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Good day, and welcome to the SmartCentres REIT Q4 2018 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Forde. Please go ahead, sir.
Good evening. Welcome to SmartCentres' Q4 2018 conference call. I'm Peter Forde, President and CEO of SmartCentres REIT; and joining me on the call today are Mitchell Goldhar, Executive Chairman; Peter Sweeney, Chief Financial Officer; Mauro Pambianchi, Chief Development Officer; Rudy Gobin, EVP Portfolio Management and Investments; and Stephen Champion, EVP Development. Peter Sweeney will talk about our results for the quarter and our financing activities, followed by me and Mitch, and then we will take your questions. Our comments will mostly refer to the first 9 pages and pages 22 and 23 of our supplemental information package and the outlook section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language at the front of the supplemental material, which also applies to any comments any of the speakers make this evening.First, an overall comment to the last few months, which have been jam-packed and very exciting. Mitch and I have spent considerable time this past quarter meeting with investors in both Canada and the United States. The general theme of SmartCentres REIT being a stable portfolio of well-located, value-oriented shopping centers with the tremendous mixed-use intensification opportunities was well received.As we have said before, real estate development takes time, and it will be a couple of years before the many new mixed-use initiatives start yielding positive results. But when it starts, it is expected to continue for years to come.We accomplished many things in the last quarter that sets us up nicely for the future. For Vaughan Metropolitan Centre VMC, we announced execution of partnership agreements for the 2019 launch of Transit City 4 and 5 condo towers, and then we are also moving forward with an adjoining purpose-built residential rental tower. We executed an overall agreement with Revera to build and operate many retirement living residences together on SmartCentres' owned land, including the first 3 projects -- 2 in Vaughan and 1 in Oakville. Good progress was made on a deal with another seniors operating 2 towers on one of our sites in Ottawa. We executed agreements with SmartStop for 2 self-storage facilities, bringing the total so far to 6, all in the GTA. And we executed more lease deals and renewals through the period of November to January than the rest of the year combined and with a very successful opening of the new 144,000-square-foot expansion of the Toronto Premium Outlet Centre. And all of this to be supported by our strong balance sheet, which was enhanced with the successful CAD 230 million issue of trust units in January.And now I'll turn it over to Peter Sweeney.
Thank you, Peter, and good evening, everyone. It is important to remember that the development initiatives that Mitch and Peter Forde will speak to in a few moments are heavily dependent upon having a strong and stable cash-flow-generating operating platform. In this regard, our financial results for the fourth quarter of 2018 reflect the continued strength, stability and security of our 34-million-square-foot, predominantly Walmart-anchored shopping center portfolio. During the fourth quarter, this portfolio generated the following improved results: Number one, rental revenue from investment properties was CAD 200.5 million, representing a 2% increase over the comparable quarter. Number two, NOI as a percentage of net base rent was 100.4%, representing a 1% increase over the comparable quarter. Number three, FFO per unit increased by CAD 0.01 to CAD 0.57, representing a 1.8% increase over the comparable quarter. Number four, ACFO exceeded both distributions declared and distributions paid by CAD 12.8 million and CAD 28 million, respectively. Finally, number five, our same-property NOI growth rate increased by 0.5% over the comparable quarter.For the fourth quarter, these improved results can be attributed to 5 primary factors: Number one, the 12 properties that were purchased as part of the OneREIT transaction, which was completed in the fourth quarter of 2017, continue to provide tremendous operational and FFO growth, which is consistent with our expectations and further reaffirms the appropriateness of the purchase decision made to buy these assets. Number two, our portfolio of maturing mortgages continues to provide refinancing opportunities at lower rates than the outgoing maturing rates. Number three, the office space in the KPMG Tower, which is now 100% occupied, continues to experience the commencement of new tenancies which are providing incremental NOI and FFO. Number four, our lease renewal program is beginning to reflect some modest improvement whereby in 2018, lease renewal increases excluding anchor tenants reflected a 3.2% increase in average net rental rates. This is substantively improved over the prior year. And finally, number five, net operating income from completed earn outs and developments, up CAD 2 million for the fourth quarter, was CAD 1.6 million higher than its comparative in the prior year's quarter. From a financing perspective, our goals with respect to our funding strategy remain: 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. Each development project typically carries construction-level debt provided by a syndicate of financial institutions for the construction period. Our experience to date has been that our syndicate members have been both supportive in terms of providing financing and also very competitive in terms of the rates we are being provided. Once the projects are finalized, they will then be termed out with funding as appropriate. With the inclusion of multiple well capitalized joint venture partners in our program that now include CentreCourt, Revera and SmartStop, this mitigates a significant portion of both our funding needs and also exposure to project risk. Secondly, to lower the cost of our future funding requirements by achieving a ratings upgrade to BBB high. Our conversations with DBRS have indicated that we need to both (a) balance our secured and unsecured funding portfolios and (b) demonstrate a plan that will result in an increased EBITDA level. We believe that we have now achieved the first objective, and we are well on our way to achieving the second. Based on our year-end debt balances, we have now achieved a balance of borrowing from secured and unsecured sources. And based on our expectations for 2019, provided the spreads on unsecured sources of financing continue to compress, we expect this ratio to approach 60:40 in favor of unsecured debt by the end of 2019. This is a significant change from just over 2 years ago, when two-thirds of our debt was sourced from secured lenders.During 2018, we repaid over CAD 400 million in mortgages and convertible debentures that carried a weighted average interest rate of 5.1%, and we replaced these maturing facilities with substantially lower cost financing alternatives despite a rising interest rate environment. As a result, our unencumbered asset pool has now grown to approximately CAD 4.3 billion, supported by income from many of our high-quality assets. And with continued focus on repaying maturing mortgages, we expect this pool of unencumbered properties to approximate CAD 5 billion by the end of 2019.Also, we recently completed the following financing initiatives: Number one, in January of 2019 with the assistance of our syndicate of banking partners, we launched a very successful equity bought deal that resulted in gross proceeds of CAD 230 million in new equity being raised. These proceeds have been applied against some of our credit facilities to reduce our overall debt levels and related debt metrics to appropriately and conservatively accommodate future levels of expected development financing. On a pro forma basis, after factoring in the impact of the recent bought deal, our debt to aggregate assets ratio reduces to 41.5%, our debt to adjusted EBITDA multiple declines to 8.0x and our interest coverage multiple improves to 3.5x, all of which should assist in our future growth plans.Secondly, last week, we announced the early redemption of our CAD 150 million Series H 4.05% convertible -- or sorry, 4.05% debentures. We will be redeeming these debentures in early March with a new 7-year, 3.59% unsecured bank loan. Similar to the recent equity bought deal, this refinancing initiative should be perceived as a preemptive opportunity to reduce risk associated with increases in interest rates and extend both our debt ladder and weighted average term metrics.Finally, number three, during the quarter, we completed a CAD 95 million first mortgage on an investment property at a favorable interest rate with varying maturity dates ranging from 3 to 7 years. The unique term was selected to accommodate expected intensification needs for the subject property over the coming years. And the various terms of this mortgage represent a significant departure from conventional secured lending.For our payout ratio distributions, we saw slightly lower maintenance CapEx, tenant improvement allowances and leasing commissions during 2018. Our overall ACFO payout ratio was 83% in 2018, which is well within a 75% to 85% range. For the fourth quarter, our surplus of ACFO over distributions declared of CAD 12.8 million shows a continued healthy level of cash generation, reflecting the unique strength and core stability of our business model. When factoring in our highly successful DRIP program, the surplus of ACFO or distributions actually paid during the quarter totaled CAD 28 million. And for the fifth consecutive year, in 2018 we announced a CAD 0.05 per unit increase in our distributions to CAD 1.80 per unit. As a result, SmartCentres REIT has now become a member of the venerable TSX Canadian Dividend Aristocrats Index. Our financial results for the fourth quarter reflect a strong and very stable business model that we believe positions us to continue to provide our unitholders with stable and growing distributions while concurrently: number one, supporting our existing business; number two, funding our growing development pipeline of retail and mixed-use initiatives; and lastly, number three, permitting us to consider appropriate acquisition opportunities as they become available.We ended 2018 with an FFO per unit growth rate before transactional FFO of 3.6%. At this time last year, we had forecasted growth in FFO per unit before transactional FFO for 2019 of approximately 4%. As many of you know, the recent bought deal will, however, dilute this growth expectation by approximately 3%, thus resulting in expected FFO per unit growth for 2019 of 1% to 1.5%. And we look forward to next year in 2020, when we expect growth in FFO per unit to exceed 10%.And with that, I will turn the call back over to Peter Forde.
All in all, a strong and stable year's performance from our existing retail portfolio as the development pipeline continues to fill and prepares to deliver the results for the Toronto Premium Outlet expansion, which opened in the last year, the completion of the VMC PwC Tower and the full occupancy of the remaining office space in the KPMG Tower. 2020 and 2021 are the first of many future regular residential development condos are completed, and on a go-forward basis from a variety of new business initiatives and developments, some of which are described this evening and in our quarterly report.Our core retail portfolio remains strong, and with its value-oriented, nationally focused tenant base, with the strongest adapting their offering and delivery, is well suited to the changes taking place in the retail marketplace. Our shopping centers are 98% occupied, 98.1% including executed leases, with occupancy at an average of 98.8% during the last 14 years.We continue to hear from tenants that Walmart's strategy for selecting and being in locations where the community can come to a larger center with convenient and easy access and find everything it needs works for most other retailers as well. All our retailers, including food, clothing, off-price brand names, dollar stores, pharmacy, fitness, financial, liquor and beer continue to seek co-location with Walmart in our centers. With the demise or departure of all other large discount general merchandisers in Canada and the continued expansion of Walmart's food offering and the resulting Walmart store customer traffic increase, our portfolio remains strong and uniquely positioned. We have 115 Walmart stores in our shopping centers, and our centers are often the only significant value-oriented center in the market, and therefore it dominates.Through our affiliation with Penguin Pick-up, we offer convenient e-commerce pickup locations for any retailer, now with 108 locations and several of them being co-branded with Walmart in key downtown Toronto locations. Bricks-and-mortar retailers that utilize their well-established locations can offer consumers convenient e-commerce options that pure play online retailers cannot -- things like convenient pickup, showcasing a product, shorter home delivery times form stores, convenient returns, et cetera. And all but 7 of our top 50 tenants, excluding restaurants and fitness, have complementary e-commerce businesses.Bombay & Bowring Canada recently closed all its locations. We had 12 leases with Bombay & Bowring in our portfolio along with 9 temp deals. All locations are in shopping centers that are anchored by a Walmart Supercenter. And because each of these locations are above 5,000 square feet in size, they represent units that are highly desirable by a large number of prospective tenants. Accordingly, we anticipate executing new deals for all of these locations within the current year.The Toronto Premium Outlet expansion of 144,000 square feet opened in November and was virtually fully leased at that time. The expansion includes the addition of several new, exciting luxury brands, including Gucci, Prada, Montblanc, Saint Laurent and Aritzia. Most tenants in the expansion are significantly exceeding their expectations of sales. The expansion will allow the center to continue being one of the top-performing Premium Outlet Centres in the world. And our acquisition group will continue to look for accretive and/or strategic retail properties to purchase, most with intensification opportunities. Our strong and stable retail portfolio provides a solid base on which we can grow income and NAV through mixed-use intensification. Again, we need to be patient until next year when these new initiatives really begin to produce FFO. A few general reminders about our development pipeline and capabilities. Virtually all of the development initiatives we are planning are on land we already own, unlocking value and not requiring us to buy very expensive land to develop density. Our development teams are planning for expanded land use permissions on our centers, allowing for greater flexibility down the road. And we are unique in that we are developing a diverse selection of new real estate types, not just 1 or 2, taking advantage of the opportunity while dispersing the risk and driving customer traffic to our shopping centers.We have very strong JV and consultant relationships, but more importantly, a large in-house team of development specialists. This is a team that has, over the past years, executed the development of 200-plus shopping centers. These transferable skills are now also delivering results in these new development types.Mitch has been very active as Executive Chairman in all aspects of the REIT's business, but in particular our new development initiatives. I will now turn things over to Mitch for him to tell you more about some of these.
Thanks, Peter. In our seniors' residence partnership with Revera and our self-storage partnership with SmartStop, SmartCentres will be developing and conducting -- and constructing the buildings, and our 50:50 partners will operate the facilities once they're complete. We expect each of these relationships to produce 5 new projects per year.For seniors' residences, we recently announced 3 specific projects on REIT-owned sites, 2 in Vaughan and 1 in Oakville, with an additional 5 in the planning stages for 2019 in the GTA. For self-storage, we are under construction in Leaside and soon to be approved and under construction in Brampton, Oshawa and Vaughan. And we recently announced 2 additional projects: Scarborough and a second location in Brampton. We are in the planning stages for several additional REIT-owned sites in Ontario in the greater Montreal area as well as in cities in western Canada with SmartStop.I point out that with respect to our partners and predating even the REIT itself, we've never done just 1 deal with a partner, and we are still partners with every partner that we ever partnered with. And I think that that is unique to SmartCentres REIT. And that includes, of course, Walmart.Now a quick update on the Vaughan Metropolitan Project which is, of course, our burgeoning Downtown North. Things are advancing quickly. The subway line extension, which is 45 minutes directly from Union Station, opened onsite in December 2017. With the subway commuters and the more than 1,300 employees working out of the KPMG building, our project is quickly becoming a metropolitan area, not just in physical presence, but in feel and mentality. If you haven't been up here to observe this emerging city center, for many reasons you should. Its look and feel will only increase in intensity, as we have now completed the office leasing of the KPMG Towers, as Peter Sweeney had mentioned. Most recently, we leased the eighth floor to Marc Anthony Cosmetics and expanded an area on the third floor for the Bank of Montreal. Secondly, we completed the mixed-use tower to be occupied by PwC in the fall of 2019 and the YMCA in early 2020 -- an additional 500 PwC employees and an estimated 1,200 daily visits to the YMCA. We are in final negotiations with a significant tenant for the one unleased floor, which floor was built as a possible future expansion for PwC someday up the road, which is way up the road. But in this new lease, it also has relocation provisions in case and when PwC wants to expand.Thirdly, we've completed -- third, complete the -- we are completing the 3 sold-out 55-story Transit City Condo Towers in 2020. There are 1,716 units. All 3 towers are under construction, are on schedule or ahead of schedule and of budget. If you visit the site, you'll see 4 large cranes, soon to be 5, working on these towers and related parking. It is expected that we will top off the 3 towers by the end of this year, which means we will be going up on all 3 towers approximately 1 floor a week.Lastly, the recently announced execution of a new partnership with CentreCourt for the 2 additional residential condo towers -- 1,015 units, 45 stories and 50 stories each, respectively. Also announced is a 35-story rental residential tower and podium rental units under the condo towers totaling 550 apartment units. An artist's rendering of these 3 new towers is in the supplementary information package.Overall, we now see 9 million to 11 million square feet being developed on the approximate 50 acres of VMC land the REIT owns with my company as partner. We are reviewing and planning for potential residential, rental, condos and/or townhouses on all our sites over time. Redevelopment plans for the following shopping centers are well underway as of this time. Our retail site of 20 acres on the west side of Highway 400 in Vaughan is slated for intensification with a potential 2.5 million square feet of redevelopment, including residential, office and retail. The site is a primary site under the Vaughan official plan, and it's just east of 2 34-story sold-out and occupied condo towers at Weston Road and Highway 7. This site can be best understood as simply 20 additional acres of land in the VMC.Pointe-Claire, Quebec, on the Island of Montreal, a 385,000-square-foot Walmart and Home Depot-anchored center. We have been working closely with the City of Pointe-Claire and have obtained zoning for 1.52 million square feet of density. Detailed planning is underway for the first residential tower, expected to be complete in 2022. South Oakville Centre. This center in South Oakville was anchored by Target and is also anchored by a Metro. We have now initiated discussions with the municipality, with tenants and with potential partners. If things go according to plan, this site will become a reconfigured 180,000-square-foot shopping center instead of 300 -- what is it now? 300 and some-odd thousand square feet -- and anchored by simply a Metro Shoppers LCBO and a GoodLife Fitness and a Winners and a few other strong retailers with an adjoining Revera seniors' residence building and a townhouse development.Westside Mall in Toronto, our 12-acre property on Eglinton West, will benefit from the LRT station being built and disrupting the entire city along Eglinton Avenue and a pedestrian bridge connecting it to the new Go Train stop. So this site is at the convergence of Eglinton Avenue, the new LRT and a new Go Train stop going north-south. With indicated city and provincial government support, this site is now designated for over 2 million square feet of mixed-use development and ideal for rental residential. The process to obtain full approvals for the site is well under way.Laval Centre. This 43-acre site is anchored by a 160,000-square-foot Walmart store. Construction of the first 2 apartment towers we will own onsite with our partner, Jadco, is underway. We expect to develop the remaining lands with primarily rental residential apartments, condominiums and retail. Weston Road and 401, 167,000 square feet, and that's the REIT's share, retail center is under review for a major reconfiguration and re-tenanting of the retail onsite and longer-term rental residential. This site has great visibility and access from the 401, the busiest highway in North America.Chilliwack Mall, 173,000-square-foot shopping center purchased as part of the 2017 OneREIT transaction, is in advanced planning stages for a de-malling of the existing enclosed portion, plus the addition of residential onsite. Other sites for which residential plans are evolving include Oakville North at Trafalgar and Dundas, which is a 50-acre site which is already designated for mixed use; Vaughan Northwest at Major Mack and Weston Road; Hamilton Stoney Creek, Hamilton Mountain Plaza; Mississauga on Burnhamthorpe; Markham at Highway 7 and Woodbine; Mirabel next to the Outlet Centre; Laval East; Muldroy and Brampton at Kingspoint, another site purchased in the OneREIT transaction as an infill just north of downtown Brampton. We have been in discussions with potential residential partners for many of our sites and will likely be developing some on our own as well. We are also in discussions with hotel operators on partnering on various sites. More news to come on these in future quarters.The potential intensification development program continues to grow as we further review our portfolio for opportunities. From this ongoing review, the number of potential projects and towers to commence construction, in addition to our retail development pipeline, within the next 5 years is up from our estimate last quarter of 76 to 82. This mixed-use and retail development will have an estimated value of CAD 9 billion on completion, with SmartCentres REIT's estimated share being over CAD 3 billion. In addition, another 86 projects of towers have been identified on which we will commence rezoning, design and site plan approval and marketing during the same 5 years, with construction commencing after that.And the review continues. We estimate that 10 years from now, we will be generating recurring NOI from these new rental businesses -- seniors' homes, apartments, offices, self-storage, potentially land leases -- which is expected to make up in excess of 20% of our total NOI -- of our total rental NOI -- emphasis on "excess" -- plus an additional CAD 20 million to CAD 40 million of profit per year, starting in 2020, from the sale of condominiums and townhouses.With that, I will turn it back to the operator to coordinate us in addressing your questions. Thank you.
[Operator Instructions.] And we'll go first to Mike Markidis with Desjardins.
A couple of questions from me. Peter, can you just help me out a little bit? I think I can get reconciled to your 2019 FFO outlook, which I think you said called for 1% to 1.5% growth per unit, factoring in all items. But the acceleration of the growth rate to in excess of 10% the following year, I presume the majority of that is transactional income. But could you just help us out in terms of what those drivers are in getting to that number?
Yes, the primary driver, Mike, for the 2020 expectation is the closings and completions of the first at least 2 phases and maybe even part of the third phase of Transit City. So I think as we've mentioned in the past, we don't consider those closings to be deemed, considered to be transactional FFO. Transactional FFO, you'll recall, is recorded by us when we move or sell a partial interest in a property into a joint venture, but the proceeds from the sale of condominiums and townhouses, because as Mitch mentioned, is becoming and has become a big part, and will continue to be a big part of our business moving forward on a habitual basis. So we're including the proceeds from these condo and townhouse sales in FFO. Certainly, we'll intend and we will be identifying it, but it will be part of our FFO. And that's how we're able to identify that come 2020, the growth rate in FFO per unit will exceed 10%.
Okay, and it sounded like you said the third tower of Transit City might come onstream. But would the first 2 towers be the bulk of that? Is there any other contributors to that in addition to Towers 1 and 2?
2020, it's expected, Mike, that it will be primarily the first 2 towers and if we're lucky, maybe part of the third one.
Okay. And then just changing over to the very expansive pipeline of opportunities that you guys have, and if I understand this correctly, in addition to what's already underway, there's another CAD 3.3 billion at SmartCentres REIT's share that will commence over the next 5 years. On that pool, is there a sense, or do you guys have a measure of the amount of existing retail that's generating income for you today that might be rationalized or demolished as part of that endeavor?
There's actually very little during that period or of that amount we'll be eliminating any existing retail income. It's generally making use of existing undeveloped land as part of those shopping centers or, in some cases, it's making use of parking lots or parking areas that are deemed to be, by us and the retailers, in excess of their needs so that we're able to add some density in the parking areas. So there's very, very little income that's being displaced from that program.
I would like to add that there will be some retail on the ground floor of some of these buildings as well which we haven't factored in, and it wouldn't be completely inconceivable that rents, after these buildings are built, will in fact be set in a sort of positive reset in some cases.
And we'll go next to Michael Smith with RBC Capital Markets.
Just wondering, when you first SmartStops, Revera and CentreCourt, those joint ventures, the ones you've announced, when do you close the lands? Presumably, you're selling them 50% and then you take that in. Is it when you announce them or when you start construction or...
Generally, they'll be closing once the site is zoned. So the deal -- we sign deals -- all the ones we have announced, we have signed executed agreements and contribution agreements. Our agreements are purchase and sale. But the transaction closes once we have zoning and severance is in place.
Okay. And then that will be taken in as transactional FFO?
Right. The 50%, the gain from selling that land into the joint venture, the 50%, yes, it goes through transactional FFO at that time.
Okay, great. And I wonder if you could just give us a little color on the leasing market? I guess lease renewal rates are sort of ticking -- it seems like they're ticking up and going in a positive direction. I wonder if you could just give us a little bit more color on that.
For sure, Mike. We recently finished off the year very strong. We had our ICSC in January, which really capped off a strong November, December and January, talking to all of our tenants, all of our major tenants -- in fact, all of our tenants -- Canadian Tire, Winners, Loblaws, Lowe's, Reitmans, Sobeys, everybody. And all of them have been talking about having more stores, rationalizing weaker markets, those who are not with Walmart-anchored sites. They were a little bit bragging about the fact that they want to be in Walmart-anchored sites because the traffic continues to be tremendous, renewal rates continue to be strong and similar to prior years. The one or two sort of independent type tenants and the weaker tenants, we'll continue to turn, as they always have every year, which we expect. And we watch for these in terms of what's going on in the market, but really paying attention to those retailers who are looking for how they grow their business, both physical and through e-commerce and distributing through their stores and through our centers. So we saw a very -- an unusually high interest in wanting to do renewals and wanting to do new deals, open up new stores, from almost everyone. It was quite an amazing closing off of the year, which we hadn't seen for the earlier part of the year.
It seems like quite a turnaround from the last couple of years.
Yes, I think everybody's had some time to absorb the Zellers space, the Best Buy closing some locations, Sears and so on. And we do a lot of deals with the TJX banners, the HomeSense, Winners and so on. And what they're finding is the same thing. They're finding that in those places where there were anchor tenants and now there is no anchor, going into a previously anchored box that is cut up in 2 or 3 smaller boxes, but the smaller tenants are now making that space -- where are the drivers? Where are the traffic drivers? And so a lot of them are now finding out that when they look at their sales in places where they have done that and looking at their sales where they are in a Walmart-anchored site, that they want to continue being where the traffic is and just continuing growing that business and evolving. Because as you can imagine, Walmart is doing the same thing with evolving their offering as well. So all in all, the co-tenancy with Walmart is just proving to be unstoppable.
And do you measure foot traffic for your, let's see, Walmarts, like traffic's up, as you mentioned? Do you have any metrics around that?
We don't do that ourselves, but we do -- Walmart shares that information publicly, actually. When they announce their results, they talk about traffic being up in their business in Canada. And, of course, in our conversations with them, we talk about individual shopping centers and stores and understand, have some understanding of the situation. But for sure, traffic is up for them.
Okay, makes sense. And then just finally, Mitch, I wonder if you could just give us an update on Penguin Pick-Up, and particularly in the SmartCentres properties? You've -- it's a big rollout. You've got, I think, 108 locations now.
Yes, continues to roll out, and then we'll roll out both in SmartCentres sites and in third-party sites. Traffic is up from last year or year-over-year for its open sites significantly. When I think significantly, I don't mean like 10% or 15%. I mean, like, multiples of, like -- I'm not going to quote it. It's obviously a private company, but the traffic is very, very good in the -- very up in the urban locations where we actually don't have shopping centers. Yes, Walmarts have continued to -- continued to emphasize Penguin Pick-Up to their customers. Particularly busy are the urban locations, and we will continue to be opening Penguin Pick-Ups in Ontario. And we are now pursuing Penguin Pick-up locations in all -- well, Montreal and Vancouver are the next two, and we're pursuing Penguin Pick-Ups in every major city in the country. It's going very well. But as you know, it's still a private company, and so we don't report the detailed results.
We'll take our next question from Pammi Bir with Scotia Capital.
Just maybe an open question. We've seen part of the market retail cap rates move up in some select markets, just from some of the survey data coming out and, I guess, across some retail formats as well. And there's still a fair amount of retail out there being marketed. Your ARFS cap rate has held firm. But I'm just curious. What are you seeing in terms of transaction pricing on portfolios or properties similar to yours?
Yes, Pammi. We've been looking at all the product that comes to the market. Obviously, we are on an acquisition play. And as part of that, we are seeing that in some of the weaker markets where you have centers that are not dominated by a strong anchor, not dominated by Walmart, those who have been selling in those weaker secondary markets are selling for cap rates probably higher than they expected. And in fact, what we're seeing is in those centers where it's not a Walmart-anchored site, those aren't centers that dominate those particular markets as ours do, even in those non-primary markets. Also, though, what's happening with ours is we are looking at the cap rates in some of those markets, and we have increased slightly those cap rates in those markets in our portfolio. However, some of our urban sites that some of our -- you know, major markets, GTA sites, GMA, GBA sites have also compressed a little bit. So while you're not seeing a marked shift in the overall cap rate, we are adjusting a little bit based on what we're seeing in the marketplace where, for some of the, I guess, eastern Canada out there in the far out Montreal markets, the increase in cap rates are being offset by what's happening in Montreal, what's happening in Toronto GTA, Vancouver, Calgary, Edmonton and so on. So we have a lot of product in those markets. It's somewhere between 70% to 75% of our product is in those markets. So that's why you're not seeing it in the overall cap rate.
I would like to just add something if you don't mind this wrong, just that there's been some movements. Somebody said small markets or medium markets, or whatever you want to call them, secondary markets, are a problem or a what-not. I don't know if somebody said it, then somebody else said it and then somebody else said it. This is like I don't know what it's based on. It's like there always has to be something that just it's easy to digest or what-not. I don't know what it's based on. Our centers in those, what do you want to call it, secondary markets are dominant, and I don't even want to use words stronger than that. But I think most of those markets, there used to be a Kmart or a Zellers and a Walmart or [indiscernible], depending on how far back you want to go. Or Target, for that matter. And there isn't any of those; there's just a Walmart store. And when you think in terms of e-commerce, these are not places in terms of usage as familiar with or likely to use e-commerce. And the transportation costs, delivery costs, in many cases is higher. So there's no traffic coming in. There's not traffic as we know it in many of these places. And we have very, very, very good experience in those so-called secondary markets. Now, I wouldn't want to be an old unanchored, outdated center, maybe full-price center in a medium-sized market because there's just not enough necessarily tenants to go around. But our centers are busy, the rent is being paid. On some we have strongest covenants in the country if not, in some cases, the world. Thriving in those places, and so it's just -- this stuff needs to be differentiated between what we're talking about in these secondary markets. We love many of these secondary markets. But there's this talk, there's some secondary markets, cap rates are up. Yes, I guess so. There are some centers in there that have some trouble. They may be tough to lease and yes, there's no buyers at the moment. It's being over-steered and maybe overplayed a little bit as well, even in that case.
So I guess it's fair to say that between your, say, more urban properties versus your secondary market properties, you wouldn't expect any material difference in the NOI growth rate of those particular properties or those regions?
No, I wouldn't say necessarily, yes. I wouldn't say there's really any difference when LCBO and Dollarama and Walmart are occupying space in -- I don't know what you want to call a secondary market, but if you're in a Sudbury or a Barrie, there's a lot of people up there, and they do all -- they need clothes and they're on a budget and, believe it or not, they shop for -- shop at LCBO and they go to Dollarama, and it's not just desperately needing something. They go there; that's their shopping pattern. So Dollarama and those are not looking to relocate out of a Walmart-anchored center in those markets. It makes no sense. It does. It just makes no sense. It's a folly to do it. Everybody's coming to the Walmart. The Walmart is it in those markets. And by the way, that's not -- I don't know if you shop in a Walmart very often, but it's a phenomenal environment as well. But when you live in a place and you get all your stuff from Walmart -- Walmart knows how to operate in those medium -- they started in those medium-sized markets. Their history is in medium-sized markets. They know how to deliver in those -- over-deliver in those markets. So yes, I would say our NOI growth in those places, for the most part, is no different, other than if we want to juice it up in the urban markets. And make no mistake. We'll be doing some intensification in some of the mid-sized markets. There's been very little done in those mid-sized markets in the way of rental residential. And in some cases, there is a market for it, and where it makes sense, we will do it there, too. And we won't -- I guess Peter earlier was saying we don't foresee having to knock down any of the NOI that's already there. And by the way, one of the reasons we have -- we're able to preserve our NOI statistic has a lot to do with the fact -- another thing that may not be visible to the naked eye, and that is that we have lower coverage than probably any other REIT. And I would go out on a limb and say we do have the lowest coverage of any REITs. In other words, we have more parking per square foot, per thousand square feet, than -- you know. We've been so -- when these were developed, they were developed intentionally, intentionally because we wanted the extra parking because we wanted the market to never have a reason not to come. But also because Walmart has always wanted that additional parking. So it's easier for us to add density without losing NOI because we have the 75% of the site is an at-grade surfaced parking lot.
Right, that's actually very helpful. Just, Rudy, I think going back to your comments about the leasing demand, at what point do you see this stronger leasing activity or demand or leasing velocity, however you want to frame it, start translating into stronger renewal leasing spreads? And would -- should we view maybe 2017 as a low point? We saw an uptick last year, so just curious. Can we get up to 5% or even 7% there? How do you see that playing out over the next couple of years?
Yes, I think that sort of the worst part, I agree, is probably behind us. What we've been seeing is the vacant space that came out of all of those other tenants and retailers that left the market or downsized or decided not to carry on in certain markets -- that space has been rationalized, and where people are doing well and wanting to co-locate is actually helping. When we talk to, whether we talk to Canadian Tire and we have 83 locations with them, or we talk to Winners and we have 57 locations with them, or we talk to a lot of these retailers -- Dollarama, we have over 50 locations with them. It's a national relationship. It's a national program. We talk about how to grow their business. We talk about us wanting to help them grow their business. So all in all, we're always talking to them about their whole business. Yes, it's one location at a time, and we've got to do that. But I do think that the worst is behind us, and as the few remaining retailers are still sorting out whether they want to be in an enclosed mall in a box that's been empty for 3 years or 4 years and go to a lower rent and risk being the anchor, they're sorting that out, and that will be some mistakes, and then we'll address that. So we may be on the tail end of that; it's not done yet. But I think the worst is behind us.
Just the last one for me. In terms of going back to Michael's question about traffic, just with all this technology out there, have you considered adding the ability to track traffic at your properties? It just seems like it would be quite helpful, certainly in terms of continuing to attract tenants and be a good sort of selling point, or even just to see how those stats are trending for yourselves.
It is something we've looked at. We don't have a definite plan of attack or mean to be doing that right at the moment, but it is something that we have been exploring. As part of some of the other things that we are working on, like digital, signs in our shopping centers and cell towers and so on that we've been working on. There may be opportunities to be capturing traffic through some of those same initiatives. But there's nothing definite that we have under way yet.
Our next question will come from Tal Woolley with National Bank Financial.
I just wanted to start out by asking about your joint ventures on seniors and storage. You mentioned, I think, in your earlier commentary that you're working with a partner other than Revera on something in Ottawa. And I was just wondering, as we think about how you'll grow those businesses going forward, should we expect you to use multiple partners? And is it really just a function of trying to find the right partner for the market? If you could maybe offer some comment about that.
Yes, I think it's all those things. We do -- it will be a small number of partners, I think, in each line of business. But we have enough sites in enough separate markets that it will make sense to be teaming up with more than one, and particularly in the seniors business. So it's too early to name the second one yet, but we will be soon. And it will make sense because of the market and so on. It will make sense to you when we do announce it, that it would be a logical extension or a logical thing to be doing. And as big as these parties are that we're teaming up with, they, too, have -- they have to grow and expand their business and be able to do as many as we anticipate wanting to do each year on our sites of these types of business. Now I don't see that, necessarily, with the storage. That hasn't been an issue at this point, but it could be. There could be a particular part of the country where it's more logical to be teaming up with somebody else. But at this stage in storage where it's the one party, SmartStop, that we're doing things with.
Okay. And if we could just have quickly on Walmart. If you think back to the history of how it rolled out, buying Woolco and having expanded with its own sort of more discretionary merchandise boxes and then adding grocery, which allowed those stores to expand even more, given that they're now rolling out even more service offerings with the click-and-collect or home delivery in select markets, like are you seeing any sort of new prototype box for Walmart? And sort of emerging in your conversations with them? And what impacts, if there is something like that ahead, what impact do you sort of see for the business in the future?
It's Mitch. So you guys probably don't realize it, but the Walmart prototype has changed every -- honestly, it's changed every 3 months for 30 years since I've dealt with them. And you don't know it, because you end up seeing this store and -- but so yes, yes, yes, exclamation mark, and the prototype is changing all the time. And you will see soon a couple new ground-up-built Walmart stores reflecting the new prototype with all things that you're implying soon. And think about Walmart. They are where they are because they don't stagnate. They don't sit around. So that's not just the new prototypes, but existing stores will continue to be remodeled and changed and what-not. But yes, stay tuned. There will be a couple to see in the next, I guess, 18 months in the GTA. And it will be really cool to see because there are some changes. But they're still, size-wise, I don't know if I'm -- I guess we're -- they're not -- it's not something -- don't expect something you don't recognize as a Walmart store. Their bread and butter are all these departments that make the place work together, so that will -- in many ways it will have all the same departments. And square footage-wise, it won't be a boutique, let's say.
Okay. And then I guess my last question is probably for Peter Sweeney. Just talking about the credit ratings upgrade again, and that the profitability or EBITDA level is sort of the checkmark you've got to achieve, given the guidance for this year, is that something that you think you can hit within the next 12 months? Or is that more of a probably 24-month time horizon?
That's a good question, Tal. I think realistically, we will not be generating a sub-8 debt-to-EBITDA metric in 2019 with our expected and intended results. However, our discussions so far with DBRS have suggested that they are much more forward looking, so they're not going to necessarily have to wait for us to get to that metric until they provide a ratings upgrade. But they'll certainly dig into our budget and forecast information. So we're going to continue meeting and speaking with them over the next 6 months or so, and we'll give them as much information as perhaps they need to see how we think, at least, we'll be able to get to the sub-8 debt-to-EBITDA level over the next 24 months. And you never know. We might be in the privileged position before the end of 2019 with DBRS where they will give us the sort of nod of approval for ratings enhancement. But it's entirely, I think, in their court at this time. We are doing more than is expected, at least, in providing them with detailed documentation and forecast information to help them with their decision-making.
We'll go next to Sam Damiani with TD Securities.
Just a couple quick questions. I know it's getting late. But just on the 2020 guidance, Peter, I wonder if you could just tell us what the growth expectation would be without the Transit City Condo profits?
Yes. Bear with me, Sam. You know what? I didn't bring that information down with me, unfortunately. It would -- obviously, it would be muted. It wouldn't be 10% or above, but it wouldn't be a negative level of growth, either. So unfortunately, we just don't have that guidance in front of us, Sam. Maybe we can get that for you.
Sure. And just on the development spend, which is expected to be over CAD 3 million in the next 5 years, what's the spend you expect in 2019 and in 2020?
'19 will be somewhere between CAD 200 million and CAD 300 million. And in 2020 -- and these are net numbers, so the 2020 guidance is net of the proceeds being received from the condominium closings. That spend in essence will be in the CAD 200 million to CAD 250 million range as well.
So that's about, call it, CAD 600 million or so for the next 2 years, which leaves quite a big number for the remaining 3 years. So I guess it's really going to ramp up?
Well, keep in mind when we talk about the CAD 3 billion or CAD 3.3 billion in development spending, it's not our intent -- and it's important that everybody understand this -- it's not our intent over the next 5 years to spend CAD 3.3 billion. It is, however, our intent to commence projects that will, over the next perhaps 10 years or so, require us to spend CAD 3.3 billion. So we'll commence projects that, over their life cycle, will require us to spend CAD 3.3 billion, and that life cycle will commence at some point within the next 5 years and will be completed, perhaps, over the next 5 to 10 years.
Sammy, it's important the word "commence," though, is start construction. Because at the same time -- or Sam, sorry -- at the same time, we're actually starting working on many, many other projects which won't actually start construction in the 5 years, but we'll be working on the zoning and the planning and the marketing of those things so that they're ready to go in Year 6 and beyond in terms of starting construction.
And maybe just one last one. On the Westside Plaza, is that sort of ready to go as soon as the LRT opens? Or are you still going to be a couple of years afterwards based on approvals and plans and what-not?
Does anyone know when the thing is going to be finished? Maybe...
Wasn't it supposed to be last year?
[indiscernible] before they finish. I don't know. The thing about these intensifications, they don't really take up much room, so if you go there, you'll see some up parcels there, and around those up parcels, we see we could build fairly -- if you get going, fairly quickly. So a Phase 1, like it's going to be a phased project, so I don't -- it's hard to say just because we don't know when they're going to be finished. But we're doing drawings and we're planning for it. And so it's hard to say. But not -- plus or minus, plus or minus.
Ladies and gentlemen, as we have no further questions, I would like to turn the conference back over to our speakers for any additional or closing remarks.
Okay, all I would say is, again, thank you for all being part of our fourth quarter call, and thank you for your continued interest in investing in our REIT. Good evening.
And that does conclude today's conference. Thank you for your participation. You may now disconnect.