asset sales be all cash? Or is there a debt component associated with paying something off there?
They're all cash. There's one property that's got a small outstanding mortgage. We expect the mortgage to be paid out on closing -- it's a small -- it's a 7-figure dollar value to give you an idea. So it's not big [indiscernible] all subject to cash purchases. There's no -- certainly no B2B financing or anything in that nature that the objectives we're trying to accomplish. So...
Great. And that actually leads into the next question then. So if I take that plus the cash on hand, you're sitting, call it, just around $0.25 billion of cash when these close. You've got the leverage under 10x now. Would that have you being a little more aggressive on the buyback given the discount to your book value? Or how are you thinking about the utilization of, let's call it, war chest?
Yes. I'm sure Neil has got some commentary on this because I know he spends a lot of time thinking about this and planning for this. What I can tell you is we while we have the real estate business. So fortunately, we've got some really attractive real estate investment opportunities. So some of the capital is going to be invested in that. But Neil, do you want to expand on how we're thinking about your specific question.
Thanks, Adam. Yes, thinking about this, your question might actually really a little bit more to maybe why didn't we buy back stock in the fourth quarter, for instance. And on the heels of maybe my response at the time in the third quarter conference call when we commented on how rates were actually rising quite rapidly at the time and that actually was a factor that caused us to pull back at the time from our buyback activity. And so through the fourth quarter, interest rates were declining, but we really -- we did not buy back any stock. And I would say at the time, it really was more so a timing issue. If you think about our prior comments and asset sales, I think we've been pretty consistent to say that the default application of funds will be debt repayment because we view the statements that we've made to bondholders and unitholders as being really commitments. And through the fourth quarter, while interest rates were declining, the fact of the matter was that we didn't go firm on our asset sales, so very, very late in the quarter and then before you know or through year-end and into our blackout. So look, the bottom line is it's easy for us to generate NAV accretion, if you will, on buying back units and at today's price or somewhat higher or somewhat lower. Our focus is to make sure that we generate FFO accretion on those repurchases as well. And interest rates do have a lot to do with that equation, both interest rates and credit spreads. So you'll see our activity when we report it as we're required to do so. We have to come out of the blackout period. And to your point, we've got lots of confidence in our near-term liquidity.
And you're not double accounting.
The following question is from Sam Damiani from TD Cowen.
First question, Adam, you mentioned the portfolio optimization plan, I guess, success to date is you're tracking ahead on FFO and leverage. Could you be a bit more specific as to how that impacts your targets for year-end? And also, how are you thinking about what the REIT will do beyond 2024 on the balance sheet front?
Yes. And just to clarify, when we came out with the plan a little over a year ago, we said that by the end of 2024 or call it, calendar '24, our objective was FFO that's greater than $1.20. We feel like we're tracking ahead of that. we said that our total debt would be less than $4 billion. We feel like we are tracking ahead of that. And importantly, we said that our debt to EBITDA would be less than 10x, which it already is. So the only thing we'd say on 2024, Neil may have more to share, but we do see a benefit of taking our debt-to-EBITDA lower. We see a benefit to unsecured credit and the cost of that, which we plan to continue to utilize. Very importantly, we see a benefit to our FFO multiples. We've spent a lot of time with equity investors over the past 12 to 18 months. There's a very consistent theme that we've heard. And so that's a very important factor. So where we were starting, it was a 2-year plan. We felt that was a reasonable objective. We're happy to be going through that. That shouldn't be interpreted as we're there and we're done. I said in my opening remarks, we're prepared to take it lower. We're not prepared at this point to expand any further on that, though.
And then just on 1071 King now that you've sort of set your JV with Woodbourne and others. Is there an intention to start construction on that rental residential project in the near to medium term?
Sam, it's Jodi. So the answer is yes, we're actually on site doing our geothermal work as we speak. And the intention is to probably start showing an excavation, I would say, into the second half of this year.
There's a couple of things that happened with that property. One is we obtained a little more density going in for variance. And as you know, Sam, most multiuse residential rental properties do not pencil out today. Most does not mean all. This is one of the rare ones that actually do. It's why we were able to bring full invest in as a capital investor is why we were able to bring Woodbourne in the pricing is strong, and that's because the deal actually works. So that's when where our intention is to go forward. We've got pretty clear objectives we're laser focused on with respect to FFO and credit metrics. And so reducing our interest down to 25% is what we had hoped to do, and we feel like that's the right equity investment percentage to balance the objective we have and retaining some upside on the development as it goes forward, which we expect to formally commence in the next few months.
So between 1071 King and Young and Roseland, how would the stabilized yields on cost pencil out on average between these 2 projects?
That's strong enough for us to make the decision to go forward. We've never put out our formal target on return or development yields. But the [indiscernible] the other one that does pencil out part of it because it's got a meaningful retail component, but it does pencil those are the only 2 that we're contemplating from a mixed-use residential rental perspective that we feel due. So the numbers were -- we think there's adequate development margin. Young and Roseland is a bigger development so we're down to 50%. Our objective is to go down a little bit further, but that project is going to start regardless whether we do that or not.
Okay. Great. Last one for me is just -- and I think I know the answer, but what is your tenant watch list looking like today given the hindsight of the holiday season and typical restructuring season in the retail sector?
Yes. As we said before, we don't have that restructuring season. Our tenant base is not discretionary retail oriented. So for some of the discretionary uses, you see this kind of January, February filing season, we've never seen that. And so the watchlist has been and there's like 1 tenant one space on it. We mentioned we work last we've got one small location with the icon big deal space was designed with retail, the depth of our AC 5 is exceptional. So I wouldn't read too much into that. But if you're pressing us for an answer, I'm in a gold new work in Liberty Village in a space that it does says retail and for what it's worth occurring on the rent.
The following question is from Matt Kornack from National Bank Financial.
Just quickly going back to Young & Roseland. Is the view to own for that property and maybe broadly speaking, 25% of mixed-use development? Or would the idea be to own the retail component of that development and forgo the multifamily component at the end of the day?
Yes. In these developments, they're pretty complicated. And when you start trying to bifurcate uses with different ownership percentages, it introduces a number of complications that yet to get into the allocation of certain costs that are tough to allocate across certain. So we like the alignment of joint ownership. And so our intent and plan and expectation for Young and Roseland is that whatever interest we own, whether it's 50 or something slightly lower, it will be on the entire field.
Okay. That's fair enough. And then back to Mario's earlier commentary in some of your initial comments around just tenant demand versus supply and the cost to build out new retail. It would seem that you're gaining pricing power as landlords in this space. But can you give us a sense as to where you think those leasing spreads could go? And obviously, given the fixed rate renewals, there's some complexity to it, but is the trajectory we've seen over the last several years what we should expect? Or do you think there's an inflection point where you start to charge more and at a quicker pace?
Well, we've seen them accelerate. I tried to touch on that in my opening remarks. So we've seen them accelerate, everything that we see would indicate continued strength in that regard, we put up a really strong quarter. I always say I never read too much into these metrics in a single quarter because they can be lumpy. But I would say like Q4 was pretty typical. We had a couple of chunky fixed flat rate options that help the spreads back by 200 to 300 basis points on a blended basis, but that's not atypical. So look, we'll see. The environment is good. The demand is good. We're dealing with really strong tenants. We're seeing tenants become more flexible given the fundamental backdrop we outlined. So you're seeing tenants that are being more flexible in terms of the size and the configuration of space given their preferred prototypes. So you've seen a lot of positive things that would indicate that, that strength continues. But we're not in a position to tell you that we think the lease renewal spreads are going to be 16% instead of 12%. We'll see how it plays out. What we do know is things look good.
With regards to dispositions, obviously, Q1, good quarter and at a pretty low implied cap rate. Can you give a sense as to the quantum and maybe timing, if there's any lumpiness to dispositions for the balance of the year? I appreciate the context on what the yield will be on those?
Yes. Well, I can assure you we'll be lumpy. It has been lumpy, but the important thing from our perspective is not what we do in any given quarter. It's are we tracking well? Are we making progress? And we are, and we expect to continue to make progress and some of the reasonings coming down the pipeline are really attractive properties that we think are well suited for disposition in this market. The market construct is something we pay very close attention to, and that's why we've had this success. This is a market where smaller is better. We've -- our entire $630 million has been a bunch of singles, like no transaction has involved more than one property. We're fortunate that we got some chunkier on ones done earlier. The remaining assets averaged by $20 million in value. So that's actually good. That's a sweet spot for us. It's a lot more work. But certainly, weren't something that we're not afraid of or shy from. So we'll see how it shapes up. It will be lumpy. We had a good quarter. Maybe next quarter is a little finer. We don't know, but we do have activities. The pipeline is good. We're encouraged. We're confident that we're going to achieve the objectives that we told the market we would achieve.
And is there anything sacred? Or is everything for sale at the right price?
Look, we sold a lot of real estate. One thing I'll note is not one single property in the multi-tenant grocery-anchored shopping center. So I'm hoping that that tells you something about where we're focused. But no, I mean, look, this is about capital allocation. This is about maximizing the value of the FCR business. This is about monetizing assets that we feel that traditional REIT investors don't fully value. And so in that context, that's what we're focused on. And that's what we continue to be focused on.
And then one quick one for Neil. There was some tax and other recoveries in this quarter outside of bad debt. Should we read any of that as being nonrecurring, and just from a run rate standpoint, if we use Q4 as the base point. I know there was some lease termination income and bad debt recovery, but is there anything else beyond that in the quarter that we should look at?
Yes, Matt. So I'll defer that here referring to property tax recoveries and adjustments occurred in prior year. I would at the margin -- so there were some adjustments in the fourth quarter at the margin, maybe they're a little larger than average, if you will. But these adjustments like they happen all the time almost every quarter, and they are ongoing elements of the business. It's kind of back to like Adam's comment on leasing spreads. Don't read too much into a quarter. They tend to average out over time. And frankly, if there was a slightly bigger adjustment in the fourth quarter of this year that relates to last year, well, it's really income that we should get in theory, in theory, would have recorded last year. So -- but if you're looking at a pure run rate basis, I think your observation is solid.
We'll trim a little bit, but perfect.
Our following question is from Pammi Bir from RBC Capital Markets.
Yes. Just on the disposition program, it's obviously been trending pretty well with rates rising and periods of falling as well. So maybe where we sit today, have you seen any change in the appetite or buyer behavior? Are there maybe more buyers surfacing with rates down from, let's say, last year's high? Or is it sort of the same level of activity?
Yes. I would definitely describe the market as very similar to what has been over the last several months. We were hopeful when the 10-year went from $350 million down to close to $300 million to $310 that would start to deepen the pool. It didn't stay there long enough for that to happen. So there's clearly a lag. But I would say, certainly, over the last say, 9 months or so, it's been very, very consistent. The types of buyers we've been dealing with has been very similar in profile. Do you agree with that?
Yes, 100%. I'm not -- certainly not seen -- we have not seen any meaningful change.
Yes. Yes. So no improvement, but also no deterioration.
Okay. And then just it looks like the targeted rezoning square footage figure over the next few years, I think it's dropped to 6 million square feet from the initial, if I recall, 11 million square feet. So was that just from some successful entitlements received maybe some effective dispositions? Or is it really just an updated view on the timing?
No, you hit the nail on the head. The 2 main drivers of the change where we've agreed to sell a bunch of density, and we've received [indiscernible] on some of it. So it's come off of that.
Okay. So it's not necessarily timing related?
No.
Okay. All right. And then just lastly, I think on one more last quarter, I think you were a bit reluctant to provide the rent lift on the new leases versus what Nordstrom was paying. I think there was obviously still some space in discussions with some prospective tenants. Now that it's done, any color you can share on what that lift look like or what the incremental NOI impact would be?
Yes. Jordy can provide a little color, but not the full color. And the reason we're going to remain a little limited on our commentary for another quarter, is that as you probably know, Nordstrom has made a settlement offer to landlords that we're still in the midst of working through. So I feel like we'll be able to provide a little more detail once we're totally through that. Jordy, anything else?
I wouldn't say a lot more, except maybe at a high level of saying that the aggregate rent will certainly be, I'll say, meaningfully more than what Nordstrom was paying and those leases will have also a higher growth profile.
Yes. And if you take the Q4 run rate, if you take the Q4 run rate, so this will capture more than just the Nordstrom spaces, which is why we can speak to it. But if you take the Q4 run rate to full annualized occupancy, excluding the positive impact that we expect from parking, so just the actual leasable area. That number, Jodi...
Somewhere between $8 million and $9 million.
Yes. So that will give you a little bit of color on what the impact of one will be on the annualized numbers from Q4 through the annualized philosophy, which were the better part of the year outcome.
We have no further questions [indiscernible] at this time. I would now like to turn the meeting over to Adam Paul for closing remarks. Please go ahead.
Okay. Thank you, operator, and thank you, everyone, for once again, taking the time to participate in our conference call. We hope to see you all at our Investor Day on February 21. Thank you very much. Have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Thank you.