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Operator
Good day, ladies and gentlemen, and welcome to the Rio Can Real Estate Investment Trust Q1 2022 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Jennifer Suess, Senior Vice President, General Counsel, and Corporate Secretary. Ms. Suess, you may begin.
Jennifer Suess
Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, and Corporate Secretary for RioCAN. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over, I am required to read the following cautionary statement. In talking about our financial and operating performance, and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance, or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, We will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCAN's performance, liquidity, cash flows, and profitability. RioCamp'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 March 30, 2022, 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. Jonathan, I'll now turn it over to you.
Jennifer Suess
Thanks so much, Jennifer, and thanks, everyone, for joining us again today. I'm pleased to report another strong quarter for this trust. Our results once again prove the quality of our portfolio is the resilience of our tenants, and our ability to advance growth initiatives. For the last two years, the impacts of the pandemic have been, well, they've certainly been widespread, but the commercial real estate sector, particularly retail, it's been pressured during mandated shutdowns and capacity restrictions. We have lockdowns and restrictions that carried into the first quarter of this year, lest we forget. RioCAN entered this environment from an advantageous position, and the trust more than held its own through the pandemic. The strength of our foundation and expertise allowed us to successfully navigate the operational challenges, while at the same time we focused on growth initiatives that translate into unit holder value. With the reopening of the nation, Canadians look forward to putting the pandemic well behind us. However, we're now facing different challenges. We're facing rising interest rates, global economic uncertainty based on war tensions, trade disruptions, and unprecedented inflation. Now, we can't control macroeconomic conditions. Instead, RioCAN's management team ensures that we mitigate against the impacts of the volatility that typically accompanies macroeconomic shifts. Our portfolio is built to perform in any economic backdrop. Our balance sheet is structured to absorb rising interest rates. Our culture is curated to retain and attract the best and the brightest. Now we already own the land on which we're developing and it's currently income producing. This positions us competitively in an inflationary environment as if development conditions are less than ideal, we can simply retain the highly productive properties in their current state. The trust's performance over the last two years demonstrates that in any environment, our portfolio, business, and team are well positioned to drive performance, overcome any challenges ahead of us, and emerge even stronger. The strength and stability of our foundation allow us to look beyond short-term turbulence and put sustainable outcomes and long-term unit holder returns at the center of everything we do. I'm now going to highlight our key operating metrics for the quarter. Then I'll discuss our progress towards our five-year plan to deliver total unit holder returns of between 10% and 12% per annum. I'll then turn the call over to our CFO, Dennis Blasuti, to discuss our financial performance. Our leading property portfolio, embedded development pipeline, and necessity-based retail anchor tenants are at the core of our growth strategy. RioCan's first quarter results are a testament to the successful execution of our strategic objectives. We prioritize stability and high quality income. We continue to focus on driving same property NOI growth. How? We're doing it by optimizing our tenant mix and revenue enhancing capital spending. We built on the excellent momentum we saw in previous quarters, and our first quarter operating results are back at pre-pandemic levels. Same property NOI grew by 4.1% when compared to the first quarter of last year. This growth was driven by a number of things, primarily occupancy gains, strong rental spreads, and a lower pandemic related provision. Now, bankruptcies are typically expected in the first quarter of any given year. However, Rio can experience minimal fallout at the beginning of 2022. Increased velocity in new leasing and higher tenant retention led to solid improvement in retail committed occupancy, which reached 97.4% in the first quarter. The quarter's new and renewed leases totaled 1.1 million square feet at a blended leasing spread of 8.9%. 372,000 square feet of new leasing was completed with our new leasing spreads at 13.5%. Leasing momentum at the well continued and accounted for the majority of new property under development leases. The consistent volume of leasing activity and magnitude of leasing spreads clearly demonstrate that well-located, professionally managed spaces like RioCamp centers are highly valued. We continue to evolve our tenant mix to make it more essential and more resilient. We also accelerate growth through the execution of our near-term development program while sensibly diversifying our asset base. We build dynamic and iconic developments that enhance communities and Canada's major markets. Earlier this year, we communicated our ambition to deliver $55 to $60 million in NOI from residential by 2026. Now, we've made significant progress in the first quarter towards this goal. RioCan's in-house development team delivered 145,000 square feet of completions, including two RioCan living rental buildings, Strata in Toronto and Latitude in Ottawa. Demand for these professionally managed, thoughtfully designed towers has been outstanding since they opened in January of 2022. Now, as of May 9th, they're already 62.3 and 62.5% leased, respectively. In addition to these two new assets, the first quarter was incredibly successful for our RioCan Living portfolio, which now has 1,837 operational rental units across eight buildings located in Toronto, Ottawa, Calgary, and Montreal. Rhythm in Ottawa is on schedule for completion in the fourth quarter of this year. Litho on DuPont in Toronto jumped to 75.7% leased as of May 9th. At the intersection of Yonge and Sheppard in Toronto, Pivot is now 91.4% leased and is expected to reach stabilization in the second quarter. Rio Can also recently acquired Market, which is a stabilized 139-unit residential rental property in Laval, Quebec. Market is the first phase of a three-phase development, and upon stabilization, Rio Can Living will acquire a 90% interest in the 297 units currently under construction. Pre-leasing of our newest tower, LUMA, in Ottawa has also begun, with residents expected to start moving in next month. The start of construction is imminent at NEXT, a new purpose-built rental project located in Surrey, British Columbia. And lands at Queen and Ashbridge in Toronto were acquired this quarter, expediting the development of this mixed-use project, which is scheduled for 2025 completion. Rio Can Living also has numerous condo projects underway. Demand at our most recent condo and townhouse development phase at Winfield Farm in Oshawa continues to be strong. All released condo units at the 588-unit UC Tower 2 have sold out, and sales at UC Tower 3 commenced last month, and we're averaging over $1,050 per square foot. An additional 66 townhomes at UC Uptown are now in interim occupancy, generating a $2 million inventory gain in the first quarter. The trust expects to deliver projects with costs of 675 million to 725 million in 2022. This is the largest amount of annual cost transfers since the inception of this development program. This is the flywheel concept that Dennis and I had alluded to in the last quarter call. RioCan also enhances its development pipeline through opportunistic asset acquisitions, including land assembly. For example, in the first quarter, RioCan entered into a 50-50 joint venture partnership with Parallax Properties for development at Bay and Bloor Street in Toronto. Each partner vended in a 50% interest of their respective properties and created additional value by assembling four adjacent properties for a mixed-use residential development on the six assembled properties. As co-development managers, the partnership is seeking approval for a high-rise residential condo building with a luxury streetfront retail component in the exclusive Toronto neighborhood of Yorkville. To summarize, the continuous improvement of our portfolio is happening concurrently with development deliveries. And at the same time, we're making opportunistic acquisitions enhancing value through zoning, and forming strategic partnerships. These partnerships mitigate risk, and they also generate sustainable pipeline of fees. This trend and trajectory will continue to gain momentum in each subsequent year. Now, I'm confident that our unit holders are going to reap the benefit of the resulting NAF and FFO increases long into the future. We do all this while maintaining an unwavering commitment to responsible growth. We placed the highest priority on ESG, culture, and balance sheet management. We continue to lead the way in ESG and were recognized as one of Canada's greenest employers for the second year in a row. Supporting our culture, investment in our people continues to accelerate, and we've introduced numerous initiatives to retain, advance, and further develop our talent. Now, in the face of rapidly changing market conditions, our focus remains on the long-term. The operating environment has stabilized, and this tremendous portfolio of ours will demonstrate its potential. We'll continue to capitalize on the strength of our portfolio, our embedded development pipeline, and our compelling growth prospects to deliver solid performance and maximize unit holder return. Our core strategies are enduring. They make sense in any backdrop. With a clear strategy, entrepreneurial spirit, and an unparalleled track record, We continue to harness Canada's most adaptable property portfolio and development pipeline to create vibrant community spaces where people want to shop, live, and work. We're on a clear path forward. I'm now going to turn the call over to Dennis, who's going to speak about our balance sheet in more detail.
Jennifer
Thank you, Jonathan, and good morning to everyone on the call. RioCan reported another strong quarter operationally and continued to deliver on growth initiatives. As a result, we remain on track to achieve our 2022 guidance. Our guidance for FFO per unit growth of 5% to 7% for the year is expected to be achieved through two simple building blocks, same property NOI growth and contributions from developments. As Jonathan mentioned, same property NOI grew by 4.1% in the quarter. With an improved market landscape, no pandemic-related provision was required in the quarter compared to 6.4 million in the prior year quarter. This is a reflection of the financial health of our tenants, further evidenced by cash collection in the first quarter rents to date of 99.1%. Excluding the impact of the lower provision and adjusting for certain unusual items in the prior year quarter, same property NOI grew by 2.6%, reflecting the underlying strength of our portfolio. Development deliveries over the course of the last 12 months and higher fees earned from partners on our active developments further contributed to our growth. This was partially offset by assets sold over the past year as part of our capital recycling program. Combined, these items resulted in FFO per unit of $0.42, an increase of $0.09 or 27% over the first quarter of 2021. Adjusting for debt repayment costs and non-recurring G&A expenses incurred in the prior year quarter, FFO per unit increased by a very healthy 5 cents or 14%. These improved earnings were the primary driver of the increase in our IFRS net asset value per unit, which expanded to $25.6 per unit, an increase of 1.6% over Q4 of 2021. We also recorded fair value gains of $35.4 million, driven predominantly by a gain at our lease side mixed-use development property. We previously sold 75% of the condo component of the project and have since cleared other development hurdles and therefore increased the value for our retained residential rental density. We also continue to execute our development goals and advance towards our annual spend guidance for 2022 of $475 to $525 million. We spent $92 million of properties under development and residential inventory in the first quarter, with the largest share of spend invested in our landmark project, The Well. The overall spend in the quarter is slightly below our quarterly run rate, as spend wound down on certain projects that were delivered, while others are starting to ramp up. We expect full-year spend to remain in line with guidance. Our development pipeline continues to make progress with an increase in zoned density of 3 million square feet when compared to Q4 2021, bringing the total zoned density to 16.8 million square feet. This increase is primarily driven by the addition of a zoned development project at Shoppers World in Brampton. This multi-phase project will be a mixed-use transit-oriented urban community in a rapidly expanding suburb of Toronto. We expect the 450,000 square foot first phase of this project to commence construction in late 2023 or early 2024. The equity component of our development pipeline is funded by retained cash flows and proceeds from asset sales, and this funding proceeded as planned. Our FFO payout ratio was 57.3%, well within our target range of 55 to 65%. In the first quarter, we closed asset sales of $86.1 million, with an additional $105.7 million of firm or conditional sales expected to close later this year, while on track to our annual target of $100 to $200 million. The above funding, combined with growth and earnings, has continued to bolster our balance sheet. Our net debt to EBITDA was 9.48 times at the end of the quarter, compared to 9.59 times at the end of 2021. This decrease was driven predominantly by increased EBITDA, and we expect to see this ratio decline to our target nine times by the second half of 2023 as projects continue to be delivered. We have also continued to maintain robust liquidity. Inclusive of the $250 million debenture issuance that was completed subsequent to quarter end, our total liquidity stands at $1.6 billion. In the current market environment, liquidity ensures that we maintain financial flexibility and capacity, which positions us well to manage risk and take advantage of opportunities. Finally, I would be remiss to conclude this call without addressing the increase in interest rates over the course of the first quarter. While the pace of interest rate increases certainly exceeded any forecast that we had seen last year, we did anticipate rising rates, both in our 2022 budget and five-year plan, and therefore took steps to mitigate the impacts. This included repaying and refinancing many of our 2022 debt maturities during 2021 and entering into hedges for the Government of Canada interest rate component for $500 million of anticipated 2022 debt issuances. This resulted in an 80 basis point savings on our $250 million venture issuance in April relative to the stated yield, or an all-in rate of 3.8%. We have an additional $250 million hedge to address our October debenture refinancing. We also have structural mitigates in our balance sheet. All of our long-term debt is fixed-rate debt, further mitigating the short- to medium-term impacts of rising rates. Only our corporate and construction lines of credit are variable-rate debt. Our well-staggered debt ladder ensures that only a relatively small portion of our refinancing activities will take place at any given point in the economic cycle. This is evidenced by the fact that we were able to lock in very low interest rates over the last few years with our weighted average contractual interest rate at 2.98% at the end of the quarter. Of course, these recent interest rate increases have been driven predominantly by the government's response to inflation, and inflation should benefit real estate like ours. As our tenants' revenue grows, we expect to capture some of this in the form of rent increases. At the same time, rising replacement costs are supportive of the value of our well-positioned retail and mixed-use real estate, as either revenues will increase to support development or new supply will be constrained. In addition, rising land costs in Canada's major markets, in the GTA in particular, enhance the competitive advantage that comes with the embedded land bank within our portfolio. Given the mitigating factors for rising interest rates combined with the benefits from inflation and our near-term development deliveries, Our five-year plan targets outlined in our recent investor data remain intact.
Jennifer Suess
With that said, I'll pass the call back to Jonathan. Thanks so much, Dennis. Great report. And before we hand it over to Q&A, I just wanted to let everyone know that I'm again surrounded by the great senior management team here at RioCan, who, as usual, will help answer a lot of your questions. And with that, I'm going to turn it over to the operator to handle the questions. Thank you.
Operator
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question is from Jenny Ma with BMO Capital Markets. Your line is open.
Jenny Ma
Hi, good morning.
Andrew
Good morning.
Jenny Ma
I just want to circle back to the reiteration of your guidance for 5% to 7% FFO per unit growth. Dennis, you talked about factoring higher interest rates and your mitigation strategies when reassessing this. I'm just wondering big picture-wise, just given so much has changed beyond just interest rates, but also on the inflation side and potential impacts to the economy, did you consider, I guess, the entire picture up to now in terms of reiterating your guidance?
Jennifer
Well, I would say that we have to consider everything that's happening in the macro environment, and we have. Risk of any number of things continuing to happen are out there these days at the macro level. At the micro level, we are very much performing extremely well, as Jonathan mentioned, a number of those factors. At the end of the day, we have a strategy that, as Jonathan mentioned, our assets are resilient in any environment, and our development pipeline is very near-term. And many of the factors that influence that, such as the costs, are already fixed and cooked. We've pre-sold many of the condos. Rents remain very strong at a number of these new developments. So when we look forward at our business, in this context, we still feel very, very good. And a number of the macro factors that are out there in terms of population growth, supply constraint historically on retail and residential in particular, those macro tailwinds also remain intact.
Jenny Ma
Okay, great. And remind me whether that 5% to 7% FFO prenatal growth is on the reported numbers. So I guess that would... bake in the big year-over-year growth you had just because of some of the one-time items from last year?
Jennifer
The 5 to 7 for the current year, 2022, did incorporate a lower provision for the year.
Jenny Ma
Okay. So a bit further but different on the inflationary front, just wondering these days when you're writing up new lease agreements, Are there any changes that you're making in terms of your ability to charge back certain expenses or rent increases that are more closely tied to CPI or just anything that may have shifted because of what we've seen on the inflation front and how you write up your leases?
Jennifer Suess
I wouldn't say there's anything substantial that has changed other than, of course, as usual, we are trying to drive for as much year over year growth as possible. And we're trying to get annual lifts as opposed to lifts every five years. We've always attempted to get CPI provisions in our leases, and it depends on the actual negotiation, but it's something we will get from time to time. We've always made it a clear priority for our leasing team to get as much embedded year-over-year growth as possible. And that benefits us in any kind of environment, whether it's inflationary or not. Our retail leases are always very much triple net. And so there's no real risk for us to have any downside on increased expenses at the property level. And then in the residential space, those are gross leases. But again, a lot of the services provided, including heat and Wi-Fi and things like that, are actually billed directly to the tenant. So we do what we can to mitigate there, but there certainly is some exposure that we will see on the residential front.
Jenny Ma
Okay. And then finally for me, at the end of last year, you did a pretty big unit buyback, reflecting the discount in the unit price. I know in the last call you mentioned you weren't necessarily looking at buybacks for much of 2022, but just given the recent market volatility, the stock is trading sort of below the average price that you did the buyback at. So does that change your philosophy on how you might utilize buybacks as a tool in 2022?
Jennifer Suess
Yeah, we'll look at any kind of measure that is going to be beneficial to our unit holders. I mean, we're getting paid to allocate capital. for our unit holders and share buybacks are certainly enticing the more our share falls below NAV. So it's something we're gonna consider, but of course it's gotta be balanced off against other ways to allocate our capital, including the improvement of our balance sheet metrics, as well as some other opportunistic acquisitions. So it's definitely in that mix and something we will continue to consider. And of course the more our stock price is impacted by the macro level conditions, then it's obviously a consideration that we have to focus on a little more acutely, but I'm not committing to anything at this point.
Jenny Ma
Okay, great. Thanks for the color. I'll turn it back.
Jennifer Suess
No problem. Thanks, Jenny.
Operator
And our next question is from Mark Rothschild with Canaccord Genuity. Your line is open.
Mark Rothschild
Thanks, and good morning. Jonathan, in your comments wrapping up, you mentioned that with interest rates rising and inflation, real estate generally benefits on the rent side. Was that just a general broad comment for the long term, or is there something specific that you're actually seeing already that you can point to, whether it's rent growth in retail or in apartments or increased demand? Just want to understand those comments further.
Jennifer Suess
Sure. So I will tell you, and I'll turn it over to Jeff for a little more on the ground color, but Mark, we're seeing more demand for our retail space. I think there has been no new retail space built in the last, well, at least half a decade. And I think when you have well-positioned space, and I think there's been a significant recognition by a lot of our tenants that they need the brick-and-mortar elements to make their whole infrastructure work. There's been more and more demand on our well-positioned space. So we are seeing tension in the negotiation process that favors the commercial landlord at this point and certainly RioCamp. So as you can see by our leasing spreads of 8.9% and our new leasing spreads in particular, which are well into the teens, that we are getting the benefit of that upward tension. So it is something that the inflationary environment along with this scarcity of really good retail is providing a bit of a tailwind for RioCan at this point. And on the residential front, again, I think markets have definitely gotten better as more people have returned to physical work and leaving, I think there was a lot of household consolidation over the last couple years and that's now dissipating. And I think you're also seeing immigration and migration and I guess universities start to kick in again. So all these things are factoring towards a bit more tension as well in residential rents. So we're of course seeing a bit of an uptick, especially compared to where we were last year at this time. in residential rents. And that's, of course, offset, as we talked about before, by some increased expenses. But by and large, we are seeing a healthy rent environment on residential. Jeff, in terms of retail, did I miss anything? Is there anything you wanted to add?
Jeff
No, except there's noticeably tension in the marketplace, which is great, where we're back seeing kind of pre-pandemic where there's multiple offers on the same units, which certainly always help with our negotiations. We're also seeing an influx of Americans starting to kick tires again. We've got a recon conference coming up in a couple of weeks, and we are solidly filled on both days with no Canadians by design. Very much we're dealing with the American-based tenants that we have, but there's a whole lot of new tenants from Europe as well. We've got a number of meetings. So what's nice is, as Jonathan alluded to before, with no new inventory hitting the marketplace, A, there seems to be more tenants chasing the units that are available, especially quality units that are available. And they're also doing much further planning. The pandemic's changed them a little bit. So all of a sudden, they're looking to ladder their options and opportunities. And we're looking at deals that not just roll or are available in 22 or 23, but also a longer horizon. So they've gotten a lot more organized. So provided, and I don't see it really coming, more retail space hitting the market, I think it's going to continue to start to sway towards a landlord side of negotiation, which is something that we look forward to.
Mark Rothschild
Okay, great. Thanks. And maybe just one more question. With construction costs rising and interest rates higher, it seems like you guys are still full force on the development side. But do you anticipate the higher costs impacting the pace of development generally in the market over the next couple of years?
Jennifer Suess
So I think that we keep our eye on every one of our projects. The ones that we have in the ground and the ones that formed a large part of our five-year guidance were projects that have already been costed. We've already got the cost locked in. In most cases, the construction debt had already been secured. So it's not going to have any impact on those and our plans for those. But, of course, going forward, Mark, every new development that we start, we've got the luxury of just basically if the conditions aren't right at that moment in time, simply having the existing retail space persist as retail space, and that's not bad for us. But we look at everything from a long-term perspective. We look at IRRs over a 10-year perspective before we launch a development project. And even though short-term costs for construction as well as interest rates costs will impact the initial going-in yield, over a 10-year period, as long as we have conviction in the rents that we're capable of receiving in these great mixed-use projects, then we will, of course, we will commence the build. But again, if we don't at that point in time, we simply will revert back to it being a retail center. So I hope that gives you some color, but it really is a case-by-case analysis, and I think we have ambitions to get to a certain level of residential NOI, and we don't think that those have been thwarted by the recent conditions in the markets.
Mark Rothschild
That is helpful. I just was curious more your thoughts on if you expect to see a notable change in the market overall and the pace of development.
Jennifer Suess
Oh, I mean, hard to speak for everyone else, but I think there are a lot of, let's say, merchant developers or, you know, developers that have started with a view to have takeout financing at a certain level and it's simply not going to be there. So I think that might create some opportunities. And in terms of development starts, yeah, Andrew, I don't know what your thoughts are, but I wonder if there will be a bit of a pause. I don't know.
Andrew
I think it's something we've got to watch, John. I think in light of where interest rates are going and escalation in the construction market is also a headwind, but we continue to see saleable per square foot condo values increase over time, and we can see residency rent increase over time. which both of those things counteract those factors. So, as you said, I think we're in a good position to evaluate each project before we start to understand the market conditions and make the right decisions for our individuals.
Mark Rothschild
Great. Thanks so much. Thanks, Mark.
Operator
And our next question is from Pami Beer with RBC Capital. Your line is open.
Pami Beer
Thanks, and good morning. Nice to see the strong releasing spreads again, but again, just considering the macro environment and pressure that tenants are facing on their own input costs, do you see that trend continue to move up over the course of the year, or does that maybe take a bit of a pause?
Jennifer Suess
We're quite confident. I mean, even the trends we're seeing already this quarter that it is going to be something that can be uh upheld i don't know i mean it's hard to predict exactly where they'll be by the end of the year um but you know like there's a lot of our tenants if you look at uh pet value loblaws a lot of these tenants that we have they're they're showing persistent strong earnings and their growth uh seems to be um really you know it seems to be um uh sustainable and if they're doing well then effectively we can do well and that'll be reflected in the in the growth that we can received from our rents. So I would say that we're fairly confident that this is not a fleeting thing, that it is a sustainable growth metric. But again, I don't know if it will be 8.9% every quarter that we release, but I think it will be a trend that is sustainable.
Pami Beer
Got it. Just maybe, you know, it looks like you've made some pretty good progress on the retail leasing at the well, even since the last update. What can you share with us in terms of how the rents there have come in relative to the pro forma and perhaps the timing of the lease that they'll be remaining, 20%?
Jennifer Suess
Well, I think the rents are coming in by and large in line with our pro forma. There's, I don't think, you know, I think as we've publicized the leasing is going well, and we fully anticipate that it's going to ramp up even further and more substantially as we get closer to our opening date. So we're getting enhanced interest as more and more people can visit the property, and that we've got something pretty spectacular to show them. So we're fairly confident that that number continues to tick upwards, the number of occupied space. Jeff, any further color on that?
Jeff
No, so long.
Pami Beer
Okay, and just one last one here. Again, coming back to the rising development costs, can you maybe just – I don't know if you can quantify this, but how much perhaps costs have risen over the last two years on projects that might still be in the planning stages, not stuff that's underway? And what kind of pressure that might have put on – you mentioned your IRRs. I'm just curious, you know, what kind of pressure that has put on the IRRs. I don't want to create the percentage increase.
Jennifer Suess
Yeah, I'm not going to get too scientific, but I think we've seen costs, not just us, but everyone in the industry see costs increase by about, what, 15% each year in the GTA in particular, year over year. So, I mean, that would give you a sense of what the last two years have done to our metrics. Thankfully, the land cost for us is reasonably controlled, and it's actually fairly low, which gives us a head start. Rents and condo prices have also increased significantly. maybe not keeping pace with 15% per year, but enough that it doesn't necessarily make our projects no longer viable. But like I said before when I answered a previous question, Tommy, if we know that a project is no longer viable because costs have just outpaced the potential for us to increase revenue, then we will simply not proceed with it. But right now we've mitigated quite well against those factors. and it hasn't had a material impact on the projects we've got on the ground right now.
Jennifer
One thing I wanted to add as well, Tommy, and we talked about this in our investor day, we are able to have financial structures that help solve part of this as well. So when we look at bringing in partners, and there remains to be a fairly substantial demand from financial partners that are looking to participate, they have a lot of money to put to work. We have the product that they need. The land's on our books for often next to nothing. We can make a land gain on the front end of our fees to the project, and that helps augment our returns. We don't go into a project with a predisposed structure. We'll look at the returns of the project as a standalone, and where it makes sense for us to achieve our hurdles, we can bring in partners at different percentages to help augment our return on our investment. So that's, I think, another lever that you'll see us use more and more like we have in the five or so projects that we highlighted in our invest today.
Pami Beer
Thanks very much, Dennis. I'll turn it back.
Operator
Thank you. Our next question is from Mario Sarek with Scotiabank. Your line is open.
Mario Sarek
Hey, good morning. I just wanted to ask a couple of questions along kind of similar themes today, just on... On the rent growth, there's a lot of discussion about the past three of costs in this high inflationary environment, and your leasing spreads are suggesting you're able to do that to this point anyways. I'm curious, the 9% spread that we saw on a net rent basis, what do you think that looks like on a gross rent basis to the tenant? And is there any concern that if higher input costs continue, that the gross rents start becoming an issue for tenants as opposed to just focusing on the net rents?
Jennifer Suess
I think all tenants, all commercial tenants, they don't care about net rent. They do care about gross rent. And so, you know, the short answer is, yeah, I mean, it's not, we're not impervious to that, to that factor. If costs increase, if the cabin tax costs increase substantially, then that impacts their ability to pay higher net rents. That being said, We as an organization have done a very good job of reducing those costs, even in the face of an inflationary environment. And we're doing that again by simply taking advantage of our scale and doing things like procuring everything on a national or regional level, which does drive costs down, especially relative to some of our competitors. and we're doing what we can to keep head office chargebacks and things like that down to a minimal amount, thus keeping those enhanced costs or those extra costs a little bit higher. That being said, again, We're in a market, as I alluded to before, where the space that we're providing and the environment in which that space is provided is, we think, next level. It is really, it's well located, but it's also well curated. And therefore, there might be an increased cost, but we do believe over time the tenants are going to bear that cost because they are over time going to be doing better. Their margins have improved, and inflation may well help them as well. So we think that even with those, if there is enhanced extra costs for our tenants in CAM and taxes, that the tenants should be able to absorb them, and it shouldn't have a significant impact on our net rent. But like I said, we're doing everything we can to mitigate those chargebacks.
Mario Sarek
Can you give us a sense of what the comparable gross rent increase would be relative to the 9% on net rent this quarter, roughly, and how much of that you may have mitigated? So is it 15% and because of all the things that you said you're doing, it's actually 11% or something along those lines? Can you quantify that?
Jennifer Suess
I don't have a scientific answer for you, Mario, but I will tell you that we have not seen a significant, I mean, in the last quarter, so we're talking retrospectively, but we have not seen a significant increase in our gross occupancy costs.
Mario Sarek
Okay. And then maybe shifting gears to capital allocation, Jonathan, I think you described RealCan is not necessarily a net seller in 2022, like you have been for the past. couple of years in Q1, you're a bit of a net buyer in terms of equity, all is equal. How does the market volatility shift your thinking in terms of the appetite for asset dispositions? And then conversely, are you a little more hesitant to buy assets given where the cost of capital has gone?
Jennifer Suess
So asset dispositions are really like the ones that we have planned for this year and perhaps the next little while are more qualitative in their constructs, meaning that we were not selling these assets or didn't plan to sell them just to raise capital as we have in the past couple of years. These were assets that we feel we could sell to make our portfolio better in the long run and to prompt more and more growth. And so quite honestly, even if there is some jitters in the market and maybe the pricing that we had prognosticated for those assets is slightly lower than we had thought, it shouldn't change our view on our view to sell those assets. Because again, we're looking at the long term and we do believe that our portfolio without some of those assets will be a better portfolio. So I don't think it'll have a significant impact, the market jitters. Now, if the market stalls to the point where they're just simply not saleable, then We'll of course have to reflect on that, but I don't think it's getting to that point. And then with respect to acquisitions, the acquisitions that we've done by and large are just land assemblies. We don't really have a view to acquiring, and we've also bought a multi-res building earlier this year. We don't have significant designs on acquiring a substantial amount of additional assets this year. We're going to see what pricing does, and if there's something opportunistic, we'll of course look at putting money towards it. That said, as I suggested to Jenny earlier in this call, there's other ways to allocate capital, one of which is improving our balance sheet metrics, and the other is of course looking at NCIB, which again, the more devalued our stock gets, the more enticing that is. But again, these are all things that we'll have to decide upon going forward. And the good news is we do have options.
Mario Sarek
Generally speaking, private market valuations will kind of wage public market valuations by, I call it, six to nine months historically in the commercial real estate space in Canada. So the REITs are signifying a pretty significant expected increase in private market cap rates going forward. Are you seeing any signs of a post quarter that your IFRS cap rate was flat quarter of quarter fee on a same property basis? Are you seeing any signs of cap rates coming up? Are you seeing any signs of tempering demand, whether it's from foreign buyers or pension funds for the types of product that you're looking for?
Jennifer Suess
So we have not been in the market selling anything at this point, but we are always in touch with the brokerage community. And the sense that we're getting is the transactions that were lined up for Q1 or in Q1, there might have been a bit of a price grind, but they're still closing. And that's not a material price grind. But things are very fluid in this market, so it's hard to predict where they will go in the next little while. There is a lot of private capital out there still looking for a home. And so we feel that we're really well positioned assets in major markets in Canada are fairly well fortified against major pricing down drafts. But it's such a hard market to predict. And I think you used historical references. But at this point, Mario, I think we can all agree that old playbooks are no longer relevant. That's an environment where there's just so much volatility. And the predictability of everything is a little more difficult. So I'm not sure where cap rates will go. And for all we know, just given the amount of capital that is out there, given the strength of some of the assets and given the growth profile that we're seeing out of these assets, they might even be more valuable in a few months than they are now. Who knows?
Mario Sarek
And the last question and an associated question for Dennis, perhaps, you know, or 300 million or so fair value losses that have occurred during the pandemic that haven't been reversed. How do you think about reversing those losses in an environment where interest rates are going up, but at the same time, the operational performance of the portfolio, as you've highlighted, has been extremely good and getting better with occupancy moving higher, rents moving higher. So how do you think about the balance between those two in terms of recovering some of those fair value losses going forward?
Jennifer
Yeah, I think if you would have asked me this a few months ago, I probably would have said we'd expect to reverse the rest of those losses this year. That may ultimately provide us a bit of a buffer. The remaining fair value losses are predominantly in Alberta, in closed malls and some secondary market assets. We've seen performance in Alberta actually be very strong. maybe that's a bit of an offset there. But I think you rightly make the point. There's two main inputs that go into valuation. Cap rate is one in a capitalized NOI scenario. NOI is the other. And with NOI improving, that certainly is a mitigate, and it would hold up in our financial statements no differently than it would hold up in the sort of, I guess, the real asset kind of theory that we always talk about with inflation benefiting our assets. I think the other thing that we have when we think about our IFRS NAV is we've been fairly conservative, we think, relative to the value of our density. We have very little fair value gains within our density relative to over 16 million square feet zoned. So that's something that we think is a conservative component of our balance sheet, whether there's incremental value.
Cap
Okay, thank you.
Jennifer
Thank you.
Operator
And your next question is from Tal Woolley with National Bank Financial. Your line is open.
Cap
Hi, good morning, everybody. Morning, Tal. Just wanted to start on the apartment side. You sort of talked about 10-year IRRs as kind of being the benchmark on which you're going to make future go-no-go decisions on developments. Can you just give us a little bit of color on
Jennifer
uh you know what the numbers are involved there like whether you're using a levered on levered target um does it vary a lot by market what sort of lease up assumptions you're using and more importantly what sort of rank growth assumptions you're using in that so so we are using a levered irr it sort of depends on the asset but in aggregate we kind of look at a uh um you know in line with our overall balance sheet metrics we make sure that all of our targets and projects kind of ladder up to that. We may have some, we've talked about our development projects being at a sort of a 60% to 65% load to cost, not necessarily load to value. So that does, that kind of overall leverage metric trends down into below 50 pretty quickly once you start ramping up a project. So I think in aggregate, we manage project by project, but then ensure that our our overall five-year plan leverage metrics line up. Do you want to take growth on that, Rex?
Jennifer Suess
Yeah, I mean, and I can turn this over to Andrew as well, but we use fairly conservative growth estimates, typically no greater than 3% year over year. And our terminal cap rate, which is always the driving factor, we never utilize a cap rate that is lower than where the current market is. In fact, sometimes we'll even go higher. But it is project by project. Andrew, do you have any further color?
Andrew
No, I think you guys captured most of Tal's questions. Tal, were there any other metrics you were asking about in terms of how we're in the IRR?
Cap
Yeah, I guess just like if you were to green light something in Toronto right now, like what sort of hurdle rate on a levered basis would you be looking for?
Andrew
I think it's a bit of a balancing act, but I think what we talked about before is generally it's got to be consistent with what we talked about in terms of overall growth in our business, right? So we talked about a 10% to 12% return in our business from a share and growth standpoint, and that's kind of what we're looking for in terms of a project being greenlit.
Jennifer
And I think it is a mix of different types of projects, Tal. So a development project, a rental project in Toronto GTA, we're probably looking at, we'd be looking at north of 12, and we're typically been running them around mid-teens. Condo projects are in the high teens to low 20s. We may end up doing some res rental that, on some acquisitions on a conservative level, rental growth assumptions that may be kind of like 8 to 10. And when we put that weighted average all together, we end up in that, you know, kind of 10 to 12, you know, aggregate portfolio rates that we're trying to ladder into.
Cap
Got it. And in your five-year plan, the 55 to 60 million in NOI, what's the number of suites that you need to have completed to hit that mark?
Jennifer Suess
Well, right now we've got just under 1,900 operational rental units, and the anticipated number, I think, by year five is probably somewhere close to 4,000.
Andrew
Yeah, and it also depends on our acquisition program and what type of units we're buying.
Jennifer Suess
Yeah, some might be smaller, some might be larger, but I think somewhere around 3,500 to 4,000.
Andrew
Yeah, I think that's a decent number. We've got a couple more projects coming online that are going to contribute to that through organic growth, and the rest will be acquisition.
Cap
Yeah. Got it. And then just on the retail commercial side, you talked about how you're seeing more interest from Americans and Europeans. Can you just talk a bit about the types of tenants that are coming out of the woodwork right now and showing interest?
Jennifer Suess
Sure. Happy to turn that one over to Jeff, who's on the ground.
Jeff
It's both in the smaller fashion boutique guys. They're looking for more high street locations, but the guys that are really pushing it hard are the F&B guys. So there's a lot of both fast food and full service sit-down restaurants. we're seeing a lot of that and certainly on the entertainment side we're seeing a lot of those starting to press in you know not too different than the Arcadia Earth that we announced earlier at the well there's a lot of virtual realities entertainment educational venues that are looking to come up and I think we're going to see a lot more of that and it's great because there's not a lot of that growth coming on a domestic basis so they're bringing something different into the market
Jennifer Suess
And then I think there's also some that have already entered the market that are just looking to expand further. I think if we look at Sephora, Under Armour, and then I think we've also seen the sporting goods store, Decathlon. Yeah, so like there's a few that are already here that are just liking the market and looking to expand further. So hopefully that gives you some color.
Cap
Okay, and then just lastly, in terms of staff, like, Can you just talk a bit about, for the development team, are you kind of at the size you need to be to continue with what you've got, or do you need to add more bodies? And can you talk a bit about retention of that stock right now?
Jennifer Suess
Yeah, I'm going to start, and then I'm going to hand it over to Terry Andrianopoulos, who's our head of people and brand. I think our development team and our RioCan Living team has certainly had to bulk up in order to achieve some of the objectives we've set. The development team has always been fairly sizable because they've been at the front end of a lot of these projects, and a lot of the heavy lifting has already happened to get the projects entitled and to get them planned and staffed and all those sorts of things. When I say staffed, I mean third-party consultancy. And then Rio Can Living was a group that we did form de novo with a lot of existing Rio Can employees, but again, we have big ambitions for that group, so we have hired and fortified that group more, and we'll probably continue to do so as those ambitions increase. But in terms of the actual retention and our ability to hire new people, we are facing similar challenges to, I think, what a lot of other industry players are facing, but Terry's got much better color on that, so I'm going to turn it over to her.
Terry Andrianopoulos
That's a great question. Thank you. We're focused on employee engagement in a way that, frankly, we never have been before. We understand the challenges in the market. I'll also say, though, that RioCamp's holding our own from a retention perspective and our ability to acquire work. We're known in the industry as being an excellent place to work, and we're investing to maintain that reputation. Really what we're doing is focusing right now on training and upskilling and cross-training. We're doing a lot of hiring from within. We find that benefits the organization in terms of transferring skill sets, but it also gives employees, current and future employees, an understanding of the career growth that they can have with Ryokan. So all said, we're holding our own. We're not immune to the market challenges, but we're very satisfied with where we are.
Cap
Okay, that's great. Thanks very much, everybody. Thanks, Tal.
Operator
And your next question is from Sam Damiani with TD Securities. Your line is open.
Sam Damiani
Thanks, and good morning, everyone. Most of my questions have been answered. But just to maybe finish off on one of the last questions in terms of types of tenants and some of the big retailers out there looking to take more space, one of the sectors that has been a source of growth in recent quarters has been grocery stores. Any update on that sector in terms of that the incumbents looking for more space currently.
Jennifer Suess
I can start and turn it over to either John or Jeff to give you some more color on that. But, I mean, as I mentioned before, Loblaws has had a remarkable year, and they're doing exceptionally well. And I do believe that they have growth ambitions primarily in the shopper's drug mart side of things, but even in the mainline grocery. And then Sobeys, who's acquired Longo's, or at least a 50% interest in Longo's and Farm Boy, I know that they are looking to aggressively enhance their store count in those banners, which I think beyond just Ontario, I think it's more widespread than that, which augurs well for us. And then, of course, you've got brands like La Blas has T&T, which I think continues to expand. Metro has Adonis, which I'm not exactly sure where they're going with that, but I think Metro is generally expanding a little bit more as well. And then we're seeing some independents. We've just done some deals with some smaller sort of six or seven store operators. who are being hyper-aggressive in today's market to get market share. So we're seeing, I think, a pretty aggressive growth profile from grocery stores. Jeff, do you have any further color?
Jeff
No, the ethnic guys are really looking at every opportunity out there. But, again, we've now reestablished quarterly meetings with every single one of the large grocery stores, and they're all open to look at anything we've got to show them. The next tranche is going to be, will somebody step up from some of these European ones, all these millennials of the world that we've been kind of keeping an eye on for a good period of time? Again, not that they've done anything officially, but there's a little bit of noise starting to come out of that camp, and they are doing well with their American rollout, and they could start to look up here. but no guarantee on that front. But certainly, as Jonathan mentioned, on the smaller groups that have five or six locations, they seem to be well-funded. They've got capital for growth, and they're looking at things as well. So we're pretty happy with that sector at the moment.
Sam Damiani
That's helpful. And just lastly for me is on the well, I guess both with the Wellington market. So is any of the pre-leasing you're talking about in the last few days, including the space in the Wellington market, And also, just with some of the larger, newer tenants that have been announced, maybe just give us a sense as to why you went with those particular operators and what spaces are left to lease on the retail side.
Jennifer Suess
Yeah, so some of the deals announced have been in the Wellington market. We continue to fill that up. I mean, those are smaller, more local operators. who aren't going to commit to space as well in advance as other larger retailers would. We've designed the space to specifically be very flexible and accommodate a number of different uses, and so we are now seeing more and more velocity on the Wellington market spaces. In terms of the types of retailers that we put in there now, well, we think we've curated a really good mix for not only, I would say, restaurants and experiential uses that were really fitting of that downtown west corridor, but also convenience uses for the numerous office and residential tenants that are part of the well, but also that surrounding area. I think it would be wholly irresponsible of us to create what we feel is a very important component of that downtown West community and not provide some convenience uses for them with the likes of Shoppers Drug Mart. But then we also love the lineup of great restaurants that we put in place as well as the experiential uses that we're putting in there too. And then of course there's gonna be some proprietary fashion tenants and gyms and things of that nature that I think are very much suited towards that community. And then finally, Someone's got to serve all these extra constituents from a medical perspective, so we're putting in medical uses, which I think will be really warmly received from that community, but also the office and residential tenants that we've brought to the site. Jeff, what have I missed?
Jeff
You nailed it all. Not to sound dramatic, but what we are doing is we're building a city center on the west side of town. So a lot of thought did go into which tenants are going to, again, be people that's going to kind of work for the on-site population that's going to be there, but also drawing both locally and regionally. So it very much, and it's an overused word, but it very much has been curated, where as much as there was interviewing and vetting of the tenants, more have gone into this than any other project I've ever been involved with. And that's why we're trying to find the local best-in-class who could step up like a sweat and tonic who's been established in the community for almost a decade, but is a leader in more of a boutique-type atmosphere. We very much wanted this to be a streetscape feeling to it, So we're quite careful as to who's going in, but I'm certainly pleased as to where we're at on our lease up. And as Jonathan alluded before, especially when it comes to the market, which all of a sudden the velocity is just being absolutely over the top, It's the, you know, they need to physically see, feel, and touch what that layout is going to be like because they're not a sophisticated user of space. They may have something on Roncesvalles or Bloor Street or Danforth, but now that they can actually walk in and see what the environment's going to feel like, we're starting to write a lot of deals on that side, and the boutique-y tenants who are waiting to clear up out the site so it didn't feel so much like a development site. If you're to wander through it today, you very much get our vision, and that's the response that we're getting. So I think the next 90 days we're going to be able to have another update and locking up a whole slew of the local tenants that have interest.
Sam Damiani
That's great. Thank you very much.
Pami Beer
No problem, Sam. Take care.
Operator
And your next question, sir, is from Dean Wilkinson with CIBC. Your line is open.
Dean Wilkinson
Thanks. Morning, everyone. Our cup runneth over. Dennis, just a quick question for you. You mentioned that very little of the density is in the IFRS NAV. Of that 16.8 million that zoning approved, can you give us a sense of how much of that is captured in the IFRS number? And the second question is, if more of that value were to be reflected on the balance sheet, Does that mean that it would fall into PUD and push you against that 15% limit, or how does that mechanism work? Thanks.
Jennifer
Yeah, so I actually don't have the exact number in front of me, but really we've only taken gains for the most part in properties that are under construction, so that's probably in the neighborhood of about $2.5 million of the $16 million as fair value gains. Now, there are values against it, but... against the other properties in that they're often like IPP properties today. So I think that is okay. On the whether it would be included in PUD, until we formally transfer it to PUD from an accounting perspective, it wouldn't be included. So we can have density value on an existing IPP project that could be over and above the IPP and not necessarily transferred into PUD until we start actually developing the asset itself. So I think the rules will follow the accounting on that one, so I think we can manage that.
Dean Wilkinson
Perfect. That's it for me. Thanks, guys. Thanks.
Operator
I am showing no further questions at this time. I would now like to turn the conference back to our President and CEO, John Gitlin. Thank you.
Jennifer Suess
Thanks, everyone. And again, I know it's a busy time for all of you on the phone, and we really appreciate you dialing in. And we're really excited about our results, and hopefully they translate well. And they're well received by all of you. If you have any further questions, we're here to answer them. And enjoy your day, everyone. Thank you.
Operator
Ladies and gentlemen, this concludes today's conference. Thank you again for your participation, and have a wonderful day. You may all disconnect.
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