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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 Fourth Quarter Conference Call. [Operator Instructions] I would now like to hand the conference over to Jennifer Suess, Senior Vice President and General Counsel. You may begin.
Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over, I am required to read the following cautionary statement.In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP under IFRS.These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the Trust's underlying core performance and provides these additional measures so that investors may do the same.Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended December 31, 2021, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedar.com.I will now turn the call over to Mr. Jonathan Gitlin, our President and CEO.
Thanks so much, Jennifer. Thanks to everyone who's called in today. And thank you also to my incredibly talented senior management team who is here with me today for this call. So Q4, like the rest of 2021 demonstrated the quality of RioCan's portfolio, the resilience of our tenants and the talent of our people. The distribution increase we announced yesterday clearly indicates our confidence that we will deliver sustainable growth and strong returns for our unitholders. We also gave guidance, and we provided this guidance as it simply makes management even more accountable to its unitholders.But I'm not going to downplay the challenges that the commercial real estate industry faced throughout the year. 2021 was volatile. Tenant shutdowns lasted into the summer, and there were numerous phases of restrictions on retail throughout 2021. The year ultimately ended with additional disruption courtesy of Omicron, which incidentally paid a visit to the Gitlin household, which was unwelcome as well. That said it's important to recognize that these volatile and uncertain times strengthened our confidence and RioCan's competitive advantages and its vision for the future. The critical nature of physical stores has been emphasized, not diminished during COVID.There's been a distinct merger of physical and online retail. Simply put COVID raised questions about the future of retail. Two years later, many of those questions have been answered and our confidence in retail, particularly necessity-based major market open air retail has been reinforced. Consumer behavior confirms that Canadians, well, they want to control their shopping experience and physical retail stores will continue to play a critical part of their lives. E-commerce and physical retail don't just coexist. They've got a relationship and there's every indication that well-placed physical retail exactly the kind that RioCan owns plays a vital role in this relationship.And we're going to focus today on our fourth quarter results. I also want to discuss our strategy for growth, which builds on our foundational strength and the value that's really inherent in our portfolio. RioCan is committed to responsible growth. To summarize, this means a prudent approach to capital management. It means reinforcing our ESG leadership position and it means ongoing investment to enhance our great culture. The results of these investments were very evident in 2021. And you've heard me say before that our commitment to ESG is organic. It's not manufactured.It makes good business sense, supports long-term value creation, and it will certainly accelerate the positive momentum we saw this year. Our efforts were recognized in numerous ways in 2021, including the award of a 5-star rating in the GRESB Real Estate Assessment for the second year in a row. Now we're going to continue to advance our ESG initiatives as we enhance the quality of our portfolio and accelerate our growth. Now this growth trajectory is also tied to our culture, which, in my humble opinion, differentiates RioCan, it drives results and it retains, develops and attracts top talent.We advanced our cultural road map and our employees responded with the highest engagement scores in RioCan's history. Our 2021 employee engagement results placed RioCan in the top decile of similar-sized companies. Now, these outstanding achievements can only happen with an exceptional leadership team. Now on that note, I want to acknowledge two important changes to our senior leadership team here at RioCan. Franca Smith has been promoted to SVP of Finance. Franca has been with RioCan for five years and recently stepped into the role of Interim CFO. As always, she executed with excellence.Franca is an experienced finance leader. She's deeply respected both internally here at RioCan and within the real estate industry. John Ballantyne has been promoted to Chief Operating Officer. Many of you have had the privilege of working with John throughout his short 27-year career here at RioCan. He's highly respected as a strategic thinker and an industry expert. He's a champion for RioCan, our employees and the communities in which we operate and his real estate IQ is invaluable in driving long-term unitholder value.Let's turn to our operational results. The fourth quarter saw excellent momentum in our operating results with key operating metrics moving closer to pre-pandemic levels. Several large-scale deals were completed and occupancy climbed to 96.8%. It's important to note that retail occupancy buoyed the overall results and in the year at over 97%. Retail tenants continue to seize the opportunity to lease our well-located space. This further demonstrates the well-located, professionally managed physical spaces like the ones in RioCan centers are hard to come by and highly valued. The spread between committed and in-place occupancy tightened, reflecting the intersection of accelerated new retail openings and RioCan's ability to quickly turn over this valuable space.Rent collection, which is still a closely watched metric in 2021, ended the year at 98.6% despite the many lockdowns and restrictions we faced. Leasing velocity was also healthy with blended leasing spreads of 4.6% for the quarter and 6.3% for the year. Same-property NOI increased by 4.9% in the quarter. Our RioCan Living residential rental portfolio also gained a lot of momentum. Pivot at Yonge Sheppard and Toronto saw significant traction in the last quarter, shifting from 62.5% leased in Q3 to close to 85% as of February 9. Another success story was Litho in Toronto, a great mixed-use development, which launched in July 2021, an increase from 27.6% in Q3 to 61.9% as of February 9.In addition, leasing commenced to two new residential properties within the portfolio, Latitude in Ottawa and Strada here in Toronto. Early indicators have shown excellent demand for both of these dynamic projects. RioCan Living and its partners are seeing strength in their for-sale condo projects with 1,481 units released for sale in 2021 with 94.4% sold as of February 9. The profit expectation for RioCan from an existing condo project is approximately CAD191 million. FFO per unit for the quarter was CAD0.46, an 18% increase over the same period last year.FFO per unit at the year-end was CAD1.60. And we're confident that our leasing capabilities and our efficient operating practices will continue to result in organic growth. We're working hand-in-hand to evolve our commercial spaces. This is necessary to solidify RioCan and our tenants' role in that last minute or last mile delivery chain. We envision what retail will need to be in four or five years, and we're starting to affect those changes now. RioCan has enviable locations, that goes without a doubt. But we won't rely on this factor alone. We want to make our offering stronger for our customers. Our objective is to distinguish ourselves from others.We continue to refine and further fortify our tenant mix. We're strategically investing capital into our properties to provide a consistent look and feel. And finally, we're implementing technology solutions such as our RioCan Connect tenant portal to enhance our tenants' experience. Now as you're aware, development is also a critical component in RioCan's growth strategy. Investors have been patient over the last five years as we built up our capabilities and invested in zoning entitlements and construction. We were clear minded in our objectives. We're confident in the income and NAV growth that will result in conversion of the zone lands into well-located income-producing mixed-use assets.Our in-house development team delivered more than 0.25 million square feet of dynamic mixed-use and purpose-built residential rental completion in 2021. Now as we complete developments, we're breaking ground on new ones. We're achieving zoning on others, and we're initiating zoning approval on still more. This virtuous cycle will continue to be demonstrated long into the future. And we're now at a critical inflection point. This is the first year where the value of our development deliveries will exceed our development investment, a trend that we expect to continue for years to come.I'm certain our unitholders will reap the benefit of the resulting NAV increases long into the future. One of our most notable development projects is our flagship mixed-use development, The Well. Solid progress continued with the construction of the commercial component, which includes office and retail, and it's now approximately 82% complete. Approximately 90% of the office space is leased and retail leasing has gained significant momentum. Nearly 62% of the retail space is leased or in late-stage negotiations with various tenants.We've been very thoughtful in our approach to selecting tenants for The Well. Our intention from the outset was to ensure the tenant mix is curated so as to enhance this extension of the King West community. At the same time, we're creating a destination designed and tenanted so as to draw traffic from far beyond the immediate radius. The Well will be completed over the next 12 to 18 months, and the retail component is expected to open in the spring of 2023. To summarize, the continuous improvement of our portfolio is happening concurrently with development deliveries.Both will translate into a positive NAV outcome. We're going to see significant buildup of our NAV over the next few years because the conditions will support it, namely improvements in our shopping centers, the increased resiliency of our tenant base, the delivery of developments and, of course, better market conditions as this pandemic subsides. RioCan's story continues to be one of reliable, high-quality income and steady responsible growth.We've proven our ability to execute in the face of unprecedented challenges. Our focus continues to be on our long-term strategy to maximize the value of this great portfolio and grow our business. We have a dedicated team, enduring strength, stability and the vision to execute and create value for you, our unitholders. I want to thank the whole RioCan team for their never-ended commitment and contributions this past year and to our unitholders for your continued dedication and confidence in RioCan.I'm now happy to turn the call over to our CFO, Dennis Blasutti.
Okay. Thank you, Jonathan, and good morning to everyone on the phone. As Jonathan mentioned, RioCan continues to see positive momentum throughout the business, which has translated into strong results. 2021 had its challenges, but it also proved the resiliency of our business. This resulted in FFO for the year of CAD1.60 per unit, which benefited from continued improvement in our same-property NOI and partial year contributions from developments that were delivered during the year. These benefits were offset by reduced NOI associated with assets sold.On tapping this a bit further, we note that the current year FFO included debt prepayment costs associated with early repayment of certain debentures and mortgages as well as onetime compensation costs. These items had a combined impact of CAD0.05 per unit. Our same property NOI increase for the year was 3.4%. This has continued to improve over the course of the year with an increase of 4.9% in the fourth quarter as compared to the same quarter in the prior year. This figure includes the benefit of lower pandemic-related provisions when compared to the prior year.However, even when excluding the impact of provisions, we achieved SPNOI growth of 1% in the fourth quarter, which further evidences the continued improvement across our operations as the impact of the pandemic decreased. Jonathan mentioned our continued cash collection during the quarter. The strength of our tenants is also reflected in the decrease in these pandemic-related provisions. We booked CAD2.9 million of provisions during the quarter compared to CAD9 million in Q4 of 2020. This was CAD17.2 million for the year compared to CAD42.5 million in 2020. We expect the need for provisions will continue to reduce going forward.For some context, our annual accounts receivable provisions in the three years prior to the pandemic averaged only CAD850,000 per year. On a revenue of over CAD1 billion, that's quite remarkable. We also note that our FFO payout ratio for the year was 62.6%, which is within our sustainable target range that we expect going forward. During the quarter, we continue to improve our balance sheet. Our debt-to-EBITDA improved to 9.6x compared to 10x at the end of the third quarter, driven primarily by increased EBITDA. We expect this to continue to improve as the development projects come online over the next 18 to 24 months and we anticipate to achieve our target of less than 9x during that timeframe.We made meaningful progress towards our objectives to increase our percentage of unsecured to secured debt and to extend our debt ladder. To this end, during the fourth quarter, we issued CAD450 million 7-year unsecured green debentures at an interest rate of 2.83%. We used CAD250 million of these proceeds to repay our Series B debentures, which had an interest rate of 3.75%. The remaining proceeds, along with some draw on our lines were used to repay CAD385 million of secured mortgages during the quarter. Following this, all of our 2022 mortgage maturities were repaid and our secured debt as a percent of total debt is 41%, down from 46% at the end of the third quarter.Our unencumbered asset pool currently stands at CAD9.4 billion. We will continue to drive the secured debt percentage down, but it will take time. We monitor potential penalties on early mortgage repayment and interest rates on those mortgages compared to rates on unsecured debt. Going forward, we intend to use secured mortgages only for our residential assets given the pricing advantages in that asset class. We have also taken steps to manage our financial risk by entering into hedges to lock in the Government of Canada rates for planned future financing.It's not our business to speculate on interest rates, but rather, we saw it as a prudent way to provide increased certainty in the context of the current rate environment. We also have liquidity currently of CAD1.3 billion. This includes a CAD250 million increase in our corporate line of credit subsequent to quarter end. Maintaining this level of robust liquidity ensures that we are prepared to take advantage of opportunities when they arise while protecting ourselves from potential risks. Next, I wanted to add some color to an important point that Jonathan raised earlier.As we mentioned, we've reached a point at our development program where we expect to see project deliveries outpace spending. In the early stages of any development program, there is a buildup of spending in the balance sheet that's not producing any income. Our investors have been patient with us through this period as we have currently amassed over CAD1.6 billion of assets under development on our balance sheet. In 2022 and 2023, we expect this patience to be rewarded. We expect to deliver a project with a cost of approximately CAD700 million per year during this time period, while spending approximately CAD500 million per year on development projects.To give you a sense of scale, these deliveries represent a total of 1.5 million square feet of net leasable area at our share as well as 653 condo units. Looking forward, we expect this flywheel effect to continue as we are at a point of development program where we will regularly deliver completed projects as new ones commence. Finally, we have provided certain guidance in our release that I would like to highlight. As Jonathan mentioned, we have increased our distribution by 6.25% to an annual amount of CAD1.02 per unit. This is supported by FFO per unit growth with a target of 5% to 7%, which amounts to a range of CAD1.68 to CAD1.71 of FFO per unitGrowing the distribution commensurate with FFO per unit growth is sustainable and ensures that we can maintain our targeted payout ratio, which is a range of 55% to 65%. This range of payout ratio ensures that we can retain the cash flow required to advance our development pipeline and property improvements while balancing our objectives associated with the balance sheet strength. For 2022, we forecast development spending of CAD475 million to CAD525 million plus spending on revenue-enhancing CapEx of CAD30 million to CAD35 million.As noted on our Q3 conference call, this spending is funded predominantly through retained cash flow, plus project level debt. This is supplemented with asset sales, including the proceeds from condo sales as well as partnerships with top institutions. We plan to dive deeper into our strategy and our target at our Investor Day on February 23, and we encourage all of you to attend.With that, I will pass the call to the operator to open the line for questions.
Thank you, sir[Operator Instructions] And our first question comes from Sam Damiani from TD Securities.
Just wanted to start off on the guidance, which is much appreciated. That 5% to 7% do you have that broken down with and without inventory gains for 2022? And also, is there an implicit sort of same property NOI growth behind that guidance as well?
Sure, Sam. So for the next couple of years, we should assume about CAD20 million to CAD25 million of inventory gains, which are included in that number, so you can pull that out. And same-property NOI would be in the range of 3% to 4%.
For '22, and that would be including changes in bad debt expense, I assume, Dennis?
Correct.
Okay. And if we look to -- I mean your comments earlier in the presentation, Jonathan on the future of retail and enhancing the resiliency of the portfolio. I'm wondering if you could shed a little more light as to how you envision that sort of playing out for RioCan? How do you envision change in the portfolio to improve the resilience?
Sure. So I mean there's a few factors in that, Sam, and thanks for calling in and good morning to you. One is there are certain assets that we have will continue to shed from our portfolio, which we don't think are as relevant in today's economy as they once were. And so again, some of those are secondary market assets. Some might be in closed mall assets. And so I think we'll continue to do what we've been doing before, which is pruning some of our lower growth assets that, again, are harder to, I would say, harder to evolve into today's current demands from our tenants.Secondly, within the properties that we're keeping, there's a tenant mix that I think in order to stay relevant and in order to stay on top of consumer trends, needs to continuously evolve and change. And I think Jeff and his team have done a great job of assessing which tenants are viable and logical going forward and which ones we feel might be challenged in today's environment. And so we are making changes to that tenant mix. They're very logical changes, and I think they will make us more resilient going forward again, switching over to more necessity-based purveyors. And in some cases, it might not be tenants with amazing covenants, but they just have some great uses that will really add to the shopping center and the flavor of the shopping center.And then I would say the last thing we are going to do or we do in many cases, but one of the other things I'd highlight is the experience you get at a RioCan center. I know that John Ballantyne and Oliver Harrison are working hard to ensure that the physical space is improved. For many years, I think RioCan has benefited from tremendous locations, and I think our tenants benefit from the attributes that a company having those great locations. But I think we -- there's a keen recognition that we've got to do more, and we've got to put some real capital which is part of the budget for this year into those properties to make them have a consistent look and feel to make them be more visitor friendly.And to also evolve the physical space so that there are these hybrid models, these I guess, these omni-channeling models available to our tenants, which just means change in the [indiscernible], changing the entrance and exit ways and creating better signage, helping them with loading and also maybe helping them demise and create new space within their existing space, so as to facilitate buy online, pick up in store and other types of, let's call them, new generation shopping practices. So that's -- I mean, just some examples, Sam. There are, of course, more than that, but I think those are a few that resonate.
That's great. And maybe just one last quick one for me. I don't know if Jeff's on the line, but the occupancy is increasing nicely, pretty close to pre-pandemic. We've seen very little in terms of retail store closures or bankruptcies in the past couple of months. Any comments on the sort of tenant watch list, the size of it versus historical ranges and what you're expecting going forward in terms of net demand?
Yes. Listen, we have a lot of blood-letting over the last couple of years. I think that took out a lot of the tenancies that were anemic. There's always going to be tenancies on that watch list, but it's certainly gone slimmer and smaller. And I will just tell you, overall, the cadence of meetings that we're having with tenants looking to kind of reset themselves. I've never seen them more strategic than they are right now. The face-to-face meetings we're having with not just our top 50 tenants, but across the portfolio, new guys coming in, like I said the cadence is kind of over the top. So the interest is certainly outpacing the guys that we're concerned about. We're always paying eyes on that. But right now, I cannot tell you there's any one of any substance that I'm overly concerned about in the immediate future.
And I'd add to that, Sam, I think that's great color and not add to that. But we -- I think I'd mentioned this in this forum before that we were expecting January to have some fallout as it typically does. A lot of tenants historically have held on through the Christmas season and then they will sort of call it a day in January. And we were also expecting that to coincide with the completion or conclusion of government support. And so far, and I'm looking at John Ballantyne, just to confirm this. But so far, we have not seen the type of fallout that we would have expected. In fact, our tenant base is holding up quite nicely. There's the odd exception, but I think that's the general state.
Yes. No, that's correct, Jonathan, no major fallout at this point and as Jeff said, not expected in the near term.
And speakers, our next question from Mark Rothschild from Canaccord.
In regards to the leasing spreads, can you maybe expand a little bit on if you saw some difference or if you're seeing some difference in the types of retail that you own?
Yes. I think -- and John, welcome to comment on this, but I would say that the open-air suburban and urban centers are the main drivers of the leasing spread. And then I think some of the enclosed ones we have are a bit of a laggard. And again, leasing spread is such a sensitive metric. And in this case, I would say that we had one deal where we replaced a dark supermarket with a live living breathing supermarket tenant. It was at a slightly lower rent, but it was the right thing to do for the property. And I think that alone, John, remind me that alone, I think, hit the statistic quite severely, right?
Yeah. I think if you pulled that out of the quarter, we would have been on a new leasing spread closer to 8%, 8.5%. And what I would add to that, I agree with Jonathan, the grocery-anchored open air is where we are seeing the biggest lifts in the rental spreads. I would say on the enclosed side, it has been a bit muted. We were very careful through the pandemic, not to solve any problems or cure any ills that tenants may be having on the ability to pay rent by locking in on any deals. So to the extent that we did renewals on the enclose, they were more shorter term basis in term and were on the lower rent spread side.
So maybe just following up on that, would it be fair to say, based on the guidance and what you commented on the same property NOI guidance you mentioned in regards to Sam's question that you're anticipating stronger leasing spreads over the next year or two in the guidance that you talked about?
Well, I think we've said that our objective on leasing spreads is to be in the mid- to high-single digits, and we're confident that we can maintain that.
Operator: And speakers, our next question from Pammi Bir from RBC Capital.
Luckily got the name right, wrong company. Just -- I do have a question may be coming back to the guidance. The assumptions you provided, I think you said CAD20 million to CAD25 million of residential gains, 2% to 4% same-property NOI growth plus you've got substantial development completions coming on. That would seem to suggest perhaps something more than 5% to 7% FFO growth. So I'm just curious, is there something offsetting there? Is it the dispositions perhaps or something else that we might be missing?
Yes, that's exactly it, Pammi. So we would have a disposition negative offsetting that basically because we had such a large disposition program this year that does net off some of those numbers.
Yes, like the full year impact of the CAD850 million of dispositions for 2021, coupled with some of the additional dispositions that we plan on doing in 2022, which again become more -- or sorry, qualitative than quantitative -- those will have an offsetting impact.
Okay. And is it -- I think the 2022 disposition at being something much lower than 2021.
Yes, it will be much more moderate. And as I've said before, I think the lion's share of the dispositions that we do in 2022, if I could read the tea leaves, will be largely qualitative rather than quantitative. We're not doing them for equity or capital raising purposes, I would say, more so we're doing them to really power the portfolio and prune some of the assets that are lower growth. And then there will be the odd transaction where we bring in partners on some development land. But I think other than that, you're not going to see the same velocity as you saw in 2021.
And Pammi, just on that in our investor presentation on our website, we show a range of 100 to 200 a year going forward. That's a pretty wide range, but we'll do these things opportunistically. And that level as well helps support our funding. We don't need more than that. And we don't need more than 100 to deal with what we have coming from that development funding perspective.
Okay. Perfect. Just on the NCIB. Obviously, you were quite active last quarter. I'm just curious how you feel about remaining active the TAMs and again, just thinking about how you're balancing that capital allocation decision between again a fair amount of development spending to go, but also trying to manage leverage as well.
Yes. I mean I can start and hand it off to Dennis, but again, it's a balancing act as always. And this year -- 2021, in particular, we ultimately ended up selling a few more assets than we thought at lower cap rates than we thought. And it allowed us -- like we had a target in terms of disposition and how much debt we wanted to pay down while we exceeded the target in terms of capital raise. And given that we were trading in my mind, quite substantially below NAV, we thought it was an appropriate use of capital to allocate it towards the NCIB. And again, we'll always view it in comparison to some of the other uses of capital. But given that we were able to fully fund our development needs through our retained cash and given that we were able to pay down debt quite substantially and start a trajectory of net debt-to-EBITDA decreases that we think will be favorable over time, then we thought it was a good use of the remaining capital to acquire back our units. And again, like I said, that was largely driven by some of the really good favorable results we got from selling some of these assets, which were at cap rates that were [astoundingly] low. But I'll turn it over to Dennis to add any color if you think it necessary.
Yes. I think Jon is bang on. We had excess capital from the asset sales, and we use that to repurchase essentially almost the exact amount to repurchase the units. We would have purchased a bit more, but limits on how like you can purchase in an NCIB program. Going forward, of course, we balance these capital decisions out. And you mentioned the development spending. I just wanted to highlight just a bit of this it is kind of high-level math, and how we think about that. We have $150 million of retained cash flow every year that when you -- if you gross that up for 60% to 65% project leverage, that's like a debt-to-cost metric, not necessarily loan-to-value. That takes you a bit north of $400 million. And so then if you added another $100 million of asset sales or partnerships, et cetera, that gets you the rest of the way there. Even when you think about just the return of proceeds from condo sales, we have that $20 million to $25 million of condo gains is actually $50 million a year of proceeds, so $100 million over the 2-year period. So that's really how we fill that gap. So we're fully funded on our development program. We don't need to raise equity any other way. And so then from there, it's any excess capital, we'll allocate those dollars where we think we can get the best return.
Got it. And just a last one for me. Just on the retail leasing at the [well] or the incremental leasing [Indiscernible] compare on the latest round relative to, I guess, the initial round that you announced last year maybe relative to your pro forma.
Yes. They're holding up quite where we thought they were going to be. No, we haven't seen any slippage and we're kind of holding to the budget pro forma numbers that we have.
Yes, across the board.
Great. Thanks very much. I'll turn it back...
Thanks, Pammi.
And our next question from Howard Leung from Veritas Investment. You may ask your question.
Thanks, good morning. I wanted to turn back to the NCIB and just a follow-up on that. Is the -- I guess, the 5% to 7% guide doesn't include any potential buybacks, just given the comments on that you're being fully [Indiscernible]. Could we see some more buybacks this year?
You're correct. We don't have any buybacks in our plan for this year in our formal budget that supports that guidance. So that's correct. I think it would depend on how the stock trades as we kind of come in a lockout and are all things of capital. But it's not explicitly included in our plan [Indiscernible].
Okay. That's good to hear. On the leverage, just saw that your variable debt has gone up to -- I think it's closer to 9% now at the end of December. Any thoughts about where we could see that at the end of this year given maybe higher interest rates [Indiscernible]?
Yes. So I think the one thing I should just be clear on that variable debt is only our lines, our corporate line and construction line. So all of our long-term debt in terms of debentures, mortgages, et cetera, is all fixed. And so that's why that number can ebb and flow a bit over time depending on our liquidity requirements and timing of other long-term issuances -- so I think I'd expect it's going to stay in around these levels. We will have some construction loans ramp up with some new projects, but we're also taking out some construction loans on completed projects. So those types of things should balance out. But it certainly -- it's definitely not a strategy to have floating rate debt within our long-term debt portfolio.
Yes. That makes sense. And I guess as you go through the development programs, a lot of completions are set for this year and next year, we should see some of that construction debt maybe go down or, I guess, maybe fluctuate?
Yes. It will be -- the construction debt will be taken out with permanent debt as we go forward. So you're absolutely right on that. At the same time, we will start new projects over the next couple of years as well. So I would say you're probably right that over the next couple of years, it comes down, but I don't think it's all that material. And it's not a long-term strategy to obtain any [on rate] debt.
It makes sense. And then just one last one on me on for the fee revenue side. Any sense when you include your forecast for '22 compared to this year, what is that going to look like? Or is it mostly the same? Or can we see some increases from this year or last year?
I think the objective is that you'll see some increases. I'm not sure how material they will be. But as we venture more into the service providing business, particularly on condo projects, where we are instituting programs similar to what we did in the verge condo project, where we become a general partner and a development manager holding only a 20% interest in projects. We expect that those types of revenue or fee revenue-generating exercises will increase. And then, of course, as we bring on more partners or some of the projects that we have completed come to finalization, there will be just general work fees for managing or asset managing those properties. But I'm not sure it would constitute a material increase for 2022.
No, that's right. In the range, I think we're around 15% this year, we may be a little bit higher than that in '22, but I would say a material difference in '22. I think we'll see that ramp up as we look forward as Jonathan said we find more and more of these opportunities to increase the fees that have failed to us, which given the demand for these types of projects, we think can be substantial over time.
Well, the demand for these kind of projects and the demand for the expertise that we currently possess [Indiscernible] can to effectively develop and manage great mixed-use projects.
No, that makes sense. I think in the kind of more medium and long term, I expect that to probably grow, [Indiscernible]
Thanks, Howard. Take care.
And our next question from Tal Woolley from National Bank Finance. You may proceed with your question.
Just wanted to talk a little bit about sort of greenlighting new developments, you sort of outlined what you think your sort of capital spend will look like over the next couple of years. How has the thinking evolved over the course of the pandemic and given the changes in financial markets to like how you're sort of -- how you're thinking about putting together new developments. I have seen some of the obvious things that kind of jump out to mind is like condo versus purpose-built rental, the office versus the resi mix in a mixed-use development. Can you just talk about how your thinking has evolved over the course of the pandemic and whether you're confident you can still hit adequate development yields going forward?
Yes. Well, I think that we're long-term, long-range thinkers as always. And so there have been some trend shake-ups throughout the course of the pandemic, but they haven't really altered our view, which is based on the foundational conclusion that there's a housing shortage, particularly in the GTA. And if we can provide that housing, whether it's rental or for sale, there will be a vibrant market for it, and we'll be doing the city good and the province good by providing it. So we are going to continue forward in searching for opportunities within our portfolio to build those types of assets. It has been -- the one big thing that's changed throughout the course of the pandemic is costs have ramped up -- but we look at everything -- we're not looking at going in yields. We're looking at a project over a 10-year period and what the IRR would be. And we feel confident in given the dynamics out there that if we continue to build residential properties, there will be a sustainable growth within those investments and that over time, they will -- our unitholders will reap the rewards of that sustainable growth. And so even though our going-in yields may have slipped a bit based on where we were 2 years ago because of these increased costs, the overall IRR throughout the term of the project, I think, will be still attractive. And then also, you have to think about it from the basis of where we're coming from. We've got these great landholdings. They're underutilized when they're covered to the tune of 25% by a retail building. They have massive parking lots, and they are really, really well positioned. And so for us to go at and sort of exploit that wonderful landholding is the right thing for us to do as stewards of our unitholders' money. And in terms of the mix between condo and rental, it's one of those things that we decide on a side-by-side basis. We don't necessarily have an entity-wide goal on how many condos we're going to develop. It's not our core business. When we do it, as I suggested before, we're now morphing more into a project manager, general partner, and ultimately development manager for other individuals. And that allows us to get continuous fees through the door, but it also allows us to bring in some capital on the front end so that we can fund and make more viable some of the rental residential developments that we anticipate carrying out. So again, it's a bit of a balance. But I would say, by and large, in answer to your question, our strategy has not been altered substantially by virtue of the pandemic. Dennis, anything to add to that?
No.
All right. Hopefully, that gives you some color.
Yes. No, that's perfect. And I think one of the things you mentioned to you, sort of from a management perspective, what you want to focus on going forward is this idea of customer centrism. I think sometimes we focus a lot on net rents and to [set] the tenants get the gross. And what do you think are some of the tangible benefits you can deliver to the tenants going forward?
Yes. It's a great question and one that our operations team spends a so much time contemplating. And there are certain things that we're doing operationally that just provide for more efficiency. I think we're taking advantage of our national scale and buying things now procuring things, services, goods, et cetera, on a national basis, which seems straight, but the truth is we used to do it regionally, and it was illogical and inefficient. From a property tax perspective, we've been, I would say, more aggressive over the last couple of years in our appeal process, and I think that's reaped a lot of benefits as well towards our tenants. And also, it's using technology to make things a little more -- run a little more efficiently, changing the way we light, heat, cool and ultimately clean a lot of our properties, which is not only good from an ESG perspective, but it also saves our tenant quite a bit of money and then also lowering our overhead, right? Like we charge back quite a bit in head office expenses. And I think one of the things that we've done quite well over the last couple of years is mine those expenses and keep them fairly limited. And I think our tenants will serve to benefit from that because you're quite right, they don't care about net rents. They care about their gross occupancy costs. Oliver, do you have anything to add to that?
I'll just add that I think around the technology piece, it's really doing our best to make sure that we are able to communicate with our tenants more efficiently. And Jonathan had mentioned that we'll be rolling out our RioCan Connect tenant portal in the second quarter of this year. And at Investor Day, we'll give you a little bit more color as to what that will look like and how that will improve our tenant experience. So beyond that, John, I think you covered it all.
Great. And then just lastly, going back to the 5% to 7% [Indiscernible] per unit guidance, Dennis, are you able to sort of comment a little bit about how much the well kind of is baked into that number? Because I think when I have been modeling it, I'd sort of presumed that, yes, you'll start to see some cash rents later this year, but you have [Indiscernible], you're not running full tilt occupancy and that it was probably going to be kind of a marginal FFO impact in 2022, but 2023 is really where the office space would really start to kick in. Is that a fair way of thinking about it?
Yes. I think you're absolutely right. The well will open up in terms of the office tenants are getting occupancy now. But you're right, we won't have cash rent starting to kick in until the middle of the year and a bit more later in the year. So the well from a contribution perspective on the commercial side, we'll see that stronger pickup coming in 2023. And then at that point in time, '23, we'll start seeing delivery on the residential starting to come in, and that will ramp up and head into 2024. So that gives us a bit of a steady run rate on growth from the well. But from a development deliveries perspective, in terms of 2022 contribution, most of that is going to come from a number of these residential projects that Jonathan mentioned earlier in terms of litho and Strata and the various products we have in Ottawa, et cetera.
Okay, sorry, maybe I'll just sneak in one more. The HPC JV, we haven't talked about that in quite some time. There's obviously been some changes going on there in terms of the strategy. Can you just give us an update on what you're thinking about? I know that the development application in Montreal? And what's going on what's sort of the thinking around some of the other sites.
Yes. I think the operations of HBC are reasonably strong. I think their operations in the U.S. are much stronger, but they foresee some pretty good results out of their operations here, particularly some of the downtown and well-located mall locations that we own with them. So they -- while they might be shrinking their footprint in certain locations, the ones that we own with them, they certainly seem very, very bullish about. And so I think it's going to be status quo with respect to that JV for the -- at least the short to medium-term Tal. And I think the only really real difference to that is, as you mentioned, there have been some inroads made with respect to, I guess, densification in both Montreal and I think Vancouver, there's also some work being done. And those are really just -- really, I think, a good program of creating value from, I would say, some of the best physical locations in Canada. What we do with that, who knows at this point, again, once those stores will remain operational and remain paying rent to the joint venture. But in the future, there could be some really significant upside in those well-located properties.
Thank you so much.
Thanks, have a great day.
[Operator Instructions] And so our next question from Jenny Ma from BMO Capital Markets. You may proceed with your questions. Good morning. I want to pivot to the Montreal multifamily rental acquisition. Could you let us know if that was an opportunity that came about through a relationship? Or was it a marketed process?
I'm going to turn it over to Andrew Duncan.
Hi Jenny, thanks for the question. We are actively keeping our eye open for opportunities across the country. This is one through our brokerage relationship that got brought to us. It wasn't broadly marketed, but it was one that we found an opportunity on.
Okay. Now this is the first outright acquisition you've done of rental apartments. Would you characterize this as opportunistic like you sort of mentioned? Or would you think about this as another leg, I guess, on your multifamily growth strategy?
I would say that it's going to be opportunistic. We are going to be relying predominantly on our development pipeline for the buildup of our multi-res assets. But we have ambitions as to how large we want that income stream to be. And if we can supplement to just supplement the existing pipeline with some acquisitions that align with the overall look and feel of other RioCan Living assets, meaning that they are new, highly [Indiscernible] major market, close to transit and we can buy them opportunistically, then we will take advantage of that. But it won't be something that we rely on. It will be something that we'll be more opportunistic.
Okay. And this is a fairly new asset. Is that correct? Because it sounds like there's a couple more coming out.
Very new -- yes.
Just recently [Indiscernible]
Okay. Now when we think about the cap rates on these assets, you sold a 50% interest in eCentral at about 3.5% and then this came in at about 4%. Now putting aside any cap rate moves in the near term. Is that a good band to think about what kind of returns or return expectations you would have for potentially buying more multifamily assets or potentially selling if the market gets a little bit hotter?
If you look at going in yields of the main indicator, then yes, I would say actually on the higher end side, it would be lower than the 3.5% at this point. I think the market has heated up quite substantially even since we sold eCentral or the 50% interest in eCentral. So I would say it's somewhere between 3.25% and 4.25% for the types of assets that we would either look to sell or buy. And I think that seems to be, if anything, only getting stronger. There seems to be an insatiable demand for them, and there's really not a lot being built. So that -- I think that's the kind of band that I would suggest is out there.
Okay. Turning to your commentary about expanding your intra RioCan type of tenants, could you maybe expand on what's incremental with that? And then specifically, when you mentioned fulfillment, is that really utilizing your current space for fulfillment processes? Or are we starting to drift into industrial-like properties?
So it's a great question, Jenny. I mean that sincerely in that it is something that's a bit misunderstood. We don't have a lot of opportunity to create fulfillment space in our portfolio. We are on a retail portfolio 97.2% occupied, and the vast majority of space that we have remaining is small in nature and would not be able to -- it doesn't have the attributes that you need to build a proper fulfillment center. Fulfillment centers are not our expertise, and it is something that we unlikely will build up in terms of expertise. So while it sounds really cool to be in the fulfillment business, RioCan is only gently in that business in that we provide space to tenants who are utilizing it a little bit differently these days. And I think there's been almost a merger of traditional shopping space with fulfillment space. So I always say that we provide fulfillment space just with a nicer facade. And so it really is our tenants utilizing it for more of a fulfillment architecture now than anything else. And so just to be clear, and I don't want there to be any misunderstanding about it. We are not getting into the fulfillment business, de novo and starting to build industrial facilities at this point. If we had open land and a partner approached us about maybe building something out, it would be a peripheral exercise that would not be core to RioCan.
Okay. So when you talk about like medical, educational, like what is incremental about the intra RioCan approach? I presume you've had maybe a few childcare centers here and there in medical offices. Does it just mean that you're going to have a more concerted effort to this property type? Or how should we think about the change in the strategy with incremental?
Yes. I would say it's totally -- I mean, look, everything at RioCan is incremental because we have such a large base. So it depends on how you define what is material versus incremental. But I think Jeff and his team have -- and they have a purview now on the types of tenants that we're talking about. And I'd say it's more than just a light initiative -- they are speaking out as a first option. A lot of these governmental uses, health care uses, libraries, welcome centers. And I think ambulatory uses that were in hospitals that are now looking to be moved outside of hospitals. Jeff, if I mischaracterized it, let us know. But...
No, we're very strategically seeking out and there are different groups that work on governmental RFPs and work with institutions. And we've, over the last number of years, really worked to get those relationships tight. And now we're reaping those rewards as we're certainly responding to everything that's out there ahead of time. We become a bit expert in that area, and we kind of felt out what they're looking for. So it's very much an active part of our leasing program.
And Jenny, there's also like the motivation there. One, typically, they're great covenants. But two, they tend to be really favorable co-tenants with a lot of our existing tenants. So when we talk about the notion of being customer-centric, we're spending more and more time with our larger tenants figuring out what kind of cotenants they want, what drives traffic to their businesses. And I would say that more often than not, this type of use, which has a lot of visits and a lot of people who are looking to consume has been viewed very favorably by our existing tenant base. So it's not done just on a [whim]. It's done with a view to making our overall portfolio more viable, more sustainable, and just really resilient going forward.
Okay. My last question is with regards to the bad debt provisions. And I'm wondering if you can comment on the cadence of how that should diminish. I think it was flat sequentially in Q4. I'm not sure if the variance had any impact on that improvement measure. But what are you thinking in terms of how that burns off? And do you think it gets to -- and I hope I heard correctly, I guess that $850,000 normalized run rate that Dennis had mentioned, is that something that you think is within view over the next 12 months?
Yes, I'll take that one. I think that is -- that run rate is in view in the next 12 months. I mean it's such a hard environment to predict anything at this point, given the rise, fall, [and] flow kind of like a constant resurgence of the stupid virus. But that being said, the way we're viewing it now is quite optimistic, and we don't think that -- as we mentioned in a prior question, our tenants have shown that they have been able to withstand this last round of lockdowns, and we are not seeing a lot of fallout on bad debt as a result of it. And so based on that, we're quite confident to say that the provision will dissipate, continue to do so, and get to a normalized space within the next 12 months. I think that's fair to say.
Yes. I think another piece that I would just layer on that is the balance sheet side of the provision. So we -- at the end of the year, a $17 million of provision sitting on -- built up in the balance sheet, which will unwind over time, and that helps protect us go forward a bit as well. In that 5% to 7% range, one reason why there is a range is because we do take assumptions on potentially continuing provisions over the course of this year, still above that, quite a lot less than we've had in the past few years. but still potentially a couple of million a quarter maybe. Now, where we stand today is it's always kind of ebbs and flows. But as Jon said earlier, the feedback of the tenants right now is quite strong. So we will continuously evaluate this over the course of Q1. Again, knock on wood, and as Jonathan has often said, we can't count this stupid virus out. But Omicron, it didn't really have much of an impact. It wasn't in our consideration in our Q4 provision at all because at that point, we were dealing with just some of the tenants that have been deals [Indiscernible].
Okay. Dennis, so just to clarify, are you saying that in your guidance, you've baked in about $2 million per quarter of bad debt expense?
Correct. within the rate. We could be more to the higher end of the range or the lower end of the range depending on how the environment plays out this year with the -- with [brand new] COVID-19.
Yes. I mean that's a big caveat, right? But if you're modeling $2 million a quarter, you're thinking that the run rate starts to approach or normalize, then is it fair to say that there could be an upside to the guidance, all else being equal?
I would say it would push us more towards the high end of the guidance rather than above the range of the guidance.
Okay. Okay. That's very helpful. Thank you very much.
No problem, Jenny. Have a great day.
And speakers, there are no further questions at this time. I will now turn the call over to Mr. Gitlin for closing remarks.
Well, thank you. I know everyone on the call has a very busy time period here with reporting season underway, and we just wanted to thank you for listening in, and thank you for following RioCan as intently as you do. And we will look forward to speaking to you again at our Investor Day on the 23rd of February. And then if not then, when we report next results. Thanks, everyone. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.