This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust fourth quarter conference call. At this time, all participants are in a listen-only mode. After management's presentation, there will be a question and answer session, and instructions will follow at that time. I would now like to hand the conference over to Jennifer Seuss, Senior Vice President and General Counsel, you may begin.
Jennifer Seuss
Thank you and good morning everyone. I am Jennifer Suth, Senior Vice President, General Counsel, and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over, I am required to read the following cautionary statement. In talking about our financial and operating performance, and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance, or expectations that are not historical facts. These statements are based on our current estimates and assumptions, and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCAN's performance, liquidity, cash flows, and profitability. RioCAN's management uses these measures to aid in assessing the trust's underlying core performance and provides these additional measures so that investors may do the same. Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures, can be found in the financial statements for the period ended December 31st, 2021, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.cdar.com. I will now turn the call over to Mr. Jonathan Gitlin, our president and CEO.
Jennifer Suth
Thanks so much, Jennifer. Thanks to everyone who's called in today. And thank you also to my incredibly talented senior management team who is here with me today for this call. So Q4, like the rest of 2021, demonstrated the quality of RioCamp's portfolio, the resilience of our tenants, and the talent of our people. The distribution increase we announced yesterday clearly indicates our confidence that we will deliver sustainable growth and strong returns for our unit holders. We also gave guidance. And we provided this guidance as it simply makes management even more accountable to its unit holders. So now I'm not going to downplay the challenges that the commercial real estate industry faced throughout the year. 2021 was volatile. Tenant shutdowns lasted into the summer, and there were numerous phases of restrictions on retail throughout 2021. The year ultimately ended with additional disruption courtesy of Omicron, which incidentally paid a visit to the Gitlin household, which was unwelcome as well. That said, it's important to recognize that these volatile and uncertain times strengthened our confidence in RioCAN's competitive advantages and its vision for the future. The critical nature of physical stores has been emphasized, not diminished, during COVID. There's been a distinct merger of physical and online retail. Simply put, COVID raised questions about the future of retail. Two years later, many of those questions have been answered, and our confidence in retail, particularly necessity-based major market open-air retail, has been reinforced. Consumer behavior confirms that Canadians, well, they want to control their shopping experience, and physical retail stores will continue to play a critical part of their lives. E-commerce and physical retail don't just coexist. They've got a relationship, and there's every indication that well-placed physical retail, exactly the kind that RioCan owns, plays a vital role in this relationship. We're going to focus today on our fourth quarter results. I also want to discuss our strategy for growth, which builds on our foundational strengths and the value that's really inherent in our portfolio. RioCan is committed to responsible growth. To summarize, this means a prudent approach to capital management. It means reinforcing our ESG leadership position, and it means ongoing investment to enhance our great culture. The results of these investments are very evident in 2021. Now, you've heard me say before that our commitment to ESG is organic. It's not manufactured. It makes good business sense, supports long-term value creation, and it will certainly accelerate the positive momentum we saw this year. Our efforts were recognized in numerous ways in 2021, including the award of a five-star rating in the Gresby Real Estate Assessment for the second year in a row. And we're going to continue to advance our ESG initiatives as we enhance the quality of our portfolio and accelerate our growth. Now, this growth trajectory is also tied to our culture, which, in my humble opinion, differentiates RioCan, it drives results, and it retains, develops, and attracts top talent. We advanced our cultural roadmap and our employees responded with the highest engagement scores in RioCAN's history. Our 2021 employee engagement results placed RioCAN in the top decile of similar sized companies. These outstanding achievements can only happen with an exceptional leadership team. Now on that note, I want to acknowledge two important changes to our senior leadership team here at RioCAN. Franca Smith has been promoted to SVP of Finance, Franca has been with RioCamp for five years and recently stepped into the role of interim CFO. As always, she executed with excellence. Franca is an experienced finance leader. She's deeply respected both internally here at RioCamp and within the real estate industry. John Ballantyne has been promoted to chief operating officer. Many of you have had the privilege of working with John throughout his short 27-year career here at RioCamp. He's highly respected as a strategic thinker and an industry expert. He's a champion for RioCan. Our employees and the communities in which we operate and his real estate IQ is invaluable in driving long-term unit holder value. Let's turn to our operational results. The fourth quarter saw excellent momentum in our operating results with key operating metrics moving closer to pre-pandemic levels. Several large-scale deals were completed and occupancy climbed to 96.8%. It's important to note that retail occupancy buoyed the overall results, ending the year at over 97%. Retail tenants continue to seize the opportunity to lease our well-located space. This further demonstrates the well-located, professionally managed physical spaces, like the ones in Rio Can Centers, are hard to come by and highly valued. The spread between committed and in-place occupancy tightened, reflecting the intersection of accelerated new retail openings and RioCan's ability to quickly turn over this valuable space. Rent collection, which is still a closely watched metric in 2021, ended the year at 98.6% despite the many lockdowns and restrictions we faced. Leasing velocity was also healthy with blended leasing spreads of 4.6% for the quarter and 6.3% for the year. same property NOI increased by 4.9% in the quarter. Our Rio Can Living residential rental portfolio also gained a lot of momentum. Pivot at Young and Shepherd in Toronto saw significant traction in the last quarter, shifting from 62.5% leased in Q3 to close to 85% as of February 9th. Another success story was Litho in Toronto, a great mixed-use development which launched in July 2021 and increased from 27.6% in Q3 to 61.9% as of February 9th. In addition, leasing commenced to two new residential properties within the portfolio, Latitude in Ottawa and Strada here in Toronto. Early indicators are showing excellent demand for both of these dynamic projects. RioCan Living and its partners are seeing strength in their for-sale condo projects, with 1,481 units released for sale in 2021, with 94.4% sold as of February 9th. The profit expectation for RioCan from its existing condo projects is approximately $191 million. FFO per unit for the quarter was $0.46, an 18% increase over the same period last year. FFO per unit at the year end was $1.60. We're confident that our leasing capabilities and our efficient operating practices will continue to result in organic growth. We're working hand-in-hand to evolve our commercial spaces. This is necessary to solidify RioCans and our tenants' role in that last mile delivery chain. We envision what retail will need to be in four or five years, and we're starting to affect those changes now. RioCan has enviable locations, that goes without a doubt. But we won't rely on this factor alone. We want to make our offering stronger for our customers. Our objective is to distinguish ourselves from others. We continue to refine and further fortify our tenant mix. We're strategically investing capital into our properties to provide a consistent look and feel. And finally, we're implementing technology solutions such as our RioCan Connect tenant portal to enhance our tenants' experience. Now, as you're aware, development is also a critical component in RioCAN's growth strategy. Investors have been patient over the last five years as we built up our capabilities and invested in zoning entitlements and construction. We were clear-minded in our objectives. We're confident in the income and NAV growth that will resolve from conversion of the zoned lands into well-located, income-producing, mixed-use assets. Our in-house development team delivered more than a quarter of a million square feet of dynamic mixed use and purpose-built residential rental completions in 2021. Now, as we complete developments, we're breaking ground on new ones. We're achieving zoning on others, and we're initiating zoning approval on still more. This virtuous cycle will continue to be demonstrated long into the future. And we're now at a critical inflection point. This is the first year where the value of our development deliveries will exceed our development investment, a trend that we expect to continue for years to come. I'm certain our unit holders will reap the benefit of the resulting NAV increases long into the future. One of our most notable development projects is our flagship mixed-use development, The Well. Solid progress continued with the construction of the commercial component, which includes office and retail and it's now approximately 82% complete. Approximately 90% of the office space is leased and retail leasing has gained significant momentum. Nearly 62% of the retail space is leased or in late stage negotiations with various tenants. We've been very thoughtful in our approach to selecting tenants for the well. Our intention from the outset was to ensure the tenant mix is curated so as to enhance this extension of the King West community. At the same time, we're creating a destination designed and tenanted so as to draw traffic from far beyond the immediate radius. The well will be completed over the next 12 to 18 months and the retail component is expected to open in the spring of 2023. To summarize, the continuous improvement of our portfolio is happening concurrently with development deliveries. Both will translate into a positive NAV outcome. You're going to see significant buildup of our NAB over the next few years because the conditions will support it. Namely, improvements in our shopping centers, the increased resiliency of our tenant base, the delivery of developments, and of course, better market conditions as this pandemic subsides. RioCan's story continues to be one of reliable, high-quality income, and steady, responsible growth. We've proven our ability to execute in the face of unprecedented challenges, Our focus continues to be on our long-term strategy to maximize the value of this great portfolio and grow our business. We have a dedicated team, enduring strength, stability, and the vision to execute and create value for you, our unit holders. I want to thank the whole RioCAN team for their never-ending commitment and contributions this past year, and to our unit holders for your continued dedication and confidence in RioCAN. I'm now happy to turn the call over to our CFO, Dennis LeSue.
Jennifer
Okay, thank you, Jonathan, and good morning to everyone on the phone. As Jonathan mentioned, RioCAN continued to see positive momentum throughout the business, which has translated into strong results. 2021 had its challenges, but it also proved the resiliency of our business. This resulted in an FFO for the year of $1.60 per unit, which benefited from continued improvement in our same property NOI and partial year contributions from developments that were delivered during the year. These benefits were offset by reduced NOI associated with assets sold. Unpacking this a bit further, we note that the current year FFO included debt prepayment costs associated with earlier payment of certain debentures and mortgages, as well as one-time compensation costs. These items had a combined impact of $0.05 per unit. Our same property NOI increase for the year was 3.4%. This has continued to improve over the course of the year with an increase of 4.9% in the fourth quarter as compared to the same quarter in the prior year. This figure includes the benefit of lower pandemic-related provisions when compared to the prior year. However, even when excluding the impact of provisions, we achieved SP&OI growth of 1% in the fourth quarter, which further evidences the continued improvement across our operations as the impact of the pandemic decreased. Jonathan mentioned our continued cash collection during the quarter. The strength of our tenants is also reflected in the decrease in these pandemic-related provisions. We booked $2.9 million of provisions during the quarter, compared to $9 million in Q4 of 2020. This was $17.2 million for the year, compared to $42.5 million in 2020. We expect the need for provisions will continue to reduce going forward. For some context, our annual accounts receivable provisions in the three years prior to the pandemic averaged only $850,000 per year. On a revenue of over a billion dollars, that's quite remarkable. We also note that our FFO payout ratio for the year was 62.6%, which is within our sustainable target range that we expect going forward. During the quarter, we continue to improve our balance sheet. Our debt to EBITDA improved to 9.6 times compared to 10 times at the end of the third quarter, driven primarily by increased EBITDA. We expect this to continue to improve as our development projects come online over the next 18 to 24 months, and we anticipate to achieve our target of less than nine times during that time frame. We made meaningful progress towards our objectives to increase our percentage of unsecured to secured debt and to extend our debt ladder. To this end, during the fourth quarter, we issued 450 million seven-year unsecured green debentures at an interest rate of 2.83%. We used $250 million of these proceeds to repay our Series B debentures, which had an interest rate of 3.75%. The remaining proceeds, along with some draws and our lines, were used to repay $385 million of secured mortgages during the quarter. Following this, all of our 2022 mortgage maturities were repaid, and our secured debt as a percent of total debt is 41%, down from 46% at the end of the third quarter. Our unencumbered asset pool currently stands at $9.4 billion. We will continue to drive the secured debt percentage down, but it will take time. We monitor potential penalties on early mortgage repayment and interest rates on those mortgages compared to rates on unsecured debt. Going forward, we intend to use secured mortgages only for our residential assets, given the pricing advantages in that asset class. We have also taken steps to manage our financial risk by entering into hedges to lock in the government of Canada rates for planned future financing. It's not our business to speculate on interest rates, but rather we saw it as a prudent way to provide increased certainty in the context of the current rate environment. We also have liquidity currently of $1.3 billion. This includes a $250 million increase in our corporate line of credit, self-squared to quarter rate. Maintaining this level of robust liquidity ensures that we are prepared to take advantage of opportunities when they arise while protecting ourselves from potential risks. Next, I wanted to add some color to an important point that Jonathan raised earlier. As he mentioned, we've reached a point in our development program where we expect to see project deliveries outpace spending. In the early stages of any development program, there's a buildup of spending on the balance sheet that's not producing any income. Our investors have been patient with us through this period as we have currently amassed over $1.6 billion of assets under development in our balance sheet. In 2022 and 2023, we expect this patience to be rewarded. We expect to deliver projects with a cost of approximately $700 million per year during this time period, while spending approximately $500 million per year on development projects. To give you a sense of scale, these deliveries represent a total of 1.5 million square feet of net leaseable area at our share, as well as 653 condo units. Looking forward, we expect this flywheel effect to continue as we are at a point of development program where we will regularly deliver completed projects as new ones commence. Finally, we have provided certain guidance that are released that I would like to highlight. As Jonathan mentioned, we have increased our distribution by 6.25% to an annual amount of $1.02 per unit. This is supported by FFO per unit growth with a target of 5% to 7%, which amounts to a range of $1.68 to $1.71 of FFO per unit. Growing the distribution commensurate with FFO per unit growth is sustainable and ensures that we can maintain our targeted payout ratio, which is a range of 55 to 65%. This range of payout ratio ensures that we can retain the cash flow required to advance our development pipeline and property improvements while balancing our objectives associated with balance sheet strength. For 2022, we forecast development spending of $475 to $525 million, plus spending on revenue-enhancing CapEx of $30 to $35 million. As noted on our Q3 conference call, this spending is funded predominantly through retained cash flow plus project-level debt. This is supplemented with asset sales, including the proceeds from condo sales, as well as partnerships with top institutions. We plan to dive deeper into our strategy and our target at our investor day on February 23rd, and we encourage all of you to attend. With that, I will pass the call to the operator to open the line for questions.
Operator
Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for our questions. And our first question comes from Sam Damini from TD Securities. You may ask your question.
Sam Damini
Thanks. Good morning, everyone. Just wanted to start off on the guidance, which is much appreciated. That 5% to 7%, do you have that broken down with and without inventory gains for 2022? And also, is there an implicit sort of same property NOI growth behind that guidance as well?
Jennifer
Sure, Sam. So for the next couple of years, we should assume about $20 million to $25 million of inventory gains, which are included in that number. So you can pull that out. And the appropriate OY would be in the range of 3% to 4%.
Sam Damini
For 2022, and that would be including changes in bad debt expense, I assume, Dennis?
Jennifer
Correct. Okay.
Sam Damini
And if we look to, I mean, your comments earlier in the presentation, Jonathan, on the future of retail and enhancing the resiliency of the portfolio, I wonder if you could shed a little more light as to how you envision that sort of playing out for RioCAN. How do you envision changing the portfolio to improve the resiliency?
Jennifer Suth
Sure. So, I mean, there's a few factors in that, Sam, and thanks for calling in and good morning to you. You know, one is there are certain assets that we will continue to shed from our portfolio, which we don't think are as relevant in today's economy as they once were. And so, again, some of those are secondary market assets. Some might be enclosed mall assets. And so I think we'll continue to do what we've been doing before, which is pruning some of our lower growth assets that, again, are harder to, I would say, harder to evolve into today's current demands from our tenants. Secondly, within the properties that we're keeping, there's a tenant mix that I think in order to stay relevant and in order to stay on top of consumer trends needs to continuously evolve and change. And I think Jeff and his team have done a great job of assessing which tenants are viable and logical going forward and which ones we feel might be challenged in today's environment. And so we are making changes to that tenant mix. They're very logical changes, and I think they will make us more resilient going forward. Again, switching over to more necessity-based purveyors. And in some cases, it might not be tenants with amazing covenants, but they just have some great uses that will really add to the shopping center and the flavor of the shopping center. And then I would say the last thing we are going to do, or we're doing many things, but one of the other things I'd highlight is The experience you get at a RioCamp center, I know that John Ballantyne and Oliver Harrison are working hard to ensure that the physical space is improved. For many years, I think RioCamp has benefited from tremendous locations, and I think our tenants benefit from the attributes that accompany having those great locations. But I think there's a keen recognition that we've got to do more, and we've got to put some real capital, which is part of the budget for this year, into those properties to make them have a consistent look and feel, to make them be more visitor-friendly, and to also evolve the physical space so that there are these hybrid models, I guess these omni-channeling models available to our tenants, which just means changing the drive aisles, changing the entrance and exit ways, and creating better signage, helping them with loading, and also maybe helping them demise and create new space within their existing space so as to facilitate buy online, pick up in store, and other types of, let's call them new generation shopping practices. So that's, I mean, just some examples, Sam. There are, of course, more than that, but I think those are a few that resonate.
Sam Damini
That's great. And maybe just one last quick one for me. I don't know if Jeff's on the line, but the occupancy is increasing nicely, pretty close to pre-pandemic. We've seen very little in terms of retail store closures or bankruptcies in the past couple of months. Any comments on the sort of tenant watch list, the size of it versus historical ranges and what you're expecting going forward in terms of net demand?
Jeff
Yeah, no, listen, we had a lot of bloodletting over the last couple of years, and I think that took out a lot of the tendencies that were anemic. There's always going to be tendencies on that watch list, but it's certainly gotten slimmer and smaller. And I will just tell you overall, the cadence of meetings that we're having with tenants looking to kind of reset themselves, I've never seen them more strategic than they are right now. The face-to-face meetings that we're having with not just our top 50 tenants, but across the portfolio of new guys coming in, like I said, the cadence is kind of over the top. So the interest is certainly outpacing the guys that we're concerned about. We're always laying eyes on that, but right now I cannot tell you there's anyone of any substance that I'm overly concerned about in the immediate future.
Jennifer Suth
And I'd add to that, Sam, I think that's great, Keller, and I'd add to that that we, I think I'd mentioned in this forum before that We were expecting January to have some fallout as it typically does. A lot of tenants historically have held on through the Christmas season and then they will sort of call it a day in January. And we were also expecting that to coincide with the completion or conclusion of government supports And so far, and I'm looking at John Ballantyne just to confirm this, but so far we have not seen the type of fallout that we would have expected. In fact, our tenant base is holding up quite nicely. There's the odd exception, but I think that's the general state.
Sam
Yeah, that's correct, Jonathan. No major fallout at this point, and as Jeff said, none expected in the near term.
Sam Damini
That's great. Thanks for the call.
Jennifer Suth
Thanks, Dan.
Operator
And speakers, our next question from Mark Rothschild from Canaccord. Please proceed with your question.
Mark Rothschild
Thanks, and good morning, everyone. Hey, Mark. In regards to the leasing spreads, can you maybe expand a little bit on if you saw some difference or if you've seen some difference in the types of retail that you own?
Jennifer Suth
Yeah, I think, and John, you're welcome to comment on this, but I would say that the David Ensign, Open Air suburban and urban centers are the main drivers of the leasing spread and then I think some of the enclosed centers we have are a bit like a bit of a laggard and again leasing spread is such a sensitive. David Ensign, Such a sensitive metric and, in this case, I would say that we had one deal where we replaced. a dark supermarket with a live, living, breathing supermarket tenant, it was at a slightly lower rent, but it was the right thing to do for the property. And I think that alone, John, remind me, that alone, I think, hit the statistic quite severely, right?
Sam
Yeah, I think if you pulled that out of the quarter, we would have been on a new leasing spread closer to 8%, 8.5%. And what I would add to that, I agree with Jonathan, you know, the grocery anchored open air is where we are seeing the biggest lifts in the rental spread. I would say on the enclosed side, it has been a bit muted. We were very careful through the pandemic not to solve any problems or cure any ills that tenants may be having on the ability to pay rent by locking in on any deals. So to the extent that we did renewals on the enclosed, they were more shorter term in basis. in term and we're on the lower rent spread side.
Mark Rothschild
So maybe just following up on that, would it be fair to say based on the guidance and what you commented on the same property and law guidance you mentioned in regards to Sam's question that you're anticipating stronger leasing spreads over the next year or two in the guidance that you talked about?
Jennifer Suth
Well, I think we've said that our objective on leasing spreads is to be in the mid to high single digits, and we're confident that we can maintain that.
Mark Rothschild
Okay, great. Thanks. I'll leave it there.
Jennifer Suth
Thank you, Mark.
Operator
And speakers, our next question from Pommy Bear from RCBC Capital. You may proceed with your question.
John
Hello, Pommy. Good morning. Luckily, I got the name right. Wrong company. Yeah. Well, I do have a question maybe coming back to the guidance. You know, the assumptions you provided of, I think you said, 20 to 25 million residential gains, 34% same-profit NMI growth, plus, you know, you've got, you know, substantial development completions coming on. That would seem to suggest perhaps something more than, you know, 5% to 7% FFO growth. So I'm just curious, is there something offsetting there? Is it, you know, the dispositions perhaps or something else that we might be missing?
Jennifer
Yeah, that's exactly it, probably. So we would have a disposition negative offsetting that, basically because we had such a large disposition program this year that does net off some of those numbers.
Jennifer Suth
Yeah, like the full year impact of the $850 million of dispositions for 2021, coupled with some of the additional dispositions that we plan on doing in 2022, which again become more qualitative than quantitative dispositions. those will have an offsetting impact.
John
Okay. And is it going to think of the 2022 dispositions as being something much lower than 2021? Oh, yeah.
Jennifer Suth
It'll be much more moderate. And as I said before, I think the lion's share of the dispositions that we do in 2022, if I could read the tea leaves, will be largely qualitative rather than quantitative. We're not doing them for equity or capital raising purposes, I would say more so we're doing them to really power the portfolio and prune some of the assets that are lower growth. And then there will be the odd transaction where we bring in partners on some development land. But I think other than that, you're not going to see the same velocity as you saw in 2021.
Jennifer
probably just on that in our investor presentation on our website we show a range of 100 to 200 a year going forward that's a pretty wide range but uh you know we'll do these things opportunistically and and that level as well helps support our funding we don't need more than that we don't need more than 100 uh to to deal with uh what we have coming from a development funding perspective okay perfect um just on the uh
John
The NPID, obviously, you're quite active last quarter. I'm just curious how you feel about remaining active as it stands. And again, just thinking about how you're balancing that capital allocation decision between, again, some still fair amount of development spending to go, but also trying to manage leverage as well.
Jennifer Suth
Yeah, I mean, I can start and hand it off to Dennis. But again, it's a balancing act, as always. And this year, or sorry, 2021 in particular, we ultimately ended up selling a few more assets than we thought at lower cap rates than we thought. And it allowed us, like we had a target in terms of disposition and how much debt we wanted to pay down, while we exceeded the target in terms of capital raised. And given that we were trading, in my mind, quite substantially below NAV, we thought it was an appropriate use of capital to allocate it towards the NCIB. And again, we'll always view it in comparison to some of the other uses of capital. But given that we were able to fully fund our development needs through our retained cash, And given that we were able to pay down debt quite substantially and start a trajectory of net debt to EBITDA decreases that we think will be favorable over time, then we thought it was a good use of the remaining capital to acquire back our units. And again, like I said, that was largely driven by some of the really good favorable results we got from selling some of these assets, which were at cap rates that were astoundingly low. But I'll turn it over to Dennis to add any color if you do think necessary.
Jennifer
Yeah, I think John is bang on. We had excess capital from the asset sales and we used that to repurchase essentially almost the exact amount to repurchase the units. We would have purchased a bit more, but you have limits on how much you can purchase in a NCIB program. Going forward, of course, we balance these capital decisions out. You mentioned the development spending, and I just wanted to highlight just a bit of this kind of high-level math of how we think about that. We have $150 million of retained cash flow every year. that when you if you gross that up for 60 to 65 percent project leverage that's like a debt to cost metric not necessarily loan to value that takes you to you know a bit north of 400 million and so then if you add in another you know 100 million of asset sales or partnerships, et cetera, that gets you the rest of the way there. Even when you think about just the return of proceeds from condo sales, we have that $20 to $25 million of condo gains is actually $50 million a year of proceeds. So $100 million over the two-year period. So that's really how we fill that gap. So we're fully funded on our development program. We don't need to raise equity any other way. And so then from there, any excess capital, we'll allocate those dollars where we think we can get the best return.
John
Thank you for that. Just last one for me, just on the retail leasing at the well. How do you compare on the latest round relative to, I guess, the initial round that you announced last year, maybe relative to your pro forma?
Jeff
Yeah, they're holding up quite where we thought they were going to be. No, we haven't seen any slippage, and we're kind of holding to the budget pro forma numbers that we have.
Jennifer Suth
Yeah, across the board.
John
Great. Thanks very much. I'll turn it back. Thanks, Tommy.
Operator
And our next question from Howard Leong from Veritas Investment. You may ask your question.
John
Thanks. Good morning. Good morning. I wanted to turn back to the NCIB and just follow up on that. I guess the 5% to 7% guide doesn't include any potential buyback, given the comments on that you're fully funded in developments. Could we see some more buybacks this year?
Jennifer
You're correct. We don't have any buybacks in our plan for this year in our formal budget that supports that guidance. So that's correct. I think it would depend on how the stock trades as we kind of come out of lockout and our alternate use of capital. But it's not explicitly included in our plan as for suspenders.
John
Okay, that's good to hear. On leverage, just saw that your variable debt has gone up to, I think it's closer to 9% now at the end of December. Any thoughts about where we could see that at the end of this year, given maybe higher interest rates and horizons?
Jennifer
Yeah, so I think the one thing I should just be clear on, that variable debt is only our lines, our corporate lines and construction lines. So all of our long-term debt in terms of debentures, mortgages, et cetera, is all fixed. And so that's why that number can ebb and flow a bit over time depending on our liquidity requirements and timing of other long-term issuances. So I think I'd expect it's going to stay in around these levels. We will have some construction loans ramp up with some new projects, but we're also taking out some construction loans on completed projects. So those types of things should balance out. But it's definitely not a strategy to have floating rate debt within our long-term debt portfolio.
John
That makes sense. And I guess as you go through the development programs, a lot of completions are set for this year and next year. We should see some of that construction debt maybe go down or I guess maybe fluctuate.
Jennifer
Yeah, the construction debt will be taken out with permanent debt as we go forward, so you're absolutely right on that. At the same time, we will start new projects over the next couple of years as well. So I would say you're probably right that over the next couple of years it comes down, but I don't think it's all that material and it's not a long-term strategy to obtain any full rate debt.
John
That makes sense. And then just one last one on the fee revenue side. Any sense, when you think about your forecast for 22 compared to this year, what is that going to look like? Or is it mostly the same? Or can we see some increases from this year or last year?
Jennifer Suth
I think the objective is that you'll see some increases. I'm not sure how material they'll be, but as we venture more into the the service-providing business, particularly on condo projects where we are instituting programs similar to what we did in the Verge condo project where we become a general partner and a development manager holding only a 20% interest in projects. We expect that those types of revenue or fee revenue generating exercises will increase. And then, of course, as we bring on more partners or as some of the projects that we have completed come to finalization, there'll be just general work fees for managing or asset managing those properties. But I'm not sure it would constitute a material increase for 2022. No, that's right.
Jennifer
Um, in the range, I think we're around 15 this year, maybe a little bit higher than that in 22, but I wouldn't say material difference. Uh, in in 22, I think we'll see that ramp up. As we go forward, as Jonathan said, and, um, you find more and more of these opportunities to. to increase the fees that are available to us, which, you know, given the demand for these types of projects, we think can be substantial over time.
Jennifer Suth
Well, the demand for these kind of projects and the demand for the expertise that we currently possess, so then we have to effectively develop and manage great mixed-use projects.
John
No, that makes sense. I think in the kind of more medium, long-term, expect that to probably grow. Thanks, Eric. I'll turn it back.
Jennifer Suth
Thanks, Howard. Take care.
Operator
And our next question from Tal Woolley from National Bank Finance. You may proceed with your question.
Tal Woolley
Hey, Tal. Good morning, Jonathan. How are you? Great. You? I'm good. Just wanted to talk a little bit about, you know, sort of green lighting new developments. You sort of outlined what you think, you know, your capital spend will look like over the next couple of years. You know, how has the thinking evolved over the course of the pandemic? And given the changes in financial markets to like how you're sort of struck how you're thinking about putting together new developments. You know, some of the obvious thing you know that kind of jumped out to mind is like condo versus purposeful rental The office versus the resume X in a, you know, in a mixed use development. You just talk about, you know, how you're thinking of evolved over the course of pandemic and whether you know you're confident you can still hit adequate development yields going forward.
Jennifer Suth
Yeah, well, I think that we're long-term, long-range thinkers, as always. And so there have been some trend shakeups throughout the course of the pandemic, but they haven't really altered our view, which is based on the foundational conclusion that there is a housing shortage, particularly in the GTA. And if we can provide that housing, whether it's rental or for sale, there will be a vibrant market for it, and we'll be doing the city good and the province good by providing it. So we are going to continue forward in searching for opportunities within our portfolio to build those types of assets. It has been, you know, the one big thing that's changed throughout the course of the pandemic is costs have ramped up. But we look at everything, you know, we're not looking at going in yields. We're looking at a project over a 10-year period and what the IRR would be. And we feel confident in, given the dynamics out there, that if we continue to build residential properties, there will be a sustainable growth within those investments, and that over time our unit holders will reap the rewards of that sustainable growth. And so even though our going-in yields may have flipped a bit based on where we were two years ago because of these increased costs, the overall IRR throughout the term of the project I think will be still attractive. And then also you have to think about it from the basis of where we're coming from. We've got these great land holdings. They're underutilized when they're covered to the tune of 25% by a retail building. They have massive parking lots and they're really, really well positioned. And so for us to go out and sort of exploit that wonderful land holding is the right thing for us to do as stewards of our unit holders' money. And in terms of the mix between condo and rental, it's one of those things that we decide on a site-by-site basis. We don't necessarily have a entity-wide goal on how many condos we're gonna develop. It's not our core business. When we do it, as I suggested before, we're now morphing more into a project manager, general partner, and ultimately development manager for other individuals. And that allows us to get continuous fees through the door, but it also allows us to bring in some capital on the front end so that we can fund and make more viable some of the rental residential developments that we anticipate carrying out. So again, it's a bit of a balance, but I would say by and large, in answer to your question, our strategy has not been altered substantially by virtue of the pandemic. Dennis, anything to add to that?
spk05
No.
Jennifer Suth
All right. Hal, hopefully that gives you some color.
Tal Woolley
Yeah, no, that's perfect. I think one of the things you mentioned, too, from a management perspective, what you want to focus on going forward is this idea of customer centrism. I think sometimes we focus a lot on net rents and forget that tenants pay the gross. And what do you think are some of the tangible benefits you can deliver to the tenants going forward? Yeah.
Jennifer Suth
It's a great question and one that our operations team spends oh so much time contemplating. And there are certain things that we're doing operationally that just provide for more efficiency. I think we're taking advantage of our national scale and buying things now, procuring things, services, goods, et cetera, on a national basis, which seems trite, but the truth is we used to do it regionally and it was illogical and inefficient. From a property tax perspective, We've been I would say more aggressive over the last couple of years in our appeal process And I think that's reaped a lot of benefits as well towards our tenants And also it's using technology to make things a little more run a little more efficiently changing the way we like heat cool and and Ultimately clean a lot of our properties, which is not only good from an ESG perspective, but it also saves our tenants quite a bit of money and then also lowering our overhead, right? Like we charge back quite a bit in head office expenses. And I think one of the things that we've done quite well over the last couple of years is mine those expenses and keep them fairly limited. And I think our tenants will serve to benefit from that because you're quite right. They don't care about net rents. They care about their gross occupancy costs. Oliver, did I, anything to add to that?
spk12
I'll just add that I think around the technology piece, it's really doing our best to make sure that we are able to communicate with our tenants more efficiently. And Jonathan had mentioned that we'll be rolling out our RioCanConnect tenant portal in the second quarter of this year. And as of yesterday, we'll give you a little bit more color as to what that will look like and how that will improve our tenant experience. But beyond that, John, I think you covered it all.
Tal Woolley
Okay. And then just lastly, going back to the 5% to 7% FFO per unit guidance, Dennis, are you able to start comment a little bit about how much the well kind of is baked into that number? Because I think when I had been modeling it, I sort of presumed that, yeah, you'll start to see some cash rents later this year, but, you know, you have interest decapitalization, you're not running, you know, full tilt occupancy, and that it was probably going to be kind of a marginal SFO impact in 2022, that 2023 is really where, you know, the office phase would really start to kick in. Is that a fair way of thinking about it?
Sam
Yeah, I think you're absolutely right.
Jennifer
The well will open up in terms of the office. Tenants are taking occupancy now, but you're right, we won't have cash rent starting to kick in until the middle of the year and a bit more later in the year. So, The well from a contribution perspective on the commercial side, we'll see that stronger pickup coming in 2023. And then at that point in time, 2023, we'll start seeing delivery on the residential start to come in, and that'll ramp up and head into 2024. So that gives us a bit of a steady run rate on growth from the well. But from a development deliveries perspective in terms of you know, 2022 contributions. Most of that is going to come from a number of these residential projects that, you know, Jonathan mentioned earlier in terms of, you know, Litho and Strata and the various projects we have in Ottawa, et cetera.
Tal Woolley
Okay. And sorry, maybe I'll just sneak in one more. The HBCJV, we haven't talked about that in quite some time. There's obviously been some changes going on there in terms of the strategy Can you just give us an update on what you're thinking about? I know that you've got the development application in Montreal, and what's going on? What's sort of the thinking around some of the other sites?
Jennifer Suth
I think the operations at HBC are reasonably strong. I think their operations in the U.S. are much stronger, but they foresee some pretty good results out of their operations here. particularly some of the downtown and well-located mall locations that we own with them. So while they might be shrinking their footprints in certain locations, the ones that we own with them, they certainly seem very, very bullish about. And so I think it's going to be status quo with respect to that JV for at least the short to medium term tell. And I think the only real difference to that is, as you mentioned, There have been some inroads made with respect to, I guess, densification in both Montreal and I think Vancouver. There's also some work being done. And those are really just, I think, a good program of creating value from, I would say, some of the best physical locations in Canada, what we do with that. Who knows? At this point, again, once those stores will remain operational and remain paying rent to the joint venture, but in the future, there could be some really significant upside in those well-located properties. Okay. Thanks very much. Thanks. Have a great day.
Operator
Again, if you would like to ask a question, please press star, then the number one on your touchstone telephone. And so our next question from Jenny Ma from BMO Capital Markets. You may proceed with your question.
Jenny Ma
Thanks and good morning.
Jennifer Suth
Hey, Jenny.
Jenny Ma
I want to pivot to the Montreal multifamily rental acquisition. Could you let us know if that was an opportunity that came about through a relationship or was it a marketed process?
Jennifer Suth
I'm going to turn it over to Andrew Duncan.
Andrew Duncan
Hi, Jenny. Thanks for the question. We are actively keeping our eye out for opportunities across the country. This is one through our brokerage relationship that got brought to us. It wasn't broadly marketed, but it was one that we found an opportunity on.
Jenny Ma
Okay. Now, this is the first outright acquisition you've done of rental apartments. Would you characterize this as opportunistic, like you sort of mentioned, or would you think about this as another leg, I guess, on your multifamily growth strategy?
Jennifer Suth
I would say that it's going to be opportunistic. We are going to be relying predominantly on our development pipeline for the buildup of our multi-res assets. But we have ambitions as to how large we want that income stream to be. And if we can supplement, so just supplement the existing pipeline with some acquisitions that align with the overall look and feel of other RioCan living assets, meaning that they are new, highly amenitized, major market assets. close to transit, and we can buy them opportunistically, then we will take advantage of that. But it won't be something that we rely on. It'll be something that will be more opportunistic.
Jenny Ma
Okay. And this is a fairly new asset. Is that correct? Because it sounds like there's a couple more coming out.
Jennifer Suth
Very new. Yeah. Just recently stabilized.
Jenny Ma
Okay. Now, when we think about the cap rates on these assets, you sold a 50% interest in eCentral. about a three five and then this came in at about a four um now putting aside any cap rate moves uh in the near term is that a good band to think about what kind of returns or you know return expectations you would have for potentially buying more multi-family assets or potentially selling if the market uh you know gets a little bit hotter if you look at going in yields as the main indicator then yes i would say actually on the higher side
Jennifer Suth
On the higher end side, it would be lower than a 3.5 at this point. I think the market has heated up quite substantially even since we sold eCentral or the 50% interest in eCentral. So I would say it's somewhere between 3.25 and 4.25 for the types of assets that we would either look to sell or buy. And I think that seems to be, if anything, only getting stronger. There seems to be an insatiable demand for them And there's really not a lot being built. So that I think that's the kind of band that I would suggest is out there.
Jenny Ma
Okay. Turning to your commentary about expanding your intra Rio can type of tenant. Could you maybe expand on, you know, what's incremental with that? And then specifically, When you mentioned fulfillment, is that really utilizing your current space for fulfillment processes, or are we starting to drift into industrial-like properties?
Jennifer Suth
It's a great question, Jenny. I mean that sincerely in that it is something that's a bit misunderstood. We don't have a lot of opportunity to create fulfillment space in our portfolio. We are on our retail portfolio 97.2% occupied and the vast majority of space that we have remaining is small in nature and would not be able to It doesn't have the attributes that you need to build a proper fulfillment center. Fulfillment centers are not our expertise, and it is something that we unlikely will build up in terms of expertise. So while it sounds really cool to be in the fulfillment business, RioCan is only tangentially in that business in that we provide space to tenants who are utilizing it a little bit differently these days. And I think there's been almost a merger of traditional shopping space with fulfillment space. So I always say that we provide fulfillment space just with a nicer facade. So it really is our tenants utilizing it for more of a fulfillment architecture now than anything else. And so just to be clear, and I don't want there to be any misunderstanding about it, we are not getting into the fulfillment business de novo and starting to build industrial facilities at this point. If we had open land and a partner approached us about maybe building something out, it would be a peripheral exercise. It would not be core to RioCamp.
Jenny Ma
okay so when you talk about like medical educational like like what is incremental about the intra rio can approach i presume you've had you know maybe a few child care centers here and there and medical offices does it just mean that you're going to have a more concerted effort to this property type or or how should we think about it you know the change in the strategy or what's incremental yeah i would say it's it's totally i mean look everything at ryokan is incremental because we have such a large base so it depends on how you define what is material versus incremental
Jennifer Suth
But I think Jeff and his team have a purview now on the types of tenants that we're talking about. And I'd say it's more than just a light initiative. They are seeking out as a first option a lot of these governmental uses, health care uses, libraries, welcome centers. And I think ambulatory uses that were in hospitals that are now looking to be moved outside of hospitals. Jeff, if I've mischaracterized it, let us know.
Jeff
No, we're very strategically seeking out, and there are different groups that work on governmental RFPs and work with institutions. And we've, over the last number of years, really worked to get those relationships tight. And now we're reaping those rewards as we're certainly responding to everything that's out there ahead of time. We've become a bit expert in that area. And we kind of have felt out what they're looking for. So it's very much an active part of our leasing program.
Jennifer Suth
And, Jenny, there's also like a motivation there. One, typically they're great covenants, but two, they tend to be really favorable co-tenants with a lot of our existing tenants. So, you know, when we talk about the notion of being customer-centric, we're spending more and more time speaking with our larger tenants, figuring out what kind of co-tenants they want, what drives traffic to their businesses. And I would say that more often than not, this type of use, which has a lot of visits and a lot of people who are looking to consume, has been viewed very favorably by our existing tenant base. So it's not done just on a whim. It's done with a view to making our overall portfolio more viable, more sustainable, and just really resilient going forward.
Jenny Ma
Okay. My last question is with regards to the bad debt provisions, and I'm wondering if you can comment on the cadence of how that should diminish. I think it was flat sequentially in Q4. I'm not sure if the variant had any impact on that improvement measure. But what are you thinking in terms of how that burns off? And do you think it gets to, and I hope I heard her correctly, it gets that $850,000 normalized run rate that Dennis had mentioned? Is that something that you think is within view over the next 12 months?
Jennifer Suth
Yeah, I'll take that one. I think that run rate is in view in the next 12 months. I mean, it's such a hard environment to predict anything at this point, given the rise, fall, ebb, flow, kind of like constant resurgence of the stupid virus. But that being said, the way we're viewing it now is quite optimistic, and we don't think that, you know, as we mentioned in a prior question, Our tenants have shown that they have been able to withstand this last round of lockdowns, and we are not seeing a lot of fallout or bad debt as a result of it. And so based on that, we're quite confident to say that the provision will dissipate, continue to do so, and get to a normalized space within the next 12 months. I think that's fair to say.
Jennifer
Yeah, I think another piece that I would just layer on that is the balance sheet side of the provision. So we, at the end of the year, have $17 million left. of provisions sitting built up in the balance sheet, which will unwind over time and that helps protect us, go forward a bit as well. In that five to seven range, one reason why there's a range is because we do take assumptions on a potentially continuing provision over the course of this year, still above that, quite a lot less than we've had in the past few years, but still potentially a couple million, a quarter, maybe. Now, where we stand today, it's always kind of ebbs and flows, but as Jonathan and John said earlier, the feedback of the tenants right now is quite strong. We'll continuously evaluate this over the course of Q1. Again, knock on wood, and as Jonathan has often said, we can't count this stupid virus out, but Omicron didn't really have much of an impact. It wasn't in our consideration in our Q4 provision at all, because at that point, we were dealing with just some tenants that have been deal-shown.
Jenny Ma
Okay. Dennis, so just to clarify, are you saying that in your guidance, you've baked in about $2 million per quarter of bad debt expense?
Jennifer
Correct. Within the range.
Jenny Ma
Great. Okay.
Jennifer
It could be more to the higher end of the range or the lower end of the range, depending on how the environment plays out this year with our friend COVID-19.
Jenny Ma
Yeah, I mean, that's the big caveat, right? But if you're modeling $2 million a quarter, but you're thinking that the run rate starts to approach or normalize, then is it fair to say that there could be upside to the guidance, all else being equal?
Jennifer
I would say it would push us more towards the high end of the guidance rather than above the range of the guidance.
Jenny Ma
Okay, okay. That's very helpful. Thank you very much.
Jennifer Suth
No problem, Jenny. Have a great day.
Operator
And speakers, there are no further questions at this time. I will now turn the call over to Mr. Gitlin for closing remarks.
Jennifer Suth
Well, thank you. I know everyone on the call has a very busy time period here with reporting season underway, and we just wanted to thank you for listening in and thank you for following RioCAN as intently as you do. And we will look forward to speaking to you again at our Investor Day on the 23rd of February, and then, if not then, when we report next results. Thanks, everyone. Have a great day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.
Disclaimer