© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust First Quarter 2021 Conference Call. [Operator Instructions] I would now like to hand the conference over to Jennifer Suess, Senior Vice President and General Counsel. You may begin.
Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website earlier this morning. Before turning the call over to Jonathan, I'm required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the trust's underlying core performance and provides these additional measures so that investors may do the same. Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended March 31, 2021, and management's discussion and analysis related thereto, as applicable, together with RioCan's most recent annual information forms that are all available on our website and at www.sedar.com.
Thank you, Jennifer. Thanks so much for that opening, and thanks to everyone for joining us today. I'm so pleased to be surrounded by RioCan's phenomenal senior leadership team, my colleagues, Qi Tang, Andrew Duncan, John Ballantyne, Jeff Ross, Oliver Harrison, Jennifer Suess, who you just heard from; and Franca Smith, who I'll introduce you to in a few moments. This is a team that leads the 570 members of the broader RioCan group. This bold adaptable and entrepreneurial team is RioCan's greatest asset. They've made it significantly less daunting to navigate this very tricky environment. I'm grateful for their support and constantly impressed by their innovation, drive and unwavering commitments to our business. As I focus now on the first quarter in the business environment, I also want to share my confidence in RioCan's long-term value creation strategy. And the circumstances that have been brought on by COVID are indisputably tough, but I'm an optimist by nature. Metrics continue to be distorted a little by this pandemic, but when it reflects only on the current conditions we're overlooking the vast number of levers for future growth that we at RioCan have at our disposal. Our focus is obviously on responsibly managing through this crisis, however, we're also looking beyond it. With the acceleration of this vaccination rollout, we will emerge poised to capitalize on the pent-up consumer activity that will benefit our tenants and ultimately you, our unitholders. The existing conditions are short-term and simply do not reflect or alter our long-term growth potential period. Now I'm going to focus on our Q1 operating results. And despite forced closures during a significant portion of the first quarter, RioCan collected a total of just under 94%, 93.9% of our rent for the first 3 months of the year, and for April, we were at 93.6% of gross rent. Rent collection will continue to improve as tenants receive funds from CERS and CEWS which have been extended out until September 25, 2021. Our rent collection has taken center stage in our results for the past 4 quarters. But you know what I'm pleased to talk offense for a moment and shift the focus to our very strong leasing efforts. We're seeing a stronger leasing environment, and this has been evidenced by our completion of 1.1 million square feet of leases and renewals in the first quarter. For context, our new leasing in the quarter exceeded that of the same quarter last year, which was, as you can all remember, pre pandemic. We completed 86 new deals totaling 435,000 square feet the average rent per square foot was $23.19. Now I'm reciting these statistics because this is well above our portfolio average of $19.87 a square foot. And quarter-over-quarter demonstrates trend in our ability to organically grow rents even in the midst of these pandemic lockdowns. The resulting new leasing spreads of 14.2% for the portfolio and 18.6% for major market properties far exceeds the pre-pandemic results of Q1 2020. The majority of these new leases were completed with strong covenant tenants, primarily value, furniture, home and essential retailers. In addition, deals were done with sitdown restaurants and personal service providers, indicating that while these categories have been impacted by the pandemic, well capitalized forward-thinking companies are seizing on the opportunity to lease well-located space such as RioCan has to offer. Furthermore, while the narrative around office leasing has been somewhat bearish over the past year, RioCan has managed to backfill 2 units at Yonge Sheppard Centre this quarter alone totaling 22,000 square feet. Our leasing spread on the 657,000 square feet of renewals completed in the first quarter was 5%. Leasing spreads such as this are a clear indication of the healthy upside between our average portfolio and the market rents. Our FFO per unit, excluding the debenture prepayment cost was $0.36 in the quarter. Given the ongoing pandemic and subsequent lockdowns, this result will have met our expectations. It was impacted by onetime G&A expenses that will not be present in the normal course. We're confident that our encouraging leasing and operating metrics, along with the absence of these onetime expenses, they're going to result in organic FFO growth over the next 3 quarters. Our FFO result also reflects the $6.4 million provision that we had to take for bad debts in the first quarter. As the pandemic subsides, this too will be a negative factor that will eventually dissipate sooner rather than later. Same-property NOI growth also continues to be impacted by the pandemic. We ended the quarter at negative 4.6%, largely due again to the pandemic related provision. It's important to note the impact on same-property NOI is a direct result of the immediate effects of COVID-19, and this is not a reflection of long-term reduction in revenue. SP NOI will also improve as we bring our occupancy levels back to their historic norms. As of May 3, we rose to 96% occupancy, a key milestone in our journey back to our pre pandemic norms of well over 97%. Now we can't predict the length from the extent of the mandated closures. But more than 90% of RioCan's annualized rental revenue was from grocery-anchored mixed-use and open air centers. Given their higher ratio of essential service tenants, these asset classes are more insulated from the impacts of pandemic related lockdowns. It's worth noting that close to 80% of our tenants are classified as strong or stable. These are primarily grocery, pharmacy, liquor, essential services and value retailers that have strong covenants and demonstrated a whole lot of resilience in volatile economic cycles. Their stability, that's highlighted by our collection of nearly 98% of these tenants' total first quarter gross rents. As always, I'm realistic. I'm not going to downplay the volatility in the industry, but I want to be clear that the relative impact to date on RioCan's revenue, it's been manageable. And we're positioned to see improvement as the impact of COVID-19 start to dissipate. I'd like to briefly highlight our very active capital recycling initiatives. [ Seething ] on a sizable disconnect between public and private market valuations, we're raising capital efficiently by selling assets. Between closed firm and conditional deals so far in 2021, we've netted proceeds of over $543 million at an average cap rate of 5.15%. The assets range from conventional retail to mixed-use to non-income-producing land. We'll put the proceeds to good use, allocating the capital towards paying down debt and funding development. Doing so will set us up well for our future. Turning to residential. We collected over 98% of our residential rent in the first quarter, which we attribute to the desirability of RioCan Living's offerings. We also established a dedicated RioCan Living department, which is solely responsible for maximizing the value of our growing portfolio of rental apartments and condominium. This team is comprised entirely of existing RioCan talent, and each member has a tremendous amount of experience in residential including experience in marketing, sales, product development, asset management and residential operations. Our RioCan Living portfolio continues to grow. We've completed 755 condo units in 2 projects in Toronto so far with our partners at Allied REIT and Metropia. We also have more than 1,200 existing residential rental units across 4 buildings, eCentral and Pivot in Toronto, Frontier in Ottawa and Brio in Calgary. This quarter saw the successful closing of the sale of a 50% non-managing interest in eCentral and commercial component of ePlace at attractive 3.6% and 4.6% capitalization rates, respectively. And this is based on stabilized NOI. The transaction represented capitalization rates and value far above our cost. This further underscores the strategic importance and net asset value growth potential of our development pipeline and residential rental business. We're confident that all RioCan Living offerings will thrive in the long term. Enhanced immigration and a resurgence in economic activity should lend to strong market dynamics going forward. In addition to the completed projects I just referenced, we have more than 1,450 residential rental units currently under construction between 6 projects, and we estimate we'll have an additional 1,014 residential units in different phases of development by 2023. The total NOI from our residential rental operations will continue to increase as new projects are completed throughout the course of this year. We also have 3 condo projects comprising nearly 1,250 units currently under construction. On the proceeds from these condo sales provide an alternative source of revenue and an important bridge of FFO to supplement our very productive core commercial portfolio. RioCan Living projects remain a cornerstone of RioCan's development program. Residential development represents almost 83% of our nearly 42 million square foot development pipeline. During the quarter, RioCan's development team completed 30,000 square feet of development, primarily related to the first phase of the retail component of Windfield Farms site in Oshawa, Ontario. The first retail phase is just about 90% leased to grocery and other necessity-based retailers. It's part of a much larger Windfield Farms mixed-use development that RioCan is developing with our partner tribute communities. The development includes 392 units of townhomes in 3 phases. The first phase is complete, and the second phase is under construction and 100% pre sold. Construction on the first of the 3 condo towers is also well underway and its 500 units or 100% presold as well. The success of retail leasing and residential sales of Windfield Farms site with profit margins of up to 23% and while it simply illustrates RioCan's ability to generate net asset value growth in all circumstances. Moving to Downtown Toronto. Construction of the 36 story office tower at the Well remains on track for initial tenant possession this year and approximately 85% of its 1.2 million square feet has been pre-leased to strong covenants of tenants, including Shopify. Approximately 1/3 of the 340,000 square feet of retail space has been leased to forward-thinking tenants that really do reflect the vibrancy of the King West neighborhood. Now I'm highlighting the progress of Windfield Farms and the well to emphasize RioCan's ability to create exceptional and successful communities in any context. Suburban or urban, commercial or residential, who've got the creativity and sophistication to create value. The overall pace of RioCan's mix use development projects was not significantly impacted by the pandemic and development spend for 2021 is estimated to be in the range of $500 million. Now this spend in future years is targeted to be a little bit lower due to the completion of a significant portion of the Well in 2021 as well as staggered development starts. And of course, the sharing of development costs and wins with strategic partners. As always, we continue to look ahead to ensure growth through sustainable development, our pipeline of zoning entitlement is one of the largest in the industry. And as we complete developments, we break new ground -- sorry, we break ground on new ones, achieve zoning on others and initiates a zoning approval process on still more. Our pipeline translates into lucrative opportunities, a proven and virtuous cycle that will continue to be demonstrated through 2021 and long into the future. We'll use our vast pipeline of air rights and will seek out partners to enhance value, reduce our overall development exposure and equally important to get paid for our deep and experienced development and residential platforms through equitable feed structure. While our focus continues to be on managing our business and tapping into opportunities, our commitment to sustainable growth hasn't diminished. RioCan continues to lead the Canadian real estate industry and ESG. We're recognized as one of Canada's greenest employers in 2021, direct acknowledgment that we're leading the nation in creating a culture of environmental awareness. We recently published our first green bond report confirming the full allocation of the net proceeds of $348 million from our inaugural green bond issuance. We also announced an exciting new partnership with context, and collaboration with the city of Toronto and TCHC to develop a mixed-use master plan community at Queen & Coxwell in Toronto. The project will provide vital retail amenities and add much needed housing for all income levels. In addition, it will contribute to Toronto's community economic development initiatives including $100,000 scholarship fund for affordable rent tenants, a $250,000 economic and social development fund and a minimum of $500,000 in value for job opportunities. RioCan also completed key diversity, equity and inclusion initiatives, including governing charter and our first ever DEI employee survey. We're going to continue to build our momentum and take action to maintain our status as an industry leader in sustainability. With that, I'll pause and turn the call over to Qi to discuss our first quarter financial performance in more detail. Qi, over to you.
Thank you, Jonathan, and good morning, everyone. Thank you all for joining us. When COVID-19 was declared a global pandemic more than a year ago, few of us anticipated that it would carry into 2021. While the end is in sight with the rollout of the vaccine, the pandemic continue to impose challenges to the retail sector, with the number of lock down throughout the first quarter of 2021. As Jonathan highlighted, despite this operating environment, RioCan delivered strong Q1 operating results, including leasing, rent collections and development progress, et cetera. Now let us take a closer look at the drivers of our FFO per unit for the quarter. Q1 2021 FFO per unit was $0.36, excluding the $7 million debenture prepayment cost. This was $0.03 lower than the $0.39 for Q4 2020. This quarter-over-quarter change, was largely driven by a onetime $5.8 million general and administrative expenses, which were mostly related to the accelerated expensing of certain unit-based compensation and represented approximately $0.02 in FFO per unit. The remaining change was primarily due to lower residential inventory gains and lower lease cancellation fees partially offset by a low pandemics related provision. During Q1, we continue to service value of our portfolio through capital recycling, one of the most efficient and effective sources of capital for RioCan to fund value-creation initiatives such as development. As Jonathan touched on earlier, year-to-date, we have aggregated $543 million of closed or firm and conditional deals. This includes $421 million of income-producing properties at a weighted average capitalization rate of 5.15% based on in-place NOI and about $122 million of development properties with no in place NOI. These deals demonstrate the quality of real cancer assets as evidenced by the pricing negotiated and the well-established partners, we have attracted in spite of the challenging environment under the pandemic. We remain committed to our development program and unlocking the significant value inherent in our portfolio. The vast majority of our pipeline is focused on mixed-use residential development. It will serve to diversify RioCan's income while addressing the growing demand for housing as Canada's population grows, particularly when the government resumes its immigration plan. The Canadian government is targeting to welcome more than 1.2 million immigrants over the next 3 years. This will further drive demand for real estate and fuel retail and residential growth post the pandemic.We manage our development program prudently. We expect to keep total IFRS value of properties under development and residential inventory on consolidated balance sheet as a percentage of total consolidated gross book value of assets at or under 10x -- 10%, despite the 15% limit permitted under our credit facility agreement. As of the quarter end, these metrics was 10.7%. Our development program consists of both residential rental and residential inventory project. The letter refers to condominium or townhouse development. In addition to meeting market demand for housing ownership, condominium or townhouse project enable us to accelerate capital recycling to further fund our development program. Currently, such projects under construction or presale include U.C. Uptowns and U.C. Tower at our Windfield Farms development, 11 YV in Yorkville and QA Condos at Queen & Coxwell, all in the Greater Toronto area. These projects are estimated to provide $133 million to $148 million in inventory gains over the next 4 to 5 years with more projects under development. The first 3 projects are effectively 100% presold and are under construction, while the new QA Condo project is already 89% pre sold. Now let me turn your attention to our balance sheet metrics. RioCan continues to maintain ample liquidity as of the quarter end, our liquidity stood at $1.3 billion in the form of cash and cash equivalent and undrawn committed revolving line of credit and other credit facilities. Subsequent to the quarter, the trust extended the maturity of its revolving unsecured operating facility by 2 more years to the end of May 2026 with all the terms unchanged. Our mortgage maturities for 2021 totaled $380 million. By now, only about $102 million remain to be refinanced. They are due later this year and are expected to be refinanced in due course. Overall, we expect to continue to maintain strong liquidity throughout the year. In addition, we continue to have a large unencumbered asset pool of $8.7 billion on proportionate share basis, which generates close to 60% of our annualized NOI and provide 2.2x coverage for our unsecured debt as of the quarter end. Also at the quarter end, our debt to adjusted EBITDA metric increased from the year-end to about 10x. This increase was primarily due to its 12 months rolling nature with Q1 results reflecting 4 quarters impacted by the pandemic versus only 3 quarters that were impacted by the pandemic in the year-end matric. Debt to total assets was 45.3%. While we expect these 2 debt metrics to increase marginally in the near term, RioCan maintains its long-term goal of keeping leverage and debt to adjusted EBITDA within the targeted ranges of lower than 42% and 8x, respectively. RioCan's successful capital recycling program and ongoing improvements in operations will serve to reduce these metrics over the medium term. Over the long term, RioCan targets to shift its unsecured versus secured debt composition to 70-30 on a proportionate share basis. This transition will take time and will be balanced with credit rating implications, cost of debt, debt ladder and liquidity needs. As of the quarter end, this ratio was 56 versus 44. RioCan is committed to a disciplined approach to maintaining its balance sheet and capital structure in order to maintain strong liquidity and financial flexibility. This has served RioCan well over 27 years of history. It will continue to position RioCan well to navigate through the ongoing pandemic and provide it the ability to invest in accretive initiatives to create value for the long term. Finally, before I turn the call over to Jonathan for a final wrap up, I would like to conclude with a personal note of appreciation and gratitude. As you know, this is my last quarter conference call at RioCan. It's been an absolute pleasure working with and knowing many of you over the last 5 years. This includes my entire team, all of my RioCan colleagues, the RioCan Board of Trustees, our unitholders, the research analysts who cover us and the investment communities that follow us. I would like to say a special thanks to our Founder CEO and industry icon, Mr. Ed Sonshine. It's been an immense privilege to have worked alongside him over these years. As he takes on his new role as RioCan's Board Chairman, he has left RioCan in great hands under Jonathan's leadership. I wish Jonathan and the entire RioCan team all the best in the years to come. With that, I'd like to turn the call over to Jonathan for his closing remarks.
Well thanks, Qi, and thank you for your significant contributions over the last 5 years. Firstly, I want to thank you and express my appreciation for all that you've done for RioCan, which has been so significant. On behalf of the entire organization and our Board of Trustees, I wish you the very best in your next step. And thanks also for ensuring a seamless transition as we complete the search for a permanent CFO. We are progressing well in our search, and we anticipate announcing a permanent successor by the third quarter of 2021. I'm pleased to announce that Franca Smith, Current Vice President, Finance at RioCan, will serve as Interim CFO effective May 12 and Franca has been with RioCan since 2017 and brings over 25 years of finance and accounting expertise. She is a respected leader with exceptional knowledge of the trust and our industry. Franca has a proven track record, and we have total confidence in our ability to lead our exceptionally strong finance team and to support RioCan's value creation initiatives. And now I'll wrap this up before we turn the call over to you for questions. I want to emphasize how proud I am of how we've navigated this challenging time. This past year has highlighted the strength of our foundation, our resiliency and our incredible talent. Now as an eternal optimist I look ahead, confident that consumer trends are going to continue to shift favorably when well located, inherently value rich assets and a compelling growth strategy, are in the hands of a responsible, innovative and entrepreneurial team like RioCan, they will thrive. It's a privilege to lead this incredible team and to have this well positioned portfolio to create value for you, our unitholders. Thank you. And now we're happy to respond to any of your questions. So Dawn, over to you to open it up for questions.
[Operator Instructions] Your first question comes from the line of Mark Rothschild with Canaccord.
It appears that in the first quarter and heading into the second quarter, asset sales are accelerating. Some of it is development assets. Can you just give a little more color on what you're selling? And more significantly, does this give any evidence of pricing for stabilized assets that you could talk to the values?
Sure. So we're selling actually a wide range of assets. I mean there are some that are development lands. There are some that are income-producing retail assets. There's some -- as we announced earlier, like ePlace and eCentral that are mixed use, it really ranges. And some of them are in primary markets, some are similar to the ones we sold a couple of years ago in secondary markets. And I think what we're seeing is a reflection of the value of retail assets and mixed-use assets, but primarily retail assets, which I think for the last year, have seen a bit of a slowdown just because people weren't certain about what the lending environment was. And I think people were trying to figure out where retail fit into the overall landscape. But I think it now serves as a very interesting value proposition for a lot of investors, be they syndicators, be they small pension funds, be they institutional or even high net worth individuals who really like the prospects of retail assets. So we're seeing a number of different types of buyers on a number of different types of assets. So given the number of transactions we have in the offer, it's very hard mark to pinpoint one specific type of asset or archetype of assets that could answer your question, it's a really wide ranging.
Is there any way to draw any conclusions on any change in values coming out of this as compared to perhaps a year ago or 1.5 years ago?
Well, I think there was a lot of uncertainty around where values were over the last year during the pandemic because there certainly weren't a lot of trades, and I think people were scrambling to figure out exactly what the appropriate benchmark is for valuing retail assets. And what we're tending to see, quite honestly, is a reversion back to values that were pre pandemic. And that -- I mean, I'm not talking about enclosed malls, those are a bit tougher to value at this point. But certainly for open air centers and for land and mixed use properties, we're seeing reversions back to pre pandemic. And in some cases, I'll be honest, we've been quite pleasantly surprised that values are in excess of where they were certain well positioned assets that have some development potential.
Okay. Great. Maybe just on more. In regards to G&A or some bad debt provisions. Are there any more onetime costs or covered really the costs we should expect in Q2? Or that you know of this year?
Qi, I can hand that over to you.
Sure. Mark, certainly bad debt. Q2 will -- realistically, we will still have some. We're hoping to be lower depending on closures, but you saw the great rent collection results, which are fairly indicated. G&A, as we mentioned, we -- this quarter, in Q1, we do have that $5.8 million special onetime, which are certainly not expected to complete next quarter or in the future quarters.
Yes. But we have definitely -- I mean, it's hard to tell right now exactly what kind of provision we would need to take. But I've got to think that particularly looking ahead, it's what we hope to be a reopening fairly soon, that the bad debt provision will continue to dissipate over the course of the year, as she said.
Your next question comes from the line of Dean Wilkinson with CIBC.
I guess, Hello, Jonathan and goodbye Qi.
Still here for this call.
We already miss you. I actually did have very similar questions to Mark. I'll call that great minds think alike. When you look at those dispositions and what you've completed so far at the low I mean that's 125 basis points inside your IFRS cap rate, some 200 basis points inside of where the market is, is kind of pricing the units. How much of that do you think was location specific and how much of that is perhaps the market is overestimating what cap rates on these kinds of transactions ought to be? And where would that look like maybe 6 months ago? Do you have a sense of that?
Sure. I mean, I think some of these are very well positioned assets, those the very low cap rates, are driven by their unique unique attributes. One of the assets, again, is at Yonge and Eglinton. And I mean, it's part of [ multi-rise ]. So that was obviously a very low cap rate. But the other stuff that we're selling, again, I think it is really a reflection of the view on retail, which is a lot better than perhaps the public markets are demonstrating their view on the values of these assets. I think if anything, the last 14 months have demonstrated that these open air centers are exceptionally resilient. I mean our rent collection, if you look at it just in our open air centers, we're looking at our strong and stable tenants, which makes up a large part of our portfolio, there doing very well, and they've done very well in the last -- in what is arguably the worst landscape that we've seen in many decades. And I think when you take that and you compare it to the values of competing asset classes like multi-res or industrial, retail tends to be -- it is overlooked. And I think it's now -- there's a recognition that it's a very good place to place money. So we are seeing a flow back into the sector, which is great for us. And I mean, the list of assets that we're selling does not even come close being to reflecting the demand that we're getting just on inbounds from people wanting to buy assets from us. There's only so much we're willing to sell. So I think there has been a fair bit of attention turned back to retail. And I think that augurs well for us and our peers who own these very well positioned properties.
I think that makes total sense. And I'm assuming a lot of that is -- there's been an abundance of private equity raised and bidding on 2 cap residential doesn't make sense for them. Would that suggest that perhaps you could turn into a bit more of a capital recycler if those prices are right? Or are you comfortable with the disposition program as it sits?
Well, the good news about RioCan is we've got options. If we wanted to recycle capital in a more aggressive fashion, we certainly could, but it really depends on what we can use that capital for. We're in a good position where we have more retained earnings based on our distribution reduction from last year. We're reducing our development spend a little bit next year. And our operations, again, our team is doing such a great job of both reducing expenses across our sites, but also Jeff and his team have done a remarkable job enhancing rents across our sites so we might not be in a position where we need to raise tremendous amounts of capital going forward. It all depends on what we can use it for. And if there's an accretive way to use that money, then yes, we can turn on the spigot at any time in a market like this and recycle more assets. From a qualitative perspective, though, I will add, and I think it's important to note that we will continue to prune our portfolio and make it better but by subtraction. We still have some assets that, from a same-property NOI perspective, drag us down a little bit. And if the opportunity arises, we will certainly look to sell those assets and ultimately have a better portfolio for it. And then from the development side, we've got a lot of very strong assets that serve as very good retail assets, but also have a tremendous amount of upside from a development perspective. And as we've stated clearly before, it's our intention to bring in capital partners on those types of assets, fairly early on to both validate the value of the air rights, but also to mitigate our risk in the development and to get some fees from that investor to ultimately help give value to our platform. So there's definitely -- I mean, we feel very good about the values out there, and we think that they are generally understated or underappreciated by the capital markets.
Your next question comes Sam Damiani with TD Securities.
Jonathan, congrats on your new call as CEO, and Qi we've already spoken. But again, wish you all the best in your next step. Just wanted to start off on, I guess, your outlook for the remainder of the year in terms of same-property NOI. I believe you mentioned that same-property NOI would be positive, which I think no one would be surprised at. But if you exclude bad debt expense, what would be your view on same-property NOI growth for perhaps the second quarter?
We're not really giving guidance on SP NOI for the second quarter at this point, Sam. I mean what I can say is that our outlook is favorable. I mean, remember, too, that we're lapping Q2 2020, which is obviously not our finest moment, given it was the outset of the pandemic. So I can tell you that I'll generally say it should be definitely a favorable conclusion of the year for us from many -- from the standpoint of many metrics, including SP NOI. But we're not really giving guidance at this point, as to exactly where it should trend, but we do believe we were confident, Sam, that it will trend in the right direction and continue to trend in the right direction.
Okay. That's helpful. And then on the disposition program, which it's great to see it ramping up and renewed interest in retail properties. I just want to clarify the comment that I think you made in your opening remarks that the average cap rate was 5.15%, and that's on the full $543 million of activity year-to-date, including land?
No, that's not including land. It's actually, if you include land, it's much lower than that, that's only for the income-producing component Sam. So again, we did much better because a lot of the land that we sold has no income, as you can imagine. So the combined cap rate would be somewhere -- Andrew, I'm not sure if we have it, but somewhere lower in the 4s, around 4.
Low 4s.
Yes, 4.
Yes, that makes sense. That makes sense. And all these values in line with your IFRS? Was there -- was the IFRS mark in the quarter due to some pricing that's been firmed up on some of these deals?
A little bit, yes. But sometimes, we have been pleasantly surprised by certain transactions where they are, in fact, better than our IFRS cap rates. But generally speaking, they're in line.
Okay. Last question for me is just on the goal of setting your debt structure at 70-30, unsecured - secured. What is the reason for that and the time line that you expect to achieve that?
Sure. I'll start with the time line. I mean, as you can imagine, Sam will take quite some time. It's not one of those things you could turn on or off immediately. So it's probably a couple of years before we can come close to that objective. And the reason for it is we just think it's prudent capital management in this environment. It gives us a lot more flexibility, and I think it also helps with our debt metrics and our debt ratings at the end of the day. We will still -- we intend to very much favor CMHC financing on our mixed use properties. So we will continue to focus on getting our secured financing bucket filled by those types of transactions. And of course, we own a lot of some properties with partners where we'll let them govern our secured financing strategy there. But otherwise, where we can, we're going to focus more on the unsecured market for a little while.
Your next question comes from the line of Tal Woolley with National Bank Financial.
I want to talk about Well, if we could. The remaining resi towers that you guys don't own, like when will all of those finish?
So Andrew, I'll hand over to Andrew Duncan, Tal, who can give you some more color on that.
Tal, thanks for the question. I guess I'll answer your question in 2 phases. We're going -- we anticipate closing all the remaining air rights on those transactions this year. We've closed 3 of them already. There's the 3 air rights deals to close. And then in terms of occupancy, there are all those buildings from a condo perspective and a rental perspective are occupying in the later half of '22 out to the beginning of '24. Because you can imagine they're all different heights, and they're all kind of occupying in different phases.
Okay. And I guess, what I'm wondering is if you're still going to be very much under construction for the next several years there over the next few years there. How should we think about how that will impact like leasing the retail portion? Like do you expect that we should expect to see that the other commercial parts kind of grow as those buildings are finished? Or do you think that actually, you know what, we will start taking occupancy [indiscernible] there.
It's a finely tuned process. Where we are focusing on ensuring that there is as little disruption as possible. I'm going to hand it over to Jeff Ross talk about some of the discussions he's had with the retail tenants and why we've mitigated any real material concerns about the phasing. Jeff?
Thanks very much, Jonathan. So we've been very quietly but actively working on the Well for a number of years as everybody knows. What they probably haven't seen is that we're probably in the neighborhood of about 40% leased on the retail leasing side of things. And with negotiations we have going on now, that's going to substantially grow through the second part of this year. There is a bit of a slowdown. There's no question because some of the Americans that we were talking to really need to lay eyes on the actual development and get feet on the ground. We feel that we've got a good chance of that happening in third and fourth quarter of this year as the U.S. starts to dilution up a little bit as soon as the border becomes a little bit more porous, they will get up here. But we're actively negotiating deals conditional on the coming up and actually seeing what we're producing. But from what we have in the hopper now, I'm pretty confident that as we kind of break out of 2021 and in '20 we will have a substantial amount of the retail done by the middle of next year. And as Jonathan said, it is a finely tuned dance that we're doing because as we get closer to this thing turning over, we're getting a really strong interest. And that's what we're really going to start to generate higher a revenue from the smaller retail units that we have. So we're pretty confident that we're heading in the right direction.
And I think just to conclude that, Tal the completion of the buildings, again, Andrew and the development team have done a very good job of ensuring that we put in process ways to internalize all of the construction of the remaining residential building. So the only thing that we'll be remaining at the time there's an opening of the retail sort of at the end of '22 is the odd [ voice ] that will be on the outside of buildings that will really be out of the way of the retail. So we feel very confident that when we set our sights on opening dates that we promised to retail tenants, they will have very little obstruction in their way to operate their businesses accordingly. And we've staged it -- we've staged it such that those things [ would rise ].
Okay. And then I guess my next question is just -- it's sort of the same question for the occupancy. You guys have noted that you've been 85% pre-leased on the office side. What's your stabilized occupancy for that building? And how quickly are you thinking you might get there?
Yes. It's a better question for Michael and the team at Allied. But we're confident with -- I mean, they have been extremely active even in the face of a bit of a challenging office environment. They're still doing deals impact just did one last month, which was, again, a strong deal. In terms of putting a specific time line on it, I would say that by the time we open or the project opens in the latter stages of 2022, we fully anticipate being stabilized. Would does stabilize mean there? I mean, I would say around 97% or 98%.
Okay. And then just lastly, on the retail side, collection rates have sort of been in this -- across the industry, at least the publicly traded guys have sort of been in the sort of low mid 90% range. Can you hazard a guess about when you expect those to start to improve?
Yes. I really think that the linchpin to all of this will be the reopening. And we've done a lot of a lot of research on what's happening in the U.S., which is a good -- I mean, I think a pretty good litmus test right now. And what we're hearing from our landlord peers as well as retailers down there, is that things have by and large, particularly in those areas that have been open for a little while, returned to normal. Rent collection numbers have improved significantly and I think we'll follow that trend. But it really does depend on the vaccination rollout. My sense is that by the summer, and then certainly by the early fall, you're going to see consumer activity return to a very active pace, in fact, higher than pre pandemic phases, which will put our tenants in good stead. And what's nice is I mean it depends on if you're a taxpayer. But what's nice is that the government is bridging the gap for a lot of our tenants that are forced to close by the extension of the CERS program to the end of September. So by the end of that, by the conclusion of that program, I believe that we will be in a stage where rent collections will be far more normalized. Will we be at our historic norms of 99.5% rent collection each month, probably not by then, but we're confident that as we roll into 2022, we'll start getting back to those heightened numbers again.
Your next question comes from the line of Pammi Bir with RBC Capital Markets.
Nice to see the activity pick up in terms of leasing, particularly on the spreads or specifically the new leasing spreads. But based on maybe what's in the pipeline and hopefully for reopening later this year, can you maybe just talk about your occupancy outlook? And then secondly, I am just curious how perhaps leasing costs and the retail net effective rents have been trending relative to pre COVID.
Yes, I'm going to hand that over to John Ballantyne, our Head of Asset Management, just to give you some more color on that.
Yes. I think, Pammi, based on the activity we're seeing now and the pipeline that Jeff's got going, we do expect our occupancy to get up to our more historical norms by, I would say, mid next year. What I would say, though, is we do have a bit more inventory right now in leased. And we're not just trying to fill it up with any tenants. We're obviously trying to do so with tenants that have been resilient throughout the pandemic. And I think the essential based tenants are the ones we're really doing business with right now, and we're going to continue to do so. So again, we will take our time a little bit more. We're putting more money into our shopping centers. To ensure that not only are we filling space, but we're filling it properly.
And I think you also asked about the net effect of rents and how much capital we're putting in. And Jeff, I don't know if there's a trend to have to heighten our TIs at this point. I think on trend, we're probably a little bit higher than normal, but I don't know what you're thoughts are.
Yes. Just to vary a little bit. But what we're really doing is we're doubling down on our qualifying the tenants that we're putting those additional capital out to. So we're more stringent than ever before on understanding where this TI is going. But we're not seeing a massive jump in it. There is some structure around some free rent and perhaps doing it that way. But the other thing we're really ensuring is the tenants wherever possible are putting their own capital in as well. So they're representative, they've got skin in the game. So the answer is, yes, it may be going up a little bit, but not a lot.
And just on the -- like on the renewals, have you been -- or even, I guess, on some of the new leasing, have you been maybe as far as the year 1 increase, maybe getting a little bit of a, obviously, a lesser or a bit of a break on the -- relative to market, let's say, but then maybe trying to incorporate whether it's annual or more periodic escalations in the term of the lease?
Yes. We're -- it's been a theme that we've been focused on even before the pandemic, but certainly now, we put a lot of pressure on our leasing department, and they've responded quite well. On not only getting 5-year bumps but actually annual bumps. And even though it's been a tricky environment, they've come through quite well. So we're all about growth for the future. We are really trying to embed that in our philosophies when we do any sort of activity, but most importantly, leasing. To ensure that, that growth is consistent and sustainable. And so Jeff and his team have done a good job of working those in. And of course, you can't do that in every lease. And certainly, some of our renewals are fixed. So there's only so much flexibility you have. But wherever the opportunity arises, we will -- again, we like to hold our net rents in year 1, but in some cases, we'll give a little bit on the first year if we can get sustained growth going forward.
Got it. Maybe just switching gears to the Well and the office, I guess, completion later this year. And just maybe if you could just clarify how the cash NOI impact will flow, I guess, on the initial phase of the completion later this year and then into 2022? Is there some maybe color you can provide on that specific project?
I'm not sure, Qi if we've disclosed exactly what the flow of funds is from the Well. But I think it's really again, it sort of logically follows the tenancy possession. So I mean, I think the office will start kicking off some fairly sizable NOI by the end of this year. And then the retailers will follow by the end of '22. And then, of course, the residential, we own our -- yes, we now have 50% of the largest residential building there that has around 600 units. That is going to be income-producing probably at the beginning of '23. So I can't give you specifics, Pammi, but those are generally the touch point that you would follow in order to determine what kind of NOI activity will happen from that site.
Got it. Maybe just one last one. And maybe, Jonathan, going back to your comments around FFO growth picking up, I guess, over the next few quarters. Any comments as to how you think the full year FFO may shape up?
Not giving guidance, Pammi at this point. Again, we're very -- I can give you the overarching statement that we're very confident that FFO will continue to improve, particularly as a result of this pandemic dissipating. And we do feel very confident that, that is something that will help us dramatically. We've also got developments that will be completed as the year goes on, that will also add to our FFO. So again, there will be growth. But in terms of giving you guidance on what that ultimate number will be. We're not offering that at this point, Pammi, but we're confident in the ability to constantly grow it.
Your next question comes from the line of Jenny Ma with BMO Capital Markets.
Congrats to you, Jonathan, and also to Qi for the next step in your career. Just with respect to the G&A, I wanted to confirm that any costs related to the changes at the C-suite were incurred in Q1 '21. So Q2 should be a cleaner quarter for G&A as far as you know right now?
Confirmed.
Okay. Great. And is [ 2.4 ] sort of a good run rate to look to in terms of a normalized quarter on G&A? I'm recognizing that's been a little bit bumpy when you look past over the last few quarters.
Jenny, if I may answer that, [ 2.4 ] you still have to add back some of the nuance. That means because last year, because of COVID we actually lowered the bonus accrual, for example, throughout the entire organization. So this year, even though still under pandemic, we certainly think it's -- hope it's better. And of course, the budget already reflect to quite an extent the pandemic effect. So it's not fully. So it's the best way to probably use Q1 what we just reported and remove the onetime as we talked about as a run rate.
Okay, great. That's helpful. Going back to the dispositions. In the MD&A, you talk about an enhanced disposition target. I didn't see a specific number, but I'm wondering if that commentary reflects what we have -- what we know to date as far as what you've sold and contracted? Or is there sort of a bigger target for the full year? Like how should we think about dispositions for the second half of 2021?
So what we've disclosed is what we currently have in the hopper. There are other transactions that are being contemplated. But of course, it's an unpredictable market. You never know what will close and what will go firm. But I will tell you that there will be growth in that number. Assuming all works out and the current deals do close, then there will be growth above what we've disclosed. Will it be material growth? I wouldn't say so, but there will be some other activity in the latter part of this year.
Okay. So it's fair to say that it's front-end weighted then on dispositions?
Yes.
Okay. Great. And Jonathan, you talked about places to reinvest that capital and possibly taking advantage of strong pricing in the market. I'm just wondering notwithstanding that the stock is up 25% year-to-date. Is there a contemplation that unit buybacks make sense from a capital allocation perspective?
One of our options for sure, Jenny. I mean right now, we are focused on making our balance sheet strong -- as strong as possible. And so our initial focus is going to be to pay down the debt a little bit, and we obviously have a development pipeline that adds huge amounts of value going forward. So we'll fund that. But looking at everything and balancing it all out, the NCIB is still at -- at this, we think, very undervalued stock price a very accretive and very prudent thing to do. But again, we're going to wait and see how the other metrics fall out after we get the proceeds from these sales, and then we'll make that determination, but it is a possibility.
Okay. Great. With respect to the rent collection, a pretty strong number considering 1/5 of your tenants are closed right now. Do you have a sense of how many of your tenants are eligible for CERS? What's kind of closing that gap between your closed tenants and their ability to pay rent?
Yes. And I'll also remind you, it's pretty good in the sense that the 80% that are open, a lot of them are open with restrictions to and severe limitations on what they can sell. So again, in the face of this environment, we're pretty pleased with it. But I'm going to turn it over to Oliver Harrison just to address the question on rent collection and who makes up the CERS category.
Yes. Well, primarily, the CERS program is targeted for [indiscernible] tenant base. And I would say just based on anecdotal conversations with the tenants. And then the resulting rent collection statistics for those category tenants. A broad base of that group is utilizing the program. And the program is actually, I would say, officially flowing through to them and then to us. It is the one thing I'd say it makes it a bit challenging is the fact that it is sort of done in arrears. So there has been a bit of a lag effect. We're seeing rent collections coming in from these tenants, let's say, in April, that relate to Q4 2020. But the program is working for them, but we do not have any specific -- specific for this.
So it's not something that you're formally tracking or have agreements with tenants in place in terms of getting that CERS money flow through to rent payment, is that fair to say?
Well, we have agreements, the leases. And so we fully anticipate getting not only the CERS payments, but 100% of their rents. And we are keeping close tabs on all those tenants that we know to be CERS eligible, and we've got an ambassador program that allows them to get our assistance to help them with the somewhat confusing process. But we just don't have, I think, specific statistics at our disposal right now, but there is -- we definitely know which tenants are eligible for CERS and which ones are eligible for other government assistance programs. But thankfully, it's a fairly broad umbrella of tenants, not just the independents, there's also smaller franchisee tenants that benefit from it as well.
Yes. We also know the statistics about their legal requirement is to provide the landlord with the money that they are collecting through CERS program so.
Otherwise, the CRA will come after them and no one wants that.
Right. And then finally, on construction costs, we're seeing inflation across the board and sort of a lack of availability of suppliers in trade. Are you starting to see that in the development projects? And are you rethinking your development yields or sort of how you underwrite developments going forward?
Yes. I'm going to turn that over to Andrew on the specifics around elevated construction costs, and then I can certainly hit on the -- what it's doing to our outlook on future projects.
Jenny, thanks for your question. I think I'll answer in a couple of ways. One, we're in a fortunate position right now in our development pipeline, where the majority of our projects are 100% tendered and contracted. So we're seeing it in a market, and we're seeing it through suppliers in those projects, but not per se through the buy. We've got some projects we're looking at kicking off sometime in '22, and we're actively pricing those projects right now and trying to appropriately mitigate the risk by adding contingency on the escalation side, but we're not specifically exposed at this moment. Are we seeing it generally in the market? Yes, there's a lot of construction starts. There's a lot of material increases. But we're adequately pricing those risks into our estimates at time.
And as for the second part of the question, Jenny, what I'll say is that RioCan is uniquely positioned. We've got a lot of assets that service development prospects that are income producing. And so we can make the decision or render the conclusion basically, right up until the day we start demolition as to whether or not it's viable. If we sense that the market for rental is just not where it needs to be and costs have elevated to a point where it's just not a viable project, we can pull the plug on it and still have a very valuable and very active income-producing retail asset. Now that's for the most part, we do have some greenfield properties. But the typical RioCan development site is one that is quite productive as it so we always track these things. And Andrew and his team do a really good job of keeping the finger on the pulse of it. And that gives us the ability to make split second decisions on whether or not to start or not on some of these projects.
Your next question comes from the line of Howard Leung with Veritas.
I just wanted to turn back to renewals and talk about the retention rate. I see in the comment in the MD&A, you pointed out that the lower retention rate was really due to 1 tenant that had a lot of space, but had a -- it was -- they were came lower than market rate. Is that fair to say that they were -- one of those potentially vulnerable tenants like maybe a department store?
No. Actually, it was a very strong tenant. Did we disclose who it is?
We didn't say which one.
But it's a very well covenanted tenant that just -- again, they had saturated the market and felt that it was a store that wasn't logical for them. But -- and it was actually an old Zellers lease that turned into a -- it was bought by another party. They opened, and then they just -- the store wasn't viable for them. But the good news there, Howard, is that we've already managed to backfill the majority of that space at higher rents. So while it did impact our retention numbers for this year, it will actually contribute to our growth going forward. And so I think it's wise to look at our normal course retention, which is close to the 85% range rather than this, which we feel is a anomalous, but ultimately, net-net, this is a win story for us. We're going to do far better with that space. Like I said, in the hands of someone like RioCan, we can do more with space than perhaps others.
Right, right. That makes sense. You should get that lift with the new tenant. I guess when you think about the tenants that aren't renewing, kind of that 15%, I guess, normalized 15%-ish, are they more so, especially in the past few quarters, have they been really in the potential vulnerable bucket for the most part? Or are they kind of a mix of all kinds of tenants?
I'm going to turn that over to John Ballantyne.
Yes. I think that's a pretty good classification. We always have typical turnover at RioCan. And sometimes it's wanted and sometimes it's unwanted. To the extent we can still refine our tenant mix, we will negotiate some tenants out. So yes, we did lose some vulnerable tenants on the way through. But we also are clearing some space to put into tenants that will be more beneficial for those centers over the long term.
Okay. Yes, that's helpful. And do you see, I guess, part of those vulnerable tenants, they should benefit as hopefully as we reopen. So can we expect maybe a higher retention rates from those class of tenants going forward? Or is that what you're seeing already now?
I mean the broadness of that category suggests that we're going to see different stories on so many different levels. I mean some of those potentially vulnerable tenants are actually very viable tenants that we want to maintain in our portfolio. A lot of them are restaurants that make up a key part of a downtown mixed-use development and even though they're suffering now, we want them to renew. We want them to be there. Some of them are movie theaters and gyms that might not have the ability to renew it's hard to give you a consistent answer in that regard. We will -- there are certain categories that make up part of that potentially vulnerable, like, let's say, fashion where we do believe that the renewals there will start to get lower and lower and lower, but that's by design. That's by choice from RioCan. We do -- we have a -- we're making a market effort to get our exposure on apparel tenants down to sort of somewhere around 5% or lower. So unless they can meet the terms that we really want on renewals, we're just telling them that they can seek other premises. So it's hard to give you a consistent answer across that entire category, Howard.
No, no, I get that's still pretty good color. Just one more on renewals from me. I guess, can you remind us again of how those fixed renewals for the renewal leasing spreads, how they're priced out or how they are determined?
On -- sorry, on fixed renewals, they're contractual. So they're already baked into a lease, and we know about them well in advance and budget for them. And obviously, when they're not fixed, it's a negotiation. And it really -- we've been very fortunate in being able to achieve rents and spreads that are higher than our existing market rent -- sorry, embedded rents. We think that, that mark-to-market, not only on our renewals but on our -- on any vacant space, is a significant upside provider for RioCan, and we're proving that out quarter-over-quarter now with some healthy leasing spreads.
Okay, right. I see. So the fixed renewals is like, it's an actual number. It's a -- that's already in the release. It's not based on some, I don't know, CPI or some other benchmark?
Well, there are some renewal clauses in leases that will say it's going to be x-plus CPI, but the consistency throughout all fixed renewals is there's a number that is set. You're right, the only variable could be, in some cases, CPI, but that's very limited. Usually, it's just a set number that has been prenegotiated.
Okay, okay. No, that makes sense. I just want to turn to disposition. It's pretty good cap rates overall. I guess there was 1 property. I think it was a partial disposition that was in the teens for the cap rate, but that I guess that's one of those properties you talked about earlier, Jonathan, in that was maybe dragging down the same-property growth and you're looking to dispose it?
Yes, I think that's accurate. I'm not sure specifically which property you're referring to, but there are, like I said before, Howard, there are qualitative aspects. Tanger, yes, Tanger, that's right. So we have made some decisions on assets where we're selling them at higher cap rates. It's not -- it might not be specifically in line with our IFRS values. But on balance, it's the right thing to do for the future of the organization because we see a future that has some troubling elements to it, and it will impact same-property NOI going forward and take up a significant amount of capital in certain cases and human capital as well. So in those cases, we elect to sell them as we did at the RioCan Tanger site in Québec. It's not the greatest cap rate. But from a qualitative perspective, it will help us going forward.
Right. Great. And for those secondary assets, you're still -- you still have in the pipeline, maybe those that have CapEx in that range. Are those -- do you have -- do you find that lately, you've had to market them heavily? Or are they -- are you getting approached actually by, I don't know, private buyers or other people looking for maybe higher cap rates?
That's a great question. The interesting thing was that once we reached our target of 90% major market focus, we sort of turned the tap off a little bit on our aggressive disposition program in secondary markets. So what you're seeing in our list of dispositions that do constitute secondary market sales, a lot of those have been off-market approaches. We have not been actively marketing a lot of these assets. There is the rare exception. But for the most part, these are just approaches from local individuals, private individuals, and they're very enticing, and we'll follow through on the deal that they are. So it is actually more of a passive approach we've taken on some of those assets.
That's very interesting. And just last one for me, maybe on debt to EBITDA. Can you just -- or I guess, more on dispositions, out of the $540 million you've disposed, can you just talk about roughly how much you expect to see going down to paying down debt? And maybe how much for developments?
I think most of those actually target to pay down the debt, depending on the end, how much we're closing. Yes. So that's the primary priority.
Yes. So the majority, I'm not -- we can't give you a specific number. But again, our focus right now is making sure our balance sheet is improved to the point that when we can turn to sort of more of an offensive posture. Our balance sheet is in great shape to make that turn.
Congrats again, Jonathan and Qi.
And there are no further questions at this time. I will now turn the call back to Mr. Gitlin for closing remarks.
All right. Well, thank you, Dawn, and thank you, everyone, who is still on the line. I also have to remind everyone that our AGM is set for May 26, and we're very much looking forward to it even though it will yet again be virtual. Unfortunately, I will not have my opportunity to shine in a live setting. But hopefully, it will be just as impactful. Anyways, thank you, everyone, for tuning in, and thank you for your ongoing support, and we look forward to speaking to you again in May, and then again in the second quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.