First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript

[Operator]

Good afternoon, and thank you for standing by. Welcome to the Q4 2024 Conference Call. [Operator Instructions]. I would now like to turn the conference over to Alison. Please proceed with your presentation.

[Alison Harnick, executive]

Thank you, and good afternoon. 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 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, 2024, 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 non-IFRS financial 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 as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call.

I'll now turn the call over to Adam.

[Adam Paul, executive]

Okay. Thank you very much, Alison. Good afternoon, everyone. Thank you for joining us today for our year-end 2024 conference call. I'll start by bringing you back to our Investor Day, which we held in early 2024 and where we presented a 3-year strategic plan. This plan was designed to be transformative for First Capital in several key respects. Most importantly, it contemplated a significant reshaping of our balance sheet. To achieve this, we would reduce the weighting and dollar amount of 2 key focus areas of our property portfolio.

First, nonstrategic low-yielding properties. Second, properties with no income at all, which are assets held in our property development pipeline. And in both cases, where we had achieved our value-enhancing objectives for the properties to be sold. These reductions were to largely be achieved through a $1 billion divestiture program over the course of the 3-year plan.

The redeployment of the proceeds from the divestiture program over the 3-year time frame were earmarked as roughly 40% towards overall debt reduction, 40% to 50% to be invested in our development program and the remaining 10% to 20% to be allocated opportunistically. Some examples in the opportunistic bucket included potential further debt reduction, compelling acquisitions, such as our purchase last year of the remaining half of Seton Gateway and depending on the cadence of dispositions and the price of FCR units, repurchases of trust units under our NCIB. As we presented the 3-year plan for our investors in early 2024, we stressed the importance of FFO growth during the time frame of our plan and over the long term. It is mission critical for our success.

However, our portfolio and ultimately our balance sheet overweighting in low and no-yield assets was impeding our ability to produce the FFO growth targets that we were aiming to achieve. With these changes to our portfolio and consequently our balance sheet over the 3-year period, we would put First Capital in a much better position to deliver the primary objectives that we set out to achieve for our investors. To reiterate, these objectives were and are quite simply establishing a very solid earnings base in recurring FFO per unit and delivering on a per unit basis consistent growth in FFO, consistent growth in net asset value and absolutely stable, reliable monthly distributions to our investors with consistent growth in these distributions over time.

As we executed the plan, we anticipated that we would deliver FFO growth of at least 3% per annum on average over the 3-year period. This is a very respectable number and importantly, powerful when combined with a simultaneous improvement of our balance sheet.

I'll now go through the results for the first year of the plan. As I do, I will refer to OFFO or operating FFO. OFFO is funds from operations, excluding the impact of items and other gains, losses and expenses. You will have noted that with our 2024 results now reported as the first year of the 3-year plan, our OFFO came in at $1.36 per unit. This represented a year-over-year growth rate of 14.9%. However, as I explained during last quarter's conference call, OFFO, as reported included 2 unusual nonrecurring items in both 2023 and 2024. Excluding these 4 items is more representative of what occurred in the underlying business. And by excluding these items, our OFFO growth rate in 2024 changes from 14.9% and to 5.4%.

The largest contributor to this OFFO growth by far was same-property NOI growth. It increased by $17.7 million or 4.4% due to leasing activity throughout the year. The strong 2024 adjusted OFFO growth rate of 5.4% exceeded our target for the year. This puts FCR in a strong position to achieve our objective of an average of at least 3% per annum over the 3-year plan period. Consistent FFO growth is a critical component for long-term success. We're off to a great start with our 2024 results.

Another key focus of our 3-year plan was to reduce our leverage ratio of debt-to-EBITDA to the low 9s by the end of 2024 and the low 8s by the end of 2026. In 2024, we were able to improve our debt-to-EBITDA by 120 basis points to 8.7x at year-end, nicely exceeding our first year target of a ratio in the low 9s. The two unusual nonrecurring items I flagged earlier in our 2024 OFFO also helped our 2024 EBITDA and consequently, our debt-to-EBITDA ratio. If we adjust EBITDA to remove both the adjusted leverage ratio changes to the low 9s, which is very much in line with our objective for the year.

Other benchmarks and targets that we discussed at our Investor Day included 5 additional metrics for the 2024 year that were embedded in our 3-year plan. One related to dispositions and we had an active year on that front. In 2024, we completed or went firm on 15 divestiture transactions totaling approximately $320 million. They were consistent with our strategy. They collectively have an NOI yield of less than 3% and notably, the assets were sold at an average premium to IFRS NAV of more than 50%.

Earlier, I referred to the $1 billion of divestitures that we are targeting over the next 3 years, an average of approximately $333 million of dispositions per year. This is in line with the $320 million that we delivered in 2024. At our Investor Day, we said that we had actually hoped to deliver closer to $400 million in the first year of the 3-year plan. Overall, we were very happy with the 2024 results that we did achieve, particularly the significant premium to net asset value.

There were also 4 other 2024 metrics that we presented at our Investor Day that were embedded in our plan. These were same-property NOI growth, development expenditures, portfolio CapEx and G&A expenses. I can now report that we met or exceeded the 2024 target that we presented on all 4. Overall, we were very pleased with our 2024 results. FFO growth was solid and above our internal forecast. In fact, the $1.26 per unit adjusted number was a new record, was last set in 2019. Debt to EBITDA improved significantly, which meaningfully improved FCR's cost of debt capital. Same property NOI also came in better than planned.

Lease renewal spreads were very healthy at 12.5%. Occupancy improved by 60 basis points to 96.8% at year-end. It is now 10 basis points away from our all-time high set at the end of 2019, just before the start of the pandemic. And the average net rent in place of $24 set another all-time high. Given our results, significant balance sheet strength and positive outlook, the Board approved a 3% increase to FCR's monthly distribution effective with the January 2025 distribution that is payable in February.

As we've discussed, stability in growth and distributions is one of First Capital's key long-term objectives. So this increase represents an important milestone. However, we do not look at 2024 in isolation, but in the context of our 3-year plan. As we start 2025, the second year of our plan, we are in a strong position to remain on track.

And with that, I will now pass things over to Neil. Neil?

[Neil Downey, executive]

Thanks, Adam, and good afternoon, everyone. Consistent with our usual practice, we have a slide deck available on our website at fcr.ca. And in my remarks today, I will make references to that presentation. So starting with Slide 6. FCR generated OFFO of $68 million in the fourth quarter. This was consistent with the fourth quarter of 2023 and it equated to approximately $0.32 per unit in both periods.

Underlying the recent results were continued solid growth in same property NOI and total NOI, partially offset by higher trust and interest expenses.

To examine the numbers in more detail, let's move to some of the components of FFO starting with net operating income. Q4 total NOI of $115 million increased by $5 million year-over-year. Same-property NOI, excluding lease termination fees and bad debt expense, was $105.5 million, an increase of $3.5 million or 3.4%. Higher base rents and improved recoveries were the key drivers.

On a same-property basis, bad debt expense was $223,000 in Q4 2024 versus a recovery of $462,000 in the fourth quarter of 2023. Same property lease termination fees were approximately $500,000 in each quarter. Acquisition activity added $600,000 to Q4 NOI on a year-over-year basis, while disposition activity accounted for a decrease in NOI growth of approximately $1.4 million. There were no acquisitions in the fourth quarter of 2024, while there were 2 notable dispositions. These included 1629 in the Queensway on November 12. And our 50% interest in 200 West Esplanade Vancouver on December 19. Finally, other non-same-property NOI of $7.1 million improved by $3.1 million year-over-year. Here, the key growth driver was straight-line rent from new leasing.

Moving further down the FFO statement. Q4 interest and other income was $6.4 million, a decrease of $300,000 year-over-year mainly due to lower interest income on average cash balances. Q4 corporate expenses were $10.7 million. This was up year-over-year, but consistent with the prior quarter. Full year G&A expenses were $43.4 million, which was in line with our formerly stated expectations of $42 million to $44 million. Interest expense was $42.2 million in Q4. This was $1 million or 2% lower sequentially, but $3.2 million or 8% higher year-over-year. Notably, Q4 2024 included $1.7 million of nonrecurring costs related to early debt repayment. So normalizing for this, finance costs were down sequentially from Q3, while they increased by 4% year-over-year. We had notable success in managing our interest rate roll-up exposure and our overall debt maturity profile through 2024, and I'll discuss this in a bit more detail in a few minutes.

Turning to Slide 7. This summarizes our full year results. Now recognizing that the only truly new information today is our fourth quarter results, I will be brief here with 2 key points. Firstly, 2024 same-property NOI growth, again, excluding lease termination fees and bad debt expense, was 3.3%. This was consistent with the 3% or better outlook provided with our third quarter results and above the beginning of the year expectations of 2% to 2.5% growth.

Leasing was strong all year long, every bit as good as we thought it would be. Secondly, and moving straight to the bottom line. 2024 operating FFO was $291 million, equating to $1.36 per unit. Excluding the Q2 assignment fee, and the Q3 density bonus revenue, which collectively tallied nearly $21 million, we view normalized FFO for the year at $270 million, which is a snick above $1.26 per unit. So this is a solid growth rate over 2023 and it exceeded our beginning of the year internal projections principally due to leasing, but also due to capital allocation and debt management successes in the face of higher interest rates.

Slides 8 and 9 cover key operating metrics, most of which Adam touched upon already, so I won't discuss these in any more detail. I'll simply note that the themes remained consistent again through the fourth quarter with continued and broad strength across key metrics.

Slides 10 and 11 provide distribution payout ratio metrics. These 2 are mostly for informational purposes, but the key takeaways are simple. The business continues to benefit from solid cash retention. In 2024, FCR generated $232 million of AFFO and $221 million of adjusted cash flow from operations. This is relative to annual distributions equating to $183 million and that puts our AFFO and ACFO payout ratios at 80% and 83%, respectively.

Advancing to Slide 12. FCR's December 31 net asset value per unit was $22.05. This is relative to $21.92 at September 30 and $21.95 one year prior. As you can see, the NAV per unit has been quite stable over the last year. During the fourth quarter, most of the $0.13 per unit increase was from retained FFO as net fair value gains were only $4 million or $0.02 per unit. Taking the full year view, the net change in NAV was about $20 million or $0.10 per unit. Now this is a very small number in the context of more than $9 billion of total assets. But we have a rigorous evaluation process and beneath the surface, there are several components to this increase. The first small changes in cap rates and discount rates resulted in $116 million fair value decrease during the year. Secondly, we also recorded a $65 million fair value decrease related to development density and land values.

On a positive note, cash flow model changes drove a $108 million fair value increase. And fourthly, as it relates to asset sales, those that are closed or under firm contract resulted in a $24 million fair value increase. And finally, most of the balance of the net asset value growth related to retained FFO.

Turning next to capital investments on Slide 13. During the fourth quarter, FCR invested $58 million, including $25 million into the operating portfolio and $33 million into development activities. For the year as a whole, the business invested $223 million. This included $117 million into development and $73 million into portfolio CapEx. Early in the year, in the first quarter, specifically, we also consolidated our ownership interest in Seton Gateway Calgary for $34 million. 2024 is more significant development expenditures included $17 million at Yonge& Roselawn, Toronto, $13 million at Humbertown Shopping Center in Etobicoke, as well as $27 million at EdenbridgeCondos and $18 million at 400 King Toronto.

Slide 14 summarizes key financing activities. During the fourth quarter, we repaid $232 million of debt and originated $203 million of new debt, including the November 1 issuance of the Series D unsecured debentures in the amount of $200 million. These debentures had a 5.6 year term to maturity, a 4.47% effective interest rate and were issued at a spread of 143 basis points. The proceeds were applied to the early repayment of term loans in the amount of $200 million. While we did incur $1.7 million of interest rate swap breakage costs on the early repayment of the term loans the annual savings of $1.3 million from the refinancing provides for a very quick payback.

And just as importantly, the financing reduced risk and added duration to our debt ladder. Overall, 2024 was a very successful year on the financing front. As you can see, we effectively repaid nearly $1 billion of debt and originated approximately $900 million of new debt. Notwithstanding the higher rate environment, particularly in the first half of last year, the financing efforts yielded no rate roll-up.

Moreover, as summarized on Slides 15 and 16, the financings and other activities allowed FCR to maintain a very strong liquidity position of more than $850 million into year-end. And through 2024, we approved most key credit metrics. Notably, these financings also reduced our 2025 and 2026 cumulative debt maturities by about $450 million or more than 25%. They extended our debt ladder to 3.7 years of term from 3.3 years of term at the beginning of the year. We believe these are all great outcomes.

Now before turning the call to Jordie, I will make a few comments related to our 2025 expectations. We achieved or exceeded key 2024 objectives, and we continue to track towards our 3-year targets. Through straight-line rent recognition, the strong 2024 results effectively pulled forth some growth from 2025, and therefore, progress this year may be more level ahead of what we expect to be more meaningful improvements again in 2026. Also during the first half of 2025, there are several factors that may suppress FFO per unit growth. For instance, our year-end liquidity position probably met or exceeded your expectations. And in part, this was due to the earlier-than-planned receipt of a $25 million double-digit interest rate loan receivable in December.

We also expect another similar size higher rate loan repayment to occur in the first half of this year. And finally, our disclosures show that the $131 million of debt due in the first half of 2025 carries a low 3.3% weighted average interest rate. So I just want to highlight these factors for those of you who model FCR's near-term earnings in detail.

In terms of other expectations for 2025, I will outline 4. Firstly, we believe same-property NOI growth should be approximately 4%. For clarity, this growth rate excludes potential lease termination fees and bad debt expense or recovery. As many of you will recall, for almost a year now and as stated at our February Investor Day with our 3-year plan, we've been expecting that 2025 would be a year of stronger organic growth. Our view towards the improvement is predicated in part by leases that are already signed.

So notwithstanding the 2024 strong results, the 2025 expectation remains intact. I will, however, highlight that 2025 cash NOI growth should exceed IFRS NOI growth due to the conversion of straight line rent into cash rents. And remember, IFRS NOI flows through to FFO while cash NOI flows through to AFFO.

Turning to development. We expect 2025 expenditures within a range of $130 million to $160 million. Key projects included Phase 2 of our Humbertown Shopping Center redevelopment, which has recently commenced. While our 1071 King and Yonge & Roselawn purpose-built rental, mixed-use projects are also in full swing. Thirdly, we expect portfolio operational CapEx to be generally consistent with the $73 million incurred in 2024. Internal leasing costs should also be roughly the same as the $8 million incurred last year. And finally, we expect normal inflationary type growth in general and administrative expenses.

This concludes my prepared remarks. I'm now pleased to turn the session to Jordie for an update principally related to development activities.

[Jordan Robins, executive]

Thank you, Neil, and good afternoon. As Adam and Neil have already taken you through the details of our investment program for the quarter and the year, today, I'm going to focus my update on our development, redevelopment and entitlement activities. Construction of our 1071 King Street West development project in Liberty Village is progressing very well. It's a unique flatiron building located in a high-growth neighborhood. You'll recall, we own 25% is 298-unit 225,000 square foot purpose-built residential rental project, which includes 6,000 square feet of at-grade retail space.

The building is targeting net zero carbon LEED gold and has achieved Tier 2 of the Toronto Green Standards. Geothermal drilling and excavation for the project have been completed. Underground waterproofing and formwork are currently underway with 70% of the costs awarded. At Yonge & Roselawn we're also progressing on schedule. Construction of the underground structure is well underway with the P2 parking level nearing completion. We own 50% of this property and served as its development manager. This project is also targeting net zero TGS Tier 2 and LEED gold. It is a 636-unit mixed-use purpose-built residential rental building with 65,000 square feet of retail space. Both tower cranes are installed and 72% of costs are awarded. While still several years from occupancy, we received significant inbound interest from retailers in the 65,000 square feet of at-grade and second floor large and smaller format retail space.

After years of robust arguably unsustainable growth, the Toronto residential market has softened this past year. As a result, there have been almost no new construction starts of multifamily projects. Given this reduction in the number of new starts, ostensibly no new supply will be delivered when our projects are completed in 2027 and '28. This should certainly bode well for FCR at that time upon commencement of our lease-up.

Over the past number of months, our executive team, asset strategy team, develop and construction team and our res team comprised of operations and leasing have collectively spent a lot of time together out in the field, touring our properties. Based upon the location and the productivity of our assets and the increased demand and rising rents from retail tenants, we believe we can re-merchandise, redesign or redevelop a number of our properties with compelling returns.

For clarity, I'm referring to what we had outlined at our Investor Day with respect the attractive investment opportunities that exist in the core value-add component of our portfolio. This opportunity is driven by the strong fundamentals of our properties. It is further supported by the store growth requirements of many of our retail tenants in this environment with virtually no new retail construction. This shortage in supply is a result of the significant gap that exists today between the economic rents required to justify new build retail space and the current market rent for that same space.

Of note, the cost of redesigning space to accommodate the retailers' requirements is meaningfully less than the cost of building a new shopping center. As a result, we can enhance and expand existing space and select FCR centers. We can lease this improved modern format space to these retailers who will pay us a significant premium to our in-place rents. Considering this growing opportunity, we can invest capital in our own properties at very attractive risk-adjusted returns on that capital. We've identified a number of very exciting opportunities and have begun our planning and mobilization. We look forward to sharing the details of these plans with you shortly.

Our redevelopment of Humbertown Shopping Center in Toronto, now well underway, is a great example of this type of investment opportunity. In 2024, we transferred the 26,500 square feet of space in Phase 1 back into IPP. As part of the first phase of the redevelopment, we removed the interior common area of the center. We also modernized exterior basing entrances we redemised existing commercial retail units with more functional dimensions. We upgraded and redesigned the facade, and we created a new retail breezeway.

Average rents in this phase have doubled from those in place prior to the redevelopment. In Q4, we also entered into a new long-term lease with Loblaws for an enlarged store. This enabled us to commence the second phase of the redevelopment in January of 2025. Phase 3 of the redevelopment, which will include a new larger format 20,000 square foot Shoppers Drug Mart, and new TD Bank and Scotiabank branches, amongst other tenants, will commence later in 2025.

On completion of our work, we will have reclaimed or remove all enclosed common area at the center. And in so doing, improved and grown the gross leasable area of Humbertown Shopping center by 17,000 square feet. More importantly, then the expanding area is that our completion this 150,000 square foot center will generate significantly more income and will be far more valuable.

In total, we expect to invest $45 million in the redevelopment of Humbertown, which will generate very compelling returns. With respect to entitlements, this past quarter, we were successful in securing approval for 660,000 square feet of retail and residential density at our Avenue & Lawrence property here in Toronto. This 8-property 3.8 acre assembly is situated in the neighborhood with one of the highest income demographics in the country. This approved density gives us real optionality as the property may be developed or maybe sold. In total, during 2024, we received approvals for 2 million square feet of incremental density on our properties. Also during the fourth quarter, we submitted entitlement applications at 4 properties. To date, we have submitted for entitlements on over 18 million square feet of incremental density, netting out the density that we've already sold. This represents 77% of our 23 million square foot pipeline.

In conclusion, I want to reiterate that we remain focused on the delivery of results that are reflective of our successful execution of our objectives. Thank you for your attention, and thank you for your continued support.

And with that, operator, we can now open it up to questions.

[Operator]

[Operator Instructions] First question is from Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

I'm sure there's a lot of questions, so I'll just keep it to one with 2 parts. Maybe Neil, just on the leverage, x items out your low 9s. It looks like you're heading to somewhere probably in the mid-8s next year. As you approach that target level, would that have you be a little more selective about the assets that you're looking to perhaps divest of and maybe tap the brakes a little on that?

And the second part of the question would be counter to that, would that have you perhaps look at ramping up some of the development activities to bring a little more of the EBITDA line up?

[Neil Downey, executive]

Dean, so when you say next year, I think you probably mean like this year, i.e., 2025?

[Dean Wilkinson, analyst]

Yes, I do.

[Neil Downey, executive]

I won't opine on your projections. All we'll really do is reiterate that our 3-year plans and low 9s by the end of 2024, which we achieved, at low 8x debt-to-EBITDA by 2026. And we believe that we're on track to meet those objectives.

[Adam Paul, executive]

And Dean, it's Adam. I'll just expand on that. So one safe assumption beyond the 3-year plan given the breadth and depth of the density that we currently have entitled and what's in the pipeline, a safe assumption would be that for many, many years, certainly, over the foreseeable decade, we will be a regular monetizer of the density and the value that we have created.

Well, the change over time is the use of proceeds. And so I went through the use of proceeds over the current $1 billion target and is a meaningful component earmarked for debt reduction. As we look beyond the 3-year plan, we will make an evaluation whether there's a benefit to our investors of further allocating capital to debt reduction. And there's a strong possibility that we say, no, we're happy with the balance sheet.

We don't see those incremental benefits going to our investors relative to what else we can do with that capital. And so one option beyond that plan, not to get too far ahead of ourselves, as we start investing more of the proceeds into what we'll call core grocery-anchored shopping centers maybe a little more in development. But certainly, we'd be keen to grow the core portfolio of grocery-anchored shopping centers.

[Operator]

The next question is from Lorne Kalmar from Desjardins.

[Lorne Kalmar, analyst]

Just wanted to focus in on the dispositions. You guys obviously had a pretty good year in 2024. A lot of moving pieces at a macro level and heading into 2025 or I guess, in 2025. Is there any concern or indication that some of this broader macro uncertainty would impact the pace of dispositions.

[Jordan Robins, executive]

It's Jordie. I would say, given that broader market uncertainty, the dispo market certainly remains, what I'll say, is challenged. But I would say, at the same time, it remains constructive. I mean we're in discussions on a number of properties now. We're progressing forward on those properties, and we still feel that we are in line with the $1 billion of dispositions we had set out as part of our objectives over 3 years.

[Adam Paul, executive]

And just to expand on that, Lorne, we don't know what the future holds. What we do know is we've been at this for a little over 2 years when you look at the time frame since we launched the optimization plan, which as you know, was replaced with our 3-year plan about a year ago. And -- the market, if you look at it over the last 2 years has said pleasantly less than ideal. It's been less than ideal.

But Jordie and the Investments group have done an exceptional job. We've sold during that time frame, a little over $800 million of this real estate at an average yield of less than 3% and an average premium to net asset value of about 20%. Those are exceptional results in a strong market, let alone a more challenging one. So we do expect it to remain challenging. We also expect to achieve the objectives we've laid out. It's not easy, but we've got good real estate. We've got talented people. And for some of them, certainly, we look back in hindsight saying we were lucky we got started when we did. You look at the sale of King High Line at that price of sub 3% cap rate, probably no chance we could replicate that transaction today.

But Jordie and his team are working on a bunch of things that we do think will get done and they're working hard to make sure that happens, and there will be a great outcome. We're very focused on premium pricing, the assets, while not if we fit in FCR's portfolio and the volume we hold them, they're still good assets, and they should command a premium price.

So hopefully, it gives you a sense of how we approach it. We're taking a focus but disciplined approach and while your comments on the macro are well taken, we still think that, as Jordie noted, the market is constructive enough for us to continue to make progress.

[Lorne Kalmar, analyst]

If it does prove to be more challenging than maybe we expect right now or you guys expect right now, would there be any appetite to maybe take a hit a bit on pricing to get things over the line? Like do we see maybe that IFRS premium come down a bit?

[Adam Paul, executive]

Yes. Look, it's difficult for us to sit here and start speculating on situations like that. We'll have to revisit in the context of a lot of different moving parts in the business and make a decision at that time. It would be premature for us at this stage to tell you that, that's what we're contemplating.

[Lorne Kalmar, analyst]

Fair enough. And then just one last quick one for Jordie, I guess. Can you maybe remind us what type of returns you would need to see to move forward with the retail redevelopment?

[Adam Paul, executive]

Well, It's Adam, not Jordie, but I know he will agree with me. The stuff in the pipeline is in the mid- to high single-digit unlevered development yield.

A little more complicated than that. We think on some of those, we will get that, but we also think over and above that, it actually changes the cap rate on certain properties, meaning lowers them/decreases the value per dollar of NOI. But to give you a rough range, we're mid- to high single-digit unlevered returns on the invested capital.

[Operator]

The next question is from Mike Markidis from BMO Capital Markets.

[Michael Markidis, analyst]

Just on the dispositions, I guess the $320 million completed and agreements in place. I think you guys did around $200 million this quarter. So that leaves $120 million. What else is in the -- in terms of the agreements? I assume they're firm, I think, Sheridan Plaza is in there, and I think it was 895 Lawrence West was mentioned last quarter. Is there anything else that's meaningful in that pool?

[Neil Downey, executive]

Mike, it's Neil. Those are the 2 assets that are -- you've identified are slated for closing late in the first quarter.

[Michael Markidis, analyst]

Okay. And that -- would that be roughly $120 million, Neil? Or is it less than that?

[Neil Downey, executive]

No, it's in the $70 million. $70 million or $72 million, I believe, is the number.

[Michael Markidis, analyst]

Okay. Got it. So then with Sheridan Plaza, just looking at the asset, Walmart anchored, grocery anchored. Is that an asset that has density? Is that a -- was that in the density bucket? Is it -- or just a non-density noncore transaction?

[Jordan Robins, executive]

No, Mike, it's Jordie. It was not part of the density pipeline. It was actually a property we had identified on our property disposition as some time ago. It's a good asset, but we didn't think it was going to contribute to the objectives we've set out in the plan and what we're trying to deliver for our investors.

[Michael Markidis, analyst]

Okay. So I guess the yield on that one would maybe be a little choosier than the sub-3%?

[Jordan Robins, executive]

Yes, that's a good assumption.

[Michael Markidis, analyst]

Okay. Just for modeling purposes. Neil or everybody, I guess, at the end of the day, the $1.7 million charge, you didn't normalize for that, but if we strip that out on the swap charge that gives you guys $0.33 as exit run rate. And I know you mentioned some headwinds for FFO growth in 2025. But I guess at what point -- where I'm going with that is if I annualize that, I'm going to get to a rate that we get you to sort of the 3% by 2026.

So I guess, what would you need to see to increase your 3% FFO growth hurdle in your 2020 3-year plan?

[Neil Downey, executive]

Well, remember, Mike, we said 3% or greater. So I suppose if we had significant confidence that, that was 4% or greater or 5% or greater, we in some way might feel inclined to say that. But I think where we stand today, there's uncertainty in the world. I pointed out some of the factors that present a challenge for FFO growth in the short term as it relates to low cost of debt coming due and some other factors. So yes. As it stands today, we are comfortable in stating greater than 3% annualized.

[Michael Markidis, analyst]

Okay. And just last one before I turn it back. In Q4, you noted the one of the factors you noted on the hindrance to FFO growth just being the straight-line rent that's come on and the difference between cash and straight line. But would most of the income from One Blur now be in the Q4 FFO number?

[Neil Downey, executive]

The short answer is yes. It's in the FFO number. That's I think all of it yes, that's a key point, right? So you've got almost $2.5 million of straight-line rent in that Q4 number. And that begins to convert pretty quickly to cash rent. So stated in an alternate way, the straight-line rent number is going to decline fairly significantly in 2025 versus 2024.

[Michael Markidis, analyst]

Okay. But recognizing that there's no -- that there's a lot of uncertainty in the world, et cetera, et cetera. If, let's say, the Black Swan scenario doesn't happen. Once that normalizes, once we sort of lap Q4 on an IFRS basis, should IFRS equal cash roughly -- we get...

[Neil Downey, executive]

Yes. So the answer is the 2 are likely to become more closely linked, but they won't necessarily equate to one another because look, it's always possible that we continue to sign leases that have rental steps, right? So that actually -- that continues to build your straight-line rent.

[Michael Markidis, analyst]

Yes. That's fair.

[Neil Downey, executive]

But they are disproportionately linked over the last 12 months, specifically because of One Blur and the fixturing period.

[Operator]

The next question is from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

First question for me, Neil. Just I think in your comments, you said growth would be more meaningful in 2026 than 2025. Were you referencing same-property NOI, FFO or both? And I wonder if you could just sort of add some color as to how -- the factors behind that.

[Neil Downey, executive]

Yes. So I think what we're referring to, Sam, is in general, the progress towards our key objectives, which are debt-to-EBITDA improvement and FFO per unit growth. So as you know, we took a pretty sizable step function in both of those in 2024. And it -- we don't think it's going to be quite significant in 2025 is what I was really indicating.

[Sam Damiani, analyst]

Okay. And last one for me, just kind of a couple of clarifications. Just with the sale of Sheridan Plaza, obviously, a different disposition than what we've seen from FCR over the last couple of years. Is this a change intact? Are there going to be more sort of IPP assets, grocery-anchored IPP assets disposed in the next year or 2 than perhaps was contemplated a year ago?

[Adam Paul, executive]

No. The short answer is Sheridan has been on our disposition list for a number of years. We recently renewed the food store and brought them to a market rent. Walmart is a typical Walmart lease, which is a flat rent with slippage for a time frame that doesn't feel dissimilar to forever. And we've got very little CRU. And given the demographics of the neighborhood, the residential density value you don't see residential development in the neighborhood, there's a reason. So when you look at it to Jordie's point, we've looked at it and said there was some upside on the food store. We've now been able to deal with that.

And in terms of delivering the objectives we laid out for our investors, we don't think it contributes, we think we can do better with the capital, and that's why it's sold. So it's not a typical grocery-anchored shopping center by FCR standards in terms of the merchandising mix, the depth of CRU and complementary uses, the demographic quality of the neighborhood, et cetera. So yes, it may be a little bit different, but -- and I'm not saying we don't have any others, but it would certainly be a one-off. And the timing of it was certainly a function of getting the lift in the food store deal done and now it was the right time.

[Sam Damiani, analyst]

That's great. Good color and totally makes sense. And just lastly, Adam, in your comments, you referenced a premium to IFRS NAV. I just want to confirm that you mean IFRS asset value because, obviously, there's a difference when looking at it gross of debt or net of debt.

[Adam Paul, executive]

Yes. So for clarity, yes, I was referencing to the sale price as a premium to the IFRS, we'll call it, carrying value, which is the gross, gross value, gross of debt, not factoring in any debt.

[Operator]

The next question is from Matt Kornack from National Bank Financial.

[Matt Kornack, analyst]

Just wanted to quickly go back to the conversation with Mike around straight-line rent. Neil, if you could -- can you give kind of a by quarter, how you'd expect that conversion will take place? Should we expect kind of $1.5 million to convert over 2 quarters? Or just it would be helpful from an FFO versus an AFFO standpoint.

[Neil Downey, executive]

Yes. Okay. You're really getting into client details, Matt. That $2.5 million should begin to decay pretty rapidly through the first half of 2025. So at a very high level, okay? Very high level, we had $7.3 million, I believe it was of straight-line rent, in 2024. You can probably pencil in at this juncture, $2 million or less for 2025. So you can see the effect in a simple snapshot that $5 million delta is $0.02 to $0.03 per unit.

[Matt Kornack, analyst]

Right. Okay. No, that makes sense. And then on interest income, you guys provide the schedule, I guess, annually in terms of the receipts and you have $77 million at 8.8%. But historically, you've kind of replaced some of the loans receivable or interest-generating accounts there. Is the idea that you'll not replace them and that $77 million goes away early in the year? Is that how we should think about modeling it?

[Adam Paul, executive]

Yes. I think not to say we won't replace it, but we're not rushing to replace it. We'll be selective with the opportunities that can be a bit spotty. So what Neil was trying to get at in his remarks is that there would be a bit of a drag from those specific loans relative to the income and FFO they contributed in '24.

[Matt Kornack, analyst]

Okay. And the swap I get. And then I guess if you turn to kind of your lease maturity profile, 2025 is a pretty muted year or normal year. But over the next 5 years, there's kind of a ramp-up in terms of the amount of space that you have coming up. Can you give us a sense how we should think about the leasing dynamics in terms of leasing spreads and retention and your confidence that, that increasing maturity profile may actually be a growth generating opportunity?

[Adam Paul, executive]

Yes. Look, it's not uncommon for us to be looking out 2, 3, 4 years and see some spikes in the expiry profile. But what inevitably happens is you end up doing early renewals with tenants to smooth it out. That's what we would expect. We think that the core metrics that we've delivered over really the last year or 2, it's probably a decent place to look at in terms of future expectations.

And as things evolve, if we have more color or more conviction that things will be different one way or the other, we would talk about it. But at this stage, we think kind of what we've seen double-digit lease renewal spreads likely to continue. So hopefully, that answers your question, Matt.

[Matt Kornack, analyst]

No, that's helpful. And then maybe lastly, have you seen any regional disparities in kind of operating performance and general demand dynamics across the country. I know favorable for necessity-based retail, but obviously, population growth is changing and some areas have been impacted more so than others? Just interested in kind of your sense as to how things are going across the provinces.

[Adam Paul, executive]

Yes. So just to keep it short, there is a remarkably high degree of consistency and we'll call it, the 6 cities that we operate. So the short answer is no regional disparities that are visible in what we're seeing.

[Operator]

Next question is from Mario Saric from Scotiabank.

[Mario Saric, analyst]

The first one, I'm not sure if I missed it on Matt's question, but on the target 4% of the same-property NOI growth in 2025, what is the expected contractual annual rental escalators in that figure? Are you expecting what you delivered in the second half of this year to persist?

[Adam Paul, executive]

Yes. I don't think we've -- Neil didn't provide that type of expectation. But what we would say is we expect to be -- to see a high degree of similarity in the activity that we completed this year as we did last year.

[Mario Saric, analyst]

Understood. Okay. And then just maybe switching over to the disposition once again, I think people have cited and they're aware of the [ migrated ] kind of macro conditions, including potential U.S. tariffs, federal election, tough Toronto condo market, uncertainty over the magnitude of future rate cuts. So like when you think about your $1 billion distribution target, granted it to 3-year targets, what do you view as being the biggest impediment towards executing on that in the near term based on what your counterparties are saying today?

[Adam Paul, executive]

Yes. I'll remove any reference to where our counterparties are saying. We'll speak solely about what we see and believe. So the potential obstacles are all the things you referenced, Mr. Mario. So depending on how those unfold, will impact our -- how hard or how successful we will be. What we can tell you is that today, we continue to have active transactions at various stages of the transaction process and at prices that we are comfortable transacting at. So we will continue to work hard and try and get those done.

[Mario Saric, analyst]

Okay. And then I can't recall if you provided it before, but how should we think about the geographic mix of the target $1 billion in dispositions? Is it fairly consistent with the broader portfolio mix today? Or is it different?

[Adam Paul, executive]

It's a little different, similar, but a little different. Because a lot of -- there's a much heavier weighting of density and development assets, and that the density that we've entitled and created have a heavier weighting to the Toronto market. So we would expect to continue to see the density monetization occur with a little more weight in trouble, but not a lot more weight.

[Mario Saric, analyst]

Okay. And is it your view that -- because there's still a decent amount of Toronto condo completions anticipated for 2025? Do you feel that those deliveries need to clear before you see tangible improvement in the residential end market in Toronto?

[Adam Paul, executive]

Yes. We'll see. We're fortunate that our condo completions don't start until 2026. But yes, look, we're looking at the same data you're looking at. So we'll have to see how it unfolds. Going back to your earlier point that the sales are weighted to Toronto, also Montreal, a little bit of Vancouver, nothing in Alberta.

[Operator]

Next question is from Pammi Bir from RBC Capital Markets.

[Pammi Bir, analyst]

Okay. It looks like I have a minute to get these in. Just coming back to all this commentary around the uncertainty out there. Are you seeing any changes in terms of any sort of tenant behavior through the early weeks of this year? Any delays in decision-making or pushback on rent growth. I mean, your guidance for 4% same property, I would suggest that that's not the case. But just curious what you're keeping an eye on that mix that might indicate the opposite.

[Adam Paul, executive]

Yes. Look, we're always keeping our eye on anything that's changing. The short answer, Pammi, is at this point and we've got hundreds of lease negotiations underway today, we have seen absolutely no change in the depth and breadth and demand or the way leases are being negotiated. Again, I think part of it relates to the fact that most of these tenants are making multi-decade real estate decisions real estate, like FCR owns has historically been tough to secure. Tenants know that they're going to operate through various cycles, various macro events, but the short answer is, fortunately, we continue to see very strong demand and no change from last month or last quarter or 6 months ago.

[Pammi Bir, analyst]

That's helpful. And then just -- there's no large known vacancies or any tenants of note on the watch list at this stage?

[Adam Paul, executive]

Yes. So in terms of large upcoming vacancies, certainly nothing out of the norm on the watch list, Neil.

[Neil Downey, executive]

Yes, Pammi, there actually is, I would say, today in a short watch list. It includes several tenants, all of which, by the way, actually are current on their rent. And we think the situations are tenant specific as opposed to indicative of any sort of challenges within a particular merchandise category. In totality, we're probably talking about 5 to 7 locations across the FCR portfolio. And I'd say also, by the way, the fact that there's a very short list of tenants on watch. It's actually more of a normal condition for retail real estate business versus, say, the past 12 to 18 months where we've essentially had watch list that has basically been nil for the most part.

[Pammi Bir, analyst]

Got it. Last one, Neil. Just I wanted to come back to your -- clarify your comment that I think you said 2025 should be more level in terms of FFO with 2024 before resuming growth in '26? Just if you could just clarify that.

[Neil Downey, executive]

Well, we had a pretty steep growth rate, if you will, in 2024, depending on how you slice things to normalize them, it's kind of up 5 -- between 5% and 6%. And what we indicated is that our objective is to deliver 3% or better on an average basis over 3 years. So I hope that puts my comments into context.

[Pammi Bir, analyst]

Got it. And the OFFO that you're referring to was the $1.26 stripping out the -- I think it was the $20 million of nonrecurring income?

[Neil Downey, executive]

Yes, $21 million, $0.10 a unit. That's correct.

[Operator]

Thank you. There are no further questions registered at this time. I'd like now to turn the meeting back over to Alison.

[Alison Harnick, executive]

Okay. Thank you very much. Thank you, everyone, for participating in our conference call and for your interest in First Capital. We look forward to working hard and updating you on our results in the future. Have a good afternoon.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.