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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the SmartCentres REIT Q4 2017 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Huw Thomas. Please go ahead, sir.
Thank you very much, Melissa. And good evening, everyone, and welcome to SmartCentres' Q4 2017 call. I'm Huw Thomas, CEO of SmartCentres. It's my pleasure to be leading the call this evening. Joining me on the call today are Peter Forde, our President and COO; Peter Sweeney, our CFO; Mauro Pambianchi, our Chief Development Officer; and Rudy Gobin, our EVP, Portfolio Management & Investments. So thank you to everyone for joining us this evening. I'll make some opening remarks about the results for the quarter, market conditions and our growth initiatives. Peter Sweeney will then talk about funding activities. And Peter Forde will add his thoughts. And then we'll open it up for questions. Our comments will mostly refer to the first 7 pages and pages 18, and now 19 of our supplementary information package and the outlook section of our MD&A, which are posted on our website, and I refer you specifically to the cautionary language at the front of the supplemental material, which applies to any comments we make this evening. For the fourth quarter, our results demonstrate the strength of our core portfolio with continued high occupancy at an industry-leading 98.3%, including committed leases and ongoing lease-up of future space at good levels. In addition, transactional gains further added to our FFO, as we realized the inherent value in our land assets. So with over CAD 9 billion of retail assets as the current core of our business, the key focus of our leasing and operations teams is and will continue to be looking after every one of our strong stable of tenants, maintaining the assets in the best possible condition, and driving growth and occupancy to maintain strong, consistent FFO and AFFO performance. Fundamentally, I don't believe there are any -- there are currently any material new factors that are affecting either retail or retail landlords, and all of the issues I and others have talked about in the past remain relevant. Retailers in industry is going through change, both positive and negative. And like any good business, we are actively working to adjust to these and to move forward. Despite market conditions being somewhat challenging with the closure of Sears operations across the country, adding significant vacant space to an already large vacancy pool in certain markets, we remain very optimistic about our long-term ability to maintain strong and competitive occupancy in our principally Walmart-anchored centers. And just as a reminder, we have no Sears in our portfolio. Retailers are certainly being more cautious in their store location decisions, but the quality of our open format centers is undeniable, and our center's fundamental ability to drive consumer traffic remains very attractive to retailers. So it's now been just over 2.5 years since we acquired the SmartCentres development platform. Our strategy aim with that transaction was to create the most dynamic development business possible, to enable us to maximize the potential we know our portfolio of shopping center assets inherently present. While we note that others are adopting a very urban-centric real estate strategy, our focus is to consider every one of our retail properties, to look for upside value-creation potential through mixed-use development. Be it a shopping center in Alliston or Stoney Creek, Point-Claire or Chilliwack, we're looking at every single site to see where we can add some form of development or intensification on the significant amount of land we already own. Our updated analysis shows, in fact, just over 2,600 acres of land, which is currently devoted to parking, of which over 1,300 acres is actually in the 6 major Canadian urban markets. And this space, together with existing undeveloped land will, we believe, significant development and redevelopment opportunities in many forms for multiple years to come. Our longest -- our latest long-term business outlook indicates that over the next 5 years, we expect to commence development either alone or with our various partners on projects valued between CAD 7 billion and CAD 8 billion, and our share of this investment is nearly CAD 3 billion and will be diversified in that it will take a variety of forms and be in multiple different locations. The financial benefits of this program will take time to be realized as we complete the initial projects in our pipeline. But after modest FFO growth in 2018 of CAD 0.07 or CAD 0.10, including transactional FFO, and a similar or somewhat higher amount in 2019 depending on project timing, by 2020, we see FFO per unit climbing by over 10% as the sales proceeds of our various townhome and condominium initiatives begin to be recognized. And after that, we would expect FFO to remain at least at these sustained levels as a mix of condo and townhome dispositions are added to growing income from rental apartments, self-storage and seniors' homes. In total, we are currently looking at projects on some 57 different properties, ranging in size from the country leading development at VMC to modest retail developments at various centers across the country. So in summary, we already have a very significant pipeline of projects underway. And we only expect these to grow over time.Secondly, partnerships and joint ventures will play a key role in our development program. And we've already demonstrated through our long-term relationships with Walmart, Simon Properties, and Mitch Goldhar that this is a core strength for us and we intend to build on that capability. Thirdly, we already have a broad array of development skills in-house to support this program. But we continue to add and upgrade selectively across the board to our skilled resources. And then fourthly, as Peter Sweeney will highlight later, we also have the financial flexibility to execute on this program. So let me be more specific about progress on some key initiatives. For our major development in VMC, all of the key elements of the program are progressing well. At the KPMG Tower, our last major tenant, FM Global, is fitting out their space. And the remainder of the office tenants in the KPMG Tower are now operational. [ TD ] has opened a large retail branch at ground level, and we are in negotiation with a number of other retail tenants for the balance of the space of the foot of the tower. The VMC subway stop opened in mid-December of last year. And our understanding is that somewhat contrary to expectations, it's the busiest of the 16 stations on the new subway extension. And the Viva bus system on Highway 7 is operational, and York Region buses are now coming to the site with the New York region SmartCentres bus terminal opening in the spring. Subway service to Union Station from Vaughan continues to be approximately 45 minutes, thus providing a significant time-saving to commuters traveling in either direction. And we've added approximately 900 surface-level paid parking spaces for commuters on-site. And generally, these lots are full each weekday. Construction of the PwC-YMCA building is underway and on track for 2019 opening. The new road infrastructure on the site linking to Highway 7 and to James Street is also now complete and is heavily used. All other work on the first 3 residential towers at Transit City is moving forward with construction now commenced for the first 2 towers. And overall, momentum on the site continues to build. And we have now turned our attention to planning condominium towers 4 and 5, a new rental residential building and the next office tower. And overall, we now see between 9 and 11 million square feet being developed on the lands we own with Mitch, based on the latest master plan and that's up 1 million square feet in total from our last estimate, which is obviously, very encouraging. From the site across Highway 400, -- sorry, for the site across Highway 400 from the VMC fronting on Highway 7, that we creatively call 407, we continue to refine our plans. Our initial work indicates the potential there for up to 2.5 million square feet of redevelopment, including residential, office, retail and entertainment. And this site is a primary site under the Vaughan official plan, which will permit the second highest density in Vaughan after the VMC. For Vaughan Northwest, all other groundwork necessary to support the level of activity we are planning is moving forward. And ultimately, we expect the site to support a mixture of existing retail townhomes, self-storage, seniors' housing, rental residential, condominium and selective retail expansion. And as we said before, this site exemplifies the model we see for a large number of our shopping center assets, with 1 or more of these new income streams being added to the existing stable retail income base. Those of you who travel along Eglinton Avenue in Toronto will recognize the level of activity that is occurring as the new LRT is built. Our 12-acre property at Westside Mall is ideally located as the new Caledonia station, which is being built on our lands, will link via pedestrian bridge to a new ghost stop on the line into Union Station. And the proposed redevelopment of the site, which is supported by both city and provincial policies on transit intensification, is now designated for over 2 million square feet of mixed-use, incorporating residential, retail and seniors' living. We'll be ramping up our development efforts in Québec to take advantage of the positive economic and operating environment in the province. Now when we bought a Walmart-anchored shopping center in Pointe-Claire in 2016, we were pleased with the Center's retail attributes. But over the last 15 months, after reviewing the site in great detail, we've identified multiple opportunities to intensify the site. And these now total up to 2 million square feet of potential net new rental residential townhomes and seniors' housing on lands that were primarily acquired simply for rental income -- sorry, retail income. The city is very supportive of our plans. And the master planning is moving forward as quickly as possible. For Laval Centre, the JV with Jadco is moving forward and the land sale to support independent developments of a hotel and office building and a seniors' home on-site have now either closed or will close early in 2018. And in addition, plans are moving forward for the balance of the site, where, over time, again, for an additional some 2 million square feet of development, potentials have been identified, including condominium and further rental apartments. And elsewhere in the province of Québec, additional condominium townhome rental apartment and self-storage opportunities are already being identified and planning is underway. Our negotiations on a significant commitment to seniors' housing with Revera on a number of our and Penguin sites is now moving forward. And the joint announcement earlier this week highlights the proposed level of development we will be creating over time. We are delighted to be adding such a well-known and highly regarded partner to our ever-growing list of strategic business relationships. And our initial focus will be in the GTA, but over time, we'll move to other parts of Canada. And we and our future partners, see seniors' housing and seniors' apartments as a natural and very complementary use for excess undeveloped land adjacent to our properties. Now because of the attractiveness of our properties, we're also having other discussions with separate potential partners at a variety of other locations for additional seniors' housing developments. And we expect those to also move forward in the coming months, and we'll provide announcements as appropriate. Similarly, discussions with established rental apartment operators are ongoing both in the GTA and elsewhere in Canada. And we expect to be moving forward with further developments in addition to the already identified sites in Montréal and Ottawa. And we are also in the final stages of a comprehensive study, using experienced internal and external consultants, to review every one of our retail properties, and establish a prioritized list for future development. And then once complete, we'll be reviewing the various business models and partners as we establish the best way to move forward. Our initiative with SmartStop to build up to 5 storage facilities a year over the next few years continues to move forward, with detailed planning, zoning submissions, et cetera, now occurring on the first 8 sites. For our premium outlets portfolio, construction of a new parking facility is complete. And we opened a new facility for this in the past Christmas season. The park 8 provides 1,800 parking spots for what is already a very busy location. And construction of the 140,000 square-foot retail expansion has now begun with a planned opening in mid-November. Both Toronto and Montréal properties are performing very well, with Montréal beginning to outpace Toronto in increased sales performance after a slower start. And for the 75 acres of development land around the Montréal site that we own with Simon Properties and Mitch, we're also now looking at various development options, including a hotel, big-box retail, and also residential development for part of the site. We also continue to progress on our planning work to 2 additional outlet locations, and one of those sites now has the potential to add significant new retail space in addition to the outlet. And some of you may have noticed, we recently abandoned a site in the East GTA and that was because it had simply become too costly and complex. But we've already begun the initial work on a replacement site.After completing the acquisition of 12 properties from OneREIT in October, integration has gone very well with no surprises and we're now finalizing the integration as well as moving forward with our leasing and development plans. And the site in South Oakville, which has the former Target store, continues to be evaluated for redevelopment and we expect to move forward in the coming months with a value-creation proposal for that property. Then finally, for our retail assets, we're still actively working with a number of big-box retailers to add new stores in selected markets over the next while, as they optimize their networks. And we are still completing earn-outs, and also adding new smaller stores on a number of our sites. So, not surprisingly, overall, our offices are extremely busy, and I see this level of activity only increasing in the coming months. So with that, I'll pass the call over to Peter Sweeney.
Thank you, Huw, and good evening, everyone. Our goals with respect to our funding strategy are, firstly, to ensure that we have ready access to funding for our extensive proposed development pipeline. Our approach is to maintain as flexible a balance sheet as possible, well within our relevant debt covenants, with a balanced approach to secured and unsecured financing. Each development project typically carries construction-level debt provided by a syndicate of financial institutions for the construction period. We have already shown that if considered appropriate, we will term out this financing with hedging to maximize certainty of cost. Once the project is finalized, we will then term out the funding as appropriate. With the inclusion of multiple, well-capitalized joint venture partners in our program, this mitigates a significant portion of our funding needs. Secondly, to lower the cost of our funding by achieving a ratings upgrade to BBB high. Our conversations with DBRS have indicated, we need both balance of our secured and unsecured funding portfolios and to increase the level of our EBITDA. And we are well on our way to achieving both of these. By December 2017, our ratio of secured to unsecured debt had improved to 57% secured, 43% unsecured and we anticipate further rebalancing in 2018. We continue to review with our board, our long-term funding needs and the appropriate capital structure. We have updated our discussions on both an NCIB program and our [ direct ] program but currently have no plans to introduce or amend either of these at this time, as we don't feel they would be value-creating for our unitholders. For our payout ratio and distributions, we saw continued, albeit somewhat lower-than-normal lease allowances in CapEx, due to the typical lower leasing activity in the first 3 quarters of 2017, but these did increase to normal levels in Q4. This still provided relatively low AFFO and ACFO payout ratios for 2017. And looking forward, we do expect somewhat higher tenant allowances in 2018 and 2019, based on tenant churn and the need to rework space to maintain our occupancy levels. But our target and our expectations are that our payout ratio will trend towards the 77% to 82% range over time.Our ACFO metric or adjusted cash flow from operations shows a continued healthy level of cash generation, reflecting the strength and core characteristics of our business model. We will continue to refine this measure over time, as we analyze all of our capital funding needs. Overall, we feel that we are well positioned to both support our existing business, and also to fund our growing development pipeline of retail and mixed-use initiatives, while still providing our unitholders with stable and growing distributions. And with that, I will turn it back to Huw.
Thank you, Peter. Now in our press release earlier this afternoon, we noted planned leadership changes. Specifically, the Board of Trustees announced that I will be stepping down at the end of my contract in June, but will be remaining as the trustee of the REIT. Mitch Goldhar, the Trust's current Non-Executive Chair and largest unitholder, will become Executive Chair immediately, and in that role will increase his already significant involvement in all aspects of the trust business, including strategy, development, intensification initiatives, leasing and finance. And Peter Forde, our current President and COO, will assume the President and CEO role when I leave in June. This leadership transition is a logical step as the trust focuses more on development and intensification opportunities on virtually its entire shopping center portfolio. And I and the board very much believe in matching expertise with the strategic and operational needs of the organization. And the appointment of Peter Forde as CEO and Mitch's ongoing commitment and further involvement in the business fully support this evolving direction. And I believe it represents an excellent transition in leadership. I've fully enjoyed my time as CEO, and I'm very pleased with the strategic positioning of the business and look forward to continue to help the business grow as a trustee. So with that, I'll just ask Peter Forde to provide his thoughts.
Okay, thanks to you. As some of know, I've been involved with SmartCentres REIT from the initial transaction between Mitch and Callaway back in October of 2003 as a trustee for over 10 years and now as part of senior management since the merger. I'm proud of what we have achieved so far and very excited about where we are going. Mitch has been active in the REIT since 2003, and especially, over the last 2.5 years since the merger of the private SmartCentres development team with the REIT. And in particular, on certain development projects such as the VMC. Now in his new role as Executive Chairman, he will be fully engaged in all of our projects, and particularly, with those on which we have development and redevelopment plans. Perfect timing, given the types, complexity and volume of development we will be carrying out. In my new role, I will continue to lead the team through its expanded focus on development. I worked for Mitch for almost 20 years in the early years, with the team producing as many as 22 new Walmart stores in a year. Today, it is those very Walmart stores and their steady cash flow that draw our customers to our shopping centers that serve as the strong base, while this same development team carries out this ambitious mixed-use development program. Mitch and my styles, experience, expertise and industry connections complement each other, and when combined with the internal integrated team of planners, engineers, architects, construction, leasing, analysts, accountants and legal, many of which have been with us for much of that 20 years, we are nicely set up. I'm excited about leading this program with Mitch and the rest of the team and look forward to getting to know many of you on the call. And with that, back to Huw.
Thank you very much, Peter, and back to you, Melissa. We'll open it up for questions.
[Operator Instructions] And we'll first go to Pammi Bir with Scotia Capital.
Huw, just maybe just going back to the management change. Can you provide maybe a little bit more background on the decision to step down? And has this been under consideration for some time? Or did you consider perhaps, staying on longer? Or was it just kind of the right time?
I just believe it's the right time, Pammi. My contract is up in June. I think the business, as I say, is extremely well positioned in terms of its future outlook. I've been at pains, I think, whenever I meet with investors to highlight my core competencies aren't necessarily real estate. I've had a very varied career, and I -- while I very much enjoyed the last 5 years and as I say, pleased on where we fit strategically, I think the future growth potential for the organization is very much obviously, development oriented. And so having a strong emphasis on development, leading the organization, I think is sort of perfect positioning. So everything came together very appropriately. I've been chatting with the board for a little while. But I'm quite happy to move back to a trustee role and obviously, contribute as much as I can in that role. But look forward to seeing how the company continues to grow with Peter and Mitch at the helm.
Great. That's good color. Just maybe for the team as a whole. Just with Peter, your appointment or pending appointment later this year. When you think about where the company is at this stage, any thoughts as to perhaps -- perhaps, shifts in the strategy or operations? Or is it sort of status quo at this stage?
Well, I think if you're describing status quo as what we've been describing for the last several quarters, which is a heavy focus on leasing and keeping the portfolio sort of at or above 98% occupied as well as taking advantage of all the land and space that we have to build out all these new types of mixed-use developments that we have been describing. So really it's just -- it's status quo, but I would say with a big push and emphasis on moving all those initiatives along.
Okay. And then just maybe last one for me. In terms of the comments on -- more so on the 2019 outlook, you mentioned 4% to 5% FFO growth as what you would be targeting to get back up to. Just want to clarify whether that includes any transactional FFO in those numbers?
No, it doesn't, Pammi. I would hope or expect that we'd have announced transactional FFO layered on top of that, given the ongoing commitments and multiple joint ventures, where we're selling land to partners in various structures then. I would hope that, that would be on top of that.
We will next go to Mike Markidis with Desjardins.
Congrats on what's going to be a great 5-year run. I think the broad investment community would certainly congratulate you on a job well done. And Peter, and congratulations on your promotion and expanded role going forward.
Thanks, Mike.
Just on that topic, with -- Mr. Goldhar has moved from Chairman to Executive Chairman. Just -- would that move require or result in any change of the existing services agreement that's in place?
I would expect that, well, we've had conversations with -- about that with the Board. We'll be looking at making sure that we have all of the appropriate agreements, and everything else in place to both reward Mitch appropriately in terms of the work that he is doing, and also, obviously, have his commitment for a period of time into the future. So, yes, I expect there will be some changes, Mike, that will come out of this over the next little while.
Okay. Just a last question from me before I turn it back. On some of the other initiatives that you're talking about, and they may be smaller, but maybe equally as important just given the technological change such as the charging stations and digital signage. Can you perhaps elaborate? I think you do have 1 charging station in Barrie already. What the outlay for capital is on the REITs behalf, and what the returns look like for the REIT?
There are actually 3 that are open now and more that are coming. The way the transactions are actually structured, there is no capital outlay on the REITs behalf at all. So these are being developed by a third party. And over time, there would be an expectation that there will be some -- revenue sharing that may come from some of the digital sign initiatives, and so on. But the initial focus was really to bring additional services to our sites, additional reasons for people either to come or conveniences when they are there. I haven't mentioned Penguin pickup, but that's obviously, another value-add that we have on a number of our sites. But essentially, they are capital-light, or 0 in terms of our commitment. And we would expect over time to start to get an actual financial contribution from them.
Okay. So more important would be the traffic driving up front and then, hopefully, a bit of a profit stream from down the road?
Yes, I mean shopping centers are evolving. I think we all recognize that you need to be cognizant of what's happening by way of technological change, shopping patterns, the evolution of e-commerce, all of those things. So it would be our intent to make sure that our centers are as relevant as they possibly can be to the shopper today and what the shopper of the future looks like.
We'll next to go to Michael Smith with RBC Capital Markets.
Congratulations, Huw and Peter. So just a couple of questions. I want to make sure I got my numbers right. So I think you said this is a new disclosure, You've about 2,600 acres of parking lot and about 1,300 of which are located in the big 6 markets. And I think -- did I catch you right when you said you're going to be spending CAD 3 billion over the next, is it 5 years?
What I actually said, Mike, is the total -- if I look every year at the value of the initiatives that start in each of the next 5 years and add those up, then the total value of those commitments, which will be spent obviously, over time is between CAD 7 and CAD 8 billion, and that our share of that is CAD 3 billion. So that doesn't mean that the CAD 3 billion will automatically get spent over the 5 years. It clearly won't. But it was an attempt to give you a magnitude of the size of commitment that we see over that -- what?
And in fact, some of that CAD 3 billion or CAD 7 million, CAD 8 billion comes back in through the sales of condos and so on during that time. So that's the gross expenditure number, and then there's some recovery, obviously.
Right. Right. And I guess, maybe that kind of opened the door to maybe a bit of color on the financing. So some projects like, let's say, the townhouse project at Major Mac and 400, that one seems to be more straightforward. You sell half your land, you get some proceeds. You use the value of your remaining piece to get construction financing. But condos are much bigger, high-rise condos. How would they go about? How would you go about financing that?
Michael, it's Peter Sweeney. So it's a good question. And maybe the simplest way to answer it is to use the existing example of Transit City Phases 1 and 2, where we currently have a construction facility in place for CAD 240 million shared among ourselves, Mitch's company, Penguin and CentreCourt. And so that CAD 240 million facility is in addition to the equity required of all 3 of us as partners initially, plus the availability of purchaser deposits that are used as part of the structure when you're building a condominium facility and project of that type. So we would see that model being used, Mike, in the future for condominium projects. And frankly, for townhouse projects as well.
So for that's specific for Transit City, so essentially your equity was basically your land?
Yes, I think we've mentioned in the past that typically, what we are finding is when we're vending in these parcels of land into these joint ventures with either CentreCourt or Jadco or Fieldgate, et cetera, that notwithstanding that we do try our best coming through the IFRS evaluation process every quarter, that at least, until now we found that when we go from the IFRS value that the statements reflect that there is also a bump to that value, when we are vending into these joint ventures. And so the aggregate of the bump as well as the historical fair value capital appreciation represents our equity that we would be required to provide to represent or fund our share of the equity for all of these ventures so far.
Great. And just on that topic. So I guess one of the issues there...
Mike, just -- it's Peter again. Just one more thought on that. So clearly what this should be at least suggesting is that we do expect a large amount of hidden equity so to speak or at least unidentified equity or unaccounted for equity to be unleashed over the next 5 years in these initiatives, as we go about each of them. And again, the model of Transit City, the model of Vaughan Northwest, the model of Jadco, we expect to be able to use continuously in each of them.
Right. Right. And that's exactly where I was going actually with the hidden value. So for example, if we look at, let's say, Westside Mall. Is it fair to assume that you would be valuing that because it's not actually your zone? I mean, we all know it's going to get over -- it's going to get the density you want. But it's -- right now, on your book, is it fair to say as if it's just as is like an income-producing property as opposed to a property with CAD 2 million? Sorry, go ahead.
Yes, it's a very fair comment, Mike. We value Westside as an income-producing property with 125,000 or 130,000 square feet of retail space on that side. And at least for IFRS valuation purposes, to-date, we've ignored any potential lift in value that the future development opportunity on that site might represent.
So it's like a couple of million square feet of density that's really not being accounted?
That's right.
And that's pretty consistent with the way that we think about valuations generally, with respect to IFRS. So obviously, as we highlight in our statements, we go through a process and have external valuations on a percentage of our assets. But our inclination is obviously, not to push the valuation, i.e., not to take the maximum but take the conservative end of the range always. That way, if there is some adjustment in cap rates that might occur in the market over the next while, then you're not certainly, going to find us having to adjust our IFRS values. We would be able to absorb that simply because we have approached things on a conservative basis, notwithstanding the uplift that's also available at all of the development sites.
Great. And just lastly, just on the VMC. Nice to see the density increased by 1 million square feet, and obviously, your -- so far what you've launched has gone extremely well, in fact. Maybe, can you give us -- I know you touched on -- the next development. But I was wondering if you could just give us a little bit more color in terms of like the next project timing or is it still kind of you're waiting to see how the market is?
Yes, first, it's a little bit of waiting exactly to see what happens at the market. But current thinking is that we would be launching at least one more condo tower next year -- this year rather, before the end of the year. The zoning process and so on has started for that to put that in place. So that we can do a number of other towers this year if the market calls for that. We are also dealing with a number of potential office tenants, with RFPs, that would potentially allow us to start another office building, probably in the same area as the condo towers close -- again, reasonably close to where the subway station is. We are also looking at doing an apartment building in that same block, potentially combined with the seniors' home. So there is a number of things that will be part of this next block. And it all depends on how quickly all of those things come together in terms of the market.
But I should say, for those of you that haven't been up to Vaughan more recently, the actual opening of the subway and all the work that we did to create the road network out to [ Jane ] and between the 2, Highway 7 and the road to the North, et cetera, has totally changed the feel of the area, particularly in the week, obviously. And as I commented, the parking lots that we have are generally full, as commuters are using the subway and a number of us used the subway last night to go downtown simply for a board dinner, et cetera. So it does fundamentally change the way that people are traveling from Vaughan to the Center. And this is just the beginning.
I can imagine that. Just on that condo tower that you expect maybe this year. Are you currently thinking similar size like 55 storeys? Or is that -- is that kind of what you're thinking?
I would say it's probably going to be -- a single tower will be somewhat less than that. There is some preliminary master planning and designing that have been done at this next block, and it would probably call for a little bit less height just from an architectural point of view. And -- but still lots of density on the site, but less height.
Okay.
But again, things will change. We didn't -- I mean originally, we didn't intend to build 55 storeys. The original contemplation was 35-storey towers, and we built three 55 storeys based on the market. So, and I would say, I may have left it a little bit iffy, but I would say unless the market was to change, we will definitely be marketing a tower this year or more.
We'll next go to Jenny Ma with Canaccord Genuity.
Congratulations to Huw and Peter on the management changes. Peter, I look forward to working with you. Just going to continue a little bit on Mike's questions about VMC. With the additional million square feet of density added, can you give us a little bit of color on what's driving it? I'm sure it's several things, but is it the higher -- the bigger condo developments? Is it, maybe your estimates initially were a bit conservative with the addition of different asset classes like seniors' housing. What contributed to that? And do you think that number is still subject to shift?
Well, the nice thing about what we're doing here is the city is very happy with the density, actually as are all levels of government because a lot of money has been spent to put in the infrastructure here, with the subway and the bus line and the bus terminal. So it's really a function of what the market wants. But we can -- we definitely, in terms of our master planning, have planned out a site plan with that additional density on it. And I'm thinking the city will be more than happy with what we contemplate doing. But most of that, we don't have a specific plan that says this particular half-acre piece must have a seniors' home on it or must have a 50-storey condo on it. It's sort of -- we are still quite flexible. And governments are being quite flexible with us as well in terms of how that will play out. But we certainly, anticipate that with the success so far and the demand that we'll be -- we can add this density that we now contemplate.
Okay, that's helpful. Moving on to the seniors' housing development, it's probably early days, but did you state an expected return on these developments? I'm not sure if I missed it or if it hasn't been discussed yet?
Yes, it's pages 18 and 19 of our supplementary, Jenny. We've expanded the disclosure on that to include now properties like Pointe-Claire, where we are moving ahead. And we've also included the seniors. So we indicated the expected return on cost between 6% and 8%. So in a, let's call it, an established year, we would expect that 5 properties would lead to about 600,000 square feet of development at a 100% and each individual property at cost of around CAD 70 million or so. And that may very slightly, obviously, based on individual sites and the type of development at those broad characteristics. So you work that through. Our net income at share is between roughly [ 2.1 and 2.8 ] per property.
Okay. Great. And then you mentioned that there are some development opportunities at some of your properties in secondary and tertiary markets. Can you expand on what you think those opportunities are? I mean, for places like Toronto, Vancouver, large cities that's obvious that residential density is a driver of that. But in the secondary and tertiary markets where you may not see that kind of housing pressure, what does the densification of those kinds of assets look like so far?
I mean, even when we looked at the smaller markets, I think we'd use maybe Alliston as an example, then you would still see opportunity for self-storage, you may see opportunity with respect to seniors' housing. You may even see opportunity for some form of rental accommodation. So we've seen all of those in the initial market studies that we've looked at. And obviously, we've scoped these out with our partners. And they've looked at those markets on a preliminary basis and would be very supportive of that type of development, as you say, outside the, what do you call the traditional or urban markets. And I think it was a couple of calls ago that I emphasized, if you go look at what happened in the last census, and you looked at markets like Alliston or Bathurst, St. Catharines, Wichard, Stouffville or Radford, et cetera, those are amongst the fastest-growing communities in Ontario. And affordability is driving people out of what we call the core GTA into those markets and those are obviously, core markets for us, well-established, Walmart-anchored centers, typically 100% occupied. But that we have vacant lands available, and that presents an excellent opportunity to densify the site on land that we've owned for a long period of time.
Okay. And then on that note, just my last question. When you are taking the excess land to develop and to intensify, is it because there is just a ton of parking space? Or do you need to add back a parking structure to allow for that kind of a parking allowance for the shopping center and the other types of property?
No, in our initial development, we have some 4 million square feet that we've indicated theoretically, would have been held for retail development. But given the slowing in demand in markets for new retail, then that land is being repurposed and being used for other uses. The concept of the parking lot is really what I will call a secondary opportunity that says that over time as all of the various car technologies and everything else change, then I think it's more than reasonable to assume that some of that land will become available for development. And the third concept, at least that we are actively working with it says that if you have sites that might be challenged by way of occupancy, then we are reworking the retail on-site, obviously consolidating that into a part of the site. And then looking to develop on what might have been or held retail in the past. But if we've been unable in a certain period of time to find tenants for property for whatever reason, then the highest and best use of that land going forward may be an alternate use. And so that's where the -- what I think of the 20 years of creativity that exists in SmartCentres' development platforms is really at its most relevant in terms of optimizing the value of every one of the sites we have in some way.
We'll next go to Pammi Bir with Scotia Capital.
Sorry, yes, just maybe one follow-up. Just looking at the guidance again for 2018, the CAD 0.07, I guess of operating FFO growth. I think that might be a bit kind of lower than, I guess, it translates to, call it, 3% growth in '18 just on an operational basis versus, I think -- I think in the past we talked about maybe 4%, up to 5% on a recurring ongoing basis. So I'm just curious, was there something in there in 2018 that dragged down or was a bit of a drag on the outlook?
No, I think it's just a recognition, Pammi, that we're in a period of time where, as we've said, there is so much vacant land or vacant space coming into the market from both Sears and still hangover from Target. There are still some other retailers that are rationalizing their portfolios and competing landlords. It's an easy decision for them if your rents are extraordinarily low to take on a tenant at what is realistically well below what we would think would be a market rent and entice the tenant to move. And for us to keep that tenant, it may require us to lower our rent, and that's the right thing to do. And we've highlighted, I think, a couple of markets where we've done that. But if you're doing that with a tenant that has 30,000 square feet and you're lowering the rent by $3, $4, $5 a square foot, that becomes meaningful in terms of the implications. So we are approaching this in what we think is a conservative way, thinking about how the market may unfold over the next while. But if Rudy and all the leasing teams and everybody else are able to have an exceptional year, then we would love to outperform that. But we are approaching it in a, what we think, is a realistic way at this point, but expect as we indicate, that number decline as we get into next year and then certainly, into 2020.
Got it. I guess, then just on the -- if we're looking at overall same property NOI, I think, last year finished up at, call it, 0.6% or [ 0.5% ]. Is similar thoughts, I guess, underlying in the assumptions for '18?
Yes, I think so, Pammi, I mean we've always said that we want to operate in that lower level range. And we know that with 40% of our square footage and 25% of our income, generally speaking, not growing, then our portfolio or our core portfolio has never been one that has had inherent substantial growth. And ironically, the fact that we don't have any Sears and didn't have hardly any Target, has sort of hurt us, if you like, to the extent that obviously, a number of other businesses have seen uplift in their performance largely driven by the fact that they've gone from very low rents to higher rents, but still not what we would think of as market. So we think that number is reasonable, yes, that you just articulated.
That concludes today's question-and-answer session. At this time, I'll turn the conference back to Huw Thomas for any additional or closing marks.
Thank you very much, operator, and thank you all for joining us. I know it's a very busy part of your season. And so we're obviously, available for any follow-up calls, should there be any. Otherwise, we appreciate, as always, your following us, and look forward to seeing all of you in the coming weeks. Good night.
That concludes today's conference, and thank you for your participation.