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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 Second 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. Good morning, everyone. My name is 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 statements. 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 June 30, 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.I'll now turn the call over to Jonathan.
Thanks, Jennifer, and thanks to all of you for joining us today. I have to say it's a real pleasure to be here in person with RioCan's fully vaccinated senior leadership team. We're here in one board room, and we're setting the tone for a safe return to a more normalized environment.I'm impressed by the innovation, the drive and commitment to our business shown every day by the executives in this room and also the people that they lead. The combined strength of our portfolio and our team's expertise has translated into a strong quarterly result that really demonstrates RioCan's resilience, stability and its growth potential.We delivered robust operational and financial performance in spite of lockdowns that extended through much of the quarter. Our performance, in my mind, was impressive, but not surprising. When you think about it, if you're standing at virtually any prominent intersection or community in Canada's major markets, there's a RioCan property close by. Now the importance of this well-positioned physical space, I'd say it's been rediscovered over the past 18 months.Early conclusions about the struggles of retail have given way to the recognition that people want more engagement and more control in their shopping experience. Now I, for one, had struggled with stolen packages, ill-fitting online clothing orders, ruined parcels, [ with sud ] and snow and rain on my front porch. And I would tell you that from this, I would say, the importance of bridging that last mile gap between distribution centers and consumers' homes has become critical.Stores may now operate in a different manner. I mean they're continuously evolving, but they are absolutely critical in the delivery chain. And we're helping our tenants evolve their space to move along with these emerging trends and help solidify RioCan and its tenants place in that last mile delivery chain.So we have programs like RioCan Curbside Collect, and these are just small examples of this evolution. We intend to continue to formulate new ways to ensure that our properties maintain critical role in the effective -- in the effect of last mile movement of goods between retailers and their consumers.RioCan properties are a vital component of the communities in which we operate, be it grocery-anchored, open-air retail, residential or mixed use. And we possess all of the tools required to evolve these great properties to maximize long-term value for our unitholders. As vaccinations accelerate and restrictions start lifting across the country, it's clear that RioCan is emerging perfectly positioned to capitalize on pent-up consumer activity that will benefit our tenants and ultimately, you, our unitholders.As ever, RioCan's story is one of strength, stability and value creation. We're a Canadian real estate leader in ESG, and we continue to gain recognition for our commitment to responsible growth. We achieved an ESG rating upgrade by MSCI, or Morgan Stanley Capital International, for the third consecutive year. We earned the 2021 Green Lease Leader designation, and we were recognized as one of the top ranked real estate firms in Corporate Knights Best 50 Corporate Citizens in Canada for the second consecutive year. We progressed our DEI focus by publishing our inaugural DEI policy and launching a DEI scholarship program. We also celebrated Pride Month with a series of cultural initiatives to drive awareness and support for the LGBTQ2+ community. We're going to build on this momentum, and we're going to continue to take action to maintain our status as an industry leader in sustainability.Now let's shift the focus over to our Q2 operating results. We had our best rent collection rate since the start of this pandemic with a total of 94.9% of our rental revenue collected for this quarter and approximately 95% of July's rent as of yesterday. Rent collection continues to improve as tenants resume regular business activity. As of this week, essentially all of RioCan's tenants are open for business. Also, as we've consistently seen, rent collection improves as tenants receive funds from stimulus programs and as our vigorous rent collection efforts bear fruit. So these numbers should change and should improve.We are well on the path to pre-pandemic collection rates. Tenants are attracted to our exceptionally well-located properties, and this is evidenced by our ongoing leasing momentum. To that end, our great leasing team completed 1.4 million square feet of new and renewed leases this quarter alone. For context, our new leasing in the quarter was equivalent to that of the same quarter in 2019, which was, of course, pre-pandemic.We completed 100 new deals totaling 372,000 square feet at an average rent per square foot of $22.82, which is well above our portfolio average of just around $20 per square foot. This trend really demonstrates our ability to grow rent even in the midst of pandemic lockdowns. The majority of these new leases were completed with strong covenant tenants, primarily personal services, specialty and essentially retailers.New leasing spreads of 9.2% provide another clear indication of the healthy upside between our average portfolio and market rents. We continue to see the well-capitalized, forward-thinking retailers are seizing on the opportunity to lease well-located space, which, of course, RioCan has in abundance.Our FFO and same-property NOI results continue to steadily recover. They still reflect the direct effects of COVID-19 and pandemic-related provisions. However, as the pandemic subsides, the impact of these provisions will continue to lessen. At $0.40 per unit, our FFO increased by 14.3% when compared to the same period last year. Same-property NOI increased by 7.8% for the second quarter, and it's going to continue to improve as occupancy levels trend back to their historic norms. Our committed occupancy was 96.1% by quarter end, and we're confident that our encouraging leasing and operating metrics will continue to result in organic FFO growth. This confidence is, of course, bolstered by the obvious strength and resilience of our tenant base.RioCan generates more than 91% of its annualized rental revenue from grocery-anchored, mixed-use and open-air centers. This solid tenant base also perfectly positions us for the improvement in growth in all operating metrics as the impacts of COVID diminish.Turning now to RioCan Living and RioCan's ongoing developments. So residential projects are really a cornerstone of RioCan's development program, so much so that residential development represents close to 83% of our 41 million square foot development pipeline. We currently have more than 1,200 operational residential units across 4 buildings in Toronto, Ottawa and Calgary. This growing portfolio is a source of income diversification and NAV growth for the Trust.Our public health measures eased, and with that, in-person tours at our properties resumed. This resulted in notable progress at Brio and Calgary, which was 94% leased as of August 4, which is up 20% since we reported in the first quarter. This is an outstanding result, given that as you may recall, Brio commenced leasing at the height of the pandemic.Pivot in Toronto launched in December of 2020. It's now close to 50% leased, and there's been a dramatic acceleration in leasing activity in the 3 weeks since the province entered stage 3. I believe that the implications of this recent residential leasing momentum span really further than our multifamily residential portfolio. The enhanced demand for urban transit-oriented mixed-use properties signifies a true validation of RioCan's growth strategy and a testament to the strength and resiliency of these communities in which we operate.Our RioCan Living portfolio continues to expand. We recently commenced pre-leasing at Litho, a 210-unit project in Toronto; and Latitude, the 209-unit project in Ottawa. Strada, which is a 61-unit boutique mixed-use residential project rental in Toronto Little Italy, will commence its pre-leasing in October of this year.Now I had an opportunity to tour these buildings late last month. And like all RioCan Living buildings, they're spectacular. I mean they're spectacular in so many respects, in their design, the location and their amenity offering. We've seen every indication that there's going to be strong lease-up velocity at each one of these sites.We anticipate the RioCan Living portfolio will include more than 10,500 residential units either completed or in different phases of development by 2023, which, of course, adds diverse NOI and NAV to our balance sheet. The portfolio includes 3 condo projects, comprising nearly 1,250 units currently under construction. U.C. Tower and U.C. Uptowns in Oshawa and 11 YV in Yorkville are essentially sold out.Queen & Ashbridge condos in Toronto launched mid-pandemic, and its 399 units are already close to 92% sold. These have been tremendously successful projects, in which over a 4-year period, RioCan will see a full return of the capital we invested, plus impressive anticipated gains of approximately $140 million. These gains provide an alternative source of revenue and also serve as a valuable FFO bridge to supplement our productive core commercial portfolio.During the second quarter, RioCan also announced a new strategic approach for the development of mixed-use residential condo projects. This sees the Trust selling a majority of its interest in these projects while retaining project oversight as general partner and sole development manager. This partnership structure enables RioCan to leverage this pipeline of prime locations and, equally importantly, its established development platform to efficiently raise capital. It also helps us mitigate development risk and earn management fees along with the promote. The consistent fee stream reflects the unparalleled expertise in managing the entire development process from zoning all the way through to unit sales.Verge, which is a 545-unit mixed-use residential project located along the Queensway in Toronto, marks the first independent condo launch under the RioCan Living banner. RioCan's mixed-use development projects continue unabated through the pandemic, and we anticipate completing 590,000 square feet of development by the end of this year.As always, we continue to look ahead to ensure growth through sustainable development. Our pipeline of zoning entitlements is one of the largest in the industry. It translates into lucrative opportunities to convert properties to their optimal uses, a proven cycle that will continue to pay off in 2021 and long into the future. We're going to use this vast pipeline of air rights and seek out partners to enhance value, reduce exposure and, equally important, to be rewarded for our deep and experienced development and residential platform through equitable fee structures.Now I'm going to take a moment to briefly highlight our ongoing and very active capital recycling initiatives. The quality of our assets and our established management expertise continue to attract strong valuations and investment from well-respected institutional funds and enable us to monetize the value that we've created in our portfolio. As of August 4, the total of $420 million of dispositions were closed at a weighted average cap rate of 4.26%. The Trust further entered into firm or conditional agreements to dispose 100% or partial interest in a number of properties for total sales proceeds of an additional $420.8 million, including the recently announced Sun Life transaction.Between closed firm and conditional deals, we expect the net proceeds of approximately $841 million at an average cap rate of 3.76%, assuming, of course, that all of these transactions are finalized. And these assets range from conventional retail, to mixed-use, to income-producing land -- sorry, to non-income-producing land, I should correct myself. These transactions include the sale of partial interests in development properties or future density and the closing of prearranged air rights sales, which allow the Trust to realize excess density value attributed to potential redevelopment for highest and best use.The volume of deals illustrates the transaction activity in the retail property market and the strong appeal of our assets to a variety of buyers. Now the proceeds are going to work hard for our unitholders. The capital is going to be allocated towards paying down debt and funding development, which sets us up well for our future sustainable growth.We also continue to invest in the strength of our team. As you know, I firmly believe that our incredibly integrated and experienced executive bench is the driving force behind RioCan's adoptability and growth. And I'm happy to announce that we further strengthened this team with the recent appointments of 2 exceptional leaders. We recognize the importance of the strong brand and the differentiated culture, and as such, Terri Andrianopoulos was promoted to Senior Vice President, People and Brand, effective June of this year. Terri is a trusted leader who's been with RioCan for more than 5 years. She's held a variety of roles that include responsibility for marketing, communications and most recently, human resources. Terri's new role elevates to our senior management team, and she's working collaboratively with the team to differentiate our brand, further develop our talent and reinforce the culture of excellence here at RioCan.Dennis Blasutti will start as RioCan's CFO effective September 7 of this year. Dennis is a proven leader with a breadth of financial knowledge and relevant experience. His career spans more than 18 years with a depth of experience in financial management, business leadership and corporate strategy. Beyond his finance expertise, Dennis is going to be a strong addition to the team in 2 priority areas for RioCan: ESG and people and culture. He has a firm grasp of ESG and deep knowledge of environmental practices, in particular, given his firsthand experience with sustainable technologies at Enwave. Dennis is known to be a collaborative and inclusive leader, and I'm confident that his effective relationship and team building skills will complement our team and further strengthen our connections with the investment community, and I'm looking forward to introducing him to you all.And before I turn the call over to Franca Smith to discuss our financial performance for the quarter, I want to first express my and RioCan's sincere appreciation. Franca has been serving as RioCan's Interim CFO for the entire second quarter. Her expertise, her collaboration, her outstanding leadership has translated into such a seamless transition period. I'm so impressed with the acumen and commitment of the entire finance team, which has been led so well by Franca.With that, Franca, I'll now turn the call over to you.
Thank you, Jonathan, and good morning, everyone. Great progress is being made in moving into the post-pandemic environment, and we are all delighted to return to our gathering spaces, and I know that I certainly am.While reopening is well underway and the end is in sight, the third wave of the pandemic extended lockdowns through much of the second quarter. As Jonathan highlighted, despite this operating environment, RioCan delivered strong Q2 operating results on all fronts. Q2 FFO per unit was $0.40, an improvement of $0.05 or 14.3% over Q2 2020. The main driver of this year-over-year change was lower pandemic-related provision of approximately $14 million, and we also recognized $2.7 million in interest cost savings and $1.9 million in higher residential inventory gains, which were partially offset by lower other operating income -- or other income, pardon me, reflecting a fee received in 2020 for terminating a forward purchase agreement.With respect to development, it is worth reiterating that development is fundamental to unlocking the significant value inherent in our portfolio. Focused on mixed-use residential development, our pipeline will serve to diversify our income while addressing the need for housing in Canada.Throughout the pandemic, RioCan's development program continued to make meaningful progress. We expect development spend for 2021 to range between $425 million to $475 million, a decline from our estimate of Q2 2021 mainly due to timing. Looking beyond 2021, our development spend is expected to taper from this level. Three main drivers of this lower estimated future spend includes the delivery of a significant portion of The Well this year, the staggered nature of our pipeline and sharing of development costs and risks through existing and new strategic partnerships.As always, we take a prudent approach to manage our development program and maintain our plans to primarily self-fund development through retained free cash flow, divestiture proceeds, strategic partnerships and accelerated capital recycling through condo or townhouse development. We expect to keep total IFRS value of properties under development and residential inventory combined as a percentage of gross book value of assets at about 10% or lower despite the 15% limit allowed under our credit facilities. And as of quarter end, this metric was 10.9%.Turning to our balance sheet. We continue to maintain ample liquidity. And as of June 30, our liquidity stood at $1.2 billion in the form of cash and cash equivalents and undrawn committed revolving lines of credit and other credit facilities. Our mortgage maturities for 2021 were $380 million, of which only $42 million have yet to be refinanced, and we expect to refinance them in due course.In addition, we have a large unencumbered asset pool of $8.5 billion on a per share basis, which generated 60% of our annualized NOI and provided 2.24x coverage of our unsecured debt as of quarter end.At the end of the second quarter, our debt to adjusted EBITDA was 9.87x compared to 10x in Q1 2021. And this quarter-over-quarter improvement was largely due to a lower pandemic-related provision. Debt to total assets was 44.7%, an improvement from 45.3% in Q1 2021. And for these 2 metrics, our long-term targets remain at 8x or lower and a range of 38% to 42%, respectively. RioCan's successful capital recycling program and ongoing improvements in operations will serve to reduce these metrics in the near to medium term.Our cost of debt continues to decline with the weighted average effective interest rate of 3.09% on a per share basis, which compares to 3.22% at year-end 2020.As of June 30, RioCan's unsecured, secured debt composition was 54-46 on a per share basis, and we continue to target shifting this ratio to 70-30 over time while balancing various factors such as credit rating implications, cost of debt, debt ladder and liquidity needs. RioCan is committed to a disciplined approach to managing its balance sheet and capital structure in order to maintain strong liquidity and financial flexibility.Our approach has proven critical to navigating through the pandemic and will continue to position RioCan well as we accelerate growth and invest in value-creation initiatives for the long term.As Interim CFO, it is a pleasure to have the opportunity to work with all of you, and I look forward to welcoming Dennis on September 7.And with that, I'll pass it back to Jonathan for closing remarks. Thank you.
Thanks so much, Franca. You did great for your first quarter in the chair.Now to wrap this up before we turn it over to questions, I want to emphasize how proud I am of how RioCan has really navigated this challenging time. We continue to demonstrate the ability to create exceptional and successful communities in any context, be the urban or suburban, commercial, residential or mixed-use.As I mentioned when I opened this call, RioCan is precisely where Canadians want and need to be. We've got enduring strength, stability and growth and a strategy to create lasting value. We're poised to thrive now that the economy has reopened, and I'm optimistic about the quarters and years to come. It's a privilege to lead this incredible team and to have this well-positioned portfolio to create value for you, our unitholders. So thank you very much.And now we, the team, are here to respond to your questions.
[Operator Instructions] Your first question comes from the line of Sam Damiani with TD Securities.
Jonathan, I think you mentioned the -- essentially all of the tenants are open today. I don't know -- I didn't see the stack for, I guess, quarter end specifically, but I assume it's up a little bit from Q2. And I'm just curious, with the reopening that's advanced in Ontario and Alberta in recent weeks and months, how has the leasing activity changed in terms of tenant composition and activity? I just saw the new leasing volumes were down a little bit from Q1, which were exceptionally strong, but just curious what the trends are.
Well, I can give you a bit of an overview, and then I'll hand it over to Jeff Ross, our Head of Leasing. But I think they've been consistent throughout -- since, I would say, the beginning of the year or close to the beginning of the year where I think a lot of our tenants, including the U.S.-based ones, are seeing opportunity to grow, particularly in the markets where RioCan resides. And so we're seeing continuous and sustainable leasing momentum in the vast majority of our environments, particularly open air and now increasingly urban environment.There are certainly some areas that are still a little bit slow off the market like office, where in Toronto, in particular, there's still a bit of, I would say, discovery going on with respect to what office users need at this point. But we're confident that we're positioned in the market from an office perspective, that will pick up over time. And we're even starting to now see a bit of that momentum take hold.And then enclosed malls, I mean, I think there's some -- I would say there's a little bit of slowness in the enclosed mall space relative to the open air space. But Jeff, do you have any more insights for Sam?
Yes, Sam. The velocity of meetings with tenants is off the charts right now. The biggest thing we're waiting for was that comfort level to get there to actually get tours going and people on the ground. And we're seeing a lot more of that, and we're starting to see that in a very positive way from our tenants that we're talking to down in the U.S. who are now getting more comfortable in kind of booking trips. And you know full well that a lot of those guys really need to walk the asset before they're ready to commit. So again, those meetings continue at a wonderful velocity. The service commercial amount of deals are going through the roof, a lot of government tenders, a lot of hard goods.On the food and QSR, as fast as the unit is coming back to us and that velocity has slowed, there's a good number of people that are ready to pick them up. So right now, I'm being very optimistic about what the next quarter is going to bring us into 2022. But if talk can then turn to conversion, I'm feeling really good going into '22.
Okay. That's very helpful. And then just quickly, between Alberta and -- versus like Ontario and Quebec with the sort of different reopening plans and the strategies, I mean, is there a difference there in terms of tenant leasing velocity? Is there any -- is it any meaningfully different in Alberta today?
No. I think all 3 of those provinces are responding similarly, and keeping in mind that we're really in the major markets in those provinces. And those major markets are exactly where tenants are expressing interest being. So we're not really seeing a market difference. We always say that Toronto is always going to have a little bit more action, but there's no market difference over the last few months in interest between those provinces.
Your next question comes from the line of Mark Rothschild with Canaccord.
Just kind of following on what you were discussing with Sam. The retention rate seems solid, yet you're still classifying about 20% or so of your tenants as vulnerable. How should we read into what that means? And are those tenants in the bucket that would not be -- that you did not retain? And how would you expect that to trend going forward with those tenants?
So my view would be that out of the -- any tenants that we would have lost, I would say -- and I don't have the science in front of me, but the vast majority of those would have been from that category. And that's -- some of that's by design. Quite honestly, we're not working hard to retain some of those tenants that we do believe is sort of a vulnerable subset. And that category is the same as it was during the pandemic.And I would say that, over time, the concerns surrounding some of those uses will dissipate because they're starting to prove that in this environment, this post pandemic, and I say that with a lot of hope but also a lot of confidence, in this post-pandemic world that they will, again, regain the strength and lose some of those attributes that we felt needed to place them in that category.Examples would be like, do I think that gyms will remain a very problematic use in the future? No, I don't. I think we're all confident that the Canadian society will absorb the need for gyms again. And there's certainly a lot of restaurants that are in that category as well because during COVID, they were closed. But I think -- sorry, not during COVID, during the pandemic, they were closed. But I think as restrictions ease, there's a lot of those tenants that are very well positioned and their businesses are strong. So I think they will move out of that category over time. But just out of prudence and an abundance of sort of conservatism, we've left the categories and the tenants within them pretty much the same because we just -- even into Q2, a lot of them were closed for business.
Okay. Great. And maybe just one more question. In regards to the strategy to sell the majority of condo development project and retain the management and earn fees that way, to what extent is that driven by being more careful with your capital to reduce leverage or that's a strategy that you just think is most effective for RioCan? Obviously, those projects are, in most cases, very profitable and you have the capacity to fund them on your own.
Well, I think there's a number of reasons that stand behind that strategy, Mark. One of them, as you suggest, is certainly the -- I guess the diversification of risk. We also have certain limitations from a [ shift ] perspective as to how much condo we can do. But also, it's something where we think we could really lever our expertise and garner recurring and sustainable fees more so than just kind of the lumpy condo gains, which will still be part of our balance sheet going forward, but we feel this is a way to diversify and prolong and sustain the income flow in a little bit more of a predictable and meaningful manner. And we've got some great expertise here, we want to leverage that and get paid for that expertise. So we really do like the plan for that reason, but there's a number of others that stand behind it as well.
Your next question comes from the line of Tal Woolley with National Bank Financial.
Let's start out with a more simple housekeeping question first. Just on the credit rating, there's obviously been -- they've all -- all the ratings agencies have kind of gotten a little bit more active over the last couple of months. For you guys, what sort of the debt numbers you need to hit with S&P to sort of maintain the current rating? And by when do you need to hit them?
Well, it's not -- I mean they're sort of paying attention to us, but they haven't sort of cast that in stone. But I think what they're looking at is trends, and they really do favor the trend in our net debt-to-EBITDA stat as well as our capital structure, putting more in unsecured over secured debt. And I think it's those trends that really have them, call it, at bay right now and quite satisfied with where we're going. But we're in close contact with them, Tal, just letting them know what our pipeline looks like and where our balance sheet is going based on our best prognostications. So we haven't really disclosed exactly what kind of guidance they've given us, but we're feeling confident that we're trending in the -- very much in the right direction.
Okay. And I've just got 2 larger sort of strategic questions. So -- we've seen some of your peers like Crombie talk about utilizing their open air centers in different ways. They're going to be taking -- they've announced one project where they'll be overhauling a tenant -- or an anchor tenant at an open air center and transforming that more into logistics space.Obviously, as one of the largest owners of open air centers across the country, like have you thought about what are some of the new uses for that format, too? I know we've talked a lot about mixed-use as being a big driver for RioCan, but I'm wondering if you're thinking differently about open air centers going forward, too.
Well, we think about it all the time. And what I would suggest to you, Tal, is that the last 1.5 years has taught us that our existing uses in a lot of these centers are actually very relevant, particularly grocery-anchored centers. And the truth is we're 96.1% occupancy now, and that's trending up. And I think we really have gone beyond the trough where we were last year. So it's not like we have an abundance of opportunity. I mean tenants -- conventional retailers really very much favor being in our centers. So we -- I would not want to forego a great conventional use to put in all the use that we actually don't have a lot of understanding about like fulfillment.That being said, we're always looking for opportunities within our centers that will drive traffic. And so when it comes to things like medical uses or if there are sort of distribution methodologies we can use, like putting in some sort of micro fulfillment, as long as it supports and aids the success of the center, we are considering it. And we have our tentacles out across the country and beyond looking for opportunities to better our shopping experience and to better the experience for our customers who are our tenants. And if that means putting a micro fulfillment depot or something like that in some of our shopping centers, if the opportunity is there and we can manage it effectively and it's a good allocation of our capital, then yes, absolutely, we're going to consider it.But we're not really coming out with a blanket statement saying that by 2023, we want to have micro fulfillment as a fundamental pillar within our business plan. I think that's a little too broad a statement. What we are saying is that we want to improve and diversify the use within our open air centers. And we're going to look at all different types of uses that improve the experience and, of course, the cash flow in those shopping centers. Long-winded answer, but hopefully, that helps you.
No, that's good. That's perfect color. And then just, I guess, lastly, on RioCan Living. You're going to be sponsoring your sort of first independent developments. The portfolio is going to scale up over the next few years to the size of some of the publicly traded players that we have out here in Canada now. And there is such a cost of capital differential, and I'm just wondering, like over the longer term, as that business scales up, is RioCan's stock the right container for RioCan Living over the long haul? Or should you be considering maybe other ways to sort of maximize the opportunity to get a better cost of capital for that platform?
Yes. I think for now, given the scale of it relative to the rest of our balance sheet, it certainly -- it fits within the RioCan mothership. At a certain point, when we achieve a certain amount of scale, we'll consider whatever creates total unitholder return for our constituents. And then on the condo side -- I mean that's the rental side. And on the condo side, I really do favor our new structure where we really are taking a minority interest but overseeing the development and getting paid for that process. And I think that is -- my hope is that investors will see value in that proposition and really buy into the fact that we can create value through those -- that vehicle.But ultimately, what our job is as a management team is to create total unitholder return. And if we're not getting recognized for the multi-res platform or mixed-use platform that we're creating here in RioCan Living, then we'll figure out ways to maximize value out of it. But that's something we're going to assess as we maintain some scale or retain some scale.So that's definitely -- the beauty of it is that the more of these types of assets we build and own, the more flexibility and the more avenues are available to us, whether it is hanging on to it within the REIT, which, again, in my mind, should create some multiple expansion and very solid income, or doing other things with it. I think we'll have a lot of potential.
And just lastly on the operational side for RioCan Living. Like as you build this up, I can't remember exactly, you were using an outside partner for property management, I believe, on the initial sort of buildings. Is there a point at which you look at bringing that in-house and trying to brand a little bit more aggressively to the consumer?
So at this point, we don't have the scale to justify it. It's something that we'll look at. And again, right now, we've got excellent third-party managers. And in some cases, they're actually partners and very much aligned with us in the ownership of the building. And we're seeing great results out of our -- out of these managers. I mean, really, we think they are best in class and represent the RioCan Living brand very well.But we've built up a really good asset management function that oversees those managers, and we've now expanded the breadth of RioCan Living to include all of the skills and capabilities that will allow us to build and oversee ownership of these things, which John Ballantyne is overseeing. And I think we're -- we've built up that team in a really effective way. But insofar as property management goes, like I said, at this point, it's not something that we're considering with any real vigor. I think it's something that if we get a certain amount of scale, it's something we would consider.
Your next question comes from the line of Jenny Ma with BMO Capital Markets.
I have 2 questions on the condo development JV. I'm wondering if the partnership structure is fixed with the same 4 partners. Or are you using as more as the blueprint to maybe solicit different partners? And when you look across the portfolio, how do you select which projects to be putting into this JV and whether or not you look at it as condo versus rental?
So the answer to your first question is the latter, meaning that it is just -- it's a prototype. The investors that we have in the first deal at Verge are -- I mean, again, they're very logical to come into other transactions that we do and to be limited partners in a few of these projects, but it's not like an open-ended or a close-ended fund. These are one-off partnerships created for each individual transaction.And with respect to your second question, it's really -- I mean it's a property-by-property assessment, whether we do it as a condo or rental. And if we choose to do with condo, there's nothing etched in stone suggesting that we will always go with this methodology and the structure, but we do believe that it is the right alternative for our unitholders, and it's something that we will likely pursue whenever given the opportunity. So when we do elect to go condo, it's quite likely that we will go with this structure.
Okay. So there's no obligation to go back to the same partners.
No.
Like I guess, how do you still look at partners through this process then? And is it a really -- is it different bucket of an investor that's interested in this piece given that it's a bit of a limited life project as opposed to building long-term rental?
For sure. I mean, multi-res, you're getting a lot of interest, as you talk from our deal with Sun Life BGO, from that institutional set who simply want the recurring income and they're very much aligned with us in that view just to hold it forever and ever, maximize the income we can get out of the project, whereas as the architect for the LP investors on our condo are looking for an IRR-driven return that has an exit. And that, to us, is very much a different profile than who we're seeing and partnering with on the multi-res rental front. So I think that -- and the good news is that there are many entities out there who are very much interested in these types of condo developments, particularly when they're aligned with a well-capitalized and increasingly more experienced team like we have here at RioCan.
Okay. Great. Now does this new prototype accelerate your development pipeline at all? I mean I recognize that your current condo projects are sort of 50-50, sort of 50% to 80%. Does it expand what you can pursue at any given point? And if so, you talked about utilizing your bandwidth, but exactly how much bandwidth do you think you have for additional projects and at what point do you need to expand your team?
Yes. I mean we look ahead -- we now look ahead very thoroughly 5 years, and we -- to get a sense of how much capital we are going to allocate towards development. We, of course, want to make sure that we are sustaining a sizable improvement in our multi-res rental units. And then we can get a sense of how much we want to allocate to condo projects because we have a number of viable potential condo projects in our pipeline. Once we've done that, of course, the less you own of each project, the more projects you can do. So the short answer to your question is, yes, it does increase our ability to do more projects. And so I think that's part of the benefit.
Great. And your bandwidth allows for that expansion at this point?
Yes.
Okay. With respect to your noncore assets, whether it be the malls or the secondary, tertiary market assets, can you talk about whether or not there is much of a market for those? And at this point, given that they -- and I don't know how much overlap between the 2 different buckets are, but it's less than 10% of your holding. Are you still actively looking to sell these assets? Or do you just sort of let that number grind down as you pursue other avenues of growth?
So what I would say there, Jenny, is that, first of all, there is a market for it as we demonstrated by a few transactions that have been done over the course of the last 5 or 6 months. But what I would say is now that we're well over 90% in major markets, which was always our objective, it becomes less of a question as to whether they're in secondary markets and more of a question of are they performing well, are they growth prospects, or are they assets that simply would be better in someone else's hands. And we are now blind to the geography, meaning that we would just as quickly sell something in a major market than we would in the secondary market if it is underperforming and we don't really have an answer as to how we can have it become a growth creator. So we are always looking to improve through subtraction. And what I would tell you from our experience is, yes, there is an increasingly improving market for those types of assets.
Okay. And then my final question is with regards to the parking revenue. It looks like it's still tracking well below 2019 levels. I'm just wondering, is it weighted towards office-driven parking or retail traffic? And what do you need to see to get it sort of back close to the 2019 levels?
I'm going to hand that over to John Ballantyne to address that.
Yes. Jenny, it is really tied more to the office component than the retail component, our mixed-use properties. We expect as back-to-office programs kick in for various companies across our portfolio, we will see a marked increase in apartment revenues. You're right, they're probably about 40% now of what they typically are. So we expect through the end of the third quarter and start of the fourth for them to ramp back up. We'd be probably back to full capacity in the new year of 2022.
Okay. And is this just daily parking? Or is it more committed monthly parking?
The committed parking has held up for the most part. It's more daily parking.
Your next question comes from the line of Howard Leung with Veritas Investment.
Just wanted to turn back to the RioCan Living. I know it's a lot of interest to all of us. Can you give us an idea of the typical fee structure and what it will be based on or what it's looking like, at least for the Verge?
So for -- so you're talking about just the condo LP because RioCan Living is obviously just not [indiscernible] for breadth than just the condo LP.
Correct.
So it's really quite simple. I mean we get work fees for development management. We do -- I mean when we sell the land to the limited partnership, they're -- I mean in Verge, there was a capital creation through that sale. But the fees are really work fees and oversight of -- if we take care of financing, there's fees for financing. So very much your typical standard fees. And then there's also a promote structure where assuming we clear a hurdle on IRR for the project, we get an outside or disproportionate amount of the proceeds from the sales of the ultimate units.Andrew, I don't know if there's anything to add to that.
No, that's exactly what it is, work fees [ in the front ].
Right. Right. Yes, that seems to make sense for the involvement that you guys have. And just maybe on the accounting for these future partnerships. Do you consolidate them? Or because you have a minority interest, you won't? Just kind of want a reminder on that.
Yes. So that particular structure is equity accounted just given the criteria, how complicated kind of this analysis can sometimes be. But in particular, that one is considered to be a joint venture and equity accounted.
Right. But I guess it -- and I guess it will depend on the circumstances and for future projects, whether it will be consolidated or equity accounted?
Yes. We'll tend to, I think, follow basically the same principle. But as you know, each deal will be very specific to the circumstances and the partnership agreement. So it will require, obviously, negotiations and analysis, and it's quite a technical area of the accounting standard. So we'll do our best to structure it accordingly.
Yes, that makes sense. I know it's definitely a very technical standard. Just wanted to turn to the top tenants kind of disclosure you have there. It looks like, overall, average rent per location -- or annualized rent per location for these tenants has increased, but the number of locations have gone down for these top tenants. Is that just -- would you just say it's just from the disposition strategy? Or is there anything you'd like to call out about a more diverse tenant base?
I think, largely, it's the disposition strategy and us getting enhanced rents out of those who are outside of that list, but I think it's largely the disposition strategy.
Your next question comes from the line of Pammi Bir with RBC Capital Markets.
I wanted to maybe just come back to the new leasing conversation. As the reopening does ramp up, can you maybe comment on how the leasing strategy -- how is it evolving at this stage in terms of duration, [ right ] steps, maybe pushing for more aggressive leasing spreads and maybe just thoughts on inducements at this stage as we look out to the next 12 months?
Yes. I'll start, and then I'll hand it over to Jeff again for some more color there. But I think we've put ourselves in a good position pre-fill. And we started seeing the benefits of kind of improving our portfolio through the disposition process so that we can be in a good negotiating position with our tenant. Obviously, during COVID, that pretty much ceased. And now that we are on the -- let's call it, the positive side of the pandemic, we are starting to get more favorable negotiating environment where we can start to talk about much more conventional terms, where capital is no longer necessarily enhanced and where there is sort of year-over-year increases embedded in the leasing.Now the one exception there, and this is by design, and we're fine with it, is when you're talking about urban environments and mixed-use properties that are in like the downtown cores, oftentimes, you want the right types of tenant mix. I mean we always want the right types of tenant mix, but in those cases, you want tenants that are local, you want tenants that fit within the development that you're creating. And in order to get those tenants, because they're not nationals, sometimes you do have to be a little more creative in the deal structure. You do shorter terms, you do point deals, you do provide them with some capital. And we think that that's a worthwhile trade-off because we're effectively betting on their businesses, and then in 2 years, once they stabilize, we will redo those terms to reflect a more normalized situation.But I think -- and then, of course, in enclosed malls, there's still a bit of softness there. So we're having to be a little more aggressive with some of the TIs we're providing. But Jeff, correct me if I'm wrong, in the open air centers where the bulk of our income is coming from, it's kind of getting back to business as usual.
It really is. Yes. It's much more reflecting pre-pandemic environment. But the one thing that we've always been known for is the speed of the life cycles of our deals. We're very quick to respond. But we're actually not putting the brakes on but slowing down a little bit to scrutinize the strength of the tenancies a lot more than we ever have in the past. Not that we weren't, always carefully we were, but we want to know what the strength of the new tenant is coming out of the pandemic, what it looks like. And more than ever, we're pressing for them to have skin in the game as well. We're prepared to put up capital for the right type of tenancies, but we want to make sure -- maybe it's not always shoulder to shoulder, but making sure that they've got as much invested in the individual units as we do. So we're spending a lot more time looking at it and wherever possible, changing that tenant mix where it makes sense, getting the service commercial or the hard good guys in or maybe you had a run of fashion. And again, fashion is never going to completely disappear from our portfolio, but we're just a lot more selective. And then as tenancies opened up a little bit over the last year, we're repositioning some of these tenancies to make the centers themselves flow a little bit differently, moving some tenants around and coming up with a better layout for the individual center. So we're very much paying attention to it.
Sounds good, yes. I know it's good to hear that the strategy is -- seems -- the momentum seems to be picking up, for sure. Just coming back to the comments on enclosed malls. Like have you seen tenants look to migrate out of some of that space, whether it's in your portfolio or others, into some of your open air space?
Yes. Listen, it's as it was before. There's tenants that are looking at both sides. They're looking both unenclosed, and they've -- are still maintaining their positioning in closed centers. So we're seeing the ones that were active on both sides to continue to do so. We have seen a whole lot of new entrants into the enclosed mall world. But look, I walk these centers every week, every day, and there are footfalls in there and there are opportunities. And I don't think that this means the end of the enclosed malls. And I think over the next year or 2, you're going to start to see some new body start to flow into that vehicle.
But that said -- and I'll add to that, and I think that's a really appropriate answer. But going back to why we got into the open air business in the first place, it was to create a cheaper alternative for tenants who wanted to not have a significant Canada tax load and wanted convenient parking right in front of their centers.And I think nowadays, tenants -- certain of the necessity-based tenants that we cater to are very much in favor of that type of environment versus the economics that attached to in a closed mall environment. So they really are still favoring that open air center environment because of those economics. And I'm not sure that's going to end anytime soon. So we're doing well in maintaining a really good environment for our enclosed mall tenants. But I do think, and I'm sure Jeff will agree, that the universe of those tenants is not growing, at best is maintaining itself.
Yes, agreed.
Got it. Maybe just one last one. As the support starts to come off for tenants with respect to the CERS later this year, what types of conversations are you having with them in terms of maybe providing some extension of support, if any at all, through the balance of the year or even into 2022?
I'm going to hand that over to Oliver Harrison, our Head of Operations.
Thanks, Pammi. I mean the conversations with tenants right now are really focused on getting them back on their feet and reopening. I suspect as we get closer to October 23, there will be some conversations with the CERS eligible category of our tenant pool that are looking to extend the systems program. But right now, it's not really the focus of our conversations with tenants. It's really what can we do to help them reopen successfully as things start to open up.
And just lastly, on CERS, any better sense as to how many -- what proportion of your tenants are receiving support?
If we use our rent collection sort of results as a proxy, I would say, for our category 3 tenants, which are mainly our independent tenants for which the program is primarily designed, the vast majority of them are participating in the program successfully. And obviously, the amount of financial support they're getting is a byproduct of whether or not they were forced to close, able to maintain some level of operation and the diminution in sales that they realize. So I would say participation is very high for eligible tenants and the program is working for them, and we are benefiting from it as well as they pass those subsidies onto us in the form of rent.
And then that percentage of our portfolio that makes up for about 15%. So I don't think we have the precise math there, nor do we disclose it, Pammi, but it's not as significant. And I think a lot of the questions that I've been fielding from investors, and not to presuppose what you're thinking, is, okay, what happens when the CERS program ends. And what we'll say is, of course, there will be some failures, but truthfully, we usually see in the normal course, even in the best of times, January being a pretty ugly month where a lot of tenants do fail. And this year, we actually saw virtually not fail in January.So my sense of it is you're going to see the same effect, it's just going to be latent, and it will happen in October or November rather than January. But I don't think it's going to be as significant as you think because a lot of these tenants are exactly the type that are thriving in this reopening environment, like restaurants, like street front fashion, like gyms. So I really -- we don't have a significant concern that there will be fallout over and above what the normal course would be.
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, everyone, for joining us on the call. And I know it's a very busy reporting season. So I'm not going to keep you here for much longer. Enjoy your weeks, and we look forward to catching up with you all soon. Thanks for joining us. Bye-bye.