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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 morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the RioCan Real Estate Investment Trust Third Quarter 2018 Conference Call. [Operator Instructions] Thank you.Mr. Edward Sonshine, you may begin your conference.
Good morning, everyone. Thank you, Casey, and thank you, everybody, for calling in. To start the conference, I'll turn it over first to Christian Green to give us the preamble.
Thank you, Ed, and good morning, everyone. The presentation materials that we will refer to in today's call were posted together with the MD&A and financials on RioCan's website earlier this morning.Before turning the call over to Qi, 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, or 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 the details on our use of non-GAAP financial measures, can be found in the financial statements for the period ended September 30, 2018 and management's discussion and analysis related thereto as applicable, together with RioCan's annual information form that are all available on our website and at www.sedar.com. Qi?
Thanks, Christian, and good morning, everyone. For the third quarter, I'm pleased to report that we once again delivered solid growth in occupancy, same property NOI and FFO per unit, while making good progress on our strategic disposition and development programs and maintaining our strong balance sheet and credit fundamentals.As of yesterday, October 30, 2018, we have had approximately $1.3 billion of dispositions in place relating to our strategic disposition program, including closed, firm, conditional measure of intent deals for 65 properties. This represents approximately 63% of our disposition target by sales proceeds. The weighted average capitalization rate for these $1.3 billion dispositions is 6.49% based on in-place NOI, materially in line with our IFRS value.As a result of completed asset sales and developments, our portfolio is becoming increasingly urban and focused in Canada's major markets. We have increased our major market exposure from 75.2% in Q3 2017 to 84.1% this quarter. Our Greater Toronto Area presence has been grown from 40.0% in Q3 2017 to 45.5% in the current quarter. As anticipated, all of the performance metrics for our major market portfolio are exceeding those of the secondary market assets.Our committed occupancy has further grown by 20 basis points from the previous quarter to 97.0% with retail occupancy also growing by 20 basis points to 97.2%. Our major markets occupancy is 98%. In-place occupancy grew 60 base points from the previous quarter to 96.2%, while major markets in-place occupancy grew 50 base points to 97.5%. Jonathan will provide you with more details on the operational performance of the portfolio later on in this conference call.For the third quarter of 2018, we achieved same property NOI growth of 1.6% for the overall portfolio, consisting of 2.1% for our major market assets and a 0.7% decline for our secondary market assets. For the first 9 months of 2018, our same property NOI increased by 2.3% for the entire portfolio and by 2.8% for our major markets portfolio, while secondary market assets same property NOI decreased by 0.3% over the comparable period.This strong same property NOI performance, coupled with 501,000 square feet of development completions and our active NCIB program led to a 2.5% increase in our quarterly FFO per unit in Q3 2018 and a 3.7% increase in our year-to-date FFO per unit. Our quarterly FFO per unit of $0.47 this quarter is the highest quarterly FFO per unit in RioCan's history, excluding Q4 2015 when we received one-time Target settlement income. This FFO per unit growth was accomplished despite more than $900 million of dispositions closed since October 2017 and $4.8 million of severance costs on a year-to-date basis. Even though the realized gains from the sale of marketable securities were $1.8 million higher this quarter than the same quarter in 2017, we also had $1.4 million lower dividend income from such marketable securities over the same comparable period. Therefore, marketable security gains and dividend income are not a key factor contributing to our FFO per unit growth in the quarter. Our continuous FFO per unit growth speaks to the quality of our portfolio, considering dilution effect of the dispositions completed to date and significant investment in our development program.As a result of the FFO per unit growth, our FFO payout ratio improved from 80.5% for the comparable period in 2017 to 78.0% in Q3 2018, stable from the last quarter and remaining below our 80% target. It is worth noting that for the 9 months ended September 30, 2018, our actual maintenance CapEx was $5.3 million lower than our normalized maintenance CapEx.Looking ahead at the coming quarters, we have major mixed-use residential project coming to the earnings stream in the next 2 to 3 quarters, including gains from the condominium units, our eCondo portion, our Yonge Eglinton Northeast Corner project, and Kingly Condos at our King Portland Centre project. We will start marketing the rental units soon at both eCentral, the rental building at Yonge Eglinton Northeast Corner in Toronto, and Frontier Apartments at Gloucester, Ottawa, which will start to generate rental income in the first half of 2019.Our development pipeline represents a tremendous opportunity for RioCan to diversify our source of income and generate long-term NAV growth as we harvest our large portfolio of urban, transit-oriented retail sites in Canada's 6 major markets and intensify them into new mixed-use properties.As of September 30, 2018, RioCan has recognized $99.8 million IFRS fair value for our substantial 26.5 million square feet of development pipeline. This represents only an insignificant portion of the future NAV growth that will be generated from the development program as the majority of $72.7 million of the $99.8 million in fair value that has been recognized to date is based on the discounted present value of air rights sales that have been secured at The Well in Toronto and 5th and 3rd project in Calgary. As projects reach anticipated milestones, we expect that additional fair value that is not currently recognized will be recognized over time, subject to prevailing economic and market conditions. Jonathan will discuss more about our development progress and anticipated completions next.And next, let's take a look at our balance sheet strengths. In our review, the most important measure of a company's financial strength, and the one that we maintain a keen focus on is the debt to adjusted EBITDA. Our debt to adjusted EBITDA was 7.79x on a proportionate share basis as of this quarter end, which remains below our target 8x and one of the lowest among our peers in Canada. This was accomplished despite our strategic disposition program and approximately $1.3 billion development on the balance sheet. Excluding the $1.3 billion development on the book, our debt to adjusted EBITDA would have been approximately 6x.In anticipation of receiving substantial disposition proceeds in the fourth quarter of 2018, we again maximized our NCIB purchases prior to entering the blackout period in late September due to quarter-end reporting. For this same reason, our leverage was unchanged from last quarter at 42.4% as of September 30, 2018.In addition to a conservatively managed capital structure, we are focused on maintaining access to multiple sources of capital and financing flexibility by managing our portfolio of unencumbered properties to achieve a balanced secured versus unsecured financing strategy. As of September 30, RioCan's debt was 59.1% unsecured and 40.9% secured. This provides benefits to our overall cost of capital and provides ample flexibility should general liquidity conditions change. Furthermore, we have met or exceeded our internal leverage and coverage targets as of the quarter end.Overall, we are very pleased with how we are doing operationally and financially and the progress to date with respect to our strategic disposition and development program. We look forward to 2019 when we will begin to receive the revenues from the first of our major urban transit-oriented residential project.With that, I would like to turn the call over to Jonathan for update on RioCan's operation this past quarter.
Thanks so much, Qi. Good morning, everyone, and thanks for dialing in -- excuse me. I'm pleased to provide the operational update for the third quarter of 2018. Our Q3 results continued to demonstrate the benefits of RioCan's major market strategy and execution. I'll begin with a focus on our income-producing portfolio and I'll follow it up with highlights from our development program.RioCan's operating performance remained strong in Q3 with the results demonstrating the critical role that bricks and mortar outlets continue to play in the retail landscape, particularly within Canada's major markets. Our results were bolstered by the strength of our major market properties, and RioCan's outlook for the remainder of 2018 continues to be positive.Our expectation for same property growth for the full year 2018 remains in the range of between 2% and 3%. Our occupancy rates are back in line with our historic average, largely due to demand in the major markets where more than 200 of RioCan's assets are located. RioCan's portfolio of committed occupancy rate increased 20 basis points over the previous quarter to 97.0% in Q3. Committed occupancy in our major market portfolio continues to be exceptionally strong, now at 98.0%. It's important to note that these occupancy numbers reflect strategic leasing efforts, meaning we are not simply filling spaces. We are carefully curating tenant mix to enhance our shopping centers and the communities that they support.Our leasing results for Q3 were also excellent. RioCan completed 971,000 square feet of new leasing in the third quarter at an average rent per square foot of $27.83. More than 90% of this new leasing was completed for properties in Canada's major markets. Our new leasing results represent 2.5x the amount of leasing completed in the third quarter of 2017 at an average net rent per square foot that was more than 25% higher than Q3 2017; results that further underscore the value of our major market assets.196 renewals totaling approximately 1.469 million square feet of space were completed during the third quarter of 2018 at an average rent of $20.77. The average rent per square foot on tenant renewals decreased by $0.29 per square foot or 1.4% in the quarter, while the retention rate for Q3 2018 further improved to 93.8%. The decrease in average net rent was primarily due to 10 lease renewals with anchor tenants, 6 of which occurred at properties located in secondary markets. If you exclude these renewals, the average net rent growth was 4.1% for the quarter or 5.1% in our major markets.And our major market properties are located precisely where existing and new-to-market tenants want to be. For example, Decathlon, a new-to-Canada, value-priced, large format French sporting goods retailer, plans to open their first location in Ontario with a 55,000-square foot store in one of RioCan's properties in Ottawa.Also, as previously mentioned, the quality of RioCan's major market portfolio presents opportunity following the legalization of recreational cannabis. As with any opportunity, we're focused on curating the right tenant mix, and over the past several months, we've been reviewing authorized retailers to ensure they align to our operating standards. The deals we have made to date reflect these standards. Once the regulatory landscape within Ontario has been clarified, RioCan expects to see far more completed leases within its portfolio.The quarter also saw the completion of Burlington Centre, a key redevelopment with our partner, KingSett Capital. When redevelopment projects such as Burlington Centre ship to completion, we anticipate a meaningful impact on the center's operating results as during redevelopment, there's a natural drain on CapEx, same property NOI and occupancy, which reverses upon project completion.Our work at Burlington Centre showcases our deep commitment to being an integral community pillar. Burlington Centre is one example of a property that through redevelopment has become a true community hub. This approach is becoming embedded in our business strategy, and the renovations underway at our Lawrence Square and Yonge Sheppard Centre here in Toronto also demonstrate the integral role RioCan is playing in communities. This approach will translate into long-term growth across our entire portfolio as community relevance will fuel higher occupancy, sales and rent per square foot.I will now shift from our income-producing portfolio to RioCan's development program. RioCan's development team is unique in the industry, due to its composition of best-in-class experts from a range of specialties including engineering, city planning, high rise residential and retail construction. The team is committed to developing properties that meet and exceed our stakeholders' needs. And based on the quality and performance of the team, I'm confident that they will continue to execute with the same discipline and high standards that we've seen thus far.During the quarter, we continued to make significant progress in advancing our development pipeline with an additional 264,000 square feet of space at RioCan's interest completed and becoming income producing in Q3. By year-end, we anticipate a total of 818,000 square feet of urban income-producing and net asset value enhancing space, many of which are mixed-use, transit-oriented properties. 654,000 square feet of our urban intensification NLA under development have committed or in-place leases at a weighted average net rent of approximately $32.06, further highlighting the value and demand of these urban spaces.Site excavation continues at our flagship mixed-use development, The Well, and is on track to be completed by the end of 2018. Foundation work is in progress for the 36-story office tower located at Front and Spadina. Together with our partner Allied, we are making significant progress on leasing the commercial component of the project. The Well is very attractive to tenants as is evidenced by the up to 71% of the 1.1 million square foot office space already pre-leased to an impressive roster, including Shopify, Index Exchange, and Spaces, a subsidiary of Regus. Retail leasing is expected to start in earnest in 2019.We achieved substantial completion of the commercial space of King Portland Centre in Toronto, and expect purchasers of units in Kingly, the condo portion of the project, to take occupancy in the second quarter of 2019.Bathurst College Centre in Toronto is substantially completed and fully leased to strong and high profile retail and office tenants, including Sobeys, Winners, Scotiabank, as well as an international leading technology company. Since 2011, we've worked closely with the city and community on this property, and its completion is an example of the strength of the work being done by our asset management, leasing and development teams.Over the next month, we will start leasing residential units in eCentral, the first purpose-built rental development in the RioCan Living portfolio. ECentral is located at the iconic intersection of Yonge and Eglinton in Toronto, steps from RioCan's Yonge Eglinton Centre, with access to the Yonge subway line and future Eglinton Crosstown LRT. Residents will begin moving into their rental units in 2019.In December 2018, we'll begin leasing the residential rental units in Frontier in Ottawa, another high-quality RioCan Living project located in a prime area adjacent to main transit lines and steps from RioCan's Silver City Gloucester Shopping Centre. These 2 projects combined will deliver approximately 700 income-producing units by the end of 2019. And I should just add that the Frontier project is with our partner, Killam REIT.From Q4 2018 to the end of 2020, we are expecting development completions of approximately 1.3 million square feet at RioCan's interest, net of air rights sales. The value created through the completion of our development projects is significant with the annualized, stabilized NOI expected to be approximately $46 million at RioCan's interest.As discussed, Q3 saw the completion of a range of key developments, and our pipeline continues to indicate strong future results. The Trust's leading position in the zoning approvals attained for its development pipeline present a competitive advantage with 45% of its pipeline, or 11.9 million square feet zoned and another 20.3% or 5.4 million square feet with zoning approvals that have been submitted. These locations are centrally located in high demand areas where the changes in use can maximize the value of the real estate and enhance the productivity of the space.Our Q3 performance was strong, and our major markets results were even better. After my first full quarter as RioCan's Chief Operating Officer, I'm excited and proud about our progress to date and confident in our future as we transform RioCan to a more urban and diversified portfolio.Those are the operational highlights. I'm now going to turn the call over to Ed.
Thank you, Jonathan. Thank you, Qi. A lot of numbers in those reports. Happily, they're all good numbers.So during our last quarter conference call, I went into some detail as to the transformation underway at RioCan and what we will look like just a few years down the road. Essentially, we will derive over 90% of our income from Canada's 6 major markets, 50% from the GTA, and we'll have dramatically expanded our office holdings, all located within the GTA, and created a significant residential portfolio consisting of newly built, transit-oriented apartment buildings located exclusively in Canada's 6 major markets, but again with an emphasis on the GTA.As is evidenced from our quarterly report, we are well on the way to achieving the portfolio metric goals we have set for ourselves, notwithstanding the headwinds created for our secondary market disposition program by a rising interest rate environment. While those headwinds may result in our moving a bit more slowly next year with that program, I am confident that by year's end, we will be at about $1.5 billion of dispositions either closed or under contract, or about 75% of our total target.But while market forces are slightly slowing down 1 component of our existing strategy, they are significantly elevating and validating our creation of office and residential assets. The office market in the GTA is quite simply better than it has ever been. Vacancy rates in both downtown and midtown are at an all-time low, and market rents have increased by a double-digit percentage over the course of this year alone. The fact that all of our newly constructed office space at Bathurst College and at King and Portland is 100% leased at rates above pro forma, and that The Well's office component is over 70% pre-leased with delivery 2 years away, certainly confirms and tells that tale.And with respect to our about-to-become reality residential assets, rent growth has been equally significant. Rents of $4 per square foot per month are becoming relatively common in the GTA in the very few newly constructed purpose built rental buildings that are coming on stream. We believe that we have come into the leasing market this fall the best located and best-designed buildings in the country. And we are quite optimistic that the rents we will achieve will be well above our pro formas and result in significant value creation.Having said that, I believe it is also important for society that more affordable rental housing be created in the GTA for those young and older people who are not investment bankers or cannabis entrepreneurs. We have existing shopping centers that could be very suitable for that type of rental development, and we are working on a construction design that would address the affordable side of the market. Over the course of the next while, we intend to try to work with the various levels of government to become a part of the solution to the problems created by the significant increases in residential rents. It will be solved by government initiatives to encourage construction by the private sector rather than piling on ever more rent controls, which history tells us always ends badly.To sum up, I would say that I'm very pleased with our progress in changing the direction of RioCan, and I would like to thank the excellent team we have here for doing all the heavy lifting required to get us to where we are today. That work is far from finished, however, and I expect them all to only get better and more efficient as we continue down this path.Our unit value, sadly, does still not reflect what is being created here at RioCan. And while I hope that that will eventually electrify itself, I've also learned that hope is not the best strategy. So while there is no doubt in my mind that the strategic initiatives we have underway are correct and starting to bear impressive fruit, I want you to rest assured that we are never satisfied, and we will continue to explore new initiatives.So, that's all I got to say right now. I'm happy to open it up for questions for anybody of -- we have our entire senior executive team here, actually. So please go ahead.
[Operator Instructions] And your first question here comes from Dean Wilkinson with CIBC.
Ed, I guess as RioCan Living is about to become RioCan Live, as it were.
Yes.
Do you have a sense of what kind of gains we could be looking at in the very near term just on the turnover of ePlace and King and Portland and perhaps to a lesser extent Windfield Farms?
You know what, I -- Qi could probably if she wants to, give you numbers. I hate to forecast numbers like that. We are looking at fairly significant gains in 2019 from all of the properties you've mentioned. We're also looking, quite frankly, at significant IFRS value gains from the RioCan Living rental buildings. But to put out those numbers today, I think I'd be loath to do that. You agree, Qi?
Yes.
Okay.
Loathed or low?
Loath. They're not low. They're pretty good.
And I guess dovetailing into that, and I think this is something that you sort of -- we batted around a fair bit in the past -- just on the issue of the air rights. You've got about $72 million booked in your IFRS valuation, largely related to The Well and 5th and 3rd.
Yes. Those are already sold. In fact, those are --
Those are sold, right?
Yes.
And that's sort of the discounted present value --
Exactly.
So when you look -- and that's probably less than 10% of the potential air rights that exist within the entire --
Actually, I think the non-Well component is more like -- well go ahead and ask your question before I give you an answer.
What has to happen on any of the other developments I guess from an accounting perspective before Qi can sort of start recognizing that and people can tangibly see, yes, here's some more of the value that comes to this. Because over time it's going to be significant.
That's a good question and one that I have addressed to both our auditors and to Qi and her team over time. And as best as I understand it -- and I'll stand to be corrected here by Qi -- you basically need a triggering event. And a triggering event, quite simply, is started construction of a new building where we then move from to the yield method of IFRS calculation rather than simply cost, which is what we do right now until a building is ready to move. And we have protocols in place for all of the parameters that have to be satisfied in order to be able to move to that yield method. It can go as far as knowing your construction costs, having zoning and building permit approvals in place, et cetera, et cetera. So basically, the cake in that sense has to be pretty fully baked with all that's left that we do is actually build it and lease it. And at that point, we start recognizing some value. Obviously, we tend again to be on the conservative side of that evaluation because that would be recognized in accordance with whatever our pro formas is at the time we start construction. And happily, the way rents have gone in virtually every market we're operating in, I expect we will do a lot better than pro forma. But again, we are loathe -- and that's L-O-A-T-H-E -- to amend those pro formas significantly until we actually have evidence by actual lease-up. So we're going to start seeing that happening in the next couple of quarters on our first buildings. The second type of thing that can happen, quite frankly, is a transaction, whether that's selling air rights like we did in The Well or at 5th and 3rd, or it's bringing in a partner like we previously did in a few transactions like Sunnybrook where we brought in Concert Properties or -- that's probably the most notable one. I would expect to see both sides of those 2 possible ways to recognize that value start to happen more often in 2019. I can't tell you which one will be more prevalent, but I think both will be there. And I think over the course of 2019, we will be recognizing significant value because -- and again, I think unrecognized just in the density itself, we have an enabler of close to $1 billion of unrecognized value. But I think I've probably gone on -- I've given an accounting lecture here, which I did not mean to do. But nonetheless, I took the time to learn all that stuff, so I've now shared it with everybody on the call.
I think you covered everything.
We're all wiser for your education.
Did I get it all, Qi?
Yes, you got it all.
Okay.
So the short answer is we think we'll recognize the fair value further gradually, given --
Not necessarily. If you do transactions, is that going to be fast?
Yes, that makes sense. Total makes sense. Last one for me, Qi. Just normalized CapEx for 2019, should we be using sort of around that $1.16 number again?
We actually will provide further guidance in our Q4 earnings. What do you mean actually a dollar -- oh, the per square foot. Got it, yes.
Yes, per square foot. Yes.
We will provide further guidance in our Q4 earnings release.
Okay, great. We'll look forward to that.
Right now I…
We're still working on it, quite frankly. We're about a week away from finalizing our 2019 budget, and of course that CapEx is part of that budget.
Your next question is from Sam Damiani with TD Securities.
Just to follow on on the topic of the budget. It was about 11 months ago, we had the anniversary of your last distribution increase. Is that something we should expect to see again going forward?
I would think not. You know what, since we've gone out of the equity raising business a few years ago, we've learned that our capital is very precious. And whether we use that capital for NCIB, which has really been a significant return of funds. By the end of this year, I think we'll be looking in the neighborhood of $0.5 billion of money returned to our unit holders through that NCIB. We really don't feel the need to do that to increase our distribution. We're yielding I think -- it makes me ill to say this, but we're yielding about 6% right now, and I think we can put better use of those funds with the value creation we have undergoing here at RioCan.
Makes sense. And just back to the residential strategy. Just given the market, the way it's evolving, higher construction costs and whatnot, do you see air rights sales potentially as a better way of sourcing value rather than developing on balance sheet in more cases?
The answer is, it's going to always be a combination of developing. Our prime goal is to create income -- that's what we are here to do for our unit holders -- and we do that by recurring income. We do that by building rental buildings rather than selling off air rights. But some of the projects we'll have coming on stream over the next couple of years will be very, very large in scale, whether that's where I hope a couple years at Eglinton and Laird or Shoppers City Brampton. Or it's even something like here Ontario and Sandalwood, which very few people even know where that is, and it's in Mississauga and there'll be a transit stop right at that corner, will call for a mix. Nobody wants to develop all at one shot a million square feet of residential at one site. So that can easily be handled by -- and again, just using very rough numbers -- each site will be unique by saying, you know what, we're going to sell off 0.5 million square feet in air rights, generate gains, generate capital, reduce the capital requirements on RioCan, and then build the other 500,000 feet as a couple of rental buildings. So it'll be a constant mix of those 2 with our prime goal really being to create rental income, though, rather than gains on sale of air rights.
Right. And at the Investor Day last spring, I think that you made the comment that rental residential would likely never become more than 10% of total NOI at RioCan. Is that something -- first of all, did I get that right, and secondly, is it something you'd reiterate today?
First of all, you're asking me to remember something from 8 months ago, so that's hard. But I think that sounds right. I think the word never is one I would probably amend. I think using that number, there were a couple of parameters that are starting to change. First of all, the size of our portfolio. The retail income is diminishing from the secondary markets, although it will start growing again as we finish our primary market developments. But I think realistically, and I try particularly at my age not to look more than 5 to 7 years down the road, and I think that's doing pretty good. I think within that 5 to 7 years, we're not going to get over 10%, so I would still stick with that.
Your next question is from Pammi Bir with Scotia Capital.
Just to clarify your comments on the disposition program. Do you expect to be at $1.5 billion by the end of this year or the end of next year? And then just maybe if you could expand on your comments around the market forces slowing down the pace.
Sure. First of all, and I'm looking at Jonathan who continues to have responsibility for our disposition program, in addition to all the other responsibilities he's taken on. He's actually starting to get shorter. Getting worn down a little bit. But the $1.5 billion is a number that I'd like to see us be at, and I think we'll come pretty close to it if we don't get there by the end of 2018, i.e. over the next 2 months. We've got a lot of things on the hop. They're not quite signed yet. You never know for sure, obviously, number one if they'll get signed. Number two if once they're signed, they'll actually be completed. But with those cautions, I'm feeling pretty good that we'll be at that $1.5 billion this year, which will leave us, call it, $500 million to undertake over the course of 2019, which was sort of the time we gave ourselves. Now that time may be slightly extended by those market forces I referred to and you've asked me about. And they're really, I would call them 3. First and foremost is the rising interest rate environment. The people we are selling these properties to are not what I'd call conventional purchasers, i.e. other REITs or pension funds. They're largely private individuals, or groups of private individuals, who really are relying on leverage to make these things be great deals for them, which quite frankly they are. The banks, because of the rising interest rates, and just generally where we are perhaps in the business cycle, are I would say tamping back a little the amount of principal that they're giving approvals to. So that holds back either a purchaser all together, or it leads him to look to give us a slightly lower price. And quite frankly, we're not conducting a fire sale. And if we can't get a price that we're happy with on a particular property, we'll just take it off the market for a while, which is okay. The second factor I think is the mere fact that there's a lot of secondary market for sale. We're our own worst overhang. When we're talking about selling $1.5 billion in just over a year in the secondary markets of this country, that's a lot of assets. So I think that's the other, the second reason. And I think the third one is that I -- the lack of growth in those secondary markets is maybe becoming a little more apparent to everybody. I think you can see it in our third quarter numbers, even though they were probably a little bit -- it's better than that shows because we had some anchor renegotiations as -- or renewals, rather, as Jonathan mentioned. So I think that's sort of becoming apparent, which maybe further narrows the buyer base a little to those who say, okay, I want the stability and I don't really care about the growth. So that's fine, but that's starting to be a narrower buyer base. So I would say those are the 3 factors that are causing us to look at maybe slowing it down a little as we roll into 2019.
That's actually really helpful. Just maybe extending on that. If you look at cap rates, I think CBRE recently cited an uptick in the Toronto power center cap rate, the segment. Just curious what you're seeing today in your core markets, and are you seeing any notable changes?
You know what, power centers, and that's much more of a factor, quite frankly, in the United States. Power centers in the United States are not looked at favorably these days. That's something, quite frankly, we knew 8 years ago when we went into the United States, which is why we primarily bought supermarket anchor strips. We haven't really seen any deterioration in cap rates in power centers. Now having said that the bulk of our power centers, with 1 or 2 small exceptions, are located in the major markets. And what they have underlying them is the possibility of future redevelopment, even though that development may be 10 or 20 years away. When you look at properties -- I'll take an example like RioCan Elgin Mills, which is at Elgin Mills and 404. About as suburban as you can get, and yet I think, Mr. Ballantyne, it's pretty well full?
Yes.
We're seeing good rent growth. And anybody knows looking at that property that one day -- and it may be a generation away -- that's going to get redeveloped. And in fact -- but in the meantime, you're still getting very close to building 1,500 homes in the property immediately adjacent to the north on that property today. So we haven't seen any -- Jon Gitlin, you want to maybe comment on that? I haven't seen any deterioration.
No, and I'd also add to that and say there haven't been many data points recently. So CBREs report -- the [ DAFs ] put one out each quarter, but I don't think there have been many trades in the major markets that include power centers, and the ones that we have seen have actually been fairly lucrative deals. So I don't necessarily agree with the comment, and I also agree with Ed's comment.
Okay, thank you.
All right. Just last one for me, just on Leon's and The Brick. It seems like they might be looking to optimize their footprint. Any sense of any potential impact in your portfolio at this stage?
Leon's, quite frankly, owns most of their own real estate that I'm aware of. Mr. Ballantyne is quickly looking to look at our exposure, but we have very little exposure. I don't recall any of them being in the top 30 even. And so I'm not aware of any of our sites at all that are at risk with them. John?
No. None of our…
No. I don't expect any impact from that at all.
Your next question comes from Michael Smith with RBC Capital Markets.
Just we have a new government in Ontario, who from what I understand there, they may be considering rethinking rent control, maybe giving a holiday for rent control for new buildings for 5 or 10 years. I wonder if you have any comments on that. And should something like that pass, would that change your strategy in terms of the mix of rentals versus condos?
I certainly have no inside information on that. I would certainly welcome it. Having what I call a stabilization period was when then previous government first announced it was probably the prime sort of initiative that we suggested, strongly suggested to the then government. It was not taken seriously. I think it would be a very smart thing to do, because what's happening quite simply right now is that most new purpose-built buildings are being -- because you look down the road and you say, well wait a minute; I'm going to be limited to 2.5% rent increases. You're looking to start at the highest base you could possibly do. And I can tell you that when that new legislation came in under the previous government, we quickly changed all our pro formas to expand the stabilization period, i.e. the rent-up for that very reason, saying you know what, we're going to hold out. We're not going to bring these properties to market as quickly as we can. We're going to take our time and aim for the highest rents because those rents are not going to grow that fast because of this rent control legislation. So I think if the government does do that, I think it would be a very smart thing for them to do. It would certainly encourage rental housing and it would encourage units, apartment units that are already built being brought more quickly to the rental market. Whether it would change our strategy, probably not. We did change one building from rental to condominium, being the Kingly, but that was probably more out of just being mad at the previous government than any other reason. But it would certainly encourage us to move ahead more quickly on some of the rental buildings.
Okay. And just on the topic of rents, I think you said that you're seeing strong rents rate across everywhere. So is that fair to say the Frontier as well, like --
Absolutely. It's not just a Toronto story. It's primarily a Toronto and Vancouver story, but we're seeing it in Ottawa. Our partners in Calgary are telling us the same thing. We've got a building well underway there in partnership with Boardwalk. And it's right across the board.
So eCentral, that, I think when we first started talking about that a couple years ago, you were talking 3, mid-3s. If I remember correctly, now we were over 4. So this is ahead of your expectations, but costs were up. So it took like…
Let me correct you, Michael. You got to remember, the good thing about something like eCentral and some of the other buildings we already have underway, 90% of the contracts, the subcontracts for a building like eCentral are really, by the beginning of construction, they're locked in. In that case you're talking 2 years ago. And that's the case -- that's just something we do as prudent developers. And so the costs on eCentral really are not up from 2 years ago. The only thing that's up is the expected income.
So your pro forma will be over?
We will well exceed the return expectations we had when we started this project 3 years ago.
Okay. Great. And just switching gears, going to The Well. I think you're going to start leasing the retail I guess in 2019.
Yes.
I wonder if you could just give us, just update us on your vision, if there's been any changes. Are you talking to any -- what types of tenants are you thinking of?
Well look, I think the -- there really hasn't been any significant changes. It's going to be obviously a very unusual for RioCan retail facility, and I think it's going to be a bit of a precedent-setting retail component in an urban environment. The anchor is going to be a food hall. It's going to be a food experience for people, which is going to be a mix of a place to go eat and places to buy ingredients to make your own meals and places to buy prepared meals to take home with you. It'll be a mix of that in the neighborhood of 85,000 or 90,000 square feet, which I believe will be something that the city has never seen. It's happened in places like New York and of course London and other places in Europe, but I think this will be quite an experience. So with that as the anchor, I think what you'll find in the rest of it, the other 300,000 feet, is much more experiential retail as opposed to conventional retail. There will be a mix of conventional because obviously people still need to buy pharmaceutical items, for example. So there will probably be a drug store that'll also sell some of the staples that people also need that they aren't going to get in a food hall as boring as toilet paper. But guess what? People still need toilet paper and Kleenex and all those other staples, so we got to provide that to the huge population that we have there. Keep in mind, we're going to have 10,000 people either living or working on site, and that's going to be there every day before we get the 100,000 that live within walking distance of this place. So I think it's going to -- our vision is to actually have it almost be part of the street. That's something that's important to understand. You're going to be able to walk down from King Street through a park into The Well, and then continue on what will seem like a street, except it will have grass instead of paving, though there'll be some elements of stone in it. It'll be quite attractive. All the way down to Front Street, pedestrian bridge, crossing the railroad tracks to connect the enormous number of residential units that are south of the railroad tracks. And if Mayor Tory is successful, and certainly we hope he is in building the Rail Deck Park, well guess what? That will be the front door of The Well, and that will also somewhat influence the kind of retail that we ultimately put in there. As you can tell, we're pretty excited about it, and I think when Toronto sees it in about 2.5 to 3 years, they will be equally excited by it.
And for that food hall, would it be a tenant similar to like an Eataly or something like that, which I understand is now going to Bloor Street?
Yes, Eataly is supposed to be open sometime next year, but that's more -- like elements of an Eataly would be a small part of what we're creating. You'll be able to get foods from everywhere in the world at this location. There'll be a heavy dose of Asian. There'll be kosher butchers and halal butchers. There'll be all kinds of fresh produce. So that kind of thing I don't think is part of Eataly. I've been in Eataly in Italy and in New York, so I don't know exactly what it's going to look like here. I know it's primarily driven I think by Loblaw/Weston, together with Terroni if I'm not mistaken. So I'm sure it's going to be great from --
So it's primarily Italian.
Pardon?
It's primarily…
Yes, obviously by Eataly, it's primarily Italian. Ours is going to be much more international in scope. But I am looking forward to Eataly because I live in the neighborhood.
[Operator Instructions] Your next question is from Matt Kornack with National Bank Financial.
Quickly on the assets where you had lower turnover spreads, Ed mentioned that they were in secondary markets. Can you speak to whether or not those are conditional in terms of sales, or will those be sort of future sales going forward?
I'm going to throw that over to Mr. Gitlin.
Some of them are under contract and some of them have in fact already been sold. So I don't have the exact percentage, Matt, but I would say that the majority of the leases that led to the negative renewal spreads were in properties that are, like I said, under contract.
And so if you want to surmise that one of the reasons that led us to accept a slightly lower rent was to get the renewals locked away to permit to sale, you would be correct.
Okay. Fair enough. And then presumably that's why you still have some confidence in the 2% to 3% same property NOI growth going forward.
Absolutely. Exactly. Those were one-offs.
Okay. And then just a last question for me. You mentioned some interesting comments with regards to affordable housing.
Yes.
In the current form under the current regime, I know CMHC has been doing some things to try to encourage the development of new affordable rental housing. But is that regime in its current state enough to get you guys interested in doing it, or will it need to be something incremental from the government?
You know what, it probably needs to be more incremental. I suspect that it will need ultimately -- and we're prepared to really work with them -- it'll need some input from all 3 levels of government. I know, again, Mayor Tory and the City of Toronto are quite committed, and they both have -- they certainly have an ambitious program. They're going to have to do something, whether it's with development charges. And keep in mind that when you look at a newly built residential unit particularly here in Toronto, or in the GTA generally, 25% of the cost roughly is governmental charges of one form or another. So we're not really looking for anybody to give us any money to build affordable housing. We're looking for them maybe to take a little less on the way through, and something they can probably afford to do to achieve this social good. It's something we're very focused on, and we'd like to produce a fair amount of it, but it will I think need all 3 levels of government to participate.
Your next question is from Sam Damiani with TD Securities.
Just quickly. On the same property NOI growth in the quarter, the same store portion, in other words, the portion excluding expansions and redevelopments, was one of the lowest levels we've seen in a few quarters at $1.1 million of growth year over year. What was the reason for that?
I think…
I'm putting Qi on the spot here.
It's definitely partly timing because the secondary market assets are still dragging down that overall to quite an extent. And like for example, the renewal spread this quarter, including the 10 leases with 1 anchor tenant is the negative, as you know. So that impacted the SPNOI for the quarter.
We think again that this is not anything that's recurring. It's a one-time thing. Listen; like many people have said in the past, reporting real estate on a quarter-by-quarter basis is difficult. And you're going to get anomalies because of just timing, and I think this is one of them.
And just to clarify. On The Well with the retail leasing expected to start next year, it sounded like from the commentary that you're waiting for maybe a little bit more pre-leasing of the office space. Is that correct?
No. No, we're quite satisfied with where the pre-leasing is on the office space. And our wonderful partner, Allied, actually I think now that they've sort of bulk in the back of it with these large tenancies they've entered into are actually taking their time. I think we're just waiting for construction to proceed a little further, because right now we're -- I think we're prognosticating, Andrew. Andrew Duncan, our Head of the Development, is who I'm calling here. That we're going to not be able to deliver retail spaces to tenants until like 2021?
Yes.
So the last tenants to commit more than 2 years ahead is we think difficult. So we're really waiting for -- and we think we'd probably be doing a disservice to ourselves by leasing space at this point. We're at the point where our costs are getting nailed down pretty good, so that lets us do our necessary calculations. And we think as The Well comes closer to being a physical reality, which as we roll into 2019, there's going to be a lot of concrete being poured into this giant hole, and it'll start moving back up to also the --. If anything, we're probably waiting for the sales efforts of our buyer of most of the residential air rights, Tridel, which we think will be starting -- I mean it's in their hands, but by spring of next year, so 6 months from now. And we think that will really make people understand in a much bigger way what's happening here at The Well, and that will be the time we start going to signing deals with all of the various retailers that are interested in this project.
We have no further questions in queue. I'll turn the call back to Edward Sonshine for closing remarks.
Okay. Well, I would like to really thank and congratulate all the analysts on the call because you ended your questions precisely at 11:00, which is what we timed it for. Now I don't know if there's another conference call happening at 11:00 so you all got to get off, but whatever the reason, thank you for fitting it right into the hour we had allocated. And I look forward to talking to you after the end of the next quarter. Bye bye.
This concludes today's conference call. You may now disconnect.